##### 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 January 31, 2005 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
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 þ No o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o 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 February 28, 2005$.001 par value Common Stock
    
    13,768,535




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INDEX PAGEPart I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22Part II. Other InformationItem 1. Legal Proceedings
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24Signatures
    
    
    30Exhibit Index
    
    
    31EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I FINANCIAL INFORMATION ASHWORTH, INC. AND SUBSIDIARIES 
 
 January 31, 2005
    
    
    October 31, 2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,983,000
    
    
    $
    5,541,000Accounts
receivable - trade, net
    
    
    30,519,000
    
    
    
    39,264,000Accounts
receivable - other
    
    
    746,000
    
    
    
    1,055,000Inventories, net
    
    
    59,248,000
    
    
    
    49,249,000Other current assets
    
    
    6,882,000
    
    
    
    4,014,000Deferred income tax asset
    
    
    1,697,000
    
    
    
    1,697,000Total current assets
    
    
    103,075,000
    
    
    
    100,820,000Property, plant and equipment, at cost
    
    
    54,779,000
    
    
    
    52,396,000Less accumulated depreciation and
amortization
    
    
    (18,930,000
    )
    
    
    (17,865,000
    )Total property, plant and equipment, net
    
    
    35,849,000
    
    
    
    34,531,000Goodwill
    
    
    12,642,000
    
    
    
    12,640,000Intangible assets, net
    
    
    10,885,000
    
    
    
    11,028,000Other assets
    
    
    619,000
    
    
    
    467,000Total assets
    
    $
    163,070,000
    
    
    $
    159,486,000Liabilities and Stockholders EquityCurrent liabilities:Line of credit payable
    
    $
    8,250,000
    
    
    $
    2,500,000Current portion of long-term debt
    
    
    4,497,000
    
    
    
    4,502,000Accounts payable
    
    
    13,852,000
    
    
    
    13,959,000Income tax payable
    
    
    
    
    
    
    1,157,000Accrued liabilities:Salaries and commissions
    
    
    2,378,000
    
    
    
    2,809,000Other
    
    
    3,954,000
    
    
    
    4,135,000Total current liabilities
    
    
    32,931,000
    
    
    
    29,062,000Long-term debt, net of current portion
    
    
    26,105,000
    
    
    
    27,186,000Deferred income tax liability
    
    
    1,667,000
    
    
    
    1,667,000Other long-term liabilities
    
    
    238,000
    
    
    
    355,000Stockholders equity:Common stock
    
    
    14,000
    
    
    
    14,000Capital in excess of par value
    
    
    42,634,000
    
    
    
    42,171,000Retained earnings
    
    
    56,192,000
    
    
    
    56,109,000Accumulated other comprehensive income
    
    
    3,289,000
    
    
    
    2,922,000Total stockholders equity
    
    
    102,129,000
    
    
    
    101,216,000Total liabilities and stockholders equity
    
    $
    163,070,000
    
    
    $
    159,486,000
 See accompanying notes to
unaudited condensed consolidated financial statements. 1




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ASHWORTH, INC. AND SUBSIDIARIES 
 
 Three months ended January 31,2005
    
    
    2004Net revenues
    
    $
    36,513,000
    
    
    $
    27,338,000Cost of goods sold
    
    
    21,878,000
    
    
    
    16,647,000Gross profit
    
    
    14,635,000
    
    
    
    10,691,000Selling, general and administrative expenses
    
    
    14,091,000
    
    
    
    10,405,000Income from operations
    
    
    544,000
    
    
    
    286,000Other income (expense):Interest income
    
    
    20,000
    
    
    
    21,000Interest expense
    
    
    (533,000
    )
    
    
    (169,000
    )Net foreign currency exchange gain
    
    
    43,000
    
    
    
    148,000Other income (expense), net
    
    
    64,000
    
    
    
    (63,000
    )Total other expense
    
    
    (406,000
    )
    
    
    (63,000
    )Income before provision for income taxes
    
    
    138,000
    
    
    
    223,000Provision for income taxes
    
    
    55,000
    
    
    
    89,000Net income
    
    $
    83,000
    
    
    $
    134,000Net income per share:Basic
    
    $
    0.01
    
    
    $
    0.01Diluted
    
    $
    0.01
    
    
    $
    0.01Weighted-average shares outstanding:Basic
    
    
    13,726,000
    
    
    
    13,302,000Diluted
    
    
    14,110,000
    
    
    
    13,644,000
 See accompanying notes to
unaudited condensed consolidated financial statements. 2




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##### Table of Contents



ASHWORTH, INC. AND SUBSIDIARIES 
 
 Three months ended January 31,2005
    
    
    2004Cash flows from operating activities:Net cash used in operating activities
    
    $
    (4,387,000
    )
    
    $
    (2,018,000
    )Cash flows from investing activities:Net purchases of property, plant and equipment
    
    
    (2,533,000
    )
    
    
    (989,000
    )Net cash used in investing activities
    
    
    (2,533,000
    )
    
    
    (989,000
    )Cash flows from financing activities:Principal payments on capital lease obligations
    
    
    (45,000
    )
    
    
    (41,000
    )Borrowings on line of credit
    
    
    13,500,000
    
    
    
    7,800,000Payments on line of credit
    
    
    (7,750,000
    )
    
    
    (7,400,000
    )Principal payments on notes payable and long-term debt
    
    
    (1,042,000
    )
    
    
    (30,000
    )Proceeds from exercise of stock options
    
    
    357,000
    
    
    
    398,000Change in
restricted cash
    
    
    (25,000
    )
    
    
    (17,000
    )Net cash provided by financing activities
    
    
    4,995,000
    
    
    
    710,000Effect of exchange rate changes on cash
    
    
    367,000
    
    
    
    1,104,000Net decrease in cash and cash equivalents
    
    
    (1,558,000
    )
    
    
    (1,193,000
    )Cash and cash equivalents, beginning of period
    
    
    5,541,000
    
    
    
    5,024,000Cash and cash equivalents, end of period
    
    $
    3,983,000
    
    
    $
    3,831,000
 See accompanying notes to
unaudited condensed consolidated financial statements. 3




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##### Table of Contents



ASHWORTH, INC. AND SUBSIDIARIES 
 
 NOTE 1  Basis of Presentation. In the opinion of management, the accompanying condensed consolidated balance sheets and
related interim condensed consolidated statements of operations and cash flows include all
adjustments (consisting only of normal recurring items) necessary for their fair presentation.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues, and expenses and the
disclosure of contingent assets and liabilities. Actual results could differ from those
estimates. Interim results are not necessarily indicative of results to be expected for the
full year. Certain information in footnote disclosures normally included in financial statements has been
condensed or omitted in accordance with the rules and regulations of the Securities and
Exchange Commission (the 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, 2004, filed with the SEC on January 28,
2005. Shipping and Handling Revenue The Company includes payments from its customers for shipping and handling in its net revenues
line item in accordance with Emerging Issues Task Force
(EITF) 00-10, Accounting for Shipping
and Handling Fees and Costs. Cost of Goods Sold The Company includes F.O.B. purchase price, inbound freight charges, duty, buying commissions
and overhead in its cost of goods sold line item. Overhead costs include purchasing and
receiving costs, inspection costs, warehousing costs, internal transfers costs and other costs
associated with the Companys distribution. The Company does not exclude any of these costs
from cost of goods sold. Shipping and Handling Expenses Shipping expenses, which consist primarily of payments made to freight companies, are reported
in selling, general and administrative expenses. Shipping expenses for the quarters ended
January 31, 2005 and 2004 were $530,000 and $314,000, respectively. Reclassifications Certain reclassifications have been made to the prior periods condensed consolidated financial
statements to conform to classifications used in the current period. These reclassifications
had no impact on previously reported results. 4




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NOTE 2  Inventories. Inventories consisted of the following at January 31, 2005 and October 31, 2004: January 31,
    
    
    October 31,2005
    
    
    2004Raw materials
    
    $
    106,000
    
    
    $
    123,000Finished goods
    
    
    59,142,000
    
    
    
    49,126,000Total inventories, net
    
    $
    59,248,000
    
    
    $
    49,249,000
 NOTE 3  Goodwill and Other Intangible Assets. The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets.Under SFAS No. 142, goodwill and certain intangible
assets are not amortized but are subject to an annual impairment test. At January 31, 2005
and October 31, 2004 goodwill totaled $12,642,000 and $12,640,000, respectively. During the
quarter ended January 31, 2005, the Company adjusted goodwill by approximately $2,000 for
certain preacquisition contingencies relating to its acquisition of Gekko Brands, LLC on July
7, 2004. The following sets forth the intangible assets, excluding goodwill, by major category: January 31, 2005
    
    
    October 31, 2004Gross Carrying
    
    
    Accumulated
    
    
    
    
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Net Book Value
    
    
    Amount
    
    
    Amortization
    
    
    Net Book ValueIndefinite life:Tradenames
    
    $
    8,700,000
    
    
    $
    
    
    
    $
    8,700,000
    
    
    $
    8,700,000
    
    
    $
    
    
    
    $
    8,700,000Finite life:Customer lists
    
    
    1,530,000
    
    
    
    (131,000
    )
    
    
    1,399,000
    
    
    
    1,530,000
    
    
    
    (72,000
    )
    
    
    1,458,000Non-competes
    
    
    1,372,000
    
    
    
    (721,000
    )
    
    
    651,000
    
    
    
    1,372,000
    
    
    
    (680,000
    )
    
    
    692,000Customer sales backlog
    
    
    190,000
    
    
    
    (143,000
    )
    
    
    47,000
    
    
    
    190,000
    
    
    
    (71,000
    )
    
    
    119,000Trademarks
    
    
    1,332,000
    
    
    
    (1,244,000
    )
    
    
    88,000
    
    
    
    1,299,000
    
    
    
    (1,240,000
    )
    
    
    59,000Total intangible assets
    
    $
    13,124,000
    
    
    $
    (2,239,000
    )
    
    $
    10,885,000
    
    
    $
    13,091,000
    
    
    $
    (2,063,000
    )
    
    $
    11,028,000
 Intangible assets with definite lives are amortized using the straight-line method over periods
ranging from 1 to 7 years. During the three months ended January 31, 2005 and 2004, aggregate
amortization expense was approximately $176,000 and $54,000, respectively. 5




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Amortization expense related to intangible assets at January 31, 2005 in each of the next five
fiscal years and beyond is expected to be as follows: Remainder 2005
    
    $
    361,0002006
    
    
    420,0002007
    
    
    411,0002008
    
    
    393,0002009
    
    
    251,0002010
    
    
    210,000Thereafter
    
    
    139,000Total
    
    $
    2,185,000
 NOTE 4  Line of Credit Agreement. On July 6, 2004, the Company entered into a new business loan agreement with Union Bank of
California, N.A., as the administrative agent, and two other lenders. The new loan agreement
is comprised of a $20,000,000 term loan and a $35,000,000 revolving credit facility, which
expires on July 6, 2009 and is collateralized by substantially all of the assets of the Company
other than the Companys real estate. Under this loan agreement, interest on the $20,000,000 term loan is fixed at 5.4% for the term
of the loan. Interest on the revolving credit facility is charged at the banks reference
rate. At January 31, 2005, the banks reference rate was 5.25%. The loan agreement also
provides for optional interest rates based on London interbank offered rates (LIBOR) for
periods of at least 30 days in increments of $500,000. On September 3, 2004, the Company entered into the First Amendment to the loan agreement to
amend Section 6.12(a), Tangible Net Worth. The loan agreement, as amended, contains certain
financial covenants that include requirements that the Company maintain (1) a minimum tangible
net worth of $74,000,000 plus the net proceeds from any equity securities issued (including net
proceeds from stock option exercises) after the date of the loan agreement for the period
ending October 31, 2004, and a minimum tangible net worth of $74,000,000, plus 90% of net
income after taxes (without subtracting losses) earned in each quarterly accounting period
commencing after January 31, 2005, plus the net proceeds from any equity securities issued
(including net proceeds from stock option exercises) after the date of the loan agreement, (2)
a minimum earnings before interest, income taxes, depreciation and amortization (EBITDA)
determined on a rolling four quarters basis ranging from $16,500,000 at July 6, 2004 and
increasing over time to $27,000,000 at October 31, 2008 and thereafter, (3) a minimum ratio of
cash and accounts receivable to current liabilities of 0.75:1.00 for fiscal quarters ending
January 31 and April 30 and 1.00:1.00 for fiscal quarters ending July 31 and October 31, and
(4) a minimum fixed charge coverage ratio of 1.10:1.00 at April 30, 2004 and 1.25:1.00
thereafter. The loan agreement
limits annual lease and rental expense associated with the Companys new distribution center in
Oceanside, California as well as annual capital expenditures in any single fiscal year on a
consolidated basis in excess of certain amounts allowed for the acquisition of real property
and equipment in connection with the new distribution center. The loan agreement has an
additional requirement where, for any period of 30 consecutive days, the total indebtedness
under the revolving credit facility may not be more than $15,000,000. The loan agreement also
limits the annual aggregate amount the Company may spend to acquire shares of its common stock.
The Company is in compliance with all of the loan agreements financial covenants as of
January 31, 2005. The line of credit under the loan agreement may also be used to finance commercial letters of credit 6




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##### Table of Contents



and standby letters of credit. Commercial letters of credit outstanding under this loan
agreement totaled $4,037,000 at January 31, 2005 as compared to $4,108,000 outstanding at
October 31, 2004. The Company had $8,250,000 outstanding against the revolving credit facility
under this loan agreement at January 31, 2005, compared to $2,500,000 outstanding at October
31, 2004. The Company had $18,000,000 outstanding on the term loan under this loan agreement
at January 31, 2005 compared to $19,000,000 at October 31, 2004. At January 31, 2005,
$22,713,000 was available for borrowings against the revolving credit facility under this loan
agreement. NOTE 5  Net Income Per Share Information. Basic net income per share has been computed based on the weighted average number of common
shares outstanding during the period. Diluted net income per share has been computed based on
the weighted average number of common shares outstanding plus the dilutive effects of common
shares potentially issuable from the exercise of common stock options. Common stock options
are excluded from the computation of net income per share if their effect is anti-dilutive.
The following table sets forth the computation of basic and diluted net income per share based
on the requirements SFAS No. 128, Earnings Per Share: Three months ended January 31,2005
    
    
    2004Numerator:Net incomeNumerator for basic and diluted
Income per share - income
available to common stockholders
    
    $
    83,000
    
    
    $
    134,000Denominator:Denominator for basic income
per share - weighted average shares
    
    
    13,726,000
    
    
    
    13,302,000Effect of dilutive securities:Stock options
    
    
    384,000
    
    
    
    342,000Denominator for diluted income
per share - adjusted weighted average
shares and assumed conversions
    
    
    14,110,000
    
    
    
    13,644,000Basic net income per share
    
    $
    0.01
    
    
    $
    0.01Diluted net income per share
    
    $
    0.01
    
    
    $
    0.01
 For the quarters ended January 31, 2005 and 2004, the diluted weighted average shares
outstanding computation excludes 412,000 and 411,000 options whose impact would have an
anti-dilutive effect, respectively. NOTE 6  Issuance of Common Stock. Common stock and capital in excess of par value increased by $463,000 in the three months ended
January 31, 2005, of which $357,000 is due to the issuance of 62,866 shares of common stock on
exercise of options and $106,000 is the tax benefit related to the exercise of those options. NOTE 7  Stock-Based Compensation. The Company has elected to follow Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees,and related interpretations in accounting for its
employee stock options. Under APB No. 25, because the exercise price of the Companys employee
stock 7




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##### Table of Contents



options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. The interim information regarding pro forma net income and
earnings per share is required by SFAS No. 123, Accounting for Stock Based Compensation, and
SFAS No. 148, Accounting for Stock Based Compensation  Transition and Disclosure. For
purposes of pro forma disclosures, the estimated fair value of the options is amortized to
expense over the vesting period of the options. Compensation expense for options issued to non-employees is based on the fair value of each
option estimated at date of grant using the Black-Scholes option-pricing model. The Company
made no such grants to non-employees during the first three months of either fiscal year 2005
or fiscal year 2004. For purposes of the following pro forma disclosures required by SFAS No. 123, the fair value of
each option granted after fiscal 1995 has been estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average assumptions used for
grants made during the three months ended January 31, 2005 and 2004, respectively: risk-free
interest rate of 2.89% to 3.22% in 2005 and 2.37% to 2.63% in 2004; expected volatility of
43.36% in 2005 and 44.48% in 2004; and expected life of 3.6 years in 2005 and 3.2 years in
2004. The Company has not paid any cash or other dividends and does not anticipate paying dividends
in the foreseeable future; therefore, the expected dividend yield is zero for all periods. The Companys pro forma information for stock-based employee compensation is as follows: Three months ended January 31,2005
    
    
    2004Net income, as reported
    
    $
    83,000
    
    
    $
    134,000Deduct: Stock-based employee
compensation expense determined
under fair value based method
for all awards, net of tax
effect
    
    
    (279,000
    )
    
    
    (78,000
    )Pro forma net income (loss)
    
    ($
    194,000
    )
    
    $
    56,000Pro forma net income (loss) per
share:Basic - as reported
    
    $
    0.01
    
    
    $
    0.01Basic - pro forma
    
    ($
    0.01
    )
    
    $
    0.00Diluted - as reported
    
    $
    0.01
    
    
    $
    0.01Diluted - pro forma
    
    ($
    0.01
    )
    
    $
    0.00
 Diluted pro forma per share information is calculated by including the additional common
shares issuable upon exercise of outstanding options in the basic weighted average share
calculation unless the effect of their inclusion is antidilutive. For the three months ended
January 31, 2005, outstanding options totaled 1,711,000. As these securities were antidilutive,
diluted pro forma net loss per share equaled basic pro forma net loss per share during that
period. The Company did not reflect any stock-based employee compensation expense in the consolidated
financial statements for the periods presented in the above table. 8




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##### Table of Contents



NOTE 8  Comprehensive Income. The Company includes the cumulative foreign currency translation adjustment as well as the net
unrealized gains and loss on cash flow hedges as components of the comprehensive income in
addition to net income for the period. The following table sets forth the computation of
comprehensive income for the periods presented: Three months ended January 31,2005
    
    
    2004Net income
    
    $
    83,000
    
    
    $
    134,000Net unrealized gains on cash flow
hedges, net of tax of $0 and $53,000,
respectively
    
    
    
    
    
    
    80,000Effects of foreign currency translation
    
    
    367,000
    
    
    
    1,024,000Total comprehensive income
    
    $
    450,000
    
    
    $
    1,238,000
 NOTE 9  Legal Proceedings. On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a class action in the
United States District Court for the Southern District of California (U.S. District Court) on
behalf of purchasers of the Companys common stock during the period between September 4, 1997
and July 15, 1998. The action was subsequently consolidated with two similar suits and
plaintiffs filed their Amended and Consolidated Complaint on December 17, 1999. Upon the
Companys motion, the U.S. District Court dismissed the Complaint with leave to amend on July
18, 2000. On September 18, 2000, plaintiffs served their Second Consolidated Amended Complaint
(Second Amended Complaint). On November 6, 2000, the Company filed its motion to dismiss the
Second Amended Complaint, which the U.S. District Court granted, in part, and denied, in part.
The remaining portions of the Second Amended Complaint alleged that, among other things, during
the class period and in violation of the Securities Exchange Act of 1934, the Companys
financial statements, as reported, did not conform to generally accepted accounting principles
with respect to revenues and inventory levels. It further alleged that certain Company
executives made false or misleading statements or omissions concerning product demand and that
two former executives engaged in insider trading. On November 8, 2004, the U.S. District Court
entered a Final Approval of Settlement. Under the settlement, all claims will be dismissed and
the litigation has been concluded in exchange for a payment of $15.25 million, approximately
82% of which was paid by Ashworths insurance carriers. As part of the settlement, Ashworth
has adopted
modifications to certain corporate governance policies. Ashworth recorded a pre-tax charge in
the third quarter of fiscal year 2004 of $3 million related to settlement of this suit. The Company is party to other claims and litigation proceedings arising in the normal course of
business. Although the legal responsibility and financial impact with respect to such other
claims and litigation cannot currently be ascertained, the Company does not believe that these
other matters will result in payment by the Company of monetary damages, net of any applicable
insurance proceeds, that, in the aggregate, would be material in relation to the consolidated
financial position, liquidity or results of operations of the Company. 9




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##### Table of Contents



NOTE 10  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 three reportable segments: Domestic, Ashworth, U.K., Ltd. and
Other International. The chief operating decision maker evaluates segment performance based
primarily on revenues and income from operations. Interest income and expense, unusual and
infrequent items and income tax expense are evaluated on a consolidated basis and are not
allocated to the Companys business segments. Segment information is summarized (for the
periods or dates presented) below: Three months January 31,2005
    
    
    2004Net revenues:Domestic
    
    $
    31,569,000
    
    
    $
    23,061,000Ashworth, U.K., Ltd.
    
    
    3,415,000
    
    
    
    2,818,000Other International
    
    
    1,529,000
    
    
    
    1,459,000Total
    
    $
    36,513,000
    
    
    $
    27,338,000Income (loss) from operations:Domestic
    
    $
    (181,000
    )
    
    $
    9,000Ashworth, U.K., Ltd.
    
    
    346,000
    
    
    
    (145,000
    )Other International
    
    
    379,000
    
    
    
    422,000Total
    
    $
    544,000
    
    
    $
    286,000Capital expenditures:Domestic
    
    $
    2,395,000
    
    
    $
    804,000Ashworth, U.K., Ltd.
    
    
    138,000
    
    
    
    185,000Total
    
    $
    2,533,000
    
    
    $
    989,000Depreciation expense:Domestic
    
    $
    972,000
    
    
    $
    798,000Ashworth, U.K., Ltd.
    
    
    77,000
    
    
    
    55,000Total
    
    $
    1,049,000
    
    
    $
    853,000
 January 31,
    
    
    October 31,2005
    
    
    2004Total assets:Domestic
    
    $
    140,896,000
    
    
    $
    137,605,000Ashworth, U.K., Ltd.
    
    
    18,353,000
    
    
    
    18,430,000Other International
    
    
    3,821,000
    
    
    
    3,451,000Total
    
    $
    163,070,000
    
    
    $
    159,486,000Long lived assets, at cost:Domestic
    
    $
    79,242,000
    
    
    $
    76,805,000Ashworth, U.K., Ltd.
    
    
    1,921,000
    
    
    
    1,789,000Total
    
    $
    81,163,000
    
    
    $
    78,594,000Goodwill:Domestic
    
    $
    12,642,000
    
    
    $
    12,640,000
 10




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS General The Company operates in an industry that is highly competitive and must accurately anticipate
fashion trends and consumer demand for its products. There are many factors that could cause
actual results to differ materially from the projected results contained in certain forward-looking
statements in this report. For additional information, see Cautionary Statements and Risk
Factors, below. Because the Companys business is seasonal, the current balance sheet balances at January 31,
2005 may more meaningfully be compared to the balances at January 31, 2004, rather than to the
balances at October 31, 2004. Critical Accounting Policies In response to the SECs Release Numbers 33-8040, Cautionary Advice Regarding Disclosure
About Critical Accounting Policies and 33-8056, Commission Statement About Managements
Discussion and Analysis of Financial Condition and Results of Operations, the Company has
identified the following critical accounting policies that affect its more significant judgments
and estimates used in the preparation of its consolidated financial statements. Revenue Recognition.Based on its terms of F.O.B. shipping point, where risk of loss and
title transfer to the buyer at the time of shipment, the Company recognizes revenue at the time
products are shipped or, for Company stores, at the point of sale. The Company records sales in
accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition. Under these
guidelines, revenue is recognized when all of the following exist: persuasive evidence of a sale
arrangement exists, delivery of the product has occurred, the price is fixed or determinable and
payment is reasonably assured. Provisions are made in the period of the sale for estimated product
returns and sales allowances. The Company also includes payments from its customers for shipping
and handling in its net revenues line item in accordance with Emerging Issues Task Force (EITF)
00-10, Accounting of Shipping and Handling Fees and Costs. Sales Returns and Other Allowances.Management must make estimates of potential future
product returns related to current period product revenues. The Company also makes payments and/or
grants credits to its customers as markdown (buydown) allowances and must make estimates of such
potential future allowances. Management analyzes historical returns and allowances, current
economic trends, changes in customer demand, and sell-through of the Companys products when
evaluating the adequacy of the sales returns and other allowances. Significant management
judgments and estimates must be made and used in connection with establishing the sales returns and
other allowances in any accounting period. These markdown allowances are reported as a reduction
of the Companys net revenues. Material differences may result in the amount and timing of the
Companys revenues for any period if management makes different judgments or utilizes different
estimates. The reserves for sales returns and other allowances amounted to $1.1 million at January
31, 2005 compared to $1.3 million at October 31, 2004 and $0.9 million at January 31, 2004. Allowance for Doubtful Accounts.Management must make estimates of the uncollectability of
accounts receivable. The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments, which results in bad debt
expense. Management determines the adequacy of this allowance by analyzing current economic
conditions, historical bad debts and continually evaluating individual customer receivables
considering the customers 11




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financial condition. If the financial condition of any significant
customers were to deteriorate, resulting in the impairment of their ability to make payments, material additional allowances for doubtful
accounts may be required. The Company maintains credit insurance to cover many of its major
accounts. The Companys trade accounts receivable balance was $30.5 million, net of allowances for
doubtful accounts of $1.3 million, at January 31, 2005, as compared to the balance of $39.3
million, net of allowances for doubtful accounts of $1.2 million, at October 31, 2004. At January
31, 2004, the trade accounts receivable balance was $27.4 million, net of allowances for doubtful
accounts of $1.1 million. Inventory.The Company writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the estimated net realizable
value based on assumptions about age of the inventory, future demand and market conditions. This
process provides for a new basis for the inventory until it is sold. If actual market conditions
are less favorable than those projected by management, additional inventory write-downs may be
required. The Companys inventory balance was $59.2 million, net of inventory write-downs of $1.1
million, at January 31, 2005, as compared to an inventory balance of $49.2 million, net of
inventory write-downs of $0.8 million, at October 31, 2004. At January 31, 2004, the inventory
balance was $53.1 million, net of inventory write-downs of $0.8 million. Asset Purchase Credits.In November 2000, the Company entered into an agreement with a third
party whereby prior seasons slower selling inventory which was not damaged was exchanged for
future asset purchase credits (APCs), which may be utilized by the Company to purchase future
goods and services over a four-year period. The original value of the inventory exchanged (at
cost) was $1.4 million resulting in $1.4 million in future APCs. In December 2003, the Company
amended its agreement with the third party to exchange $0.9 million of additional prior seasons
slower selling inventory (at cost) which was not damaged for an additional $0.9 million in future
APCs and an extension of the original November 2000 agreement through December 1, 2007. The
Company has entered into contracts with several third party suppliers who have agreed to accept
these APCs, in part, as payment for goods and services. The Company purchases products such as
sales fixtures, office and packaging supplies, as well as temporary help, freight and printing
services from such third party suppliers. From time to time, the Company may enter into additional
contracts with such third party suppliers to use the APCs. Management reviews and estimates the
likelihood of fully utilizing the APCs on a periodic basis. If the Company is unable to find
suppliers who agree to accept the APCs in quantities as projected by management, a write-down of
the value of the APCs may be required. At January 31, 2005, the Company had $0.6 million of the
APCs remaining and management expects to fully utilize them over the remaining life of the contract
through December 1, 2007. At January 31, 2005, the Company has recorded $0.4 million of the APCs
in its Other Current Assets line item and $0.2 million in its Other Assets line item. Off-Balance Sheet Arrangements At January 31, 2005 and 2004, 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. 12




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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 88% of its products manufactured in Asian
countries. The Company embroiders a majority of these garments with custom golf course, tournament
and corporate logos for its customers. In July 2004, the Company completed the acquisition (the Gekko Acquisition) of all of the
membership interests in Gekko Brands, LLC (Gekko), a leading designer, producer and distributor
of headwear and apparel under The GameÒ and KudzuÒ brands. Ashworth expects that the
operations of this subsidiary will continue to focus on designing, producing and distributing
headwear and apparel. With the acquisition of Gekko, the Company expands its existing distribution
channels to include colleges and universities, NASCAR/racing markets, and sporting goods dealers
that serve the high school and college markets. The purchase price for the Gekko Acquisition was $24.0 million consisting of $23.0 million in
cash and a $1.0 million promissory note. Up to an additional $6.5 million will be paid to the
remaining members of Gekkos management if the subsidiary achieves specific EBIT and other
operating targets over approximately the next four years or through Ashworths fiscal year 2008. In connection with the Gekko Acquisition, Ashworth entered into a new secured 5-year bank
facility comprised of a $20.0 million term loan and a $35.0 million line of credit replacing its
prior $55.0 million facility. To finance the cash purchase price of the Gekko Acquisition,
Ashworth utilized the term loan together with part of the new line of credit. Also during the third quarter of fiscal 2004, the Company recorded a pre-tax charge of $3.0
million related to a settlement to conclude the securities class action lawsuit brought in 1999
against the Company and certain current and former directors and officers in the United States
District Court for the Southern District of California. The litigation was brought on behalf of a
class of investors who purchased the Companys stock in the open market between September 4, 1997
and July 15, 1998. Under the settlement, all claims have been dismissed and the litigation was
terminated in exchange for a payment of $15.3 million, approximately 82% of which was paid by
Ashworths insurance carriers. As part of the settlement, Ashworth has adopted modifications to
certain corporate governance policies. During the second quarter of fiscal 2004, the Company completed two transactions relating to
its distribution facilities. In February 2004, the Company completed the sale and lease-back of
its old distribution center located in Carlsbad, California. The Company sold the Carlsbad
distribution center for $5.7 million and realized a gain on sale of fixed assets of $1.6 million.
In April 2004, the Company completed the purchase of the new distribution facility in Oceanside,
California for approximately $14.0 million. The Company applied the tax deferred gain on sale of
the old facility to reduce the cost basis of the new facility, for tax purposes, utilizing a
tax-deferred exchange under Internal Revenue Code section 1031. During the first quarter of fiscal 2005, the Company placed into service its new distribution
center in Oceanside, California and is currently integrating information systems and improving
operational processes. 13




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The Company includes F.O.B. purchase price, inbound freight charges, duty, buying commissions
and overhead in its cost of goods sold line item. Overhead costs include purchasing and
receiving costs, inspection costs, warehousing costs, internal transfers costs and other costs
associated with the Companys distribution. The Company does not exclude any of these costs from
cost of goods sold. Results of Operations First quarter 2005 compared to First quarter 2004 Consolidated net revenues for the first quarter of fiscal 2005 increased 33.6% to $36.5
million from $27.3 million for the same period in 2004. The increase was primarily due to the
addition of Gekkos net revenues as well as higher revenues from the Companys retail distribution
channel and international segments. The increases were partially offset by decreases in net
revenues in the corporate, green grass and off-course specialty distribution channels. Net revenues for the domestic segment increased 36.9% to $31.6 million for the current quarter
from $23.1 million in the first quarter of 2004, primarily due to the acquisition of Gekko, which
contributed $8.6 million in net revenues to the consolidated results for the first quarter of 2005.
Net revenues from the Companys retail distribution channel increased 1.3% or $48,000, primarily
driven by an approximately 20% year-over-year increase in sales of
mens apparel into the channel, partially offset by a decrease
in sales of womens apparel into the channel.
Net revenues from the green grass and off-course specialty distribution channel decreased 1.2% or
$163,000 due to generally slow golf industry conditions. Net revenues from the Companys corporate
distribution channel decreased by 8.6% or $404,000. The decrease in net revenues in the corporate
distribution channel was primarily resulting from a delay in the launch of our 2005
Authenticsä product line due to planned alterations of the product assortments within the
line. Net revenues for the Companys U.K. subsidiary increased 21.1% to $3.4 million for the current
quarter from $2.8 million for the same period of the prior fiscal year. The increase in net
revenues for the Companys U.K. subsidiary was primarily due to favorable market conditions driven
by strength of market currencies verses the U.S. dollar and favorable foreign currency exchange
rates fluctuations. Net revenues for the Companys other international segment increase 4.8% but remained at
approximately $1.5 million in the current quarter compared to the same quarter of the previous
year. The net revenues for the other international segment were affected by an increase in
international licensee and distributor revenues, partially offset by a decrease in revenues from
the Companys Canadian divisions. Consolidated gross margin for the first quarter of fiscal 2005 increased 100 basis points to
40.1% as compared to 39.1% for the same quarter a year earlier. This improvement was primarily due
to the addition of The Game and Kudzu brands partially offset by increased costs related to the new
distribution center. Consolidated selling, general and administrative (SG&A) expenses increased 35.4% to $14.1
million for the first quarter of fiscal 2005 from $10.4 million for the same period in fiscal 2004.
As a percent of net revenues, SG&A expenses were 38.6% for the first quarter of fiscal 2005 as
compared to 38.1% for the same period of the prior year. The increase in SG&A is primarily due to
the acquisition of Gekko in July 2004 and incremental costs related to the timing of advertising
copy placement. Total other expense increased to $406,000 for the first quarter of fiscal 2005 from $63,000 in
the first quarter of fiscal 2004. The increase was primarily due to higher interest expense
resulting from increased long-term debt. 14




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The effective income tax rate for the first quarter of fiscal 2005 remained unchanged from the
same period of fiscal year 2004 at 40.0% of pre-tax income. Capital Resources and Liquidity The Companys primary sources of liquidity for the next 12 months are expected to be its cash
flows from operations, the working capital line of credit with its bank and other financial
alternatives such as leasing. The Company requires cash for capital expenditures and other
requirements associated with the expansion of its domestic and international production,
distribution and sales, as well as for general working capital purposes. Ashworths need for
working capital is seasonal, with the greatest requirements existing from approximately December
through the end of July each year. The Company typically builds up its inventory during this
period to provide product for shipment for the spring/summer selling season. On July 6, 2004, the Company entered into a new business loan agreement with Union Bank of
California, N.A., as the administrative agent, and two other lenders. The new loan agreement is
comprised of a $20.0 million term loan and a $35.0 million revolving credit facility, which expires
on July 6, 2009 and is collateralized by substantially all of the assets of the Company other than
the Companys real estate. Under this loan agreement, interest on the $20.0 million term loan is fixed at 5.4% for the
term of the loan. Interest on the revolving credit facility is charged at the banks reference
rate. At January 31, 2005, the banks reference rate was 5.25%. 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 $0.5 million. On September 3, 2004, the Company entered into the First Amendment to the loan agreement to
amend Section 6.12(a), Tangible Net Worth. The loan agreement, as amended, contains certain
financial covenants that include requirements that the Company maintain (1) a minimum tangible net
worth of $74.0 million plus the net proceeds from any equity securities issued (including net
proceeds from stock option exercises) after the date of the loan agreement for the period ending
October 31, 2004, and a minimum tangible net worth of $74.0 million, plus 90% of net income after
taxes (without subtracting losses) earned in each quarterly accounting period commencing after
January 31, 2005, plus the net proceeds from any equity securities issued (including net proceeds
from stock option exercises) after the date of the loan agreement, (2) a minimum earnings before
interest, income taxes, depreciation and amortization (EBITDA) determined on a rolling four
quarters basis ranging from $16.5 million at July 6, 2004 and increasing over time to $27.0 million
at October 31, 2008 and thereafter, (3) a minimum ratio of cash and accounts receivable to current
liabilities of 0.75:1.00 for fiscal quarters ending January 31 and April 30 and 1.00:1.00 for
fiscal quarters ending July 31 and October 31, and (4) a minimum fixed charge coverage ratio of
1.10:1.00 at April 30, 2004 and 1.25:1.00 thereafter. The loan agreement limits annual lease and
rental expense associated with the Companys new distribution center in Oceanside, California as
well as annual capital expenditures in any single fiscal year on a consolidated basis in excess of
certain amounts allowed for the acquisition of real property and equipment in connection with the
new distribution center. The loan agreement has an additional requirement where, for any period of
30 consecutive days, the total indebtedness under the revolving credit facility may not be more
than $15.0 million. The loan agreement also limits the annual aggregate amount the Company may
spend to acquire shares of its common stock. The Company is in compliance with all of the loan
agreements financial covenants as of January 31, 2005. The line of credit under the loan agreement may also be used to finance commercial letters of
credit and standby letters of credit. Commercial letters of credit outstanding under this loan
agreement totaled $4.0 million at January 31, 2005 as compared to $4.1 million outstanding at
January 31, 2004 15




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under the prior loan agreement. The Company had $8.3 million outstanding against
the revolving credit facility under this loan agreement at January 31, 2005, compared to $3.8 million outstanding
at January 31, 2004 under the prior agreement. The decrease in outstanding letters of credit is
primarily due to the continued conversion of vendors from letters of credit to open credit terms.
The increase in borrowings against the revolving credit facility is primarily due to a $1.5 million
incremental increase in capital expenditures, $1.0 million in repayments on the term loan and other
operating cash flow needs. The Company had $18.0 million outstanding on the term loan under this
loan agreement at January 31, 2005 compared to $19.0 million at October 31, 2004. At January 31,
2005, $22.7 million was available for borrowings against the revolving credit facility under this
loan agreement. During the three months ended January 31, 2005, cash used in operations was $4.4 million as
compared to $2.0 million used in operations during the same period of the prior fiscal year. The
increase in cash used in operations was primarily due to higher working capital requirements as the
result of the acquisition of Gekko. Net trade receivables were $30.5 million at January 31, 2005, a decrease of $8.7 million from
the balance at October 31, 2004. Because the Companys business is seasonal, the net receivables
balance may more meaningfully be compared to the balance of $27.4 million at January 31, 2004,
rather than the year-end balance. The comparison of the first quarter fiscal 2005 balance to the
first quarter fiscal 2004 balance shows an increase of approximately $3.1 million. This increase
is due to the addition of the Gekko net trade receivables of $4.1 million, partially
offset by a decrease in trade receivables due to more timely collections. Net inventories increased 20.3% to $59.2 million at January 31, 2005 from $49.2 million at
October 31, 2004, primarily due to the seasonal nature of the Companys golf distribution channel
and the Companys inventory requirements to meet market demand in the spring/summer selling season.
Compared to net inventories of $53.1 million at January 31, 2004, net inventories at January 31,
2005 have increased by 11.6%, primarily due to the addition of Gekko. The Company
believes that its current inventory mix is appropriate to respond to anticipated market demand. Current liabilities increased 13.3% to $32.9 million at January 31, 2005 from $29.1 million at
October 31, 2004. Compared to current liabilities of $18.3 million at January 31, 2004, current
liabilities increased 79.8%, primarily due to the $3.8 million in additional current liabilities
from the acquisition of Gekko, the additional $4.2 million in the current portion of long-term debt
related to the term loan used to finance part of the Gekko Acquisition and an increase in
borrowings against the line of credit of $4.5 million to fund working capital requirements. On October 25, 2002, the Company entered into an agreement to purchase the land and building,
to be built to the Companys specifications, in the Ocean Ranch Corporate Center in Oceanside,
California. The building was constructed with approximately 200,000 square feet of useable office
and warehouse space to warehouse, embroider, finish, package and distribute the Companys clothing
products and related accessories. On April 2, 2004, the Company completed the purchase of the new
distribution center for approximately $14.0 million and entered into a secured loan agreement with
a bank to finance $11.7 million of the purchase price. The loan is at a fixed interest rate of
5.0% and will be amortized over 30 years, but is due and payable on May 1, 2014. To fulfill
certain requirements under the mortgage loan agreement, the Company created Ashworth EDC LLC, a
special purpose entity, to be the purchaser and mortgagor. Ashworth EDC LLC is a wholly owned
limited liability company organized under the laws of the State of Delaware and its results and
assets are reported in the condensed consolidated statements included in this report. On November
1, 2004, the new distribution center was placed into service. During the first three months of fiscal 2005, the Company incurred capital expenditures of
$2.5 16




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million primarily for computer systems and equipment, new outlet stores and distribution
center equipment. The Company anticipates capital spending of between $2.5 million and $3.5 million
during the remainder of fiscal 2005, primarily on outlet stores openings, distribution center
related improvements and renovations and upgrades of computer systems and equipment. Management
currently intends to finance the purchase of the additional capital equipment from the Companys
cash resources, but may use leases or equipment financing agreements if deemed appropriate. The Company capitalized interest of $27,000 during the three months ended January 31, 2004
related to self-constructed construction in progress for the new distribution center. Construction
of the new distribution center was completed and the self-constructed assets were placed in service
on November 1, 2004. On February 24, 2004, the Company sold certain property located in Carlsbad, California, used
in its distribution operation for $5.7 million and recorded a gain on disposal of fixed assets of
$1.6 million. The land, buildings and other assets were reported in the Companys domestic segment
and were sold as a unit on an as is basis. As a result of the sale, the Company paid the $2.6
million balance due on the mortgage relating to the subject property. The Company also entered
into a lease agreement to lease the facility from the new owner. The term of the lease commenced
on February 24, 2004 and terminated on December 31, 2004. Under the terms of the prior lease
agreement, the Company paid monthly rent of approximately $47,000 plus taxes, insurance and
utilities. On August 30, 2004, the Company agreed to a schedule with Key Equipment Finance, a Division of
Key Corporate Capital, Inc. (KEF), thereby completing the Master Equipment Lease Agreement, dated
as of June 23, 2003, previously entered into by Ashworth and KEF. Under the terms of the schedule,
we will be leasing equipment for our distribution center in Oceanside, California. The aggregate
cost of the equipment is approximately $10.4 million. The initial term of the lease is for
ninety-one (91) months beginning on September 1, 2004 and the monthly rent payment is $128,800. At
the end of the initial term, the Company will have the option to (1) purchase all, but not less
than all, equipment on the initial term expiration date at a price equal to the greater of (a) the
then fair market sale value thereof, or (b) 12% of the total cost of the equipment (plus, in each
case, applicable sales taxes), (2) renew the lease on a month-to-month basis at the same rent
payable at the expiration of the initial lease term, (3) renew the lease for a minimum period of
not less than 12 consecutive months at the then current fair market rental value, or (4) return
such equipment to KEF pursuant to, and in the condition required by, the lease. The Company is party to an exclusive licensing agreement with Callaway Golf Company which
requires certain minimum royalty payments which began in January 2003. The agreement is effective
until December 31, 2010 and, at Ashworths sole discretion, may be extended for on five-year term
provided that Ashworth meets or exceeds certain minimum requirements for calendar years 2008 and
2009, that Ashworth gives notice of its intention to renew by January 1, 2010 and that Ashworth is
not in material breach of the agreement. 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 $463,000 in the three months
ended January 31, 2005, of which $357,000 is due to the issuance of 62,866 shares of common stock
on exercise of options and $106,000 is the tax benefit related to the exercise of those options. Based on current levels of operations, the Company expects that sufficient cash flow will be
generated from operations so that, combined with other financing alternatives available, including
cash on hand, borrowings under its bank credit facility and leasing alternatives, the Company will
be able to meet all of its debt service, capital expenditure and working capital requirements for
at least the next 12 months. 17




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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 will 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 operations in the same period as the hedged
transactions. These contracts have maturity dates that do not normally exceed 12 months. During
the quarter ended January 31, 2005, neither the Company nor any of its subsidiaries had any
outstanding foreign exchange contracts. New Accounting Standards In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4.This statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to
clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated that ...under
some circumstances, items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current period charges.... SFAS No.
151 requires that those items be recognized as current-period charges regardless of whether they
meet the criterion of so abnormal. In addition, this statement requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the production
facilities. The provisions of SFAS 151 shall be applied prospectively and are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier
application permitted for inventory costs incurred during fiscal years beginning after the date
this Statement is issued. The Company anticipates adopting SFAS No. 151 effective November 1,
2005. The Companys adoption of SFAS No. 151 is not expected to have a material impact on the
Companys financial position and results of operations. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment
of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions, is based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of assets exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle. This Statement amends Opinion 29 to eliminate the exception
for nonmonetary exchanges of similar productive assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the entity are expected
to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company anticipates
adopting SFAS No. 153 effective November 1, 2005. The Companys adoption of SFAS No. 153 is not
expected to have a material impact on the Companys financial position and results of operations. In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123(R)), Share-Based
Payment. SFAS No. 123(R) revises FASB Statement No. 123, Accounting for Stock-Based Compensation,
and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,and its related
implementation guidance. The Statement focuses primarily on accounting for transactions in which
an entity obtains employee services in share-based payment transactions. The Statement requires a
public entity to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited exceptions). That cost
will be 18




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recognized over the period during which an employee is required to provide service in
exchange for the award  the requisite service period (usually the vesting period). The cost of employee
services received shall be measured at its then current fair value and then remeasured at fair
value at each reporting date through the settlement date. Changes in fair value during the
requisite service period will be recognized as compensation cost over that period. The Statement
is effective as of the beginning of the first interim or annual reporting period that begins after
June 15, 2005. The Statement also requires that, as of the required effective date, all public
entities that used the fair-value based method for either recognition or disclosure under Statement
123 shall apply the modified prospective application transition method. For periods before the
required effective date, public entities may elect to apply the modified retrospective application
transition method. The Company anticipates adopting SFAS No. 123(R), effective August 1, 2005,
using the modified prospective application transition method. Under that method, the provisions of
the Statement apply to new awards and to awards modified, repurchased, or cancelled after the
required effective date. Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered that are outstanding as of the required effective date
shall be recognized as the requisite service is rendered on or after the required effective date.
Although the Companys adoption of SFAS No. 123(R) could have a material impact on the Companys
financial position and results of operations, management is still evaluating the potential impact
from adopting this Statement. Cautionary Statements and Risk Factors This report contains certain forward-looking statements, including without limitation those
regarding the Companys plans and expectations for revenue growth, product lines, strategic
alliances, designs and seasonal collections, capital spending, marketing programs, foreign
sourcing, cost controls, inventory levels and availability of working capital. These
forward-looking statements may contain the words believe, anticipate, expect, estimate,
project, will be, will continue, will likely result or other similar words and phrases.
Readers are cautioned not to place undue reliance on these forward-looking statements. The Company
undertakes no obligation to update any such statements or publicly announce any updates or
revisions to any of the forward-looking statements contained herein. Forward-looking statements
and the Companys plans and expectations are subject to a number of risks and uncertainties that
could cause actual results to differ materially from those anticipated, and the Companys business
in general is subject to certain risks that could affect the value of the Companys common stock.
These risks include, but are not limited to, the following:  ú
    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.ú
    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.ú
    The Companys results of operations would be adversely affected if
the new Oceanside distribution center does not operate as
anticipated or functionality problems are encountered. Any such
operational problems may cause the Company to incur additional
expense, experience delays in customer shipments, or require the
Company to lease additional distribution space. In addition, 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.ú
    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 19




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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.ú
    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.ú
    In July 2004, the Company acquired Gekko, a
leading designer, producer and distributor of headwear and apparel
under The GameÒ and KudzuÒ brands. The Company must
successfully integrate the acquisition to realize the expected
growth in new, quality channels of distribution for the
AshworthÒ and Callaway Golf apparel brands as well as
further growth from The Game and Kudzu brands sales into the
Companys current distribution channels. The Companys results of
operations would be adversely affected if it fails to successfully
integrate the new operations as anticipated or the expected
synergies are not realized.ú
    The outbreak of Severe Acute Respiratory Syndrome (SARS)
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 of SARS, the Avian Flu, or other life threatening
communicable diseases, 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.ú
    The Companys foreign suppliers ability to deliver products may
be adversely affected by future changes in tariffs, quotas and
other trade barriers imposed by the foreign countries, as well as
by the United States. Additionally, such changes could result in
increased volumes of products being delivered through domestic
ports resulting in shipping, port and other transportation related
delays. As a direct result of such delays, if any, the Company
could lose sales. In particular, the suppliers for Gekko are
concentrated in China.ú
    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.ú
    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 and have lower gross profit
margins.ú
    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. 20




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ú
    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
uncollectable accounts.ú
    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 any assurances the outcomes and ultimate
financial impact of any such matters. 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.ú
    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.ú
    The Company maintains high levels of inventory to support its
Authentics TM program as well as the Callaway
Golf apparel basics. 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.ú
    Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will
be required to perform an evaluation of our internal controls over
financial reporting and have our auditor attest to such evaluation
as of October 31, 2005. We have prepared an internal plan of
action for compliance, including a timeline and scheduled
activities, although as of the date of this filing we have not yet
completed the evaluation. Our auditors have not yet completed
their testing of our internal controls. Compliance with these
requirements has been and continues to be expensive and time
consuming. If we fail to timely complete this evaluation, or if
our auditors cannot timely attest to our evaluation, we could be
subject to regulatory scrutiny and a loss of public confidence in
our internal controls.In designing and evaluating our internal controls over financial reporting, we recognize that
any internal control or procedure, no matter how well designed and operated, can provide only
reasonable assurance of achieving desired control objectives, and management is required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. While we believe that our internal controls over financial reporting currently
provide reasonable assurance of achieving their control objectives, no system of internal
controls can be designed to provide absolute assurance of effectiveness. See Item 4. Controls
and Procedures contained in this report. A material failure of internal controls over
financial reporting could materially impact our reported financial results and the market price
of our stock could significantly decline. Additionally, adverse publicity related to a material
failure of internal controls over financial reporting could have a negative impact on our
reputation and business. 21




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Companys debt consists of a term loan, mortgage note, notes payable, capital lease and
line of credit obligations that had a total balance of $38.9 million at January 31, 2005. The debt
bears interest at fixed rates ranging from 3.5% to 5.4%, which approximates fair value based on
current rates offered for debt with similar risks and maturities. The Company also had $8.3
million outstanding at January 31, 2005 on its revolving line of credit with interest charged at a
weighted average rate of 4.21%. Under the loan agreement, borrowings against the revolving line of
credit are charged interest at the banks reference rate (prime) or, at the Companys option, at an
optional interest rate based on LIBOR in increments of $0.5 million for periods of at least 30
days. At January 31, 2005, the banks reference rate was 5.25%. A hypothetical 10% increase in
interest rates during the three months ended January 31, 2005 would have resulted in an $8,000
decrease in net income. For details regarding the Companys variable and fixed rate debt, see Item 2. Management
Discussion and Analysis of Financial Condition and Results of Operations  Capital Resources and
Liquidity. Foreign Currency Exchange Rate Risk The Companys ability to sell its products in foreign markets and the U.S. dollar value of the
sales made in foreign currencies can be significantly influenced by foreign currency fluctuations.
A decrease in the value of foreign currencies relative to the U.S. dollar could result in downward
price pressure for the Companys products or losses from currency exchange rates. From time to
time the Company enters into short-term foreign exchange contracts with its bank to hedge against
the impact of currency fluctuations between the U.S. dollar and the British pound and the U.S.
dollar and the Canadian dollar. The contracts provide that, on specified dates, the Company will
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 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. During the quarter ended January
31, 2005, neither the Company nor any of its subsidiaries had any outstanding foreign exchange
contracts. 
 Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of January 31, 2005, 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, 22




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summarized and reported within required time periods. Changes in Internal Control over Financial Reporting There was no significant change in the Companys internal controls over financial reporting
during the Companys first quarter of fiscal 2005 that has materially affected or is reasonably
likely to materially affect the Companys internal control over financial reporting. 
 PART II OTHER INFORMATION 
 Item 1. LEGAL PROCEEDINGS On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a class action in the
United States District Court for the Southern District of California (U.S. District Court) on
behalf of purchasers of the Companys common stock during the period between September 4, 1997 and
July 15, 1998. The action was subsequently consolidated with two similar suits and plaintiffs
filed their Amended and Consolidated Complaint on December 17, 1999. Upon the Companys motion,
the U.S. District Court dismissed the Complaint with leave to amend on July 18, 2000. On September
18, 2000, plaintiffs served their Second Consolidated Amended Complaint (Second Amended
Complaint). On November 6, 2000, the Company filed its motion to dismiss the Second Amended
Complaint, which the U.S. District Court granted, in part, and denied, in part. The remaining
portions of the Second Amended Complaint alleged that, among other things, during the class period
and in violation of the Securities Exchange Act of 1934, the Companys financial statements, as
reported, did not conform to generally accepted accounting principles with respect to revenues and
inventory levels. It further alleged that certain Company executives made false or misleading
statements or omissions concerning product demand and that two former executives engaged in insider
trading. On November 8, 2004, the U.S. District Court entered a Final Approval of Settlement.
Under the settlement, all claims were dismissed and the litigation was concluded in exchange for
a payment of $15.25 million, approximately 82% of which was paid by Ashworths insurance carriers.
As part of the settlement, Ashworth has adopted modifications to certain corporate governance
policies. Ashworth recorded a pre-tax charge of $3 million in the third quarter of fiscal year
2004 related to settlement of this suit. The Company is party to other claims and litigation proceedings arising in the normal course
of business. Although the legal responsibility and financial impact with respect to such other
claims and litigation cannot currently be ascertained, the Company does not believe that these
other matters will result in payment by the Company of monetary damages, net of any applicable
insurance proceeds, that, in the aggregate, would be material in relation to the consolidated
financial position or results of operations of the Company. 
 Item 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  None 
 Item 3. DEFAULTS UPON
SENIOR SECURITIES  None. 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS  Not applicable. 23




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Item 5. OTHER
INFORMATION As previously disclosed and
discussed above under Item 1, Legal Proceedings, the Company
entered into that certain Stipulation and Agreement of Settlement in
which the U.S. District Court entered a Final Approval of
Settlement on November 8, 2004. 
 Item 6. EXHIBITS Exhibits3(a)
    
    Certificate of Incorporation as filed March 19, 1987 with the Secretary of State of Delaware,
Amendment to Certificate of Incorporation as filed August 3, 1987 and Amendment to Certificate
of Incorporation as filed April 26, 1991 (filed as Exhibit 3(a) to the Companys Registration
Statement dated February 21, 1992 (File No. 33-45078) and incorporated herein by reference)
and Amendment to Certificate of Incorporation as filed April 6, 1995 (filed as Exhibit 3(a) to
the Companys Form 10-K for the fiscal year ended October 31, 1994 (File No. 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)(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. 001-14547) 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. 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).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.
001-14547) 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. 001-14547) and incorporated herein by reference).
 24




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##### Table of Contents



Exhibits10(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. 001-14547) 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. 001-14547) and incorporated herein by reference).10(e)*
    
    Amended and Restated Nonqualified Stock Option Plan dated November 1, 1996 (filed as Exhibit
10(i) to the Companys Form 10-K for the fiscal year ended October 31, 2000 (File No.
001-14547) 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.
001-14547) 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 July 6, 2004, between Ashworth, Inc. as Borrower, Union Bank of
California, N.A., as Administrative Agent and Lender, Bank of the West and Columbus Bank and
Trust as Lenders, expiring July 6, 2009 (filed as Exhibit 10(z)(1) to the Companys Form 10-Q
for the quarter ended July 31, 2004 (File No. 001-14547) and incorporated herein by
reference).10(h)(2)
    
    Guaranty Agreement dated July 6, 2004 between Ashworth Store I, Inc., Ashworth Store II,
Inc., Ashworth Acquisition Corp, Gekko Brands, LLC, Kudzu, LLC and The Game, LLC as Guarantors
and Union Bank of California, N.A., as Administrative Agent on behalf of Ashworth, Inc. as the
Borrower (filed as Exhibit 10(z)(2) to the Companys Form 10-Q for the quarter ended July 31,
2004 (File No. 001-14547) and incorporated herein by reference).10(h)(3)
    
    Security Agreement effective as of July 6, 2004 to the Credit Agreement dated July 6,
2004, between Ashworth, Inc. as Pledgor, Union Bank of California, N.A., as Administrative
Agent and Lender, Bank of the West and Columbus Bank and Trust as Lenders, expiring July 6,
2009(filed as Exhibit 10(z)(3) to the Companys Form 10-Q for the quarter ended July 31, 2004
(File No. 001-14547) and incorporated herein by reference).10(h)(4)
    
    Security Agreement effective as of July 6, 2004 to the Credit Agreement dated July 6,
2004, between Ashworth Store I, Inc., Ashworth Store II, Inc., Ashworth Acquisition Corp,
Gekko Brands, LLC, Kudzu, LLC and The Game, LLC as Pledgor, Union Bank of California, N.A., as
Administrative Agent and Lender, Bank of the West and Columbus Bank and Trust as Lenders,
expiring July 6, 2009 (filed as Exhibit 10(z)(4) to the Companys Form 10-Q for the quarter
ended July 31, 2004 (File No. 001-14547) and incorporated herein by reference).10(h)(5)
    
    Deed of Hypothec of Universality of Moveable Property effective as of July 6, 2004 to the
Credit Agreement dated July 6, 2004, between Ashworth, Inc. as Grantor, Union Bank of
California, N.A., as Administrative Agent and Lender, Bank of the West and Columbus Bank and
Trust as Lenders, expiring July 6, 2009 (filed as Exhibit 10(z)(5) to the Companys Form 10-Q
for the quarter ended July 31, 2004 (File No. 001-14547) and incorporated herein by
reference).
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Exhibits10(h)(6)
    
    Equitable Mortgage Over Securities effective as of July 6, 2004 to the Credit Agreement
dated July 6, 2004, between Ashworth, Inc. as Mortgagor, Union Bank of California, N.A., as
Security Trustee and Beneficiary, Bank of the West and Columbus Bank and Trust as
Beneficiaries, expiring July 6, 2009 (filed as Exhibit 10(z)(6) to the Companys Form 10-Q for
the quarter ended July 31, 2004 (File No. 001-14547) and incorporated herein by reference).10(h)(7)
    
    First Amendment effective as of September 3, 2004 to the Credit Agreement dated
July 6, 2004, between Ashworth, Inc. as Borrower, Union Bank of California, N.A., as
Administrative Agent and Lender, Bank of the West and Columbus Bank and Trust as Lenders,
expiring July 6, 2009 (filed as Exhibit 10(z)(7) to the Companys Form 10-Q for the quarter
ended July 31, 2004 (File No. 001-14547) 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. 001-14547) and incorporated herein by reference).10(j)*
    
    Change in Control Agreement dated November 1, 2000 by and between Ashworth, Inc. and Terence
W. Tsang (filed as Exhibit 10(n) to the Companys Form 10-K for the fiscal year ended October
31, 2000 (File No. 001-14547) 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. 001-14547) and incorporated herein by reference).10(l)*
    
    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. 001-14547) and incorporated herein by
reference).10(m)
    
    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.
001-14547) and incorporated herein by reference).10(n)*
    
    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. 001-14547) and incorporated herein by reference).10(o)
    
    Purchase and Installation Agreement dated April 10, 2003 between Ashworth, Inc. and Gartner
Storage & Sorter Systems of Pennsylvania (filed as Exhibit 10 (r) to the Companys Form 10-Q
for the quarter ended April 30, 2003 (File No. 001-14547) and incorporated herein by
reference).10(p)
    
    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. 001-14547) and incorporated herein by reference).10(q)
    
    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. 001-14547) and incorporated herein by reference).10(r)(1)
    
    Master Equipment Lease Agreement dated as of June 23, 2003 by and between Key Equipment
Finance and Ashworth, Inc. including Amendment 01, the Assignment of Purchase Agreement and
the Certificate of Authority (filed as Exhibit 10(u) to the Companys Form 10-Q for the
quarter ended July 31, 2003 (File No. 001-14547) and incorporated herein by reference).
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Exhibits10(r)(2)
    
    Equipment Schedule No. 01 dated as of August 30, 2004 by and between Ashworth, Inc. and
Key Equipment Finance, a Division of Key Corporate Capital, Inc.(filed as Exhibit 99.1 to the
Companys Form 8-K on September 3, 2004 (File No. 001-14547) and incorporated herein by
reference).10(s)*
    
    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. 001-14547) and incorporated herein by
reference).10(t)
    
    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. 001-14547) and incorporated herein by reference).10(u)
    
    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. 001-14547) and incorporated herein by reference).10(v)(1)
    
    Purchase and Sale Agreement, dated as of December 2, 2003, by and between Ashworth, Inc.
and LBA Inc. (filed as Exhibit 10(w)(1) to the Companys Form 10-Q for the quarter ended
January 31, 2004 (File No. 001-14547) and incorporated herein by reference).10(v)(2)
    
    First Amendment to Purchase and Sale Agreement, dated as of January 29, 2004, by and
between Ashworth, Inc. and LBA Inc. (filed as Exhibit 10(w)(2) to the Companys Form 10-Q for
the quarter ended January 31, 2004 (File No. 001-14547) and incorporated herein by reference).10(v)(3)
    
    Assignment and Assumption of Purchase and Sale Agreement, effective February 24, 2004, by
and between LBA Inc. and LBA Industrial Fund-Canyon, Inc. (filed as Exhibit 10(w)(3) to the
Companys Form 10-Q for the quarter ended January 31, 2004 (File No. 001-14547) and
incorporated herein by reference).10(v)(4)
    
    Lease dated February 24, 2004 by and between Ashworth, Inc. and LBA Industrial
Fund-Canyon, Inc. (filed as Exhibit 10(w)(4) to the Companys Form 10-Q for the quarter ended
January 31, 2004 (File No. 001-14547) and incorporated herein by reference).10(v)(5)
    
    Exchange Agreement and Supplemental Closing Instructions, dated as of December 3, 2003, by
and between Ashworth, Inc. and Asset Preservation, Inc. (filed as Exhibit 10(w)(5) to the
Companys Form 10-Q for the quarter ended January 31, 2004 (File No. 001-14547) and
incorporated herein by reference).10(w)(1)
    
    Assignment and Assumption Agreement, effective April 1, 2004, by and between Innovative
Development Enterprises, Inc., Ashworth EDC, LLC and Ashworth, Inc. (filed as Exhibit 10(x)(1)
to the Companys Form 10-Q for the quarter ended April 30, 2004 (File No. 001-14547) and
incorporated herein by reference).10(w)(2)
    
    Grant Deed, effective March 30, 2004, by and between Innovative Development Enterprises,
Inc., Ashworth EDC, LLC. (filed as Exhibit 10(x)(2) to the Companys Form 10-Q for the quarter
ended April 30, 2004 (File No. 001-14547) and incorporated herein by reference).10(w)(3)
    
    Loan Agreement, effective April 2, 2004, by and between Ashworth EDC, LLC and Bank of
America, N.A. (filed as Exhibit 10(x)(3) to the Companys Form 10-Q for the quarter ended
April 30, 2004 (File No. 001-14547) and incorporated herein by reference).10(w)(4)
    
    Promissory Note, effective April 2, 2004, by and between Ashworth EDC, LLC and Bank of
America, N.A. (filed as Exhibit 10(x)(4) to the Companys Form 10-Q for the quarter ended
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##### Table of Contents



ExhibitsApril 30, 2004 (File No. 001-14547) and incorporated herein by reference).10(w)(5)
    
    Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing,
effective April 2, 2004, by and between Ashworth EDC, LLC, PRLAP, Inc. and Bank of America,
N.A. (filed as Exhibit 10(x)(5) to the Companys Form 10-Q for the quarter ended April 30,
2004 (File No. 001-14547) and incorporated herein by reference).10(w)(6)
    
    Environmental Indemnity Agreement, effective April 2, 2004, by and between Ashworth EDC,
LLC, Ashworth, Inc. and Bank of America, N.A. (filed as Exhibit 10(x)(6) to the Companys Form
10-Q for the quarter ended April 30, 2004 (File No. 001-14547) and incorporated herein by
reference).10(x)(1)
    
    Membership Interests Purchase Agreement, dated July 6, 2004, by and among Ashworth
Acquisition Corp. and the selling members, identified therein (filed as Exhibit 99.1 to the
Companys Form 8-K on July 21, 2004 (File No. 001-14547) and incorporated herein by
reference).10(x)(2)
    
    Ashworth Acquisition Corp. Promissory Note in favor of W. C. Bradley Co. (filed as Exhibit
99.2 to the Companys Form 8-K on July 21, 2004 (File No. 001-14547) and incorporated herein
by reference).10(x)(3)
    
    Ashworth, Inc. Guaranty of Ashworth Acquisition Corp. Promissory Note in favor of W. C.
Bradley Co. (filed as Exhibit 99.3 to the Companys Form 8-K on July 21, 2004 (File No.
001-14547) and incorporated herein by reference).10(x)(4)
    
    Amended and Restated Lease Agreement, dated July 6, 2004, by and between 16 Downing, LLC
as Lessor and Gekko Brands, LLC as Lessee (filed as Exhibit 99.4 to the Companys Form 8-K
July 21, 2004 (File No. 001-14547) and incorporated herein by reference).10(x)(5)
    
    Ashworth, Inc. Guaranty of Payments under the Amended and Restated Lease Agreement, dated
July 6, 2004, by and between 16 Downing, LLC as Lessor and Gekko Brands, LLC as Lessee (filed
as Exhibit 99.5 to the Companys Form 8-K on July 21, 2004 (File No. 001-14547) and
incorporated herein by reference).10(x)(6)
    
    Form of Executive Employment Agreement by and between Gekko Brands, LLC and certain
selling members (filed as Exhibit 99.6 to the Companys Form 8-K on July 21, 2004 (File No.
001-14547) and incorporated herein by reference).10(y)*
    
    Form of Stock Option Agreement for issuance of stock option grants to each of the Companys
executive officers and non-employee directors on December 21, 2004 (filed as Exhibit 10.1 to
the Companys Form 8-K on December 22, 2004 (File No. 001-14547) and incorporated herein by
reference.10(z)*
    
    Employment Agreement, effective November 1, 2004, by and between Ashworth, Inc. and Per
Gasseholm (filed as Exhibit 10.1 to the Companys Form 8-K on October 12, 2004 (File No.
001-14547) and incorporated herein by reference).10.1
    
    Stipulation and Agreement of
Settlement regarding shareholder class-action lawsuit in which the
U.S. District Court entered a Final Approval of Settlement on
November 8, 2004.14
    
    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 year ended October 31, 2003 (file No. 001-14547) 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
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##### Table of Contents



ExhibitsSarbanes-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.
        Certain portions of this exhibit have been omitted pursuant to a request for confidential
treatment filed separately with the Securities and Exchange Commission. 29




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##### Table of Contents



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 11, 2005
    
    By: /s/ Terence W. TsangTerence W. Tsang
Executive Vice President,
Chief Financial Officer and
Treasurer
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EXHIBIT INDEX ExhibitNumber
    
    
    Description of Exhibit10.1
    
    

Stipulation
and Agreement of Settlement regarding shareholder class-action
lawsuit in which the U.S. District Court entered a Final
Approval of Settlement on November 8, 200431.1
    
    
    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.
 31