##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended April 30, 2004 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: 0-18553 Ashworth, Inc.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    84-1052000
(I.R.S. Employer
Identification No.)
 2765 LOKER AVENUE WEST
CARLSBAD, CA 92008
(Address of Principal Executive Offices) (760) 438-6610
(Telephone No. Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
x  No
o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
o  No
x Indicate the number of shares outstanding of each of the registrants classes
of common stock, as of the latest practicable date. Title
    
    Outstanding at June 10, 2004$.001 par value Common Stock
    
    13,449,002




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INDEX  
 PAGEPart I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets
    
    1Condensed Consolidated Statements of Income
    
    2Condensed Consolidated Statements of Cash Flows
    
    3Notes to Condensed Consolidated Financial Statements
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    9Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    19Item 4. Controls and Procedures
    
    19Part II. Other InformationItem 1. Legal Proceedings
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    20Item 3. Defaults Upon Senior Securities
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    20Item 5. Other Information
    
    21Item 6. Exhibits and Reports on Form 8-K
    
    21Signatures
    
    26Exhibit Index
    
    27EXHIBIT 10(X)(1)EXHIBIT 10(X)(2)EXHIBIT 10(X)(3)EXHIBIT 10(X)(4)EXHIBIT 10(X)(5)EXHIBIT 10(X)(6)EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  -ii-




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PART I 
 FINANCIAL INFORMATION 
 Item 1. Financial Statements ASHWORTH, INC. AND SUBSIDIARIES 
 
 April 30,
    
    October 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,747,000
    
    
    $
    5,024,000Accounts receivable  trade, net
    
    
    48,149,000
    
    
    
    30,993,000Accounts receivable  other
    
    
    1,795,000
    
    
    
    1,575,000Inventories, net
    
    
    43,539,000
    
    
    
    44,476,000Other current assets
    
    
    4,962,000
    
    
    
    3,676,000Deferred income tax asset
    
    
    1,887,000
    
    
    
    1,953,000Total current assets
    
    
    102,079,000
    
    
    
    87,697,000Property, plant and equipment, at cost
    
    
    49,333,000
    
    
    
    39,985,000Less accumulated depreciation and amortization
    
    
    (20,012,000
    )
    
    
    (22,523,000
    )Total property, plant and equipment, net
    
    
    29,321,000
    
    
    
    17,462,000Other assets, net
    
    
    1,591,000
    
    
    
    877,000Total assets
    
    $
    132,991,000
    
    
    $
    106,036,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Line of credit payable
    
    $
    7,000,000
    
    
    $
    3,400,000Current portion of long-term debt
    
    
    308,000
    
    
    
    289,000Accounts payable  trade
    
    
    9,199,000
    
    
    
    5,731,000Income taxes payable
    
    
    2,799,000
    
    
    
    118,000Accrued liabilities
    
    
    4,436,000
    
    
    
    3,917,000Total current liabilities
    
    
    23,742,000
    
    
    
    13,455,000Long  term debt, net of current portion
    
    
    11,528,000
    
    
    
    2,631,000Deferred income tax liability
    
    
    1,586,000
    
    
    
    950,000Other long term liabilities
    
    
    337,000
    
    
    
    445,000Stockholders equity:Common stock
    
    
    13,000
    
    
    
    13,000Capital in excess of par value
    
    
    40,144,000
    
    
    
    39,230,000Retained earnings
    
    
    53,703,000
    
    
    
    47,906,000Accumulated other comprehensive income
    
    
    1,938,000
    
    
    
    1,406,000Total stockholders equity
    
    
    95,798,000
    
    
    
    88,555,000Total liabilities and stockholders equity
    
    $
    132,991,000
    
    
    $
    106,036,000
 See accompanying notes to condensed consolidated financial statements. 1




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##### Table of Contents



ASHWORTH, INC. AND SUBSIDIARIES 
 
 Three months ended April 30,
    
    Six months ended April 30,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    $
    54,672,000
    
    
    $
    52,595,000
    
    
    $
    82,010,000
    
    
    $
    79,158,000Cost of goods sold
    
    
    31,363,000
    
    
    
    30,635,000
    
    
    
    48,010,000
    
    
    
    47,231,000Gross profit
    
    
    23,309,000
    
    
    
    21,960,000
    
    
    
    34,000,000
    
    
    
    31,927,000Selling, general and administrative
expenses
    
    
    15,087,000
    
    
    
    14,712,000
    
    
    
    25,492,000
    
    
    
    24,394,000Income from operations
    
    
    8,222,000
    
    
    
    7,248,000
    
    
    
    8,508,000
    
    
    
    7,533,000Other income (expense):Interest income
    
    
    11,000
    
    
    
    5,000
    
    
    
    32,000
    
    
    
    15,000Interest expense
    
    
    (227,000
    )
    
    
    (259,000
    )
    
    
    (396,000
    )
    
    
    (451,000
    )Other income
    
    
    1,434,000
    
    
    
    143,000
    
    
    
    1,519,000
    
    
    
    216,000Total other income (expense)
    
    
    1,218,000
    
    
    
    (111,000
    )
    
    
    1,155,000
    
    
    
    (220,000
    )Income before provision for income
taxes
    
    
    9,440,000
    
    
    
    7,137,000
    
    
    
    9,663,000
    
    
    
    7,313,000Provision for income taxes
    
    
    3,777,000
    
    
    
    2,855,000
    
    
    
    3,866,000
    
    
    
    2,925,000Net income
    
    $
    5,663,000
    
    
    $
    4,282,000
    
    
    $
    5,797,000
    
    
    $
    4,388,000Net income per shareBasic:Weighted average shares outstanding
    
    
    13,373,000
    
    
    
    12,958,000
    
    
    
    13,331,000
    
    
    
    12,955,000Net income per share
    
    $
    0.42
    
    
    $
    0.33
    
    
    $
    0.43
    
    
    $
    0.34Diluted:Weighted average shares outstanding
    
    
    13,737,000
    
    
    
    13,082,000
    
    
    
    13,679,000
    
    
    
    13,081,000Net income per share
    
    $
    0.41
    
    
    $
    0.33
    
    
    $
    0.42
    
    
    $
    0.34
 See accompanying notes to condensed consolidated financial statements. 2




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ASHWORTH, INC. AND SUBSIDIARIES 
 
 Six months ended April 30,2004
    
    2003Cash flows from operating activities:Net cash used in operating activities
    
    ($
    5,411,000
    )
    
    ($
    7,207,000
    )Cash flows from investing activities:Proceeds from sale of fixed assets
    
    
    5,277,000
    
    
    
    Purchases of property and equipment
    
    
    (16,955,000
    )
    
    
    (1,646,000
    )Net cash used in investing activities
    
    
    (11,678,000
    )
    
    
    (1,646,000
    )Cash flows from financing activities:Increase in restricted cash
    
    
    (11,000
    )
    
    
    Principal payments on capital lease obligations
    
    
    (84,000
    )
    
    
    (86,000
    )Borrowings on line of credit
    
    
    20,300,000
    
    
    
    27,652,000Payments on line of credit
    
    
    (16,700,000
    )
    
    
    (20,095,000
    )Borrowing on notes payable and long-term debt
    
    
    11,650,000
    
    
    
    Principal payments on notes payable and long-term debt
    
    
    (2,650,000
    )
    
    
    (325,000
    )Proceeds from issuance of common stock
    
    
    775,000
    
    
    
    63,000Net cash provided by financing activities
    
    
    13,280,000
    
    
    
    7,209,000Effect of exchange rate changes on cash
    
    
    532,000
    
    
    
    566,000Net decrease in cash and cash equivalents
    
    
    (3,277,000
    )
    
    
    (1,078,000
    )Cash and cash equivalents, beginning of period
    
    
    5,024,000
    
    
    
    2,336,000Cash and cash equivalents, end of period
    
    $
    1,747,000
    
    
    $
    1,258,000
 See accompanying notes to 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 (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 10K for the year ended
October 31, 2003, filed with the SEC on January 29, 2004. 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 of 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 April 30, 2004 and 2003 were
$618,000 and $520,000 respectively. For the six-month periods ended
April 30, 2004 and 2003, shipping expenses were $932,000 and $832,000
respectively. Reclassifications Certain reclassifications have been made to the prior periods condensed
consolidated financial statements to conform to classifications used in
the current period. These reclassifications had no impact on previously
reported results. 4




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##### Table of Contents



NOTE 2 - Inventories. Inventories consist of the following at April 30, 2004 and October 31,
2003: April 30,
    
    October 31,2004
    
    2003Raw materials
    
    $
    156,000
    
    
    $
    127,000Finished goods
    
    
    43,383,000
    
    
    
    44,349,000Total inventories, net
    
    $
    43,539,000
    
    
    $
    44,476,000
 NOTE 3  Disposal and Acquisition of Fixed Assets. The Company owned land and two buildings located in Carlsbad, California
that were purchased on December 9, 1993 for $3,500,000 and were reported
in the domestic segment. On February 24, 2004 the Company completed the
sale of the land, buildings and other assets for approximately $5,747,000
and paid off the $2,610,000 balance due on the existing mortgage. The
property was sold as a unit on an as is basis for a price which
exceeded its carrying value. The gain on the sale of the property was
recorded in the second quarter of fiscal 2004. The Company has also
entered into a lease agreement to lease the facility from the new owner
commencing on February 24, 2004 and terminating on December 31, 2004,
with an option to renew the term of the lease for a period of 60 days.
Under the terms of the lease agreement, the Company pays monthly rent of
approximately $47,000 plus taxes, insurance and utilities. On October 25, 2002, the Company entered into an agreement to purchase
the land and building, to be built to the Companys specifications, in
the Ocean Ranch Corporate Center in Oceanside, California. The building
was constructed with approximately 200,000 square feet of useable office
and warehouse space and will be used by the Company to warehouse,
embroider, finish, package and distribute clothing products and related
accessories. On April 2, 2004, the Company completed the purchase of the
new distribution center in Oceanside, California for approximately
$13,686,000 and entered into a secured loan agreement with a bank to
finance $11,650,000 of the purchase price. The loan carries a fixed
interest rate of 5% and will be amortized over 30 years, but is due and
payable on May 1, 2014. NOTE 4 - 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 of Statement of Accounting Standards (SFAS) No. 128,
Earnings Per Share: 5




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Three months ended April 30,
    
    Six months ended April 30,2004
    
    2003
    
    2004
    
    2003Numerator:Net income numerator for basic and diluted
income per share  income
available to common stockholders
    
    $
    5,663,000
    
    
    $
    4,282,000
    
    
    $
    5,797,000
    
    
    $
    4,388,000Denominator:Denominator for basic income
per share  weighted average shares
    
    
    13,373,000
    
    
    
    12,958,000
    
    
    
    13,331,000
    
    
    
    12,955,000Effect of dilutive securities:stock options
    
    
    364,000
    
    
    
    124,000
    
    
    
    348,000
    
    
    
    126,000Denominator for diluted income
per share  adjusted weighted average
shares and assumed conversions
    
    
    13,737,000
    
    
    
    13,082,000
    
    
    
    13,679,000
    
    
    
    13,081,000Basic net income per share
    
    $
    0.42
    
    
    $
    0.33
    
    
    $
    0.43
    
    
    $
    0.34Diluted net income per share
    
    $
    0.41
    
    
    $
    0.33
    
    
    $
    0.42
    
    
    $
    0.34
 For the quarters ended April 30, 2004 and 2003, the diluted weighted
average shares outstanding computation excludes 324,000 and 1,867,000
options, respectively, whose impact would have an anti-dilutive effect.
For the six-month periods ended April 30, 2004 and 2003, the diluted
weighted average shares outstanding computation excludes 320,000 and
1,847,000 options, respectively, whose impact would have an anti-dilutive
effect. NOTE 5  Stock Option Compensation. The Company has elected to follow Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees,and related
interpretations in accounting for its employee stock options. Under APB
No. 25, because the exercise price of the Companys employee stock
options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. The interim information
regarding pro forma net income and earnings per share is required by SFAS
No. 123, Accounting for Stock Based Compensation,and SFAS No. 148,
Accounting for Stock Based Compensation  Transition and Disclosure.For
purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. Compensation expense for options issued to non-employees is based on
the fair value of each option estimated at date of grant using the
Black-Scholes option-pricing model. The Company made no such grants
to non-employees during the first six months of either fiscal year
2004 or fiscal year 2003. For purposes of the following pro forma disclosures required by SFAS No.
123, the fair value of each option granted after fiscal 1995 has been
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants
during the second quarter of fiscal 2004: risk-free interest rate of
3.73%; expected volatility of 6




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57.0%; and expected life of 10 years. The Company did not grant any
options during the second quarter of fiscal 2003. The following
weighted-average assumptions were used for grants during the first six
months of fiscal 2004 and first six months of fiscal 2003, respectively:
risk-free interest rates of 3.73% to 4.49% in fiscal 2004 and 3.98% to
4.01% in fiscal 2003; expected volatility of 57.0% to 58.3% in fiscal
2004 and 58.3% in fiscal 2003; and expected life of 10 years in fiscal
2004 and fiscal 2003. The Company has not paid any cash or other
dividends and does not anticipate paying dividends in the foreseeable
future; therefore, the expected dividend yield is zero. The Companys
pro forma information is as follows: Three months ended April 30,
    
    Six months ended April 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    5,663,000
    
    
    $
    4,282,000
    
    
    $
    5,797,000
    
    
    $
    4,388,000Deduct: Stock-based
employee compensation
expense determined under
fair value based method for
all awards,net of tax effect
    
    
    (25,000
    )
    
    
    (140,000
    )
    
    
    (84,000
    )
    
    
    (337,000
    )Pro forma net income
    
    $
    5,638,000
    
    
    $
    4,142,000
    
    
    $
    5,713,000
    
    
    $
    4,051,000Net Income per share:Basic  as reported
    
    $
    0.42
    
    
    $
    0.33
    
    
    $
    0.43
    
    
    $
    0.34Basic  pro forma
    
    $
    0.42
    
    
    $
    0.32
    
    
    $
    0.43
    
    
    $
    0.31Diluted  as reported
    
    $
    0.41
    
    
    $
    0.33
    
    
    $
    0.42
    
    
    $
    0.34Diluted  pro forma
    
    $
    0.41
    
    
    $
    0.32
    
    
    $
    0.42
    
    
    $
    0.31
 The Company did not reflect any stock-based employee compensation expense
in the consolidated financial statements for the periods presented in the
above table. NOTE 6  Issuance of Common Stock. Common stock and capital in excess of par value increased by $914,000 in
the six months ended April 30, 2004, of which $775,000 is due to the
issuance of 142,000 shares of common stock on exercise of options and
$139,000 is the tax benefit related to the exercise of those options. NOTE 7  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 components of
other comprehensive income for the periods presented: Three months ended April 30,
    
    Six months ended April 30,2004
    
    2003
    
    2004
    
    2003Net Income
    
    $
    5,663,000
    
    
    $
    4,282,000
    
    
    $
    5,797,000
    
    
    $
    4,388,000Net unrealized gains on cash flow hedges,
net of tax of $19,000 and $72,000
    
    
    28,000
    
    
    
    
    
    
    
    108,000
    
    
    
    Foreign currency translation income (loss)
    
    
    (600,000
    )
    
    
    (140,000
    )
    
    
    424,000
    
    
    
    566,000Total other comprehensive income
    
    $
    5,091,000
    
    
    $
    4,142,000
    
    
    $
    6,329,000
    
    
    $
    4,954,000
 7




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NOTE 8  Legal Proceedings.  On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP
filed a class action in the United States District Court for the
Southern District of California (U.S. District Court) on behalf of
purchasers of the Companys common stock during the period between
September 4, 1997 and July 15, 1998. The action was subsequently
consolidated with two similar suits and plaintiffs filed their
Amended and Consolidated Complaint on December 17, 1999. Upon the
Companys motion, the U.S. District Court dismissed the Complaint
with leave to amend on July 18, 2000. On September 18, 2000,
plaintiffs served their Second Consolidated Amended Complaint
(Second Amended Complaint). On November 6, 2000, the Company
filed its motion to dismiss the Second Amended Complaint, which the
U.S. District Court granted, in part, and denied, in part. The
remaining portions of the Second Amended Complaint allege that,
among other things, during the class period and in violation of the
Securities Exchange Act of 1934, the Companys financial statements,
as reported, did not conform to generally accepted accounting
principles with respect to revenues and inventory levels. It
further alleges that certain Company executives made false or
misleading statements or omissions concerning product demand and
that two former executives engaged in insider trading. The
plaintiffs seek unspecified damages. The parties are currently in
the discovery process. The Company has not to date booked any
provision for settlement charges.The Company is party to other claims and litigation proceedings arising
in the normal course of business. Although the legal responsibility and
financial impact with respect to such other claims and litigation cannot
currently be ascertained, the Company does not believe that these other
matters will result in payment by the Company of monetary damages, net of
any applicable insurance proceeds, that, in the aggregate, would be
material in relation to the consolidated financial position, liquidity or
results of operations of the Company. NOTE 9  Segment Information.  The Company defines its operating segments as components of an enterprise
for which separate financial information is available and regularly
reviewed by the Companys senior management. The Company has the
following two reportable segments: domestic and international.
Management evaluates segment performance based primarily on revenues and
income from operations. Interest income and expense is evaluated on a
consolidated basis and is not allocated to the Companys business
segments. Segment information is summarized (for the dates or periods
presented) below: Three months ended April 30,
    
    Six months ended April 30,2004
    
    2003
    
    2004
    
    2003Net revenues:Domestic
    
    $
    44,450,000
    
    
    $
    43,440,000
    
    
    $
    67,511,000
    
    
    $
    66,977,000International
    
    
    10,222,000
    
    
    
    9,155,000
    
    
    
    14,499,000
    
    
    
    12,181,000Total
    
    $
    54,672,000
    
    
    $
    52,595,000
    
    
    $
    82,010,000
    
    
    $
    79,158,000Income from operations:Domestic
    
    $
    5,821,000
    
    
    $
    5,606,000
    
    
    $
    5,830,000
    
    
    $
    5,467,000International
    
    
    2,401,000
    
    
    
    1,642,000
    
    
    
    2,678,000
    
    
    
    2,066,000Total
    
    $
    8,222,000
    
    
    $
    7,248,000
    
    
    $
    8,508,000
    
    
    $
    7,533,000
 8




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April 30,
    
    October 31,2004
    
    2003Total assets:Domestic
    
    $
    110,286,000
    
    
    $
    85,947,000International
    
    
    22,705,000
    
    
    
    20,089,000Total
    
    $
    132,991,000
    
    
    $
    106,036,000Total fixed assets, costDomestic
    
    $
    47,903,000
    
    
    $
    38,713,000International
    
    
    1,430,000
    
    
    
    1,272,000Total
    
    $
    49,333,000
    
    
    $
    39,985,000
 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS General The Company operates in an industry that is highly competitive and must
accurately anticipate fashion trends and consumer demand for its products.
There are many factors that could cause actual results to differ materially
from the projected results contained in certain forward-looking statements in
this report. For additional information, see Cautionary Statements and Risk
Factors, below. Because the Companys business is seasonal, the current balance sheet
balances at April 30, 2004 may more meaningfully be compared to the balances at
April 30, 2003, rather than to the balances at October 31, 2003. Critical Accounting Policies In response to the SECs Release Numbers 33-8040, Cautionary Advice
Regarding Disclosure About Critical Accounting Policies and 33-8056,
Commission Statement About Managements Discussion and Analysis of Financial
Condition and Results of Operations, the Company has identified the following
critical accounting policies that affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements. Revenue Recognition.Based on its terms of F.O.B. shipping point, where
risk of loss and title transfer to the buyer at the time of shipment, the
Company recognizes revenue at the time products are shipped or, for Company
stores, at the point of sale. The Company records sales in accordance with SEC
Staff Accounting Bulletin No. 104, Revenue Recognition. Under these
guidelines, revenue is recognized when all of the following exist: persuasive
evidence of a sale arrangement exists, delivery of the product has occurred,
the price is fixed or determinable and payment is reasonably assured.
Provisions are made in the period of the sale for estimated product returns and
sales allowances. The Company also includes payments from its customers for
shipping and handling in its net revenues line item in accordance with Emerging
Issues Task Force (EITF) 00-10, Accounting of Shipping and Handling Fees and
Costs. Sales Returns and Other Allowances.Management must make estimates of
potential future product returns related to current period product revenues.
The Company also makes payments and/or grants credits to its customers as
markdown (buydown) allowances and must make estimates of such 9




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potential future
allowances. Management analyzes historical returns, current economic trends,
changes in customer demand, and sell-through of our products when evaluating
the adequacy of the sales returns and other allowances. Significant management
judgments and estimates must be made and used in connection with establishing
the sales returns and other allowances in any accounting period. Material
differences may result in the amount and timing of our revenues for any period
if management makes different judgments or utilizes different estimates. The
reserves for sales returns and other allowances amounted to $1.1 million at
April 30, 2004 compared to $728,000 at October 31, 2003 and $575,000 at April
30, 2003. Allowance for Doubtful Accounts.Management must also make estimates of
the uncollectability of accounts receivable. The Company maintains an
allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments, which results in bad debt
expense. Management determines the adequacy of this allowance by analyzing
historical bad debts, continually evaluating individual customer receivables
considering the customers financial condition and current economic conditions.
During the second quarter of fiscal 2003 the Company wrote off the $2.5
million unpaid principal balance of an unsecured promissory note and
approximately $2.0 million of receivables due from a national retail customer
which had filed for protection under U.S. bankruptcy laws, against the $4.5
million previously reserved by the Company for these specific receivables. If
the financial condition of other significant customers of ours were to
deteriorate, resulting in the impairment of their ability to make payments,
material additional allowances for doubtful accounts may be required. In
October 2002, the Company acquired credit insurance to cover many of its major
accounts. Our trade accounts receivable balance was $48.1 million, net of
allowances for doubtful accounts of $1.1 million at April 30, 2004 as compared
to the balance of $31.0 million, net of allowances for doubtful accounts of
$1.3 million at October 31, 2003. At April 30, 2003, the trade accounts
receivable balance was $48.5 million, net of allowances for doubtful accounts
of $1.3 million. Inventory.The Company writes down its inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated net realizable value based on assumptions about
age of the inventory, future demand and market conditions. This process
provides for a new basis for the inventory until it is sold. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required. Our inventory balance was $43.5
million, net of inventory write-downs of $0.7 million at April 30, 2004 as
compared to an inventory balance of $44.5 million, net of inventory write-downs
of $1.0 million at October 31, 2003. At April 30, 2003, the inventory balance
was $43.4 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) for an
additional $0.9 million in future APCs and an extension of the original
November 2000 agreement through December 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 April 30, 2004, the Company had $1.1 million of the APCs remaining and
management expects to fully utilize them over the remaining life of the
contract through December 2007. 10




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The Company recorded $0.3 million of the APCs
in its Other Current Assets line item and $0.8 million in its Other Assets
line item. Off-Balance Sheet Arrangements At April 30, 2004 and 2003, the Company did not have any relationships
with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. In addition, the Company
does not engage in trading activities involving non-exchange traded contracts
which rely on estimation techniques to calculate fair value. As such, the
Company is not exposed to any financing, liquidity, market or credit risk that
could arise if the Company had engaged in such relationships. Overview The Company earns revenues and income and generates cash through the
design, marketing and distribution of quality mens and womens sports apparel
under the Ashworth® and Callaway Golf apparel brands. The Companys products
are sold in the United States, Europe, Canada and various other international
markets to selected golf pro shops, resorts, off-course specialty shops,
upscale department stores, to top specialty-advertising firms for the corporate
market as well as in the Companys own stores. Nearly all of the Companys
production is through full package purchases of ready-made goods with
approximately 85% of its products manufactured in Asian countries. The Company
embroiders a majority of these garments with custom golf course, tournament and
corporate logos for its customers. The Company includes F.O.B. purchase price, inbound freight charges, duty,
buying commissions and overhead in its cost of goods sold line item. Overhead
costs include purchasing and receiving costs, inspection costs, warehousing
costs, internal transfers costs and other costs associated with the Companys
distribution. The Company does not exclude any of these costs from cost of
goods sold. During the second quarter of fiscal 2004 the Company completed two
transactions relating to its distribution facilities. In February 2004, the Company
completed the sale and lease-back of its old distribution center located in
Carlsbad, California. The Company sold the Carlsbad distribution center for
$5,747,000 and realized a gain on sale of fixed assets of $1,589,000. In April
2004, the Company completed the purchase of the new distribution facility in
Oceanside, California for $13,686,000. The Company applied the tax deferred
gain on sale of the old facility to reduce the cost basis of the new facility,
for tax purposes, utilizing a tax-deferred exchange under Internal Revenue Code section 1031. Second quarter fiscal 2004 net revenue increased 4.0% to $54,672,000 as
compared to $52,595,000 for the same period of the prior year. The increase
was primarily driven by net revenue increases in its retail, international and
corporate channels, offset by a decrease in net revenues from the Company owned
stores while net revenues in our domestic core golf and off-course specialty
distribution channel were essentially flat. The net revenues growth, combined
with improved gross margins and controlled expenses, and the $1.0 million after
tax gain on sale of the Companys facilities in Carlsbad, California, resulted
in second quarter net income of $5,663,000 or $0.41 per diluted share, compared
to net income of $4,282,000 or $0.33 per diluted share in the same quarter of
last fiscal year. Results of Operations Second quarter 2004 compared to second quarter 2003 Consolidated net revenues for the second quarter of fiscal 2004 increased
4.0% to $54,672,000 11




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from $52,595,000 for the same period in 2003 primarily due
to higher revenues from the Companys retail and corporate distribution
channels as well as the international segment. Net revenues for the domestic segment increased 2.3% to $44,450,000 for
the second quarter of fiscal 2004 from $43,440,000 in the second quarter of
fiscal 2003. Net revenues from the Companys retail distribution channel
increased 24.3% or $973,000 as compared to the second quarter of fiscal 2003.
The increase in the retail distribution channel in the second quarter of fiscal
2004 as compared to the same period of the prior fiscal year is primarily from
the addition of retail-specific product offerings and the implementation of the
resort shop concept in retail locations. Net revenues from the Companys
corporate distribution channel increased 5.1% or $273,000 in the current
quarter as compared to the same quarter of the prior fiscal year. The increase
in the corporate distribution channel in the current quarter was primarily due
to the addition of the Callaway Golf apparel Sport line to the product lines
offered by the corporate distribution channel, as well as the improving
economy. These increases were partially offset by a decrease in the net
revenues from the Company owned stores in the current quarter as compared to
the same quarter in the prior fiscal year. Net revenues from the Company owned
stores decreased 13.3% or $214,000 due to the closing of two of the nine
Company owned stores. Net revenues from the Companys golf related
distribution channel were essentially flat as compared to the same quarter of
the prior fiscal year. Net revenues for the international segment increased 11.7% to $10,222,000
from $9,155,000 for the same period of the prior fiscal year. The increase was
primarily due to higher revenues in the Companys U.K. subsidiary and Canadian
divisions resulting from the fluctuations in currency exchange rates as well as
a slight increase in net revenues from other international territories. Consolidated gross margin for the quarter increased 80 basis points to
42.6% as compared to 41.8% a year earlier. This increase was primarily due to
reduced costs resulting from improved international product sourcing. Consolidated selling, general, and administrative (SG&A) expenses
increased 2.6% to $15,087,000 for the second quarter of fiscal 2004 from
$14,712,000 for the same period in fiscal 2003. This increase was primarily
due to higher sales related variable expense resulting from the higher
revenues. As a percentage of net revenues, SG&A expenses decreased slightly to
27.6% of net revenues for the second quarter of fiscal 2004 compared to 28.0%
in the second quarter of fiscal 2003. Total other income increased to $1,218,000 for the second quarter of
fiscal 2004 from an expense of $111,000 in the second quarter of fiscal 2003,
due primarily to a $1,532,000 net gain on disposal of fixed assets offset by
the currency transaction loss recorded in the second quarter of fiscal 2004 as
compared to a currency transaction gain recorded by the Companys U.K.
subsidiary in the same period of the prior fiscal year. The effective income tax rate for the second quarter of fiscal 2004
remained unchanged form the same period of fiscal year 2003 at 40.0% of pre-tax
income. Six months ended April 30, 2004 compared to six months ended April 30, 2003 Consolidated net revenues for the first half of fiscal 2004 increased 3.6%
to $82,010,000 from $79,158,000 for the same period in fiscal 2003 primarily
due to higher revenues from its retail and corporate distribution channels as
well as the international segment, partially offset by a decrease in net
revenues from the Companys golf related distribution channel. Net revenues for the domestic segment increased 0.8% to $67,511,000 in the
first six months of 12




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fiscal 2004 from $66,977,000 in the first half of fiscal
2003. Net revenues from the Companys retail distribution channel increased
45.3% or $2,699,000 in the first six months of fiscal 2004 as compared to the
same period of fiscal 2003. The increase in the retail distribution channel in
the first half of fiscal 2004 as compared to the same period of the prior
fiscal year is primarily due to increased number of doors as well as slightly
higher comparable store sales resulting from retail-specific product offerings
and the implementation of the resort shop concept in retail locations. Net
revenues from the Companys corporate distribution channel increased 5.4% or
$536,000 in the first half of fiscal 2004 as compared to the same period of the
prior fiscal year. The increase in the corporate distribution channel was
primarily due to the addition of the Callaway Golf apparel Sport line to the
product lines offered by the corporate distribution channel, as well as the
improving economy. These increases were partially offset by a decrease in the
net revenues from the Companys golf related distribution channel as well as
from the Company owned stores. Net revenues from the Companys golf related
distribution channel decreased 4.2% or $2,032,000 in the first half of fiscal
2004 as compared to the first half of fiscal 2003. This decrease was primarily
due to continuing industry weakness resulting in a reduction in the average
order size. Net revenues from the Company owned stores decreased 20.2% or
$669,000 primarily due to the closing of two of the nine Company owned stores. Net revenues for the international segment increased 19.0% to $14,499,000
in the first half of fiscal 2004 from $12,181,000 for the same period of the
prior fiscal year. The increase was primarily due to higher revenues in the
Companys U.K. subsidiary and Canadian divisions of which $1,549,000 was due to
the weakening of the U.S. dollar against the British pound and Canadian dollar
during the first half of fiscal 2004. Net revenues from the Companys U.K.
subsidiary in the first half of fiscal 2004 increased by $1,806,000 or 25.4%
compared to the same period of the prior fiscal year, of which $1,094,000 was
due to fluctuations in currency exchange rates. The balance of the increase
was due to an increased number of accounts as well as an increased average
order size. Net revenue from the Canadian divisions increased by $514,000 or
14.5% as compared to net revenues in the same period of the prior fiscal year,
of which $455,000 was due to changes in currency exchange rates. Consolidated gross margin for the first six months of fiscal 2004
increased 120 basis points to 41.5% as compared to 40.3% in the first half of
fiscal 2003. This improvement was primarily due to improved product sourcing
as well as a more favorable product sales mix. Consolidated SG&A expenses increased 4.5% to $25,492,000 for the first
half of fiscal 2004 from $24,394,000 for the same period in fiscal 2003. As a
percentage of revenues, SG&A expenses increased to 31.1% of net revenues for
the first six months of fiscal 2004, as compared to 30.8% for the first six
months of fiscal 2003. The increase in SG&A is primarily due to increased
insurance expense as well as the timing of sales and marketing expenses. Total other income increased to $1,155,000 in the first half of fiscal
2004 from a net other expense of $220,000 in the first six months of fiscal
2003, due primarily to a $1,532,000 net gain on disposal of fixed assets offset
by higher interest expense on equipment financing as well as reduced currency
transaction gains recorded by the Companys U.K. subsidiary and Canadian
divisions in the current fiscal year as compared to the same period of the
prior year. The effective income tax rate in the first half of fiscal 2004 remained
unchanged from the same period in fiscal year 2003 at 40.0% of pre-tax income. Capital Resources and Liquidity The Companys primary sources of liquidity for the remainder of fiscal
2004 are expected to be its cash flows from operations, the working capital
line of credit with its bank and other financial alternatives 13




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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 April 24, 2003, the Company entered into a new business loan agreement
with Bank of America, N.A., as the administrative agent, and two other lenders.
The new credit facility expires on April 30, 2005 and is collateralized by
substantially all of the assets of the Company, other than real estate. The
loan agreement provides a revolving line of credit of $45,000,000 with a
seasonal increase in the line of credit to $55,000,000 for each period
commencing December 1 through June 15 during the term of the agreement. Interest under this loan agreement is currently charged at the banks
reference (prime) rate. At April 30, 2004, the prime rate was 4.00%. The loan
agreement also provides for optional interest rates based on London interbank
offered rates (LIBOR) for periods of at least 30 days in increments of
$500,000. The loan agreement contains certain financial covenants that include a
requirement that the Company maintain (1) a minimum tangible net worth of
$72,000,000, plus 90% of net income after taxes (without subtracting losses)
earned in each quarterly accounting period commencing after October 31, 2002,
plus the net proceeds from any equity securities issued (including net proceeds
from stock option exercises) after the date of the loan agreement, (2) a
minimum EBITDA determined on a rolling four quarter basis ranging from
$12,500,000 at April 29, 2003 and increasing over time to $19,500,000 at
October 31, 2004 and thereafter, and (3) a minimum ratio of cash and accounts
receivable to current liabilities of 0.60:1.0 for each January 31 through July
30 period and 0.90:1.0 for each July 31 through January 30 period. 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 loan agreement may not be more than $15,000,000 in
fiscal year 2003 or $19,000,000 in fiscal year 2004 and in each fiscal year
thereafter. 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 in all material respects with all of the loan agreements financial
covenants as of April 30, 2004. The line of credit under the loan agreement may also be used to finance
commercial letters of credit and standby letters of credit. Commercial letters
of credit outstanding under this loan agreement totaled $3,911,000 at April 30,
2004 as compared to $7,128,000 at April 30, 2003. The Company had $7,000,000
outstanding against the line of credit at April 30, 2004, compared to
$18,682,000 outstanding at April 30, 2003. The decrease in outstanding letters
of credit and borrowings is primarily due to converting several vendors from
letters of credit to open credit terms as well as better working capital
management. At April 30, 2004, $44,089,000 was available for borrowings under
this loan agreement. During the first six months ended April 30, 2004, cash used in operations
was $5,411,000 as compared to $7,207,000 used during the same period of the
prior fiscal year. The improvement in cash management was primarily due to the
Companys ability to negotiate more favorable payment terms with many of its
vendors as well as controlling inventory growth and improving collections of
accounts receivable. 14




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Net trade receivables were $48,149,000 at April 30, 2004, an increase of
$17,156,000 from the balance at October 31, 2003. Because the Companys
business is seasonal, the net receivables balance may more meaningfully be
compared to the balance of $48,468,000 at April 30, 2003, rather than the
year-end balance. The comparison to the second quarter of fiscal 2003 shows a
decrease of 0.7% in net trade receivables. Net inventories decreased 2.1% to $43,539,000 at April 30, 2004 from
$44,476,000 at October 31, 2003. Compared to net inventories of $43,371,000 at
April 30, 2003, net inventories at April 30, 2004 have increased by 0.4%. The
Company believes that its current inventory mix and amounts are appropriate to
respond to market demand. On October 25, 2002, the Company entered into an agreement to purchase the
land and building, to be built to the Companys specifications, in the Ocean
Ranch Corporate Center in Oceanside, California. The building was constructed
with approximately 200,000 square feet of useable office and warehouse space
and will be used by the Company to warehouse, embroider, finish, package and
distribute clothing products and related accessories. On April 2, 2004, the
Company completed the purchase of the new distribution center for approximately
$13,686,000 and entered into a secured loan agreement with a bank to finance
$11,650,000 of the purchase price. The loan 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 are reported in the condensed consolidated statements
included in this report. During the first six months of fiscal 2004, the Company incurred capital
expenditures of $16,955,000 primarily for the purchase of the new distribution
center, computer systems and equipment, leasehold improvements and distribution
center equipment. The Company anticipates capital spending of approximately
$2,745,000 during the remainder of fiscal 2004, primarily on sales fixtures,
distribution center related improvements, outlet stores openings and
renovations and upgrades of computer systems and equipment. Except for the
purchase of the real property, for which the Company obtained mortgage
financing, management currently intends to finance the purchase of the
additional capital equipment from its own cash resources, but may use leases or
equipment financing agreements if deemed appropriate. The Company capitalized interest of $61,000 and $0 during the six months
ended April 30, 2004 and 2003, respectively, related to self-constructed
construction in progress for the new distribution center. On February 24, 2004, the Company sold certain property located in
Carlsbad, California, used in its distribution operation for $5,747,000 and
recorded a gain on disposal of fixed assets of $1,589,000. The land, buildings
and other assets were sold as a unit on an as is basis. As a result of the
sale, the Company paid the $2,610,000 balance due on the mortgage relating to
the subject property. The Company has entered into a lease agreement to lease
the facility from the new owner. The term of the lease commenced on February
24, 2004 and terminates on December 31, 2004, with an option to renew the term
of the lease for a period of 60 days with written notice of intent to exercise
the option due at least 90 days prior to the expiration of the initial term of
the lease. Under the terms of the lease agreement, the Company pays monthly
rent of approximately $47,000 plus taxes, insurance and utilities. The Company has entered into agreements with equipment manufacturers to
purchase the equipment required for the operation of the Companys new
distribution center in Oceanside, California. On June 23, 2003, the Company
entered into a Master Equipment Lease Agreement with a financial institution
which has accepted an assignment of these purchase agreements and assumed all
rights and payment obligations under these agreements. From time to time,
commencing approximately June 26, 2003, the financial institution will make
progress payments to the equipment manufacturers 15




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during the period while the
equipment is being purchased, assembled, installed and/or tested as required by
the purchase agreements. The total cost of the equipment is expected to be
approximately $12,000,000. The Company is obligated to pay the financial
institution for interest costs related to the progress payments calculated
using the prime rate plus one half of one percentage point per annum based on a
360-day year. As of April 30, 2004, the financial institution has made
progress payments of $5,798,000 leaving an available balance of $6,202,000 and
the Company has paid $132,000 in interest charges during the first half of
fiscal 2004. Under the original agreement, if the Company failed to deliver a
certificate of acceptance and execute an equipment schedule by the outside
closing date, the Company would be obligated to purchase the equipment from the
financial institution at a price equal to the aggregate amount of all costs,
disbursements and expenses incurred or committed to be incurred by the
financial institution. The Company has entered into an agreement with the
financial institution to extend the outside closing date to August 31, 2004. The Company is party to an exclusive licensing agreement with Callaway
Golf Company which requires certain minimum royalty payments which began in
January 2003. The revenues from the Callaway Golf apparel product line have
been, and the Company believes will continue to be, sufficient to cover such
minimum guarantees. Common stock and capital in excess of par value increased by $914,000 in
the six months ended April 30, 2004, of which $775, 000 is due to the issuance
of 141,800 shares of common stock on exercise of options and $139,000 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, bank credit
facilities and leasing alternatives, the Company will be able to meet all of
its debt service, capital expenditure and working capital requirements for at
least the next 12 months. Derivatives From time to time the Company enters into short-term foreign exchange
contracts with its bank to hedge against the impact of currency fluctuations
between the U.S. dollar and the British pound and the U.S. dollar and the
Canadian dollar. The contracts provide that, on specified dates, the Company
would sell the bank a specified number of British pounds or Canadian dollars in
exchange for a specified number of U.S. dollars. Additionally, from time to
time the Companys U.K. subsidiary enters into similar contracts with its bank
to hedge against currency fluctuations between the British pound and the U.S.
dollar and the British pound and other European currencies. Realized gains and
losses on these contracts are recognized in the same period as the hedged
transactions. These contracts have maturity dates that do not normally exceed
12 months. On July 15, 2003, the Companys U.K. subsidiary entered into four
forward exchange contracts to sell British pounds and buy U.S. dollars, as well
as five forward exchange contracts to sell Euros and buy British pounds. All
of these contracts were settled as intended and, at April 30, 2004, neither the
Company nor any of its subsidiaries had any outstanding foreign exchange
contracts. New Accounting Standards In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities(FIN No.
46). FIN No. 46 addresses consolidation of entities that are not controllable
through voting interests or in which the equity investors do not bear the
residual economic risks and rewards. These entities have been commonly
referred to as special purpose entities. FIN No. 46 provides guidance related
to identifying variable interest entities and determining whether such entities
should be consolidated. It also provides guidance related to the initial and 16




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subsequent measurement of assets, liabilities and non-controlling interests in
newly consolidated variable interest entities and requires disclosures for both
the primary beneficiary of a variable interest entity and other beneficiaries
of the entity. For variable interest entities created, or interests in
variable interest entities obtained, subsequent to January 31, 2003, the
Company is required to apply the consolidation provisions of FIN No. 46
immediately. For variable interest entities created, or interests in variable
interest entities obtained, on or before January 31, 2003, the consolidation
provisions of FIN No. 46 were first required to be applied in the Companys
financial statements as of July 31, 2003. In January 2004, the FASB issued a
revision to FIN No. 46, to clarify some requirements and add new scope
exceptions. The revised guidance is effective for the first reporting period
beginning after December 15, 2003. The provisions of FIN No. 46 have not had a
material impact on the Companys financial position and results of operations. Cautionary Statements and Risk Factors This report contains certain forward-looking statements, including without
limitation those regarding the Companys plans and expectations for revenue
growth, product lines, strategic alliances, designs and seasonal collections,
capital spending, marketing programs, foreign sourcing, cost controls,
inventory levels and availability of working capital. These forward-looking
statements may contain the words believe, anticipate, expect,
estimate, project, will be, will continue, will likely result or
other similar words and phrases. Readers are cautioned not to place undue
reliance on these forward-looking statements. The Company undertakes no
obligation to update any such statements or publicly announce any updates or
revisions to any of the forward-looking statements contained herein.
Forward-looking statements and the Companys plans and expectations are subject
to a number of risks and uncertainties that could cause actual results to
differ materially from those anticipated, and the Companys business in general
is subject to certain risks that could affect the value of the Companys common
stock. These risks include, but are not limited to, the following:  
    
    Demand for the Companys products may decrease significantly if the
economy weakens, if the popularity of golf decreases or if unusual
weather conditions cause a reduction in rounds played.
    
    Like other apparel manufacturers, the Company must correctly
anticipate and help direct fashion trends within its industry. The
Companys results of operations would suffer if the Company fails to
develop fashions or styles that are well received in any season.
    
    The Company is party to a multi-year licensing agreement to design,
source and sell Callaway Golf apparel primarily in the United States,
Europe and Canada. The Company must correctly anticipate the fashion
trends and demand for these product lines. The Companys results of
operations would suffer if it fails to develop fashions or styles for
the Callaway Golf apparel product line that are well received in any
season.
    
    The market for golf apparel and sportswear is extremely competitive.
The Company has several strong competitors that are better
capitalized. Outside the green grass market, the Companys market
share is not as significant. Price competition or industry
consolidation could weaken the Companys competitive position.
    
    The Company has purchased land and a building in Oceanside, California
to replace and expand existing owned and leased office and
distribution facilities. The Companys results of operations would be
adversely affected if the Oceanside distribution center does not
become operational as anticipated or functionality problems are
encountered. Any such delay or operational problems may cause the
Company to incur additional expense, experience delays in customer
shipments, require the Company to lease additional distribution space
or extend the term of existing leases. In addition, 17




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##### Table of Contents



whether or not
the facilities are operational at the time anticipated, the Companys
results of operations could be negatively impacted if future sales
volume growth does not reach expected levels and the facilitys
additional distribution capacity is not fully utilized, or if the
Company does not achieve projected cost savings from the new
distribution facilities as soon as, or in the amounts, anticipated.
    
    The outbreak of Severe Acute Respiratory Syndrome affected travel to
countries where the Companys products are manufactured. Visiting
manufacturers in the affected countries is an important part of the
product development process for the Company. If travel to these
countries is again restricted by a similar outbreak, the Companys
product development process and reputation as a designer and
manufacturer of innovative products may be adversely affected, our
international production and shipments may be limited, and the Company
could lose sales.
    
    The Company relies on domestic and foreign contractors to manufacture
various products. If these contractors deliver goods late or fail to
meet the Companys quality standards, the Company could lose sales and
its reputation could suffer. The Companys foreign suppliers ability
to deliver products may be adversely affected by future changes in
tariffs, quotas and other trade barriers imposed by the foreign
countries, as well as the United States.
    
    The Companys domestic and foreign suppliers rely on readily available
supplies of raw materials at reasonable prices. If these raw
materials are in short supply or are only available at inflated
prices, the contractors may be unable to deliver the Companys
products in sufficient quantities or at expected prices and the
Company could lose sales or have lower gross profit margins.
    
    An increase in terrorist activities, as well as 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.
    
    If economic conditions deteriorate, the ability of the Companys
customers to pay current obligations may be adversely impacted and the
Company may experience an increase in delinquent and uncollectible
accounts.
    
    The Company is from time to time party to claims and litigation
proceedings. Such matters include the specific litigation described
in this report and other litigation arising in the ordinary course of
business. See Legal Proceedings, below. Such matters are subject
to many uncertainties and the Company cannot predict with assurances
the outcomes and ultimate financial impacts of them. There can be no
guarantees that actions that have been or may be brought against the
Company in the future will be resolved in the Companys favor or that
insurance carried by the Company will be available or paid to cover
any litigation exposure. Any losses resulting from settlements or
adverse judgments arising out of these claims could materially and
adversely affect the Companys consolidated financial position and
results of operations.
    
    Fluctuations in foreign currency exchange rates could affect the
Companys ability to sell its products in foreign markets and the
value in U.S. dollars of revenues received in foreign currencies. The
Companys revenues from its international segment may also be
adversely affected by taxation and laws or policies of the foreign
countries in which the Company has operations, as well as laws and
policies of the United States affecting foreign trade, investment and
taxation. 18




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
    
    The Company maintains high levels of inventory to support its
AuthenticsTM program as well as the Callaway Golf apparel Classics
program. Additional products, greater sales volume, and customer
trends toward increased at-once ordering may require increased
inventory. Disposal of excess prior season inventory is an ongoing
part of the Companys business, and write-downs of inventories may
materially impair the Companys financial performance in any period.
Particular inventories may be subject to multiple write-downs if the
Companys initial reserve estimates for inventory obsolescence or lack
of throughput prove to be too low. These risks increase as inventory
increases. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Companys long-term debt consists of notes payable which had a total
balance of $11,836,000 at April 30, 2004. The debt bears interest at variable
and fixed rates ranging from 5.0% to 8.3%, which approximates fair value based
on current rates offered for debt with similar risks and maturities. The
Company also had $7,000,000 outstanding at April 30, 2004 on its revolving line
of credit with interest charged at the banks reference (prime) rate. The loan
agreement also provides for optional interest rates based on LIBOR for periods
of at least 30 days in increments of $500,000. A hypothetical 10% increase in
interest rates during the six months ended April 30, 2004 would have resulted
in a $13,000 reduction in net income. Foreign Currency Exchange Rate Risk The Companys ability to sell its products in foreign markets and the U.S.
dollar value of the sales made in foreign currencies can be significantly
influenced by foreign currency fluctuations. A decrease in the value of
foreign currencies relative to the U.S. dollar could result in downward price
pressure for the Companys products or losses from currency exchange rates.
From time to time the Company and its U.K. subsidiary enter into short-term
foreign exchange contracts with its bank to hedge against the impact of
currency fluctuations between the U.S. dollar and the British pound. The
contracts provide that, on specified dates, the Company would sell the bank a
specified number of British pounds in exchange for a specified number of U.S.
dollars. Additionally, the Companys subsidiary in England from time to time
enters into similar contracts with its bank to hedge against currency
fluctuations between the British pound and other European currencies. Realized
gains and losses on these contracts are recognized in the same period as the
hedged transaction. These contracts have maturity dates that do not normally
exceed 12 months. The Company will continue to assess the benefits and risks
of strategies to manage the risks presented by currency exchange rate
fluctuations. There is no assurance that any strategy will be successful in
avoiding losses due to exchange rate fluctuations, or that the failure to
manage currency risks effectively would not have a material adverse effect on
the Companys results of operations. On July 15, 2003, the Companys U.K.
subsidiary entered into four forward exchange contracts to sell British pounds
and buy U. S. dollars, as well as five forward exchange contracts to sell Euros
and buy British pounds. All of these contracts were settled as intended and,
at April 30, 2004, neither the Company nor any of its subsidiaries had any
outstanding foreign exchange contracts. 
 Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of April 30, 2004, the Company carried out an evaluation, under the
supervision and with the participation of the Companys management, including
the Companys Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, our Chief Executive 19




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##### Table of Contents



Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures are effective and provide
reasonable assurance that information required to be disclosed by the Company
in the reports it files under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within required time periods. Changes in Internal Control over Financial Reporting There was no significant change in the Companys internal controls over
financial reporting during the Companys first quarter of fiscal 2004 that has
materially affected or is reasonably likely to materially affect the Companys
internal control over financial reporting. 
 PART II OTHER INFORMATION 
 Item 1. LEGAL PROCEEDINGS On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a
class action in the United States District Court for the Southern District of
California (U.S. District Court) on behalf of purchasers of the Companys
common stock during the period between September 4, 1997 and July 15, 1998.
The action was subsequently consolidated with two similar suits and plaintiffs
filed their Amended and Consolidated Complaint on December 17, 1999. Upon the
Companys motion, the U.S. District Court dismissed the Complaint with leave to
amend on July 18, 2000. On September 18, 2000, plaintiffs served their Second
Consolidated Amended Complaint (Second Amended Complaint). On November 6,
2000, the Company filed its motion to dismiss the Second Amended Complaint,
which the U.S. District Court granted, in part, and denied, in part. The
remaining portions of the Second Amended Complaint allege that, among other
things, during the class period and in violation of the Securities Exchange Act
of 1934, the Companys financial statements, as reported, did not conform to
generally accepted accounting principles with respect to revenues and inventory
levels. It further alleges that certain Company executives made false or
misleading statements or omissions concerning product demand and that two
former executives engaged in insider trading. The plaintiffs seek unspecified
damages. The parties are currently in the discovery process. The Company has
not to date booked any provision for settlement charges. The Company is party to other claims and litigation proceedings arising in
the normal course of business. Although the legal responsibility and financial
impact with respect to such other claims and litigation cannot currently be
ascertained, the Company does not believe that these other matters will result
in payment by the Company of monetary damages, net of any applicable insurance
proceeds, that, in the aggregate, would be material in relation to the
consolidated financial position 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 At the Companys Annual Meeting of Stockholders (Annual Meeting) on
March 24, 2004, the following five directors were elected for varying terms to
serve on the Companys board of directors: Mr. Stephen G. Carpenter, Ms.
Judith K. Hofer and Mr. Phillip D. Matthews were elected as Class II directors 20




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##### Table of Contents



to serve for a three year term until the Annual Meeting in 2007, Mr. James B.
Hayes was elected as a Class I director to serve a two year term until the
Annual Meeting in 2006 and Mr. Andre P. Gambucci was elected as a Class III
director to serve a one year term until the Annual Meeting in 2005. The
following directors continued in office after the meeting but were not subject
to reelection at the meeting: Messrs. John M. Hanson, Jr., Mr. H. Michael
Hecht and Mr. Randall L. Herrel, Sr. The stockholder votes on the elections were as follows: Stephen G. CarpenterNumber of votes FOR
    
    
    12,320,623Number of votes WITHHELD
    
    
    166,485Number of broker non-votes
    
    
    0Judith K. HoferNumber of votes FOR
    
    
    12,366,024Number of votes WITHHELD
    
    
    121,084Number of broker non-votes
    
    
    0Phillip D. MatthewsNumber of votes FOR
    
    
    12,362,393Number of votes WITHHELD
    
    
    124,715Number of broker non-votes
    
    
    0James B. HayesNumber of votes FOR
    
    
    12,364,493Number of votes WITHHELD
    
    
    122,615Number of broker non-votes
    
    
    0Andre P. GambucciNumber of votes FOR
    
    
    12,319,602Number of votes WITHHELD
    
    
    167,506Number of broker non-votes
    
    
    0
 
 Item 5. OTHER
INFORMATION  NONE 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3(a)
    
    Certificate of Incorporation as filed March 19, 1987 with the Secretary
of State of Delaware, Amendment to Certificate of Incorporation as filed
August 3, 1987 and Amendment to Certificate of Incorporation as filed
April 26, 1991 (filed as Exhibit 3(a) to the Companys Registration
Statement dated February 21, 1992 (File No. 33-45078) and incorporated
herein by reference) and Amendment to Certificate of Incorporation as
filed April 6, 1995 (filed as Exhibit 3(a) to the Companys Form 10-K for
the fiscal year ended October 31, 1994 (File No. 0-18553) and incorporated
herein by reference).3(b)
    
    Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the
Companys Current Report on Form 8-K on February 23, 2000 (File No.
0-18553) and incorporated herein by reference).4(a)
    
    Specimen certificate for Common Stock, par value $.001 per share, of the
Company (filed as Exhibit 4(a) to the Companys Registration Statement
dated November 4, 1987 (File No. 33-
 21




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##### Table of Contents



16714-D) and incorporated herein by
reference).4(b)(1)
    
    Specimen certificate for Options granted under the Amended and Restated
Nonqualified Stock Option Plan dated March 12, 1992 (filed as Exhibit 4(b)
to the Companys Form 10-K for the fiscal year ended October 31, 1993
(File No. 0-18553) and incorporated herein by reference).4(b)(2)
    
    Specimen certificate for Options granted under the Founders Stock
Option Plan dated November 6, 1992 (filed as Exhibit 4(b)(2) to the
Companys Form 10-K for the fiscal year ended October 31, 1993 (File No.
0-18553) and incorporated herein by reference).4(c)
    
    Specimen certificate for Options granted under the Incentive Stock Option
Plan dated June 15, 1993 (filed as Exhibit 4(c) to the Companys Form 10-K
for the fiscal year ended October 31, 1993 (File No. 0-18553) and
incorporated herein by reference).4(d)
    
    Rights Agreement dated as of October 6, 1998 and amended on February 22,
2000 by and between Ashworth, Inc. and American Securities Transfer &
Trust, Inc. (filed as Exhibit 4.1 to the Companys Form 8-K filed on March
14, 2000 (File No. 0-18553) and incorporated herein by reference).10(a)*
    
    Personal Services Agreement and Acknowledgement of Termination of
Executive Employment effective December 31, 1998 by and between Ashworth,
Inc. and Gerald W. Montiel (filed as Exhibit 10(b) to the Companys Form
10-K for the fiscal year ended October 31, 1998 (File No. 0-18553) and
incorporated herein by reference).10(b)*
    
    Amendment to Personal Services Agreement effective January 1, 1999 by
and between Ashworth, Inc. and Gerald W. Montiel (filed as Exhibit 10(c)
to the Companys Form 10-K for the fiscal year ended October 31, 1998
(File No. 0-18553) and incorporated herein by reference).10(c)*
    
    First Amended and Restated Executive Employment Agreement effective
February 22, 1999 by and between Ashworth, Inc. and Randall L. Herrel, Sr.
(filed as Exhibit 10(a) to the Companys Form 10-Q for the quarter ended
April 30, 1999 (File No. 0-18553) and incorporated herein by reference).10(d)*
    
    Employment Agreement effective December 15, 2000 by and between
Ashworth, Inc. and Terence W. Tsang (filed as Exhibit 10(f) to the
Companys Form 10-Q for the quarter ended January 31, 2001 (File No.
0-18553) and incorporated herein by reference).10(e)*
    
    Amended and Restated Nonqualified Stock Option Plan dated November 1,
1996 (filed as Exhibit 10(i) to the Companys Form 10-K for the fiscal
year ended October 31, 2000 (File No. 0-18553) and incorporated herein by
reference).10(f)*
    
    Amended and Restated Incentive Stock Option Plan dated November 1, 1996
(filed as Exhibit 10(j) to the Companys Form 10-K for the fiscal year
ended October 31, 2000 (File No. 0-18553) and incorporated herein by
reference).10(g)*
    
    Amended and Restated 2000 Equity Incentive Plan dated December 14, 1999
adopted by the stockholders on March 24, 2000 (filed as Exhibit 4.1 to the
Companys Form S-8 filed on December 12, 2000 (File No. 333-51730) and
incorporated herein by reference).10(h)(1)
    
    Credit Agreement dated April 24, 2003, between Ashworth, Inc. as
Borrower, Bank of America, N.A., as Administrative Agent and Lender, Union
Bank of California, N.A. and Bank of the West as Lenders, expiring April
30, 2005 (filed as Exhibit 10(i)(1) to the Companys Form 10-Q for the
quarter ended April 30, 2003 (File No. 0-18553) and incorporated herein by
reference).
 22




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##### Table of Contents



10(h)(2)
    
    Guaranty Agreement dated April 24, 2003 between Ashworth Store I,
Inc., Ashworth Store II, Inc. and Ashworth Store III, Inc. as Guarantors
and Bank of America, N.A., as Administrative Agent on behalf of Ashworth,
Inc. as the Borrower (filed as Exhibit 10(i)(2) to the Companys Form 10-Q
for the quarter ended April 30, 2003 (File No. 0-18553) and incorporated
herein by reference).10(h)(3)
    
    Security Agreement effective as of April 24, 2003 to the Credit
Agreement dated April 24, 2000, between Ashworth, Inc. as Pledgor, Bank of
America, N.A., as Administrative Agent and Lender, Union Bank of
California, N.A. and Bank of the West as Lenders, expiring April 30, 2005
(filed as Exhibit 10(i)(3) to the Companys Form 10-Q for the quarter
ended April 30, 2003 (File No. 0-18553) and incorporated herein by
reference).10(h)(4)
    
    Security Agreement effective as of April 24, 2003 to the Credit
Agreement dated April 24, 2000, between Ashworth Store I, Inc., Ashworth
Store II, Inc. and Ashworth Store III, Inc. as Pledgor, Bank of America,
N.A., as Administrative Agent and Lender, Union Bank of California, N.A.
and Bank of the West as Lenders, expiring April 30, 2005 (filed as Exhibit
10(i)(4) to the Companys Form 10-Q for the quarter ended April 30, 2003
(File No. 0-18553) and incorporated herein by reference).10(h)(5)
    
    Deed of Hypothec of Universality of Moveable Property effective as of
April 24, 2003 to the Credit Agreement dated April 24, 2000, between
Ashworth, Inc. as Grantor, Bank of America, N.A., as Administrative Agent
and Lender, Union Bank of California, N.A. and Bank of the West as
Lenders, expiring April 30, 2005 (filed as Exhibit 10(i)(5) to the
Companys Form 10-Q for the quarter ended April 30, 2003 (File No.
0-18553) and incorporated herein by reference).10(h)(6)
    
    Equitable Mortgage Over Securities effective as of April 24, 2003 to
the Credit Agreement dated April 24, 2000, between Ashworth, Inc. as
Mortgagor, Bank of America, N.A., as Security Trustee and Beneficiary,
Union Bank of California, N.A. and Bank of the West as Beneficiaries,
expiring April 30, 2005 (filed as Exhibit 10(i)(6) to the Companys Form
10-Q for the quarter ended April 30, 2003 (File No. 0-18553) and
incorporated herein by reference).10(i)*
    
    Change in Control Agreement dated November 1, 2000 by and between
Ashworth, Inc. and Randall L. Herrel, Sr. (filed as Exhibit 10(m) to the
Companys Form 10-K for the fiscal year ended October 31, 2000 (File No.
0-18553) and incorporated herein by reference).10(j)*
    
    Change in Control Agreement dated November 1, 2000 by and between
Ashworth, Inc. and Terence W. Tsang (filed as Exhibit 10(n) to the
Companys Form 10-K for the fiscal year ended October 31, 2000 (File No.
0-18553) and incorporated herein by reference).10(k)
    
    Promotion Agreement effective November 1, 1999 by and between Ashworth,
Inc. and Fred Couples (filed as Exhibit 10(o) to the Companys Form 10-K
for the fiscal year ended October 31, 2000 (File No. 0-18553) and
incorporated herein by reference).10(l)*
    
    Offer and Acceptance of Executive Employment effective May 29, 2001 by
and between Ashworth, Inc. and Eddie Fadel (filed as Exhibit 10(o) to the
Companys Form 10-K for the fiscal year ended October 31, 2002 (File No.
0-18553) and incorporated herein by reference).10(m)*
    
    Contract Termination Agreement effective October 31, 2002 by and among
Ashworth, Inc., James Nantz, III and Nantz Communications, Inc. (filed as
Exhibit 10(p) to the Companys Form 10-K for the fiscal year ended October
31, 2002 (File No. 0-18553) and incorporated herein by reference).10(n)
    
    Real Estate Purchase and Sale Agreement and Joint Escrow Instructions
effective
 23




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##### Table of Contents



October 25, 2002 by and between Innovative Development
Enterprises, Inc. and Ashworth, Inc. (filed as Exhibit 10(q) to the
Companys Form 10-K for the fiscal year ended October 31, 2002 (File No.
0-18553) and incorporated herein by reference).10(o)*
    
    Promotion Agreement effective October 31, 2002 by and among Ashworth,
Inc., James W. Nantz, III and Nantz Enterprises, Ltd. (filed as Exhibit
10(q) to the Companys Form 10-Q for the quarter ended January 31, 2003
(File No. 0-18553) and incorporated herein by reference).10(p)
    
    Purchase and Installation Agreement dated April 10, 2003 between
Ashworth, Inc. and Gartner Storage & Sorter Systems of Pennsylvania (filed
as Exhibit 10® to the Companys Form 10-Q for the quarter ended April
30, 2003 (File No. 0-18553) and incorporated herein by reference).10(q)
    
    Agreement for Lease dated May 1, 2003 by and among Ashworth, Inc.,
Ashworth U.K. Limited and Juniper Developments Limited (filed as Exhibit
10(s) to the Companys Form 10-Q for the quarter ended April 30, 2003
(File No. 0-18553) and incorporated herein by reference).10(r)
    
    Lease dated September 1, 2003 by and among Ashworth, Inc., Ashworth U.K.
Limited and Juniper Developments Limited (filed as Exhibit 10(t) to the
Companys Form 10-Q for the quarter ended July 31, 2003 (File No. 0-18553)
and incorporated herein by reference).10(s)
    
    Master Equipment Lease Agreement dated as of June 23, 2003 by and
between Key Equipment Finance and Ashworth, Inc. including Amendment 01,
the Assignment of Purchase Agreement and the Certificate of Authority
(filed as Exhibit 10(u) to the Companys Form 10-Q for the quarter ended
July 31, 2003 (File No. 0-18553) and incorporated herein by reference).10(t)*
    
    Offer and Acceptance of Executive Employment effective August 30, 2001
by and between Ashworth, Inc. and Gary I. Schneiderman (filed as Exhibit
10(u) to the Companys Form 10-K for the fiscal year ended October 31,
2003 (File No. 0-18553) and incorporated herein by reference).10(u)
    
    License Agreement, effective May 14, 2001, by and between Ashworth, Inc.
and Callaway Golf Company (filed as Exhibit 10(v) to the Companys Form
10-K for the fiscal year ended October 31, 2003 (File No. 0-18553) and
incorporated herein by reference).10(v)
    
    Amendment to License Agreement, effective December 16, 2003, by and
between Ashworth, Inc. and Callaway Golf Company (filed as Exhibit 10(w)
to the Companys Form 10-K for the fiscal year ended October 31, 2003
(File No. 0-18553) and incorporated herein by reference).10(w)(1)
    
    Purchase and Sale Agreement, dated as of December 2, 2003, by and
between Ashworth, Inc. and LBA Inc. filed as Exhibit 10(w)(1) to the
Companys Form 10-Q for the quarter ended January 31, 2004 (File No.
0-18553) and incorporated herein by reference).10(w)(2)
    
    First Amendment to Purchase and Sale Agreement, dated as of January
29, 2004, by and between Ashworth, Inc. and LBA Inc. filed as Exhibit
10(w)(2) to the Companys Form 10-Q for the quarter ended January 31, 2004
(File No. 0-18553) and incorporated herein by reference).10(w)(3)
    
    Assignment and Assumption of Purchase and Sale Agreement, effective
February 24, 2004, by and between LBA Inc. and LBA Industrial Fund-Canyon,
Inc. filed as Exhibit 10(w)(3) to the Companys Form 10-Q for the quarter
ended January 31, 2004 (File No. 0-18553) and incorporated herein by
reference).10(w)(4)
    
    Lease dated February 24, 2004 by and between Ashworth, Inc. and LBA
Industrial Fund-Canyon, Inc. filed as Exhibit 10(w)(4) to the Companys
Form 10-Q for the quarter ended January 31, 2004 (File No. 0-18553) and
incorporated herein by reference).10(w)(5)
    
    Exchange Agreement and Supplemental Closing Instructions, dated as of
December 3, 2003, by
 24




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##### Table of Contents



and between Ashworth, Inc. and Asset Preservation,
Inc. filed as Exhibit 10(w)(5) to the Companys Form 10-Q for the quarter
ended January 31, 2004 (File No. 0-18553) and incorporated herein by
reference).10(x)(1)
    
    Assignment and Assumption Agreement, effective April 1, 2004, by and
between Innovative Development Enterprises, Inc., Ashworth EDC, LLC and
Ashworth, Inc.10(x)(2)
    
    Grant Deed, effective March 30, 2004, by and between Innovative
Development Enterprises, Inc., Ashworth EDC, LLC.10(x)(3)
    
    Loan Agreement, effective April 2, 2004, by and between Ashworth EDC,
LLC and Bank of America, N.A.10(x)(4)
    
    Promissory Note, effective April 2, 2004, by and between Ashworth EDC,
LLC and Bank of America, N.A.10(x)(5)
    
    Deed of Trust, Assignment of Leases and Rents, Security Agreement and
Fixture Filing, effective April 2, 2004, by and between Ashworth EDC, LLC,
PRLAP, Inc. and Bank of America, N.A.10(x)(6)
    
    Environmental Indemnity Agreement, effective April 2, 2004, by and
between Ashworth EDC, LLC, Ashworth, Inc. and Bank of America, N.A.14
    
    Ashworth, Inc. Code of Business Conduct and Ethics adopted October 17,
2003 (filed as Exhibit 14 to the Companys Form 10-K for the fiscal year
ended October 31, 2003 (File No. 0-18553) and incorporated herein by
reference).31.1
    
    Certification Pursuant to Rules 13a-14 and 15d-14, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 by Randall L. Herrel, Sr.31.2
    
    Certification Pursuant to Rules 13a-14 and 15d-14, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 by Terence W. Tsang.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Randall L. Herrel, Sr.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Terence W. Tsang.
  * Management contract or compensatory plan or arrangement required to be filed
as an Exhibit pursuant to Item 15(c) of Form 10-K and applicable rules of the
Securities and Exchange Commission.  Certain portions of this exhibit have been omitted pursuant to a request for
confidential treatment filed separately with the Securities and Exchange
Commission. (b) Reports on Form 8-K  The Company filed a report on Form 8-K dated March 4, 2004 furnishing
the press release reporting the results of operations for the first
quarter of fiscal 2004 as well as earnings guidance for the second
quarter and fiscal year 2004. 25




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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: June 14, 2004
    By:
    /s/ Terence W. TsangTerence W. TsangExecutive Vice President,

Chief Operating Officer,

Chief Financial Officer and

Treasurer 26




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##### Table of Contents



EXHIBIT INDEX ExhibitNumber
    
    Description of Exhibit10(x)(1)
    
    Assignment and Assumption Agreement, effective April 1,
2004, by and between Innovative Development Enterprises,
Inc., Ashworth EDC, LLC and Ashworth, Inc.10(x)(2)
    
    Grant Deed, effective March 30, 2004, by and between
Innovative Development Enterprises, Inc., Ashworth EDC,
LLC.10(x)(3)
    
    Loan Agreement, effective April 2, 2004, by and between
Ashworth EDC, LLC and Bank of America, N.A.10(x)(4)
    
    Promissory Note, effective April 2, 2004, by and between
Ashworth EDC, LLC and Bank of America, N.A.10(x)(5)
    
    Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing, effective April 2, 2004, by
and between Ashworth EDC, LLC, PRLAP, Inc. and Bank of
America, N.A.10(x)(6)
    
    Environmental Indemnity Agreement, effective April 2, 2004,
by and between Ashworth EDC, LLC, Ashworth, Inc. and Bank
of America, N.A31.1
    
    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.
 27