##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 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
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 2765 LOKER AVENUE WEST
CARLSBAD, CA 92008
 (760) 438-6610
 þ o
 þ o
 o o
  Title
    
    Outstanding at July 31, 2005$.001 par value Common Stock
    
    13,985,239




---



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
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    27Part II. Other InformationItem 1. Legal Proceedings
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    30Signatures
    
    
    36Exhibit Index
    
    
    37EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I
 
 FINANCIAL INFORMATION
  
  July 31, 2005
    
    
    October 31, 2004(UNAUDITED)AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,094,000
    
    
    $
    5,541,000Accounts receivable  trade, net
    
    
    38,796,000
    
    
    
    39,264,000Accounts receivable  other
    
    
    1,229,000
    
    
    
    1,055,000Inventories, net
    
    
    54,179,000
    
    
    
    49,249,000Income tax receivable
    
    
    3,617,000
    
    
    
    Other current assets
    
    
    6,042,000
    
    
    
    4,014,000Deferred income tax asset
    
    
    1,697,000
    
    
    
    1,697,000Total current assets
    
    
    107,654,000
    
    
    
    100,820,000Property, plant and equipment, at cost
    
    
    59,345,000
    
    
    
    52,396,000Less accumulated depreciation and amortization
    
    
    (21,066,000
    )
    
    
    (17,865,000
    )Total property, plant and equipment, net
    
    
    38,279,000
    
    
    
    34,531,000Goodwill
    
    
    12,660,000
    
    
    
    12,640,000Intangible assets, net
    
    
    10,668,000
    
    
    
    11,028,000Other assets
    
    
    262,000
    
    
    
    467,000Total assets
    
    $
    169,523,000
    
    
    $
    159,486,000Liabilities and Stockholders EquityCurrent liabilities:Line of credit payable
    
    $
    13,300,000
    
    
    $
    2,500,000Current portion of long-term debt
    
    
    4,461,000
    
    
    
    4,502,000Accounts payable
    
    
    15,159,000
    
    
    
    13,959,000Income tax payable
    
    
    
    
    
    
    1,157,000Accrued liabilities:Salaries and commissions
    
    
    2,987,000
    
    
    
    2,809,000Other
    
    
    3,959,000
    
    
    
    4,135,000Total current liabilities
    
    
    39,866,000
    
    
    
    29,062,000Long-term debt, net of current portion
    
    
    23,777,000
    
    
    
    27,186,000Deferred income tax liability
    
    
    1,667,000
    
    
    
    1,667,000Other long-term liabilities
    
    
    256,000
    
    
    
    355,000Stockholders equity:Common stock
    
    
    14,000
    
    
    
    14,000Capital in excess of par value
    
    
    44,240,000
    
    
    
    42,171,000Retained earnings
    
    
    57,620,000
    
    
    
    56,109,000Accumulated other comprehensive income
    
    
    2,083,000
    
    
    
    2,922,000Total stockholders equity
    
    
    103,957,000
    
    
    
    101,216,000Total liabilities and stockholders equity
    
    $
    169,523,000
    
    
    $
    159,486,000
 
 1




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Three months ended July 31,
    
    
    Nine months ended July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues
    
    $
    48,304,000
    
    
    $
    42,825,000
    
    
    $
    149,484,000
    
    
    $
    124,835,000Cost of goods sold
    
    
    33,299,000
    
    
    
    24,798,000
    
    
    
    91,761,000
    
    
    
    72,808,000Gross profit
    
    
    15,005,000
    
    
    
    18,027,000
    
    
    
    57,723,000
    
    
    
    52,027,000Selling, general and administrative expenses
    
    
    19,865,000
    
    
    
    13,560,000
    
    
    
    53,259,000
    
    
    
    37,463,000Income (loss) from operations
    
    
    (4,860,000
    )
    
    
    4,467,000
    
    
    
    4,464,000
    
    
    
    14,564,000Other income (expense):Interest income
    
    
    15,000
    
    
    
    14,000
    
    
    
    49,000
    
    
    
    46,000Interest expense
    
    
    (624,000
    )
    
    
    (452,000
    )
    
    
    (1,733,000
    )
    
    
    (848,000
    )Net foreign currency exchange gain (loss)
    
    
    (129,000
    )
    
    
    (79,000
    )
    
    
    (155,000
    )
    
    
    20,000Other expense, net
    
    
    (40,000
    )
    
    
    (3,104,000
    )
    
    
    (107,000
    )
    
    
    (3,273,000
    )Total other expense
    
    
    (778,000
    )
    
    
    (3,621,000
    )
    
    
    (1,946,000
    )
    
    
    (4,055,000
    )Income (loss) before provision for income taxes
    
    
    (5,638,000
    )
    
    
    846,000
    
    
    
    2,518,000
    
    
    
    10,509,000Provision for income taxes
    
    
    (2,255,000
    )
    
    
    338,000
    
    
    
    1,007,000
    
    
    
    4,204,000Net income (loss)
    
    $
    (3,383,000
    )
    
    $
    508,000
    
    
    $
    1,511,000
    
    
    $
    6,305,000Net income (loss) per share:Basic
    
    $
    (0.24
    )
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.47Diluted
    
    $
    (0.24
    )
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.46Weighted-average shares outstanding:Basic
    
    
    13,929,000
    
    
    
    13,444,000
    
    
    
    13,823,000
    
    
    
    13,366,000Diluted
    
    
    13,929,000
    
    
    
    13,757,000
    
    
    
    14,198,000
    
    
    
    13,703,000
  2




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Nine months ended July 31,2005
    
    
    2004Cash flows from operating activities:Net Cash (used in) provided by operating activities
    
    $
    (5,341,000
    )
    
    $
    8,588,000Cash flows from investing activities:Proceeds from sale of fixed assets
    
    
    5,000
    
    
    
    5,277,000Purchases of property, plant and equipment
    
    
    (6,677,000
    )
    
    
    (19,263,000
    )Purchase of intangible assets
    
    
    (96,000
    )
    
    
    Acquisition of business
    
    
    
    
    
    
    (23,678,000
    )Net cash used in investing activities
    
    
    (6,768,000
    )
    
    
    (37,664,000
    )Cash flows from financing activities:Principal payments on capital lease obligations
    
    
    (70,000
    )
    
    
    (127,000
    )Borrowings on line of credit
    
    
    31,250,000
    
    
    
    27,539,000Payments on line of credit
    
    
    (20,450,000
    )
    
    
    (31,350,000
    )Proceeds from long-term debt
    
    
    
    
    
    
    31,666,000Principal payments on notes payable and long-term debt
    
    
    (3,380,000
    )
    
    
    (2,677,000
    )Proceeds from exercise of stock options
    
    
    2,069,000
    
    
    
    1,081,000Net cash provided by financing activities
    
    
    9,419,000
    
    
    
    26,132,000Effect of exchange rate changes on cash
    
    
    (757,000
    )
    
    
    1,060,000Net decrease in cash and cash equivalents
    
    
    (3,447,000
    )
    
    
    (1,884,000
    )Cash and cash equivalents, beginning of period
    
    
    5,541,000
    
    
    
    5,024,000Cash and cash equivalents, end of period
    
    $
    2,094,000
    
    
    $
    3,140,000Supplemental disclosures of noncash transactions:Note payable issued for acquisition of business
    
    $
    
    
    
    $
    1,000,000
  3




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NOTE 1  Basis of Presentation
   Shipping and Handling Revenue
 Accounting of Shipping
and Handling Fees and Costs
 Cost of Goods Sold
  Shipping and Handling Expenses
  Reclassifications
  4




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NOTE 2  Inventories
  July 31,
    
    
    October 31,2005
    
    
    2004Raw Materials
    
    $
    103,000
    
    
    $
    123,000Finished Goods
    
    
    54,076,000
    
    
    
    49,126,000Total Inventories, net
    
    $
    54,179,000
    
    
    $
    49,249,000
 NOTE 3  Goodwill and Other Intangible Assets
 Goodwill and Other Intangible Assets.
 July 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
    
    
    
    (248,000
    )
    
    
    1,282,000
    
    
    
    1,530,000
    
    
    
    (72,000
    )
    
    
    1,458,000Non-competes
    
    
    1,372,000
    
    
    
    (805,000
    )
    
    
    567,000
    
    
    
    1,372,000
    
    
    
    (680,000
    )
    
    
    692,000Customer sales backlog
    
    
    190,000
    
    
    
    (190,000
    )
    
    
    
    
    
    
    190,000
    
    
    
    (71,000
    )
    
    
    119,000Trademarks
    
    
    1,375,000
    
    
    
    (1,256,000
    )
    
    
    119,000
    
    
    
    1,299,000
    
    
    
    (1,240,000
    )
    
    
    59,000Total intangible assets
    
    $
    13,167,000
    
    
    $
    (2,499,000
    )
    
    $
    10,668,000
    
    
    $
    13,091,000
    
    
    $
    (2,063,000
    )
    
    $
    11,028,000
  5




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Remainder 2005
    
    $
    104,0002006
    
    
    429,0002007
    
    
    420,0002008
    
    
    402,0002009
    
    
    260,0002010
    
    
    214,000Thereafter
    
    
    139,000Total
    
    $
    1,968,000
 NOTE 4  Line of Credit Agreement.
    6




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NOTE 5  Net Income (Loss) Per Share Information.
 Earnings Per Share
 Three months ended July 31,
    
    
    Nine months ended July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Net income (loss)Numerator for basic and diluted
income (loss) per share  income
available to common stockholders
    
    $
    (3,383,000
    )
    
    $
    508,000
    
    
    $
    1,511,000
    
    
    $
    6,305,000Denominator:Denominator for basic income (loss)
per share  weighted average shares
    
    
    13,929,000
    
    
    
    13,444,000
    
    
    
    13,823,000
    
    
    
    13,366,000Effect of dilutive securities:stock options
    
    
    
    
    
    
    313,000
    
    
    
    375,000
    
    
    
    337,000Denominator for diluted income (loss)
per share  adjusted weighted average
shares and assumed conversions
    
    
    13,929,000
    
    
    
    13,757,000
    
    
    
    14,198,000
    
    
    
    13,703,000Basic net income (loss) per share
    
    $
    (0.24
    )
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.47Diluted net income (loss) per share
    
    $
    (0.24
    )
    
    $
    0.04
    
    
    $
    0.11
    
    
    $
    0.46
  7




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NOTE 6  Issuance of Common Stock.
  NOTE 7  Stock-Based Compensation.
 Accounting for Stock Issued to Employees, Accounting for
Stock-Based Compensation Accounting for Stock-Based Compensation 
Transition and Disclosure
    8




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Three months ended July 31,
    
    
    Nine months ended July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss), as reported
    
    $
    (3,383,000
    )
    
    $
    508,000
    
    
    $
    1,511,000
    
    
    $
    6,305,000Deduct: Stock-based employee and director
compensation expense determined
under fair value based method for all
awards, net of tax effect
    
    
    (244,000
    )
    
    
    (179,000
    )
    
    
    (774,000
    )
    
    
    (548,000
    )Pro forma net income (loss)
    
    $
    (3,627,000
    )
    
    $
    329,000
    
    
    $
    737,000
    
    
    $
    5,757,000Pro forma net income (loss) per share:Basic  as reported
    
    
    (0.24
    )
    
    
    0.04
    
    
    
    0.11
    
    
    
    0.47Basic  pro forma
    
    
    (0.26
    )
    
    
    0.02
    
    
    
    0.05
    
    
    
    0.43Diluted  as reported
    
    
    (0.24
    )
    
    
    0.04
    
    
    
    0.11
    
    
    
    0.46Diluted  pro forma
    
    
    (0.26
    )
    
    
    0.02
    
    
    
    0.05
    
    
    
    0.42
  NOTE 8  Comprehensive Income.
  Three months ended July 31,
    
    
    Nine months ended July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    (3,383,000
    )
    
    $
    508,000
    
    
    $
    1,511,000
    
    
    $
    6,305,000Net unrealized gains on cash flow
hedges, net of tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108,000Effects of foreign currency translation
    
    
    (1,359,000
    )
    
    
    544,000
    
    
    
    (839,000
    )
    
    
    968,000Total comprehensive income (loss)
    
    $
    (4,742,000
    )
    
    $
    1,052,000
    
    
    $
    672,000
    
    
    $
    7,381,000
 9




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NOTE 9  Legal Proceedings.
   10




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NOTE 10  Segment Information
  Three months ended July 31,
    
    
    Nine months ended July 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues:Domestic
    
    $
    40,011,000
    
    
    $
    35,795,000
    
    
    $
    123,491,000
    
    
    $
    103,305,000Ashworth, U.K., Ltd.
    
    
    5,422,000
    
    
    
    4,723,000
    
    
    
    17,268,000
    
    
    
    13,638,000Other International
    
    
    2,871,000
    
    
    
    2,307,000
    
    
    
    8,725,000
    
    
    
    7,892,000Total
    
    $
    48,304,000
    
    
    $
    42,825,000
    
    
    $
    149,484,000
    
    
    $
    124,835,000Income (loss) from operations:Domestic
    
    $
    (6,085,000
    )
    
    $
    3,429,000
    
    
    $
    59,000
    
    
    $
    10,848,000Ashworth, U.K., Ltd.
    
    
    314,000
    
    
    
    380,000
    
    
    
    1,815,000
    
    
    
    1,115,000Other International
    
    
    911,000
    
    
    
    658,000
    
    
    
    2,590,000
    
    
    
    2,601,000Total
    
    $
    (4,860,000
    )
    
    $
    4,467,000
    
    
    $
    4,464,000
    
    
    $
    14,564,000Capital expenditures:Domestic
    
    $
    1,647,000
    
    
    $
    2,251,000
    
    
    $
    6,524,000
    
    
    $
    18,963,000Ashworth, U.K., Ltd.
    
    
    5,000
    
    
    
    58,000
    
    
    
    153,000
    
    
    
    300,000Total
    
    $
    1,652,000
    
    
    $
    2,309,000
    
    
    $
    6,677,000
    
    
    $
    19,263,000Depreciation expense:Domestic
    
    $
    1,112,000
    
    
    $
    695,000
    
    
    $
    3,117,000
    
    
    $
    2,275,000Ashworth, U.K., Ltd.
    
    
    80,000
    
    
    
    60,000
    
    
    
    237,000
    
    
    
    174,000Total
    
    $
    1,192,000
    
    
    $
    755,000
    
    
    $
    3,354,000
    
    
    $
    2,449,000
 July 31,
    
    
    October 31,2005
    
    
    2004Total assets:Domestic
    
    $
    146,303,000
    
    
    $
    137,605,000Ashworth, U.K., Ltd.
    
    
    18,211,000
    
    
    
    18,430,000Other International
    
    
    4,739,000
    
    
    
    3,451,000Total
    
    $
    169,253,000
    
    
    $
    159,486,000Long lived assets, at cost:Domestic
    
    $
    83,476,000
    
    
    $
    76,805,000Ashworth, U.K., Ltd.
    
    
    1,959,000
    
    
    
    1,789,000Other International
    
    
    0
    
    
    
    0Total
    
    $
    85,435,000
    
    
    $
    78,594,000Goodwill:Domestic
    
    $
    12,660,000.00
    
    
    $
    12,640,000.00
 11




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NOTE 11  Contingencies
  12




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
   Critical Accounting Policies
  Revenue Recognition. Revenue Recognition Accounting of Shipping and Handling Fees and Costs
 Sales Returns and Other Allowances.
 Allowance for Doubtful Accounts.
 13




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Inventory.
 Asset Purchase Credits.
 Off-Balance Sheet Arrangements
  14




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Overview
 ®
   Ò Ò
    15




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Results of Operations
 Third quarter 2005 compared to third quarter 2004
       16




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17




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Nine months ended July 31, 2005 compared to nine months ended July 31, 2004
       18




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Capital Resources and Liquidity
     19




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20




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21




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Derivatives
  New Accounting Standards
 Determining the Amortization Period for Leasehold
Improvements
 Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB Statement
No. 3
 Exchanges of Nonmonetary Assets, an amendment
of APB Opinion No. 29 Accounting for Nonmonetary
Transactions
 22




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Share-Based
Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees,
  Inventory Costs, an amendment of ARB No. 43,
Chapter 4. Inventory Pricing
 23




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Cautionary Statements and Risk Factors
  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 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.
 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 recent years, the retail industry has experienced consolidation
and other ownership changes. In the future, retailers in the
United States and in foreign markets may undergo changes that
could decrease the number of stores that carry our products or
increase the ownership concentration within the retail industry,
including: consolidating their operations; undergoing
restructurings, undergoing reorganizations; or, realigning their
affiliations. The Companys business could be materially affected
by these changes in the future.
 ú
    
    The Companys results of operations would be adversely affected if
the new EDC 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.
 24




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##### Table of Contents



ú
    
    The Company maintains high levels of inventory to support its
AuthenticsTM 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 have
materially impaired the Companys financial position in the past and may do so again in the
future. Particular inventories may be subject to multiple write-downs if the Companys initial
reserve estimates for inventory obsolescence or lack of sell-through prove to be too low.
These risks increase as inventory increases.
 ú
    
    In July 2004, the Company acquired Gekko, a leading designer,
producer and distributor of headwear and apparel under The Game®
and Kudzu® brands. The Company must successfully integrate the
acquisition to realize the expected growth in new, quality
channels of distribution for the Ashworth and Callaway Golf
apparel brands as well as further growth from The Game and Kudzu
brands sales into the Companys current distribution channels.
The Companys results of operations would be adversely affected if
it fails to successfully integrate the new operations as
anticipated or the expected synergies are not realized.
 ú
    
    The outbreak of Severe Acute Respiratory Syndrome (SARS)
previously 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 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.
 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
uncollectible 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 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.
 25




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##### Table of Contents



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
    
    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.
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
   26




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Foreign Currency Exchange Rate Risk
  
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 PART II
 OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  27




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##### Table of Contents



Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 None
 
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  Ratio/Amount atFinancial Covenant
    
    Requirement
    
    
    July 31, 2005Minimum tangible net worth
    
    $
    81,456,352
    
    
    $
    80,628,681Minimum EBITDA
    
    $
    19,000,000
    
    
    $
    12,817,294Minimum ratio of cash and accounts receivable to
current liabilities
    
    
    1.0 to 1
    
    
    
    .96 to 1Fixed charge coverage ratio
    
    
    1.25 to 1
    
    
    
    .41 to 1Maximum capital expenditures
    
    $
    6,400,000
    
    
    $
    6,677,000
  28




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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 Not applicable.
 
 Item 5. OTHER INFORMATION
      29




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##### Table of Contents



Item 6. EXHIBITS
  3(a)
    
    Certificate of Incorporation as filed March 19, 1987 with the Secretary of State of Delaware,
Amendment to Certificate of Incorporation as filed August 3, 1987 and Amendment to Certificate
of Incorporation as filed April 26, 1991 (filed as Exhibit 3(a) to the Companys Registration
Statement dated February 21, 1992 (File No. 33-45078) and incorporated herein by reference)
and Amendment to Certificate of Incorporation as filed April 6, 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).
 30




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##### Table of Contents



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. 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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10(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).
 32




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10(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).
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##### Table of Contents



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
April 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(aa)
    
    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 (filed as
Exhibit 10.1 to
the Companys Form 10Q on March 11, 2005 (File No. 001-14547) and incorporated herein by
reference).
 34




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##### Table of Contents



10(bb)*
    
    Annual Base Salary for the Companys Chief Executive Officer Effective as of January 1,
2005 (filed as Exhibit 10.1 to the Companys Form 10-Q on June 9, 2005 (File No. 001-14547)
and incorporated herein by reference).10.1*
    
    Employment Agreement with the Companys Executive Vice President of Sales and Marketing, Mr.
Gary I. Sims Schneiderman, effective September 12, 2005.10.2*
    
    Change in Control Agreement with the Companys Executive Vice President of Sales and
Marketing, Mr. Gary I. Sims Schneiderman effective September 12, 2005.14
    
    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
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. 35




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SIGNATURES
 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
 ASHWORTH, INCDate: September 9, 2005
    
    /s/ Peter S. CasePeter S. Case
Senior Vice-President of Finance and Interim
Chief Financial Officer, and Treasurer
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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit10.1
    
    Employment Agreement with the Companys Executive Vice
President of Sales and Marketing, Mr. Gary I. Sims
Schneiderman, effective September 12, 2005.10.2
    
    Change in Control Agreement with the Companys
Executive Vice President of Sales and Marketing, Mr.
Gary I. Sims Schneiderman, effective September 12,
2005.31.1
    
    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 Peter S. Case.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 Peter S. Case.
 37