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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 April 30, 2005 OR oTRANSITION 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
(Address of Principal Executive Offices) (760) 438-6610
(Telephone No. Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. Title
    
    Outstanding at May 31, 2005$.001 par value Common Stock
    
    13,900,605




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INDEX PAGEPart I.Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4. Controls and Procedures
    
    
    25Part II. Other InformationItem 1. Legal Proceedings
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 3. Defaults Upon Senior Securities
    
    
    26Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 5. Other Information
    
    
    26Item 6. Exhibits
    
    
    27Signatures
    
    
    33Exhibit Index
    
    
    34EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I FINANCIAL INFORMATION ASHWORTH, INC. AND SUBSIDIARIES 
  April 30, 2005
    
    
    October 31, 2004(UNAUDITED)AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,032,000
    
    
    $
    5,541,000Accounts receivable  trade, net
    
    
    52,443,000
    
    
    
    39,264,000Accounts receivable  other, net
    
    
    1,146,000
    
    
    
    1,055,000Inventories, net
    
    
    53,931,000
    
    
    
    49,249,000Other current assets
    
    
    7,122,000
    
    
    
    4,014,000Deferred income tax asset
    
    
    1,697,000
    
    
    
    1,697,000Total current assets
    
    
    119,371,000
    
    
    
    100,820,000Property, plant and equipment, at cost
    
    
    57,747,000
    
    
    
    52,396,000Less accumulated depreciation and
amortization
    
    
    (19,945,000
    )
    
    
    (17,865,000
    )Total property, plant and equipment, net
    
    
    37,802,000
    
    
    
    34,531,000Goodwill
    
    
    12,660,000
    
    
    
    12,640,000Intangible assets, net
    
    
    10,750,000
    
    
    
    11,028,000Other assets
    
    
    283,000
    
    
    
    467,000Total assets
    
    $
    180,866,000
    
    
    $
    159,486,000Liabilities and Stockholders EquityCurrent liabilities:Line of credit payable
    
    $
    16,000,000
    
    
    $
    2,500,000Current portion of long-term debt
    
    
    4,457,000
    
    
    
    4,502,000Accounts payable
    
    
    16,415,000
    
    
    
    13,959,000Income tax payable
    
    
    2,685,000
    
    
    
    1,157,000Accrued liabilities:Salaries and commissions
    
    
    2,556,000
    
    
    
    2,809,000Other
    
    
    3,993,000
    
    
    
    4,135,000Total current liabilities
    
    
    46,106,000
    
    
    
    29,062,000Long-term debt, net of current portion
    
    
    25,082,000
    
    
    
    27,186,000Deferred income tax liability
    
    
    1,667,000
    
    
    
    1,667,000Other long-term liabilities
    
    
    247,000
    
    
    
    355,000Stockholders equity:Common stock
    
    
    14,000
    
    
    
    14,000Capital in excess of par value
    
    
    43,305,000
    
    
    
    42,171,000Retained earnings
    
    
    61,003,000
    
    
    
    56,109,000Accumulated other comprehensive income
    
    
    3,442,000
    
    
    
    2,922,000Total stockholders equity
    
    
    107,764,000
    
    
    
    101,216,000Total liabilities and stockholders equity
    
    $
    180,866,000
    
    
    $
    159,486,000
 See accompanying notes to condensed consolidated financial statements. 1




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ASHWORTH, INC. AND SUBSIDIARIES 
   Three months ended April 30,
    
    
    Six months ended April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues
    
    $
    64,668,000
    
    
    $
    54,672,000
    
    
    $
    101,180,000
    
    
    $
    82,010,000Cost of goods sold
    
    
    36,585,000
    
    
    
    31,363,000
    
    
    
    58,463,000
    
    
    
    48,010,000Gross profit
    
    
    28,083,000
    
    
    
    23,309,000
    
    
    
    42,717,000
    
    
    
    34,000,000Selling, general and
administrative expenses
    
    
    19,303,000
    
    
    
    13,555,000
    
    
    
    33,393,000
    
    
    
    23,960,000Income from operations
    
    
    8,780,000
    
    
    
    9,754,000
    
    
    
    9,324,000
    
    
    
    10,040,000Other income (expense):Interest income
    
    
    14,000
    
    
    
    11,000
    
    
    
    34,000

    
    
    
    32,000Interest expense
    
    
    (576,000
    )
    
    
    (227,000
    )
    
    
    (1,109,000
    )
    
    
    (396,000
    )Net foreign currency
exchange gain (loss)
    
    
    (69,000
    )
    
    
    (48,000
    )
    
    
    (26,000
    )
    
    
    99,000Other expense, net
    
    
    (131,000
    )
    
    
    (50,000
    )
    
    
    (67,000
    )
    
    
    (112,000
    )Total other expense
    
    
    (762,000
    )
    
    
    (314,000
    )
    
    
    (1,168,000
    )
    
    
    (377,000
    )Income before provision
for income taxes
    
    
    8,018,000
    
    
    
    9,440,000
    
    
    
    8,156,000
    
    
    
    9,663,000Provision for income taxes
    
    
    3,207,000
    
    
    
    3,777,000
    
    
    
    3,262,000
    
    
    
    3,866,000Net income
    
    $
    4,811,000
    
    
    $
    5,663,000
    
    
    $
    4,894,000
    
    
    $
    5,797,000Net income per share:Basic
    
    $
    0.35
    
    
    $
    0.42
    
    
    $
    0.36
    
    
    $
    0.43Diluted
    
    $
    0.34
    
    
    $
    0.41
    
    
    $
    0.35
    
    
    $
    0.42Weighted-average shares
outstanding:Basic
    
    
    13,813,000
    
    
    
    13,373,000
    
    
    
    13,769,000
    
    
    
    13,331,000Diluted
    
    
    14,271,000
    
    
    
    13,737,000
    
    
    
    14,184,000
    
    
    
    13,679,000
 See accompanying notes to condensed consolidated financial statements. 2




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ASHWORTH, INC. AND SUBSIDIARIES 
   Six months ended April 30,2005
    
    
    2004CASH FLOW FROM OPERATING ACTIVITIES:Net cash used in operating activities
    
    
    (10,348,000
    )
    
    
    (5,411,000
    )CASH FLOWS FROM INVESTING ACTIVITIESCapital expenditures
    
    
    (5,091,000
    )
    
    
    (16,955,000
    )Proceeds from sale of equipment
    
    
    5,000
    
    
    
    5,277,000Purchase of intangibles
    
    
    (71,000
    )
    
    
    Net cash used in investing activities
    
    
    (5,157,000
    )
    
    
    (11,678,000
    )CASH FLOWS FROM FINANCING ACTIVITIESIncrease in restricted cash
    
    
    (9,000
    )
    
    
    (11,000
    )Principal payments on capital lease obligations
    
    
    (101,000
    )
    
    
    (84,000
    )Borrowings on line of credit
    
    
    25,750,000
    
    
    
    20,300,000Payments on line of credit
    
    
    (12,250,000
    )
    
    
    (16,700,000
    )Borrowings on notes payable and long-term debt
    
    
    
    
    
    
    11,650,000Principal payments on notes payable and long-term debt
    
    
    (2,048,000
    )
    
    
    (2,650,000
    )Proceeds from issuance of common stock
    
    
    1,134,000
    
    
    
    775,000Net cash provided by financing activities
    
    
    12,476,000
    
    
    
    13,280,000Effect of exchange rate changes on cash
    
    
    520,000
    
    
    
    532,000Net decrease in cash and cash equivalents
    
    
    (2,509,000
    )
    
    
    (3,277,000
    )Cash, beginning of period
    
    
    5,541,000
    
    
    
    5,024,000Cash, end of period
    
    $
    3,032,000
    
    
    $
    1,747,000
 See accompanying notes to condensed consolidated financial statements. 3




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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 10-K for the year ended October 31, 2004, filed with the SEC on January 28,
2005. Shipping and Handling Revenue The Company includes payments from its customers for shipping and handling in its net revenues
line item in accordance with Emerging Issues Task Force (EITF) 00-10, Accounting 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 distribution of the Companys products. 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, 2005 and 2004 were $855,000 and $618,000, respectively. For the six-month periods
ended April 30, 2005 and 2004, shipping expenses were $1,385,000 and $932,000 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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NOTE 2  Inventories. Inventories consisted of the following at April 30, 2005 and October 31, 2004: April 30,
    
    
    October 31,2005
    
    
    2004Raw materials
    
    $
    159,000
    
    
    $
    123,000Finished goods
    
    
    53,772,000
    
    
    
    49,126,000Total inventories, net
    
    $
    53,931,000
    
    
    $
    49,249,000
 NOTE 3  Goodwill and Other Intangible Assets. The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets.Under SFAS No. 142, goodwill and certain intangible
assets are not amortized but are subject to an annual impairment test. At April 30, 2005 and
October 31, 2004, goodwill totaled $12,660,000 and $12,640,000, respectively. During the six
months ended April 30, 2005, the Company adjusted goodwill by approximately $20,000 for certain
preacquisition contingencies relating to its acquisition of Gekko Brands, LLC on July 7, 2004.
The following sets forth the intangible assets, excluding goodwill, by major category: April 30, 2005
    
    
    October 31, 2004Gross Carrying
    
    
    Accumulated
    
    
    
    
    
    
    Gross Carrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    Net Book Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueIndefinite life:Tradenames
    
    $
    8,700,000
    
    
    $
    
    
    
    $
    8,700,000
    
    
    $
    8,700,000
    
    
    $
    
    
    
    $
    8,700,000Finite life:Customer lists
    
    
    1,530,000
    
    
    
    (189,000
    )
    
    
    1,341,000
    
    
    
    1,530,000
    
    
    
    (72,000
    )
    
    
    1,458,000Non-competes
    
    
    1,372,000
    
    
    
    (763,000
    )
    
    
    609,000
    
    
    
    1,372,000
    
    
    
    (680,000
    )
    
    
    692,000Customer sales backlog
    
    
    190,000
    
    
    
    (190,000
    )
    
    
    
    
    
    
    190,000
    
    
    
    (71,000
    )
    
    
    119,000Trademarks
    
    
    1,350,000
    
    
    
    (1,250,000
    )
    
    
    100,000
    
    
    
    1,299,000
    
    
    
    (1,240,000
    )
    
    
    59,000Total intangible assets
    
    $
    13,142,000
    
    
    $
    (2,392,000
    )
    
    $
    10,750,000
    
    
    $
    13,091,000
    
    
    $
    (2,063,000
    )
    
    $
    11,028,000
 Intangible assets with definite lives are amortized using the straight-line method over periods
ranging from 1 to 7 years. During the six months ended April 30, 2005 and 2004, aggregate
amortization 5




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expense was approximately $329,000 and $50,000, respectively. Amortization expense related to intangible assets at April 30, 2005 in each of the next five
fiscal years and beyond is expected to be as follows: Year ending October 31,Remainder 2005
    
    $
    212,0002006
    
    
    424,0002007
    
    
    415,0002008
    
    
    397,0002009
    
    
    255,0002010
    
    
    210,000Thereafter
    
    
    137,000Total
    
    $
    2,050,000
 NOTE 4  Line of Credit Agreement. On July 6, 2004, the Company entered into a new business loan agreement with Union Bank of
California, N.A., as the administrative agent, and two other lenders. The new loan agreement
is comprised of a $20,000,000 term loan and a $35,000,000 revolving credit facility, which
expires on July 6, 2009 and is collateralized by substantially all of the assets of the Company
other than the Companys real estate. Under this loan agreement, interest on the $20,000,000 term loan is fixed at 5.4% for the term
of the loan. Interest on the revolving credit facility is charged at the banks reference
rate. At April 30, 2005, the banks reference rate was 5.75%. The loan agreement also
provides for optional interest rates based on London interbank offered rates (LIBOR) for
periods of at least 30 days in increments of $500,000. On September 3, 2004, the Company entered into the First Amendment to the loan agreement to
amend Section 6.12(a). The loan agreement, as amended, contains certain financial covenants
that include a requirement that the Company maintain (1) a minimum tangible net worth of
$74,000,000 plus the net proceeds from any equity securities issued (including net proceeds
from stock option exercises) after the date of the loan agreement for the period ended October
31, 2004, and a minimum tangible net worth of $74,000,000, plus 90% of net income after taxes
(without subtracting losses) earned in each quarterly accounting period commencing after
January 31, 2005, plus the net proceeds from any equity securities issued (including net
proceeds from stock option exercises) after the date of the loan agreement, (2) a minimum
earnings before interest, income taxes, depreciation and amortization (EBITDA) determined
on a rolling four quarters basis ranging from $16,500,000 at July 6, 2004 and increasing over
time to $27,000,000 at October 31, 2008 and thereafter, (3) a minimum ratio of cash and
accounts receivable to current liabilities of 0.75:1.00 for fiscal quarters 6




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ending January 31
and April 30 and 1.00:1.00 for fiscal quarters ending July 31 and October 31, and (4) a minimum
fixed charge coverage ratio of 1.10:1.00 at July 31, 2004 and 1.25:1.00 thereafter. The loan
agreement limits annual lease and rental expense associated with the Companys new distribution
center in Oceanside, California as well as annual capital expenditures in any single fiscal
year on a consolidated basis in excess of certain amounts allowed for the acquisition of real
property and equipment in connection with the new distribution center. The loan agreement has
an additional requirement where, for at least 30 consecutive days in each year, the total
indebtedness under the revolving credit facility may not be more than $15,000,000. The loan
agreement also limits the annual aggregate amount the Company may spend to acquire shares of
its common stock. The Company is in compliance with or has obtained waivers for all of the
loan agreements financial covenants as of April 30, 2005. The line of credit under the loan agreement may also be used to finance commercial letters of
credit and standby letters of credit. Commercial letters of credit outstanding under this loan
agreement totaled $4,743,000 at April 30, 2005 as compared to $4,108,000 outstanding at October
31, 2004. The Company had $16,000,000 outstanding against the revolving credit facility under
this loan agreement at April 30, 2005, compared to $2,500,000 outstanding at October 31, 2004.
The Company had $17,000,000 outstanding on the term loan under this loan agreement at April
30, 2005 compared to $19,000,000 at October 31, 2004. At April 30, 2005, $14,257,000 was
available for borrowings against the revolving credit facility under this loan agreement. NOTE 5  Net Income Per Share Information. Basic net income per share has been computed based on the weighted average number of common shares outstanding during the period. Diluted net income per share has been computed based on
the weighted average number of common shares outstanding plus the dilutive effects of common shares potentially issuable from the exercise of common stock options. Common stock options
are excluded from the computation of net income per share if their effect is anti-dilutive.
The following table sets forth the computation of basic and diluted net income per share based
on the requirements SFAS No. 128, Earnings Per Share: Three months ended April 30,
    
    
    Six months ended April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Net incomeNumerator for basic and diluted
income per share  income
available to common stockholders
    
    $
    4,811,000
    
    
    $
    5,663,000
    
    
    $
    4,894,000
    
    
    $
    5,797,000Denominator:Denominator for basic income
per share  weighted average shares
    
    
    13,813,000
    
    
    
    13,373,000
    
    
    
    13,769,000
    
    
    
    13,331,000Effect of dilutive securities:stock options
    
    
    458,000
    
    
    
    364,000
    
    
    
    415,000
    
    
    
    348,000Denominator for diluted income
per share  adjusted weighted average
shares and assumed conversions
    
    
    14,271,000
    
    
    
    13,737,000
    
    
    
    14,184,000
    
    
    
    13,679,000Basic net income per share
    
    $
    0.35
    
    
    $
    0.42
    
    
    $
    0.36
    
    
    $
    0.43Diluted net income per share
    
    $
    0.34
    
    
    $
    0.41
    
    
    $
    0.35
    
    
    $
    0.42
 For the quarters ended April 30, 2005 and 2004, the diluted weighted average shares outstanding
computation excludes 170,000 and 324,000 shares under option grants, respectively, whose impact
would have an anti-dilutive effect. For the six-month periods ended April 30, 2005 and 2004,
the 7




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diluted weighted average shares outstanding computation excludes 437,000 and 320,000 shares
under option grants, respectively, whose impact would have an anti-dilutive effect. NOTE 6  Issuance of Common Stock. Common stock and capital in excess of par value increased by $1,134,000 in the six months ended
April 30, 2005, of which $830,000 is due to the issuance of 154,936 shares of common stock on
exercise of options and $304,000 is the tax benefit related to the exercise of those options. NOTE 7  Stock-Based Compensation. The Company has elected to follow Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees,and related interpretations in accounting for its
employee stock options. Under APB No. 25, because the exercise price of the Companys employee
stock 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 2005 or
fiscal year 2004. For purposes of the following pro forma disclosures required by SFAS No. 123, the fair value of
each option granted after fiscal 1995 has been estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average assumptions used for
grants made during the quarters ended April 30, 2005 and 2004, respectively: risk-free interest
rate of 3.75% in 2005 and 1.91% in 2004; expected volatility of 42.7% in 2005 and 44.5% to in
2004; and expected life of 3.87 in 2005 and 3.16 years in 2004. The following weighted-average
assumptions were used for grants made during the six months ended April 30, 2005 and 2004,
respectively: risk-free interest rate of 2.89% to 3.75% in 2005 and 1.91% to 2.63% in 2004;
expected volatility of 42.7% to 43.36% in 2005 and 44.5% in 2004; and expected life of 3.55 to
3.87 years in 2005 and 3.16 years in 2004. The Company has not paid any cash or other dividends and does not anticipate paying dividends
in the foreseeable future; therefore, the expected dividend yield is zero for all periods. The Companys pro forma information for stock-based employee compensation is as follows: 8




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Three months ended April 30,
    
    
    Six months ended April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    4,811,000
    
    
    $
    5,663,000
    
    
    $
    4,894,000
    
    
    $
    5,797,000Deduct: Stock-based employee
compensation expense determined
under fair value based method for all
awards, net of tax effect
    
    
    (252,000
    )
    
    
    (91,000
    )
    
    
    (530,000
    )
    
    
    (169,000
    )Pro forma net income
    
    $
    4,559,000
    
    
    $
    5,572,000
    
    
    $
    4,364,000
    
    
    $
    5,628,000Pro forma net income per share:Basic  as reported
    
    
    0.35
    
    
    
    0.42
    
    
    
    0.36
    
    
    
    0.43Basic  pro forma
    
    
    0.33
    
    
    
    0.42
    
    
    
    0.32
    
    
    
    0.42Diluted  as reported
    
    
    0.34
    
    
    
    0.41
    
    
    
    0.35
    
    
    
    0.42Diluted  pro forma
    
    
    0.32
    
    
    
    0.41
    
    
    
    0.31
    
    
    
    0.41
 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 8  Comprehensive Income. The Company includes the cumulative foreign currency translation adjustment as well as the net
unrealized gains and loss on cash flow hedges as components of the comprehensive income in
addition to net income for the period. The following table sets forth the computation of
comprehensive income for the periods presented: Three months ended April 30,
    
    
    Six months ended April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    4,811,000
    
    
    $
    5,663,000
    
    
    $
    4,894,000
    
    
    $
    5,797,000Net unrealized gains on cash flow
hedges, net of tax
    
    
    
    
    
    
    28,000
    
    
    
    
    
    
    
    108,000Effects of foreign currency translation
    
    
    154,000
    
    
    
    (600,000
    )
    
    
    520,000
    
    
    
    424,000Total comprehensive income
    
    $
    4,965,000
    
    
    $
    5,091,000
    
    
    $
    5,414,000
    
    
    $
    6,329,000
 9




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NOTE 9  Legal Proceedings. On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a class action in the
United States District Court for the Southern District of California (U.S. District Court) on
behalf of purchasers of the Companys common stock during the period between September 4, 1997
and July 15, 1998. The action was subsequently consolidated with two similar suits and
plaintiffs filed their Amended and Consolidated Complaint on December 17, 1999. Upon the
Companys motion, the U.S. District Court dismissed the Complaint with leave to amend on July
18, 2000. On September 18, 2000, plaintiffs served their Second Consolidated Amended Complaint
(Second Amended Complaint). On November 6, 2000, the Company filed its motion to dismiss the
Second Amended Complaint, which the U.S. District Court granted, in part, and denied, in part.
The remaining portions of the Second Amended Complaint alleged that, among other things, during
the class period and in violation of the Securities Exchange Act of 1934, the Companys
financial statements, as reported, did not conform to generally accepted accounting principles
with respect to revenues and inventory levels. It further alleged that certain Company
executives made false or misleading statements or omissions concerning product demand and that
two former executives engaged in insider trading. On November 8, 2004, the U.S. District Court
entered a Final Approval of Settlement. Under the settlement, all claims will be dismissed and
the litigation was concluded in exchange for a payment of $15.25 million, approximately 82% of
which was paid by Ashworths insurance carriers. As part of the settlement, Ashworth also
agreed to adopt modifications to certain corporate governance policies. Ashworth recorded a
pre-tax charge in the third quarter of fiscal year 2004 of $3 million related to settlement of
this suit. The Company is party to other claims and litigation proceedings arising in the normal course of
business. Although the legal responsibility and financial impact with respect to such other
claims and litigation cannot currently be ascertained, the Company does not believe that these
other matters will result in payment by the Company of monetary damages, net of any applicable
insurance proceeds, that, in the aggregate, would be material in relation to the consolidated
financial position or results of operations of the Company. 10




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NOTE 10  Segment Information. The Company defines its operating segments as components of an enterprise for which separate
financial information is available and regularly reviewed by the Companys senior management.
The Company has the following three reportable segments: Domestic, Ashworth, U.K., Ltd. and
Other International. The chief operating decision maker evaluates segment performance based
primarily on revenues and income from operations. Interest income and expense, unusual and
infrequent items and income tax expense are evaluated on a consolidated basis and are not
allocated to the Companys business segments. Segment information is summarized (for the
periods or dates presented) below: Three months ended April 30,
    
    
    Six months ended April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net revenues:Domestic
    
    $
    51,868,000
    
    
    $
    44,450,000
    
    
    $
    83,480,000
    
    
    $
    67,511,000Ashworth, U.K., Ltd.
    
    
    8,431,000
    
    
    
    6,098,000
    
    
    
    11,846,000
    
    
    
    8,915,000Other International
    
    
    4,369,000
    
    
    
    4,124,000
    
    
    
    5,854,000
    
    
    
    5,584,000Total
    
    $
    64,668,000
    
    
    $
    54,672,000
    
    
    $
    101,180,000
    
    
    $
    82,010,000Income (loss) from operations:Domestic
    
    $
    6,342,000
    
    
    $
    7,353,000
    
    
    $
    6,143,000
    
    
    $
    7,362,000Ashworth, U.K., Ltd.
    
    
    1,144,000
    
    
    
    1,025,000
    
    
    
    1,504,000
    
    
    
    888,000Other International
    
    
    1,294,000
    
    
    
    1,376,000
    
    
    
    1,676,000
    
    
    
    1,790,000Total
    
    $
    8,780,000
    
    
    $
    9,754,000
    
    
    $
    9,323,000
    
    
    $
    10,040,000Capital expenditures:Domestic
    
    $
    2,480,000
    
    
    $
    15,908,000
    
    
    $
    4,867,000
    
    
    $
    16,712,000Ashworth, U.K., Ltd.
    
    
    52,000
    
    
    
    57,000
    
    
    
    190,000
    
    
    
    242,000Total
    
    $
    2,532,000
    
    
    $
    15,965,000
    
    
    $
    5,057,000
    
    
    $
    16,954,000Depreciation expense:Domestic
    
    $
    1,034,000
    
    
    $
    684,000
    
    
    $
    2,103,000
    
    
    $
    1,580,000Ashworth, U.K., Ltd.
    
    
    80,000
    
    
    
    157,000
    
    
    
    59,000
    
    
    
    114,000Total
    
    $
    1,114,000
    
    
    $
    841,000
    
    
    $
    2,162,000
    
    
    $
    1,694,000
 April 30,
    
    
    October 31,2005
    
    
    2004Total assets:Domestic
    
    $
    155,587,000
    
    
    $
    137,605,000Ashworth, U.K., Ltd.
    
    
    20,620,000
    
    
    
    18,430,000Other International
    
    
    4,659,000
    
    
    
    3,451,000Total
    
    $
    180,866,000
    
    
    $
    159,486,000Long lived assets, at cost:Domestic
    
    $
    81,578,000
    
    
    $
    76,805,000Ashworth, U.K., Ltd.
    
    
    2,064,000
    
    
    
    1,789,000Other International
    
    
    0
    
    
    
    0Total
    
    $
    83,642,000
    
    
    $
    78,594,000Goodwill:Domestic
    
    $
    12,660,000
    
    
    $
    12,640,000
 
 11




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company operates in an industry that is highly competitive and must accurately anticipate
fashion trends and consumer demand for its products. There are many factors that could cause
actual results to differ materially from the projected results contained in certain forward-looking
statements in this report. For additional information, see Cautionary Statements and Risk
Factors, below. Because the Companys business is seasonal, the current balance sheet balances at April 30,
2005 may be more meaningfully compared to the amounts at April 30, 2004, rather than to the amounts
at October 31, 2004. Critical Accounting Policies In response to the SECs Release Numbers 33-8040, Cautionary Advice Regarding Disclosure
About Critical Accounting Policies and 33-8056, Commission Statement About Managements
Discussion and Analysis of Financial Condition and Results of Operations, the Company has
identified the following critical accounting policies that affect its more significant judgments
and estimates used in the preparation of its consolidated financial statements. Revenue Recognition.Based on its terms of F.O.B. shipping point, where risk of loss and
title transfer to the buyer at the time of shipment, the Company recognizes revenue at the time
products are shipped or, for Company stores, at the point of sale. The Company records sales in
accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition. Under these
guidelines, revenue is recognized when all of the following exist: persuasive evidence of a sale
arrangement exists, delivery of the product has occurred, the price is fixed or determinable and
payment is reasonably assured. Provisions are made in the period of the sale for estimated product
returns and sales allowances. The Company also includes payments from its customers for shipping
and handling in its net revenues line item in accordance with Emerging Issues Task Force (EITF)
00-10, Accounting of Shipping and Handling Fees and Costs. Sales Returns and Other Allowances.Management must make estimates of potential future
product returns related to current period product revenues. The Company also makes payments and/or
grants credits to its customers as markdown (buydown) allowances and must make estimates of such
potential future allowances. Management analyzes historical returns and allowances, current
economic trends, changes in customer demand, and sell-through of the Companys products when
evaluating the adequacy of the sales returns and other allowances. Significant management
judgments and estimates must be made and used in connection with establishing the sales returns and
other allowances in any accounting period. These markdown allowances are reported as a reduction
of the Companys net revenues. Material differences may result in the amount and timing of the
Companys revenues for any period if management makes different judgments or utilizes different
estimates. The reserves for sales returns and other allowances amounted to $1.6 million at April
30, 2005 compared to $1.3 million at October 31, 2004 and $1.1 million at
April 30, 2004. Allowance for Doubtful Accounts.Management must make estimates of the uncollectability of
accounts receivable. The Company maintains an allowance for doubtful accounts for estimated losses

resulting from the inability of its customers to make required payments, which results in bad debt
expense. Management determines the adequacy of this allowance by analyzing current economic
conditions, historical bad debts and continually evaluating individual customer receivables
considering the customers financial condition. If the financial condition of any significant
customers were to deteriorate, resulting in the impairment of their ability to make payments,
material additional allowances for doubtful accounts may be required. The Company maintains credit
insurance to cover many of its major accounts. The Companys trade accounts receivable balance was
$52.4 million, net of allowances for doubtful accounts of $1.3 million, at April 30, 2005, as
compared to the balance of $39.3 million, net of allowances for doubtful accounts of $1.2 million,
at October 31, 2004. At April 30, 2004, the trade accounts receivable balance was $48.1 million,
net of allowances for doubtful accounts of $1.1 million. 12




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Inventory.The Company writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the estimated net realizable
value based on assumptions about age of the inventory, future demand and market conditions. This
process provides for a new basis for the inventory until it is sold. If actual market conditions
are less favorable than those projected by management, additional inventory write-downs may be
required. The Companys inventory balance was $53.9 million, net of inventory write-downs of $1.1
million, at April 30, 2005, as compared to an inventory balance of $49.2 million, net of inventory
write-downs of $0.8 million, at October 31, 2004. At April 30, 2004, the inventory balance was
$43.5 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 1, 2007. The Company has entered into
contracts with several third party suppliers who have agreed to accept these APCs, in part, as
payment for goods and services. The Company purchases products such as sales fixtures, office and
packaging supplies, as well as temporary help, freight and printing services from such third party
suppliers. From time to time, the Company may enter into additional contracts with such third
party suppliers to use the APCs. Management reviews and estimates the likelihood of fully
utilizing the APCs on a periodic basis. If the Company is unable to find suppliers who agree to
accept the APCs in quantities as projected by management, a write-down of the value of the APCs may
be required. At April 30, 2005, the Company had $0.4 million of the APCs remaining and management
expects to fully utilize them over the remaining life of the contract through December 1, 2007. At
April 30, 2005, the Company recorded $0.4 million of the APCs in its Other Current Assets line
item. Off-Balance Sheet Arrangements At April 30, 2005 and 2004, the Company did not have any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured finance or special
purpose entities, which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. In addition, the Company
does not engage in trading activities involving non-exchange traded contracts which rely on
estimation techniques to calculate fair value. As such, the Company is not exposed to any
financing, liquidity, market or credit risk that could arise if the Company
had engaged in such relationships. 13




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Overview The Company earns revenues and income and generates cash through the design, marketing and
distribution of quality mens and womens sports apparel under the Ashworth® and
Callaway Golf apparel brands. The Companys products are sold in the United States, Europe, Canada
and various other international markets to selected golf pro shops, resorts, off-course specialty
shops, upscale department stores, 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 transfer 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 $5.7 million and realized a gain on sale of fixed assets of $1.6 million.
In April 2004, the Company completed the purchase of the new distribution facility in Oceanside,
California for approximately $14.0 million. The Company applied the tax deferred gain on sale of
the old facility to reduce the cost basis of the new facility, for tax purposes, utilizing a
tax-deferred exchange under Internal Revenue Code section 1031. During the third quarter of fiscal 2004, the Company completed the acquisition (the
Acquisition) of all of the membership interests in Gekko Brands, LLC (Gekko), a leading
designer, producer and distributor of headwear and apparel under The GameÒ and KudzuÒ
brands, pursuant to that certain Membership Interests Purchase Agreement entered into on July 6,
2004, by and among Ashworth Acquisition Corp., a Delaware corporation and wholly owned subsidiary
of Ashworth, Inc. and the selling members identified therein. Ashworth intends that the operations
of Gekko will continue to focus on designing, producing and distributing headwear and apparel. The purchase price for the Acquisition was $24.0 million consisting of $23.0 million in cash
and a $1.0 million promissory note. Under the purchase agreement, the selling members may be
entitled to receive an additional $6.5 million if the subsidiary achieves specific EBIT and other
operating targets through Ashworths fiscal year 2008. For the period from July 7, 2004 through
October 31, 2004, the subsidiary achieved the specified EBIT and other operating targets and the
selling members were paid an additional $540,000. In connection with the Acquisition, Ashworth entered into a new secured 5-year bank facility
comprised of a $20.0 million term loan and a $35.0 million line of credit replacing its prior $55.0
million facility. To finance the cash purchase price of the Acquisition, Ashworth utilized the
term loan together with part of the new line of credit. Also during the third quarter of fiscal 2004, the Company recorded a pre-tax charge of $3.0
million related to a tentative settlement to conclude the securities class action lawsuit brought
in 1999 against the Company and certain current and former directors and officers in the United
States District 14




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##### Table of Contents



Court for the Southern District of California. The litigation was brought on behalf of a class of investors who purchased the Companys stock in the open market between
September 4, 1997 and July 15, 1998. Under the settlement, all claims will be dismissed and the
litigation will be terminated in exchange for a payment of $15.3 million, approximately 82% of
which will be paid by Ashworths insurance carriers. As part of the settlement, Ashworth also
agreed to adopt modifications to certain corporate governance policies. Results of Operations Second quarter 2005 compared to second quarter 2004 Consolidated net revenues for the second quarter of fiscal 2005 increased 18.3% to $64.7
million from $54.7 million for the same period of the prior fiscal year, primarily due the addition
of Gekkos net revenues as well as higher net revenues from the Companys retail and corporate
distribution channels and international segments. These increases were partially offset by declines
in net revenues from the Companys golf-related distribution channel. Net revenues for the domestic segment increased 16.6% to $51.9 million for the second quarter
of fiscal 2005 from $44.5 million for the same period of the prior fiscal year, primarily due to
the acquisition of Gekko. Net revenues from the Companys retail distribution channel increased
14.8% or $0.7 million for the second quarter of fiscal 2005, primarily driven by an approximately
26% year over year increase in sales of mens apparel into the channel. Net revenues from the
green grass and off-course specialty distribution channel decreased 5.5% or $1.8 million for the
second quarter of fiscal 2005 due to generally slow golf conditions due to poor weather and the
resulting decline in the number of rounds played. Net revenues from the Companys corporate
distribution channel increased by 6.4% or $364,000 for the second quarter of fiscal 2005. The
increase in net revenues in the corporate distribution channel was primarily due to the success of
certain sales promotions. Net revenues from the Company-owned stores increased 10.6% or $148,000
primarily due to revenue contributions from the opening of three new stores, partially offset by a
loss of revenues from the closing of one existing outlet store. Net revenues for the Ashworth U.K., Ltd segment increased 37.7% to $8.4 million for the second
quarter of fiscal 2005 from $6.1 million for the same period of the prior fiscal year. The
increase is primarily due to strong demand in the United Kingdom and Ireland as well as
fluctuations in currency exchange rates. Net revenues for the other international segment increased 6.1% to $4.4 million for the second
quarter of fiscal 2005 from $4.1 million for the same period of the prior fiscal year. The
increase was due to an increase in international licensing fee revenues and favorable currency
fluctuations at the Companys Canadian divisions. Consolidated gross margin for the second quarter of fiscal 2005 increased 80 basis points to
43.4% as compared to 42.6% for the same period of the prior fiscal year. This improvement was
primarily due to the addition of The Game and Kudzu brands, partially offset by increased costs
related to the start up of the new embroidery distribution center. Consolidated selling, general and administrative (SG&A) expenses increased 41.9% to $19.3
million for the second quarter of fiscal 2005 from $13.6 million for the same period of the prior
fiscal year. As a percent of net revenues, SG&A expenses were 29.8% for the second quarter of
fiscal 2005 as 15




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compared to 24.9% for the same period of the prior year. A portion of the increase
is attributable to a $1.6 million gain on the sale of land and building included as an offset
against SG&A expenses for the fiscal quarter ended April 30, 2004. The remainder of the increase
results from the addition of Gekko, increased selling costs at the Companys Ashworth U.K., Ltd
segment, incremental costs associated with the Companys Sarbanes-Oxley Section 404 compliance
efforts and increased rent expense resulting from the opening of new outlet stores. Total net other expense was $762,000 for the second quarter of fiscal 2005 compared to net
other expense of $314,000 for the same period of the prior fiscal year due primarily to increased
interest expense resulting from the increase in debt financing. The effective income tax rate for the second quarter of fiscal 2005 remained unchanged from
the same period of the prior fiscal year at 40.0% of pre-tax income. Six months ended April 30, 2005 compared to six months ended April 30, 2004 Consolidated net revenues for the first half of fiscal 2005 increased 23.4% to $101.2 million
from $82.0 million for the same period of the prior fiscal year primarily due to higher revenues
from the retail distribution channel 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 23.6% to $83.5 million in the first half of
fiscal 2005 from $67.5 million for the same period of the prior fiscal year. Net revenues from the
Companys retail distribution channel increased 9.1% or $785,000 in the first half of fiscal 2005
as compared to the same period the prior fiscal year, primarily due to an approximately 26% year
over year increase in sales of mens apparel into the channel. Net revenues from the green grass
and off-course specialty distribution channel decreased 4.2% or $1,931,000 in the first half of
fiscal 2005 as compared to the first half of the prior fiscal year. This decrease was primarily
because of generally slow golf industry conditions due to poor weather and the resulting decline in
the number of rounds played. Net revenues from the Companys corporate distribution channel
decreased 0.4% or $40,000 in the first half of fiscal 2005 as compared to the same period of the
prior fiscal year. The decrease in the corporate distribution channel was primarily due to a delay
in the launch of our 2005 Authenticsä product line in the first quarter of fiscal 2005. Net
revenues from the Company-owned stores increased 22.4% or $589,000 in the first half of fiscal 2005
as compared to the same period of the prior fiscal year primarily due to revenue contributions from the opening of
three new stores, partially offset by a loss of revenues from the closing of one existing outlet
store. Net revenues for the Ashworth U.K., Ltd segment increased 32.6% to $11.8 million in the first
half of fiscal 2005 from $8.9 million for the same period of the prior fiscal year. The increase
is due to strong demand in the United Kingdom and Ireland as well as fluctuations in currency
exchange rates. Net revenues for the other international segment increased 4.9% to $5.9 million for the first
half of fiscal 2005 from $5.6 million for the same period of the prior fiscal year. The increase
was due to an increase in international licensing fee revenues and favorable currency fluctuations
at the Companys Canadian divisions. Consolidated gross margin for the first half of fiscal 2005 increased 70 basis points to 42.2%
as compared to 41.5% for the same period of the prior fiscal year. This improvement was primarily
due to 16




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the addition of The Game and Kudzu brands partially offset by increased costs related to the
new embroidery distribution center. Consolidated
SG&A expenses increased 39.8% to $33.4 million for the first half of fiscal 2005
from $23.9 million for the same period of the prior fiscal year. As a percentage of revenues, SG&A
expenses increased to 33.0% of net revenues for the first half of fiscal 2005, as compared to 29.2%
for the same period of the prior fiscal year. A portion of the increase is attributable to a $1.6
million gain on the sale of land and building included as an offset against SG&A expenses for the
quarter ended April 30, 2004. The remainder of the increase results from the addition of Gekko,
increased selling costs at the Companys Ashworth U.K., Ltd segment, incremental costs associated
with the Companys Sarbanes-Oxley Section 404 compliance efforts and increased rent expense
resulting from the opening of new outlet stores. Total net other expense was $1.2 million in the first half of fiscal 2005 compared to net
other expense of $0.4 million for the same period of the prior fiscal year, due primarily to higher
interest expense resulting from the increase in debt financing. The effective income tax rate in the first half of fiscal 2005 remained unchanged from the
same period of the prior fiscal year at 40.0% of pre-tax income. Capital Resources and Liquidity The Companys primary sources of liquidity for the next 12 months are expected to be its cash
flows from operations, the working capital line of credit with its bank and other financial
alternatives such as leasing. The Company requires cash for capital expenditures and other
requirements associated with the expansion of its domestic and international production,
distribution and sales, as well as for general working capital purposes. Ashworths need for
working capital is seasonal with the greatest requirements existing from approximately December
through the end of July each year. The Company typically builds up its inventory during this
period to provide product for shipment for the spring/summer selling season. On July 6, 2004, the Company entered into a new business loan agreement with Union Bank of
California, N.A., as the administrative agent, and two other lenders. The new loan agreement is
comprised of a $20.0 million term loan and a $35.0 million revolving credit facility, which expires on July
6, 2009 and is collateralized by substantially all of the assets of the Company other than the
Companys real estate. Under this loan agreement, interest on the $20.0 million term loan is fixed at 5.4% for the
term of the loan. Interest on the revolving credit facility is charged at the banks reference
rate. At April 30, 2005, the banks reference rate was 5.75%. The loan agreement also provides
for optional interest rates based on London interbank offered rates (LIBOR) for periods of at
least 30 days in increments of $0.5 million. On September 3, 2004, the Company entered into the First Amendment to the loan agreement to
amend Section 6.12(a), Tangible Net Worth. The loan agreement, as amended, contains certain
financial covenants that include a requirement that the Company maintain (1) a minimum tangible net
worth of $74.0 million plus the net proceeds from any equity securities issued (including net
proceeds from stock option exercises) after the date of the loan agreement for the period ending
October 31, 2004, and a minimum tangible net worth of $74.0 million, plus 90% of net income after
taxes (without subtracting 17




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losses) earned in each quarterly accounting period commencing after January 31, 2005, plus the net proceeds from any equity securities issued (including net proceeds
from stock option exercises) after the date of the loan agreement, (2) a minimum earnings before
interest, income taxes, depreciation and amortization (EBITDA) determined on a rolling four
quarters basis ranging from $16.5 million at July 6, 2004 and increasing over time to $27.0 million
at October 31, 2008 and thereafter, (3) a minimum ratio of cash and accounts receivable to current
liabilities of 0.75:1.00 for fiscal quarters ending January 31 and April 30 and 1.00:1.00 for
fiscal quarters ending July 31 and October 31, and (4) a minimum fixed charge coverage ratio of
1.10:1.00 at July 31, 2004 and 1.25:1.00 thereafter. The loan agreement limits annual lease and
rental expense associated with the Companys new distribution center in Oceanside, California as
well as annual capital expenditures in any single fiscal year on a consolidated basis in excess of
certain amounts allowed for the acquisition of real property and equipment in connection with the
new distribution center. The loan agreement has an additional requirement where, for at least 30
consecutive days in each year, the total indebtedness under the revolving credit facility may not
be more than $15.0 million. The loan agreement also limits the annual aggregate amount the Company
may spend to acquire shares of its common stock. The Company is in compliance with or has obtained
waivers for all of the loan agreements financial covenants as of April 30, 2005. The line of credit under the loan agreement may also be used to finance commercial letters of
credit and standby letters of credit. Commercial letters of credit outstanding under this loan
agreement totaled $4.7 million at April 30, 2005 as compared to $3.9 million outstanding at April
30, 2004 under the prior loan agreement. The increase in outstanding letters of credit is
primarily due to increased inventory purchases. The Company had $16.0 million outstanding against
the revolving credit facility under this loan agreement at April 30, 2005, compared to $7.0 million
outstanding at April 30, 2004 under the prior agreement and $2.5 million outstanding at October 31,
2004. The increase in borrowings against the revolving credit facility is primarily due to
borrowings to finance the Gekko acquisition, repayments on the term loan and higher operating cash
flow requirements to support continued revenue growth. The Company had $17.0 million outstanding
on the term loan under this loan agreement at April 30, 2005 compared to $19.0 million at October
31, 2004. At April 30, 2005, $14.3 million was available for borrowings against the revolving
credit facility under this loan agreement. During the first half of fiscal 2005, cash used in operations was $10.3 million as compared to
$5.4 million used in operations during the same period of the prior fiscal year. The increase in
cash used in operations was primarily due to higher working capital requirements as the result of
inventory purchases and the acquisition of Gekko Brands, LLC. Net trade receivables were $52.4 million at April 30, 2005, an increase of $13.2 million from
the balance at October 31, 2004. Because the Companys business is seasonal, the net receivables
balance may be more meaningfully compared to the balance of $48.1 million at April 30, 2004, rather
than the year-end balance. The comparison of the second quarter fiscal 2005 balance to the second
quarter fiscal 2004 balance shows an increase of approximately $4.3 million. This increase is
primarily due to the addition of the Gekko Brands, LLC net trade receivables of $3.7 million. Net inventories increased 9.5% to $53.9 million at April 30, 2005 from $49.2 million at
October 31, 2004, primarily due to the seasonal nature of the Companys golf distribution channel
and the Companys inventory requirements to meet market demand in the spring/summer selling season.
Compared to net inventories of $43.5 million at April 30, 2004, net inventories at April 30, 2005
have increased by 23.9%. The increase is partly due to the addition of Gekko, and partly due to the
planned earlier receipt of basics inventory to mitigate the expected logistics bottleneck resulting
from the lifting of some quotas on Chinese goods by the United States. The Company believes that
its current inventory mix is appropriate to respond to market demand. 18




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Current liabilities increased 58.4% to $46.1 million at April 30, 2005 from $29.1 million at
October 31, 2004. Compared to current liabilities of $23.7 million at April 30, 2004, current
liabilities increased 97.5%, primarily due to the $3.1 million in additional current liabilities
from the acquisition of Gekko Brands, LLC, the $4.0 million in additional current portion of
long-term debt related to the term loan used to finance part of the acquisition, increased accounts
payable to fund additional inventory purchases of $5.4 million, an increase in borrowings against
the line of credit of $9.0 million. 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 $14 million and entered into a secured
loan agreement with a bank to finance $11.7 million of the purchase price. The loan is at a fixed
interest rate of 5.0% and will be amortized over 30 years, but is due and payable on May 1, 2014.
To fulfill certain requirements under the mortgage loan agreement, the Company created Ashworth EDC
LLC, a special purpose entity, to be the purchaser and mortgagor. Ashworth EDC LLC is a wholly
owned limited liability company organized under the laws of the State of Delaware and its results
and assets are reported in the condensed consolidated statements included in this report. During the first half of fiscal 2005, the Company incurred capital expenditures of $5.1
million primarily for computer systems and equipment, leasehold improvements related to new outlet
stores and distribution center equipment in connection with the placing in service of the new
embroidery distribution center. The Company anticipates capital spending of between $1.0 million
and $1.5 million during the remainder of fiscal 2005, primarily on outlet stores openings and
information systems improvements. 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 $0 and $61,000 during the six months ended April 30, 2005
and 2004, 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 $5.7 million and recorded a gain on disposal of fixed assets of
$1.6 million. The land, buildings and other assets were reported in the Companys domestic segment
and were sold as a unit on an as is basis. As a result of the sale, the Company paid the $2.6
million balance due on the mortgage relating to the subject property. The Company entered into a lease agreement to lease the
facility from the new owner. The term of the lease commenced on February 24, 2004 and terminated
on December 31, 2004, with an option to renew the term of the lease for a period of 60 days. The
Company did not exercise its option to renew the lease past the expiration date of December 31,
2004. Under the terms of the lease agreement, the Company paid monthly rent of approximately
$47,000 plus taxes, insurance and utilities. On August 30, 2004, the Company agreed to a schedule with Key Equipment Finance, a Division of
Key Corporate Capital, Inc. (KEF or the Lessor) thereby completing the Master Equipment Lease
Agreement, dated as of June 23, 2003, previously entered into by Ashworth and KEF. Under the terms
of the schedule, we are leasing equipment for our distribution center in Oceanside, California. The
aggregate cost of the equipment is approximately $10.4 million. The initial term of the lease is
for ninety-one (91) months beginning on September 1, 2004 and the monthly rent payment is $128,800.
At the end of the initial term, the Company has the option to (1) purchase all, but not less than
all, equipment on the initial 19




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term expiration date at a price equal to the greater of (a) the then fair market sale value thereof, or (b) 12% of the total cost of the equipment (plus, in each case,
applicable sales taxes), (2) renew the lease on a month to month basis at the same rent payable at
the expiration of the initial lease term; (3) renew the lease for a minimum period of not less than
12 consecutive months at the then current fair market rental value; or (4) return such equipment to
the Lessor pursuant to, and in the condition required by, the lease. The Company is party to an exclusive licensing agreement with Callaway Golf Company, which
requires certain minimum royalty payments which began in January 2003. The 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 $1,134,000 in the six months
ended April 30, 2005, of which $830,000 is due to the issuance of 154,936 shares of common stock
on exercise of options and $304,000 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 available financing alternatives, including
cash on hand, borrowings under its bank credit facility and leasing alternatives, the Company will
be able to meet all of its debt service, capital expenditure and working capital requirements for
at least the next 12 months. Derivatives From time to time the Company enters into short-term foreign exchange contracts with its bank
to hedge against the impact of currency fluctuations between the U.S. dollar and the British pound
and the U.S. dollar and the Canadian dollar. The contracts provide that, on specified dates, the
Company would sell the bank a specified number of British pounds or Canadian dollars in exchange
for a specified number of U.S. dollars. Additionally, from time to time, the Companys U.K.
subsidiary enters into similar contracts with its bank to hedge against currency fluctuations
between the British pound and the U.S. dollar and the British pound and other European currencies.
Realized gains and losses on these contracts are recognized in the same period as the hedged
transactions. These contracts have maturity dates that do not normally exceed 12 months. During
the quarter ended April 30, 2005, neither the Company nor any of its subsidiaries had any
outstanding foreign exchange contracts. New Accounting Standards In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No.
43, Chapter 4.This statement amends the guidance in ARB No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB No. 43, Chapter 4, previously stated
that ...under some circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as current period
charges... SFAS No. 151 requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of so abnormal. In addition, this statement
requires that allocation of fixed production overheads to the costs of conversion be based on the
normal capacity of the production facilities. The provisions of SFAS 151 shall be applied
prospectively and are effective for inventory costs incurred during fiscal years beginning after
June 15, 2005, with earlier application permitted for inventory costs incurred during fiscal years
beginning after the date this Statement is issued. The Companys adoption of SFAS No. 151 is not
expected to have a material impact on the Companys financial position and results of operations. 20




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In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29. The guidance in APB Opinion No. 29, Accounting for Nonmonetary
Transactions, is based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of assets exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle. This Statement amends APB Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity
are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for
nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005. The Companys
adoption of SFAS No. 153 is not expected to have a material impact on the Companys financial
position and results of operations. In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123 (R)), Share-Based
Payment. SFAS No. 123 (R) revises FASB Statement No. 123, Accounting for Stock-Based Compensation,
and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees,and its related
implementation guidance. The Statement focuses primarily on accounting for transactions in which
an entity obtains employee services in share-based payment transactions. The Statement requires a
public entity to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to provide service in
exchange for the award  the requisite service period (usually the vesting period). The cost of
employee services received shall be measured at its then current fair value and then remeasured at
fair value at each reporting date through the settlement date. Changes in fair value during the
requisite service period will be recognized as compensation cost over that period. The Statement
was originally effective as of the beginning of the first interim or annual reporting period
beginning after June 15, 2005. However, in April 2005, the SEC issued Release No. 33-8568,
Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Statement of
Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment. Release No. 33-8568
amends the date for compliance with SFAS No. 123 (revised 2004) so that each registrant that is not
a small business issuer will be required to prepare financial statements in accordance with SFAS
No. 123 (revised 2004) beginning with the first interim or annual reporting period of the
registrants first fiscal year beginning on or after June 15, 2005. The Statement also requires
that, as of the required effective date, all public entities that used the fair-value based method
for either recognition or disclosure under Statement 123 shall apply the modified prospective
application transition method. For periods before the required effective date, public entities may
elect to apply the modified retrospective application transition method. The Company anticipates
adopting SFAS No. 123 (R) beginning in the quarter ending January 31, 2006 using the modified
prospective application transition method. Under that method, the provisions of the Statement
apply to new awards and to awards modified, repurchased, or cancelled after the required effective
date. Additionally, compensation cost for the portion of awards for which the requisite service has not been
rendered that are outstanding as of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective date. Although the Companys
adoption of SFAS No. 123 (revised 2004) could have a material impact on the Companys financial
position and results of operations, management is still evaluating the potential impact from
adopting this statement. In March 2005, the SEC issued Staff Accounting Bulletin Number 107 (SAB 107) that provided
additional guidance to public companies relating to share-based payment transactions and the
implementation of SFAS 123 (revised 2004), including guidance regarding valuation methods and
related assumptions, classification of compensation expense and income tax effects of share-based
payment arrangements. Management is still evaluating the impact from adopting SFAS No. 123
(revised 2004) together with the guidance provided by SAB 107. 21




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Cautionary Statements and Risk Factors This report contains certain forward-looking statements, including without limitation those
regarding the Companys plans and expectations for revenue growth, product lines, strategic
alliances, designs and seasonal collections, capital spending, marketing programs, foreign
sourcing, cost controls, inventory levels and availability of working capital. These
forward-looking statements may contain the words believe, anticipate, expect, estimate,
project, will be, will continue, will likely result or other similar words and phrases.
Readers are cautioned not to place undue reliance on these forward-looking statements. The Company
undertakes no obligation to update any such statements or publicly announce any updates or
revisions to any of the forward-looking statements contained herein. Forward-looking statements
and the Companys plans and expectations are subject to a number of risks and uncertainties that
could cause actual results to differ materially from those anticipated, and the Companys business
in general is subject to certain risks that could affect the value of the Companys common stock.
These risks include, but are not limited to, the following: ú
    
    Demand for the Companys products may decrease significantly if
the economy weakens, if the popularity of golf decreases, or if
unusual weather conditions cause a reduction in rounds played.ú
    
    Like other apparel manufacturers, the Company must correctly
anticipate and help direct fashion trends within its industry.
The Companys results of operations would suffer if the Company
fails to develop fashions or styles that are well received in any
season.ú
    
    The Companys results of operations would be adversely affected if
the new Oceanside distribution center does not operate as
anticipated or functionality problems are encountered. Any such
operational problems may cause the Company to incur additional
expense, experience delays in customer shipments, or require the
Company to lease additional distribution space. In addition, the
Companys results of operations could be negatively impacted if
future sales volume growth does not reach expected levels and the
facilitys additional distribution capacity is not fully utilized,
or if the Company does not achieve projected cost savings from the
new distribution facilities as soon as, or in the amounts,
anticipated.ú
    
    The Company is party to a multi-year licensing agreement to
design, source and sell Callaway Golf apparel primarily in the
United States, Europe and Canada. The Company must correctly
anticipate 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. While to date these changes in the retail industry
have not had a material adverse effect on our business or
financial condition, our business could be materially affected by
these changes in the future.
 22




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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 AshworthÒ and Callaway Golf
apparel brands as well as further growth from The Game and Kudzu
brands sales into the Companys current distribution channels.
The Companys results of operations would be adversely affected if
it fails to successfully integrate the new operations as
anticipated or the expected synergies are not realized.ú
    
    The outbreak of Severe Acute Respiratory Syndrome (SARS)
affected travel to countries where the Companys products are
manufactured. Visiting manufacturers in the affected countries is
an important part of the product development process for the
Company. If travel to these countries is again restricted by a
similar outbreak of SARS, the Avian Flu, or other life threatening
communicable diseases, the Companys product development process
and reputation as a designer and manufacturer of innovative
products may be adversely affected, our international production
and shipments may be limited, and the Company could lose sales.ú
    
    The Companys foreign suppliers ability to deliver products may
be adversely affected by future changes in tariffs, quotas and
other trade barriers imposed by the foreign countries, as well as
by the United States. Additionally, such changes could result in
increased volumes of products being delivered through domestic
ports resulting in shipping, port and other transportation related
delays. As a direct result of such delays, if any, the Company
could lose sales. In particular, the suppliers for Gekko are
concentrated in China.ú
    
    The Company relies on domestic and foreign contractors to
manufacture various products. If these contractors deliver goods
late or fail to meet the Companys quality standards, the Company
could lose sales and its reputation could suffer.ú
    
    The Companys domestic and foreign suppliers rely on readily
available supplies of raw materials at reasonable prices. If
these raw materials are in short supply or are only available at
inflated prices, the contractors may be unable to deliver the
Companys products in sufficient quantities or at expected prices
and the Company could lose sales and have lower gross profit
margins.ú
    
    An increase in terrorist activities, as well as the continued
conflicts around the world, would likely adversely affect the
level of demand for the Companys products as customers and
consumers attention and interest are diverted from golf and
fashion and become focused on these events and the economic,
political, and public safety issues and concerns associated with them. Also, such events could
adversely affect the Companys ability to manage its supply and delivery of product from
domestic and foreign contractors. If such events caused a significant disruption in domestic
or international shipments, the Companys ability to fulfill customer orders also would be
materially adversely affected.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 any assurances the outcomes and ultimate
financial impact of any such matters. There can be no guarantees
that actions that have been or may be brought against the
 23




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Company in the future will be resolved in the Companys favor or that insurance
carried by the Company will be available or paid to cover any litigation exposure. Any
losses resulting from settlements or adverse judgments arising out of these claims could
materially and adversely affect the Companys consolidated financial position and results
of operations.ú
    
    Fluctuations in foreign currency exchange rates could affect the
Companys ability to sell its products in foreign markets and the
value in U.S. dollars of revenues received in foreign currencies.
The Companys revenues from its international segment may also be
adversely affected by taxation and laws or policies of the foreign
countries in which the Company has operations, as well as laws and
policies of the United States affecting foreign trade, investment
and taxation.ú
    
    The Company maintains high levels of inventory to support its
Authentics TM program as well as the Callaway
Golf apparel basics. Additional products, greater sales volume,
and customer trends toward increased at-once ordering may
require increased inventory. Disposal of excess prior season
inventory is an ongoing part of the Companys business, and
write-downs of inventories may materially impair the Companys
financial performance in any period. Particular inventories may
be subject to multiple write-downs if the Companys initial
reserve estimates for inventory obsolescence or lack of throughput
prove to be too low. These risks increase as inventory increases.ú
    
    Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we will
be required to perform an evaluation of our internal controls over
financial reporting and have our auditor attest to such evaluation
as of October 31, 2005. We have prepared an internal plan of
action for compliance, including a timeline and scheduled
activities, although as of the date of this filing we have not yet
completed the evaluation. Our auditors have not yet completed
their testing of our internal controls. Compliance with these
requirements has been and continues to be expensive and time
consuming. If we fail to timely complete this evaluation, or if
our auditors cannot timely attest to our evaluation, we could be
subject to regulatory scrutiny and a loss of public confidence in
our internal controls.In designing and evaluating our internal controls over financial reporting, we recognize that
any internal control or procedure, no matter how well designed and operated, can provide only
reasonable assurance of achieving desired control objectives, and management is required to
apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures. While we believe that our internal controls over financial reporting currently
provide reasonable assurance of achieving their control objectives, no system of internal
controls can be designed to provide absolute assurance of effectiveness. See Item 4. Controls
and Procedures contained in this report. A material failure of internal controls over
financial reporting could materially impact our reported financial results and the market price
of our stock could significantly decline. Additionally, adverse publicity related to a material
failure of internal controls over financial reporting could have a negative impact on our
reputation and business.
 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Companys debt consists of a term loan, mortgage note, notes payable, capital lease and
line of credit obligations which had a total balance of
$45.5 million at April 30, 2005. The Companys debt, excluding revolving line of credit obligations,
bears interest at fixed rates ranging from 3.5% to 5.4%, which approximates fair value based on
current rates offered for debt with similar risks and maturities. The Company had $16 million
outstanding at April 30, 2005 on its revolving line of credit with interest charged at the banks
reference rate (prime). The loan 24




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agreement also provides for optional interest rates based on LIBOR for periods of at least 30
days in increments of $0.5 million. A hypothetical 10% increase in interest rates during the six
months ended April 30, 2005 would have resulted in a $23,000 decrease in net income. For details regarding the Companys variable and fixed rate debt, see Item 2. Management
Discussion and Analysis of Financial Condition and Results of Operations  Capital Resources and
Liquidity. Foreign Currency Exchange Rate Risk The Companys ability to sell its products in foreign markets and the U.S. dollar value of the
sales made in foreign currencies can be significantly influenced by foreign currency fluctuations.
A decrease in the value of foreign currencies relative to the U.S. dollar could result in downward
price pressure for the Companys products or losses from currency exchange rates. From time to
time, the Company enters into short-term foreign exchange contracts with its bank to hedge against
the impact of currency fluctuations between the U.S. dollar and the British pound and the U.S.
dollar and the Canadian dollar. The contracts provide that, on specified dates, the Company sells
the bank a specified number of British pounds or Canadian dollars in exchange for a specified
number of U.S. dollars. Additionally, from time to time, the Companys U.K. subsidiary enters into
similar contracts with its bank to hedge against currency fluctuations between the British pound
and the U.S. dollar and the British pound and other European currencies. Realized gains and losses
on these contracts are recognized in the same period as the hedged transaction. These contracts
have maturity dates that do not normally exceed 12 months. The Company will continue to assess the
benefits and risks of strategies to manage the risks presented by currency exchange rate
fluctuations. There is no assurance that any strategy will be successful in avoiding losses due to
exchange rate fluctuations, or that the failure to manage currency risks effectively would not have
a material adverse effect on the Companys results of operations. During the three and six month
periods ended April 30, 2005, neither the Company nor any of its subsidiaries had any outstanding
foreign exchange contracts. 
 Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of April 30, 2005, the Company carried out an evaluation, under the supervision and with
the participation of the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective and provide reasonable assurance that information
required to be disclosed by the Company in the reports it files under the Securities Exchange Act
of 1934, as amended, is recorded, processed, 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 second quarter of fiscal 2005 that has materially affected or is reasonably
likely to materially affect the Companys internal control over financial reporting. 
 25




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PART II OTHER INFORMATION 
 Item 1. LEGAL PROCEEDINGS On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a class action in the
United States District Court for the Southern District of California (U.S. District Court) on
behalf of purchasers of the Companys common stock during the period between September 4, 1997 and
July 15, 1998. The action was subsequently consolidated with two similar suits and plaintiffs
filed their Amended and Consolidated Complaint on December 17, 1999. Upon the Companys motion,
the U.S. District Court dismissed the Complaint with leave to amend on July 18, 2000. On September
18, 2000, plaintiffs served their Second Consolidated Amended Complaint (Second Amended
Complaint). On November 6, 2000, the Company filed its motion to dismiss the Second Amended
Complaint, which the U.S. District Court granted, in part, and denied, in part. The remaining
portions of the Second Amended Complaint alleged that, among other things, during the class period
and in violation of the Securities Exchange Act of 1934, the Companys financial statements, as
reported, did not conform to generally accepted accounting principles with respect to revenues and
inventory levels. It further alleged that certain Company executives made false or misleading
statements or omissions concerning product demand and that two former executives engaged in insider
trading. On November 8, 2004, the U.S. District Court entered a Final Approval of Settlement.
Under the settlement, all claims will be dismissed and the litigation will be concluded in exchange
for a payment of $15.25 million, approximately 82% of which will be paid by Ashworths insurance
carriers. As part of the settlement, Ashworth also agreed to adopt modifications to certain
corporate governance policies. Ashworth recorded a pre-tax charge of $3 million in the third
quarter of fiscal year 2004 related to settlement of this suit. The Company is party to other claims and litigation proceedings arising in the normal course
of business. Although the legal responsibility and financial impact with respect to such other
claims and litigation cannot currently be ascertained, the Company does not believe that these
other matters will result in payment by the Company of monetary damages, net of any applicable
insurance proceeds, that, in the aggregate, would be material in relation to the consolidated
financial position or results of operations of the Company. 
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None 
 Item 3. DEFAULTS UPON SENIOR SECURITIES. None 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At
the Companys Annual Meeting of Stockholders (Annual
Meeting) on March 23, 2005 Mr. H. Michael Hecht
and Mr. James G. OConnor were elected as
Class III directors to serve on the Companys board of directors for a three year term until the Annual
Meeting in 2008. The following directors continued in office after the meeting but were not subject to reelection
at the meeting: Mr. Stephen G. Carpenter,
Mr. John M. Hanson, Jr., Mr. James B. Hayes,
Mr. Randall L. Herrel, Sr., Ms. Judith K.
Hofer and Mr. Phillip D. Matthews. The stockholder votes on the elections were as follows: H. Michael HechtNumber of votes FOR
12,410,243Number of votes WITHHELD
60,919Number of broker non-votes
0James B. HayesNumber of votes FOR
12,405,589Number of votes WITHHELD
65,573Number of broker non-votes
0 
 Item 5. OTHER INFORMATION Effective January 1, 2005, the Compensation Committee of the Board of Directors approved an
adjustment in base salary from $387,000 per year to $425,000 per year
for Randall L. Herrel, Sr., Chairman, CEO and President. Seidensticker (Overseas) Limited, a supplier of inventoried products to us, owns approximately 5.5% of our outstanding
common stock. We purchased approximately $1.2 million of
products from Seidensticker during the quarter ended April 30,
2005, and $2.4 million during the six months ended
April 30, 2005. During fiscal 2004, we purchased
approximately $4.0 million of products from Seidensticker. We believe that the terms upon which we purchased the inventoried products from Seidensticker are consistent with the terms
offered to other, unrelated parties. 26




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Item 6. EXHIBITS 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).10(c)*
    
    First Amended and Restated Executive Employment Agreement effective February 22, 1999 by
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##### Table of Contents



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).10(h)(6)
    
    Equitable Mortgage Over Securities effective as of July 6, 2004 to the Credit Agreement dated
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July 6,
2004, between Ashworth, Inc. as Mortgagor, Union Bank of California, N.A., as Security Trustee and
Beneficiary, Bank of the West and Columbus Bank and Trust as Beneficiaries, expiring July 6, 2009
(filed as Exhibit 10(z)(6) to the Companys Form 10-Q for the quarter ended July 31, 2004 (File No.
001-14547) and incorporated herein by reference).10(h)(7)
    
    First Amendment effective as of
September 3, 2004 to the Credit Agreement dated
July 6, 2004, between Ashworth, Inc. as Borrower, Union Bank of California, N.A., as Administrative Agent and Lender, Bank
of the West and Columbus Bank and Trust as Lenders, expiring July 6, 2009 (filed as Exhibit 10(z)(7)
to the Companys Form 10-Q for the quarter ended July 31, 2004 (File No. 001-14547) and incorporated
herein by reference).10(i)*
    
    Change in Control Agreement dated November 1, 2000 by and between Ashworth, Inc. and Randall L.
Herrel, Sr. (filed as Exhibit 10(m) to the Companys Form 10-K for the fiscal year ended October 31,
2000 (File No. 001-14547) and incorporated herein by reference).10(j)*
    
    Change in Control Agreement dated November 1, 2000 by and between Ashworth, Inc. and Terence W. Tsang
(filed as Exhibit 10(n) to the Companys Form 10-K for the fiscal year ended October 31, 2000 (File
No. 001-14547) and incorporated herein by reference).10(k)
    
    Promotion Agreement effective November 1, 1999 by and between Ashworth, Inc. and Fred Couples (filed
as Exhibit 10(o) to the Companys Form 10-K for the fiscal year ended October 31, 2000 (File No.
001-14547) and incorporated herein by reference).10(l)*
    
    Contract Termination Agreement effective October 31, 2002 by and among Ashworth, Inc., James Nantz,
III and Nantz Communications, Inc. (filed as Exhibit 10(p) to the Companys Form 10-K for the fiscal
year ended October 31, 2002 (File No. 001-14547) and incorporated herein by reference).10(m)
    
    Real Estate Purchase and Sale Agreement and Joint Escrow Instructions effective October 25, 2002 by
and between Innovative Development Enterprises, Inc. and Ashworth, Inc. (filed as Exhibit 10(q) to the
Companys Form 10-K for the fiscal year ended October 31, 2002 (File No. 001-14547) and incorporated
herein by reference).10(n)*
    
    Promotion Agreement effective October 31, 2002 by and among Ashworth, Inc., James W. Nantz, III and
Nantz Enterprises, Ltd. (filed as Exhibit 10(q) to the Companys Form 10-Q for the quarter ended
January 31, 2003 (File No. 001-14547) and incorporated herein by reference).10(o)
    
    Purchase and Installation Agreement dated April 10, 2003 between Ashworth, Inc. and Gartner Storage &
Sorter Systems of Pennsylvania (filed as Exhibit 10 (r) to the Companys Form 10-Q for the quarter
ended April 30, 2003 (File No. 001-14547) and incorporated herein by reference).10(p)
    
    Agreement for Lease dated May 1, 2003 by and among Ashworth, Inc., Ashworth U.K. Limited and Juniper
Developments Limited (filed as Exhibit 10(s) to the Companys Form 10-Q for the quarter ended April
30, 2003 (File No. 001-14547) and incorporated herein by reference).10(q)
    
    Lease dated September 1, 2003 by and among Ashworth, Inc., Ashworth U.K. Limited and Juniper
Developments Limited (filed as Exhibit 10(t) to the Companys Form 10-Q for the quarter ended July 31,
2003 (File No. 001-14547) and incorporated herein by reference).10(r)(1)
    
    Master Equipment Lease Agreement dated as of June 23, 2003 by and between Key Equipment Finance and
Ashworth, Inc. including Amendment 01, the Assignment of Purchase Agreement and the Certificate of
Authority (filed as Exhibit 10(u) to the Companys Form 10-Q for the quarter ended July 31, 2003 (File
No. 001-14547) and incorporated herein by reference).
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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).10(w)(4)
    
    Promissory Note, effective April 2, 2004, by and between Ashworth EDC, LLC and Bank of America, N.A.
(filed as Exhibit 10(x)(4) to the Companys Form 10-Q for the quarter ended
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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).10.1
    
    Annual Base Salary for the Companys Chief Executive Officer effective as of January 1, 2005.
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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. 32




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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: June 9, 2005
    
    By: /s/ Terence W. TsangTerence W. TsangExecutive Vice President,
Chief Financial Officer andTreasurer
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EXHIBIT INDEX ExhibitNumber
    
    
    Description of Exhibit10.1
    
    
    Annual Base Salary for the Companys Chief Executive
Officer effective as of January 1, 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 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.
 34