##### Table of Contents



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 June 30, 2005
 Commission
file number 0-21630
 ACTION PERFORMANCE COMPANIES, INC.
 (Exact Name of Registrant as Specified in Its Charter)
 ARIZONA
    
    86-0704792(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 (Address, including zip code, of principal executive offices)
 (Registrants telephone number, including area code)
 þ o
 þ o
  CLASS
Common Stock, $0.01 Par Value
    
    OUTSTANDING AT JULY 31, 2005
18,573,805 Shares




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TABLE OF CONTENTS  PART I- FINANCIAL INFORMATIONITEM 1. Financial StatementsITEM 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3. Quantitative and Qualitative Disclosures About Market RiskITEM 3. Quantitative and Qualitative Disclosures About Market RiskITEM 4. Controls and ProceduresPART II  OTHER INFORMATIONITEM 1. Legal ProceedingsITEM 2. Unregistered Sales of Equity Securities and Use of ProceedsITEM 3. Defaults Upon Senior SecuritiesITEM 4. Submissions of Matters to a Vote of Security HoldersITEM 5. Other InformationITEM 6. ExhibitsSIGNATURESExhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2Exhibit 99.1    Table of Contents  
 PART I- FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 ACTION PERFORMANCE COMPANIES, INC.
 Unaudited Condensed Consolidated Balance Sheets
 June 30,
    
    September 30,2005
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    6,336
    
    
    $
    12,580Accounts receivable, net
    
    
    31,263
    
    
    
    47,050Inventories
    
    
    46,457
    
    
    
    48,514Prepaid royalties
    
    
    5,608
    
    
    
    2,774Taxes receivable
    
    
    1,132
    
    
    
    306Deferred income taxes
    
    
    9,700
    
    
    
    7,006Prepaid expenses and other
    
    
    4,140
    
    
    
    5,740Assets to be disposed
    
    
    13,493
    
    
    
    16,971Total current assets
    
    
    118,129
    
    
    
    140,941Long-Term Assets:Property and equipment, net
    
    
    57,275
    
    
    
    64,691Goodwill
    
    
    86,180
    
    
    
    86,764Licenses and other intangibles, net
    
    
    40,931
    
    
    
    52,302Other
    
    
    2,092
    
    
    
    3,196Assets to be disposed
    
    
    95
    
    
    
    6,389Total long-term assets
    
    
    186,573
    
    
    
    213,342$
    304,702
    
    
    $
    354,283LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    15,597
    
    
    $
    28,044Accrued royalties
    
    
    10,388
    
    
    
    10,002Accrued expenses
    
    
    6,270
    
    
    
    8,453Taxes payable
    
    
    2,312
    
    
    
    1,742Current portion of long-term debt
    
    
    373
    
    
    
    4,009Liabilities related to assets to be disposed
    
    
    1,954
    
    
    
    1,729Total current liabilities
    
    
    36,894
    
    
    
    53,979Long-Term Liabilities:Long-term debt
    
    
    3,908
    
    
    
    11,882Deferred income taxes
    
    
    22,313
    
    
    
    24,979Other
    
    
    241
    
    
    
    298Total long-term liabilities
    
    
    26,462
    
    
    
    37,159Commitments and ContingenciesMinority Interests
    
    
    2,466
    
    
    
    2,518Shareholders Equity:Common stock, $.01 par value, 62,500 shares authorized,
18,764 and 18,560 shares issued
    
    
    188
    
    
    
    186Additional paid-in capital
    
    
    160,010
    
    
    
    158,429Treasury stock, at cost, 190 and 190 shares
    
    
    (3,999
    )
    
    
    (3,999
    )Accumulated other comprehensive loss
    
    
    (2,409
    )
    
    
    (1,456
    )Retained earnings
    
    
    85,090
    
    
    
    107,467Total shareholders equity
    
    
    238,880
    
    
    
    260,627$
    304,702
    
    
    $
    354,283
  2




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##### Table of Contents



ACTION PERFORMANCE COMPANIES, INC.
 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
 Three Months Ended
    
    Nine Months Ended2005
    
    2004
    
    2005
    
    2004Net sales
    
    $
    72,693
    
    
    $
    88,334
    
    
    $
    216,050
    
    
    $
    232,662Cost of sales
    
    
    50,583
    
    
    
    58,827
    
    
    
    155,999
    
    
    
    164,135Gross profit
    
    
    22,110
    
    
    
    29,507
    
    
    
    60,051
    
    
    
    68,527Operating expenses:Selling, general, and administrative
    
    
    21,037
    
    
    
    20,307
    
    
    
    62,489
    
    
    
    57,346Amortization of licenses and other intangibles
    
    
    892
    
    
    
    937
    
    
    
    2,640
    
    
    
    2,715Impairment losses on trademarks and licenses
    
    
    12,674
    
    
    
    
    
    
    
    12,674
    
    
    
    Total operating expenses
    
    
    34,603
    
    
    
    21,244
    
    
    
    77,803
    
    
    
    60,061Operating income (loss)
    
    
    (12,493
    )
    
    
    8,263
    
    
    
    (17,752
    )
    
    
    8,466Interest expense
    
    
    (303
    )
    
    
    (468
    )
    
    
    (1,000
    )
    
    
    (1,370
    )Foreign exchange gains (losses)
    
    
    (1,122
    )
    
    
    (196
    )
    
    
    (214
    )
    
    
    957Earnings (losses) from joint venture
    
    
    (59
    )
    
    
    204
    
    
    
    343
    
    
    
    966Other income
    
    
    25
    
    
    
    47
    
    
    
    106
    
    
    
    159Other expense
    
    
    (540
    )
    
    
    (280
    )
    
    
    (1,309
    )
    
    
    (1,060
    )Total other expense
    
    
    (1,999
    )
    
    
    (693
    )
    
    
    (2,074
    )
    
    
    (348
    )Income (loss) from continuing operations before
income taxes
    
    
    (14,492
    )
    
    
    7,570
    
    
    
    (19,826
    )
    
    
    8,118Income taxes
    
    
    (5,014
    )
    
    
    2,869
    
    
    
    (6,012
    )
    
    
    3,042Income (loss) from continuing operations
    
    
    (9,478
    )
    
    
    4,701
    
    
    
    (13,814
    )
    
    
    5,076Loss from discontinued operations, net of income
taxes
    
    
    (5,522
    )
    
    
    (868
    )
    
    
    (7,639
    )
    
    
    (1,660
    )Net income (loss)
    
    
    (15,000
    )
    
    
    3,833
    
    
    
    (21,453
    )
    
    
    3,416Other comprehensive income (loss)
    
    
    (1,784
    )
    
    
    (196
    )
    
    
    (953
    )
    
    
    618Comprehensive income (loss)
    
    $
    (16,784
    )
    
    $
    3,637
    
    
    $
    (22,406
    )
    
    $
    4,034Earnings (loss) per common share:Basic -Income (loss) from continuing operations
    
    $
    (0.51
    )
    
    $
    0.26
    
    
    $
    (0.75
    )
    
    $
    0.28Loss from discontinued operations
    
    
    (0.30
    )
    
    
    (0.05
    )
    
    
    (0.41
    )
    
    
    (0.09
    )Net income (loss)
    
    $
    (0.81
    )
    
    $
    0.21
    
    
    $
    (1.16
    )
    
    $
    0.19Diluted -Income (loss) from continuing operations
    
    $
    (0.51
    )
    
    $
    0.26
    
    
    $
    (0.75
    )
    
    $
    0.27Loss from discontinued operations
    
    
    (0.30
    )
    
    
    (0.05
    )
    
    
    (0.41
    )
    
    
    (0.09
    )Net income (loss)
    
    $
    (0.81
    )
    
    $
    0.21
    
    
    $
    (1.16
    )
    
    $
    0.18Cash dividends declared, per common share
    
    $
    
    
    
    $
    0.05
    
    
    $
    0.05
    
    
    $
    0.15
  3




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ACTION PERFORMANCE COMPANIES, INC.
 Unaudited Condensed Consolidated Statements of Cash Flows
 Nine Months Ended June 30,2005
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (21,453
    )
    
    $
    3,416Adjustments to reconcile net income (loss) to cash provided by
operating activities-Discontinued operations and related impairment charges
    
    
    10,552
    
    
    
    (3,810
    )Depreciation and amortization
    
    
    24,612
    
    
    
    21,473Impairment losses on trademark and licenses
    
    
    12,674
    
    
    
    Provision for doubtful accounts
    
    
    2,741
    
    
    
    991Deferred taxes
    
    
    (6,400
    )
    
    
    690Other
    
    
    921
    
    
    
    170Changes in assets and liabilities, net of businesses
acquired and disposed-Accounts receivable
    
    
    12,967
    
    
    
    15,172Accounts payable and accrued expenses
    
    
    (10,624
    )
    
    
    (3,264
    )Taxes payable and receivable, net
    
    
    (199
    )
    
    
    (394
    )Inventories
    
    
    1,927
    
    
    
    (12,173
    )Prepaid royalties and accrued royalties
    
    
    (2,421
    )
    
    
    1,524Other
    
    
    2,487
    
    
    
    (4,433
    )Net cash provided by operating activities
    
    
    27,784
    
    
    
    19,362CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, net
    
    
    (18,787
    )
    
    
    (20,208
    )Acquisition of businesses and intangibles, net of costs
    
    
    (2,103
    )
    
    
    (2,890
    )Other
    
    
    675
    
    
    
    265Net cash used in investing activities
    
    
    (20,215
    )
    
    
    (22,833
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net borrowings under line-of-credit
    
    
    
    
    
    
    11,700Long-term debt repayments
    
    
    (11,636
    )
    
    
    (478
    )Dividends paid  common shareholders
    
    
    (1,842
    )
    
    
    (2,746
    )Dividends paid  minority interest shareholders
    
    
    (1,115
    )
    
    
    (1,414
    )Stock option and other exercise proceeds
    
    
    918
    
    
    
    270Net cash provided by (used in) financing activities
    
    
    (13,675
    )
    
    
    7,332Effect of exchange rates on cash and cash equivalents
    
    
    (138
    )
    
    
    178Net change in cash and cash equivalents
    
    
    (6,244
    )
    
    
    4,039Cash and cash equivalents, beginning of period
    
    
    12,580
    
    
    
    49,462Cash and cash equivalents, end of period
    
    $
    6,336
    
    
    $
    53,501Supplemental Disclosures:Interest paid
    
    $
    772
    
    
    $
    1,632Income taxes paid (refunded), net
    
    
    (1,153
    )
    
    
    4,571
  4




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ACTION PERFORMANCE COMPANIES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
 INTERIM FINANCIAL REPORTING
   DISCONTINUED OPERATIONS
      5




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McArthur
    
    Hamilton
    
    Castaway
    
    TotalThree Months Ended June 30, 2005:Net sales
    
    $
    3,642
    
    
    $
    (11
    )
    
    $
    14
    
    
    $
    3,645Loss on disposal
    
    
    (2,861
    )
    
    
    
    
    
    
    
    
    
    
    (2,861
    )Loss before income taxes
    
    
    (2,597
    )
    
    
    (5,713
    )
    
    
    (373
    )
    
    
    (8,683
    )Loss from discontinued operations, net of tax
    
    
    (1,652
    )
    
    
    (3,633
    )
    
    
    (237
    )
    
    
    (5,522
    )Three Months Ended June 30, 2004:Net sales
    
    $
    3,172
    
    
    $
    587
    
    
    $
    58
    
    
    $
    3,817Income (loss) before income taxes
    
    
    300
    
    
    
    (1,534
    )
    
    
    (101
    )
    
    
    (1,335
    )Income (loss) from discontinued operations,
net of tax
    
    
    195
    
    
    
    (997
    )
    
    
    (66
    )
    
    
    (868
    )Nine Months Ended June 30, 2005:Net sales
    
    $
    9,521
    
    
    $
    2,010
    
    
    $
    137
    
    
    $
    11,668Loss on disposal
    
    
    (2,861
    )
    
    
    
    
    
    
    
    
    
    
    (2,861
    )Loss before income taxes
    
    
    (2,701
    )
    
    
    (8,744
    )
    
    
    (566
    )
    
    
    (12,011
    )Loss from discontinued operations, net of tax
    
    
    (1,718
    )
    
    
    (5,561
    )
    
    
    (360
    )
    
    
    (7,639
    )Nine Months Ended June 30, 2004:Net sales
    
    $
    9,068
    
    
    $
    4,560
    
    
    $
    664
    
    
    $
    14,292Income (loss) before income taxes
    
    
    339
    
    
    
    (2,730
    )
    
    
    (163
    )
    
    
    (2,554
    )Income (loss) from discontinued operations,
net of tax
    
    
    221
    
    
    
    (1,775
    )
    
    
    (106
    )
    
    
    (1,660
    )
  June 30, 2005McArthur
    
    Hamilton
    
    Castaway
    
    TotalAccounts receivable, net
    
    $
    1,725
    
    
    $
    483
    
    
    $
    197
    
    
    $
    2,405Inventories
    
    
    3,228
    
    
    
    479
    
    
    
    181
    
    
    
    3,888Taxes receivable
    
    
    983
    
    
    
    3,183
    
    
    
    206
    
    
    
    4,372Deferred income taxes
    
    
    494
    
    
    
    2,065
    
    
    
    
    
    
    
    2,559Other
    
    
    180
    
    
    
    81
    
    
    
    8
    
    
    
    269Property and equipment, net
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    78Licenses and other intangibles, net
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    17Assets to be disposed
    
    $
    6,705
    
    
    $
    6,291
    
    
    $
    592
    
    
    $
    13,588Accounts payable
    
    $
    1,112
    
    
    $
    5
    
    
    $
    2
    
    
    $
    1,119Accrued royalties
    
    
    123
    
    
    
    442
    
    
    
    2
    
    
    
    567Accrued expenses
    
    
    171
    
    
    
    5
    
    
    
    92
    
    
    
    268Liabilities related to assets to be disposed
    
    $
    1,406
    
    
    $
    452
    
    
    $
    96
    
    
    $
    1,954
 6




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September 30, 2004McArthur
    
    Hamilton
    
    Castaway
    
    TotalAccounts receivable, net
    
    $
    2,076
    
    
    $
    2,462
    
    
    $
    180
    
    
    $
    4,718Inventories
    
    
    3,596
    
    
    
    4,514
    
    
    
    323
    
    
    
    8,433Taxes receivable (payable)
    
    
    (236
    )
    
    
    1,930
    
    
    
    127
    
    
    
    1,821Deferred income taxes
    
    
    154
    
    
    
    1,605
    
    
    
    
    
    
    
    1,759Other
    
    
    189
    
    
    
    42
    
    
    
    9
    
    
    
    240Property and equipment, net
    
    
    123
    
    
    
    65
    
    
    
    
    
    
    
    188Goodwill
    
    
    1,889
    
    
    
    
    
    
    
    
    
    
    
    1,889Licenses and other intangibles, net
    
    
    30
    
    
    
    4,282
    
    
    
    
    
    
    
    4,312Assets to be disposed
    
    $
    7,821
    
    
    $
    14,900
    
    
    $
    639
    
    
    $
    23,360Accounts payable
    
    $
    481
    
    
    $
    247
    
    
    $
    6
    
    
    $
    734Accrued royalties
    
    
    195
    
    
    
    498
    
    
    
    6
    
    
    
    699Accrued expenses
    
    
    142
    
    
    
    71
    
    
    
    92
    
    
    
    305Other
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Liabilities related to assets to be disposed
    
    $
    818
    
    
    $
    816
    
    
    $
    95
    
    
    $
    1,729
 IMPAIRMENT CHARGES
    RECENT ACCOUNTING PRONOUNCEMENTS
  7




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STOCK-BASED COMPENSATION
  Three Months Ended
    
    Nine Months Ended2005
    
    2004
    
    2005
    
    2004Volatility
    
    
    62.6
    %
    
    
    65.1
    %
    
    
    61.1
    %
    
    
    65.2
    %Risk-free interest rate
    
    
    4.0
    %
    
    
    3.2
    %
    
    
    3.5
    %
    
    
    2.7
    %Dividend rate
    
    
    0.5
    %
    
    
    1.0
    %
    
    
    0.7
    %
    
    
    1.0
    %Expected life of options
    
    3 years
    
    3 years
    
    3 years
    
    3 years
  Three Months Ended
    
    Nine Months Ended2005
    
    2004
    
    2005
    
    2004Net income (loss), as reported
    
    $
    (15,000
    )
    
    $
    3,833
    
    
    $
    (21,453
    )
    
    $
    3,416Total stock-based employee compensation expense
determined under fair value method for all
awards, net of related tax effects
    
    
    (490
    )
    
    
    (1,015
    )
    
    
    (1,962
    )
    
    
    (3,043
    )Pro forma net income (loss)
    
    $
    (15,490
    )
    
    $
    2,818
    
    
    $
    (23,415
    )
    
    $
    373Basic earnings (loss) per share:As reported
    
    $
    (0.81
    )
    
    $
    0.21
    
    
    $
    (1.16
    )
    
    $
    0.19Pro forma
    
    $
    (0.84
    )
    
    $
    0.15
    
    
    $
    (1.27
    )
    
    $
    0.02Diluted earnings (loss) per share:As reported
    
    $
    (0.81
    )
    
    $
    0.21
    
    
    $
    (1.16
    )
    
    $
    0.18Pro forma
    
    $
    (0.84
    )
    
    $
    0.15
    
    
    $
    (1.27
    )
    
    $
    0.02
  DEBT AND FINANCING
  8




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SEGMENT INFORMATION
   Three Months Ended June 30,Inter-
    
    Depreciation
    
    OperatingExternal
    
    segment
    
    and
    
    IncomeRevenues
    
    Revenues
    
    Amortization
    
    (Loss)2005:Domestic die-cast
    
    $
    27,735
    
    
    $
    879
    
    
    $
    14,179
    
    
    $
    (8,252
    )(c)Domestic apparel and memorabilia
    
    
    34,880
    
    
    
    285
    
    
    
    721
    
    
    
    4,693Foreign die-cast
    
    
    9,430
    
    
    
    
    
    
    
    2,390
    
    
    
    1,733Corporate and other
    
    
    648
    
    
    
    476
    
    
    
    3,975
    (d)
    
    
    (11,333
    ) (d)Eliminations
    
    
    
    
    
    
    (1,640
    )
    
    
    
    
    
    
    666Total per consolidated
financial statements
    
    $
    72,693
    
    
    $
    
    
    
    $
    21,265
    
    
    $
    (12,493
    )2004:Domestic die-cast
    
    $
    40,741
    
    
    $
    2,869
    
    
    $
    3,185
    
    
    $
    7,604Domestic apparel and memorabilia
    
    
    38,145
    
    
    
    59
    
    
    
    610
    
    
    
    6,139Foreign die-cast
    
    
    8,698
    
    
    
    
    
    
    
    2,222
    
    
    
    1,117Corporate and other
    
    
    750
    
    
    
    236
    
    
    
    1,129
    
    
    
    (6,399
    )Eliminations
    
    
    
    
    
    
    (3,164
    )
    
    
    
    
    
    
    (198
    )Total per consolidated
financial statements
    
    $
    88,334
    
    
    $
    
    
    
    $
    7,146
    
    
    $
    8,263
 9




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Nine Months Ended June 30,Inter-
    
    Depreciation
    
    OperatingExternal
    
    segment
    
    and
    
    IncomeRevenues
    
    Revenues
    
    Amortization
    
    (Loss)2005:Domestic die-cast
    
    $
    85,001
    
    
    $
    2,801
    
    
    $
    21,695
    
    
    $
    (8,982
    )(c)Domestic apparel and memorabilia
    
    
    99,113
    
    
    
    773
    
    
    
    2,129
    
    
    
    10,868Foreign die-cast
    
    
    29,530
    
    
    
    
    
    
    
    6,798
    
    
    
    4,851Corporate and other
    
    
    2,406
    
    
    
    1,315
    
    
    
    6,664
    (d)
    
    
    (25,216
    ) (d)Eliminations
    
    
    
    
    
    
    (4,889
    )
    
    
    
    
    
    
    727Total per consolidated
financial statements
    
    $
    216,050
    
    
    $
    
    
    
    $
    37,286
    
    
    $
    (17,752
    )2004:Domestic die-cast
    
    $
    103,607
    
    
    $
    5,925
    
    
    $
    9,733
    
    
    $
    14,235Domestic apparel and memorabilia
    
    
    99,599
    
    
    
    536
    
    
    
    2,002
    
    
    
    9,932Foreign die-cast
    
    
    27,135
    
    

    
    
    
    
    
    6,264
    
    
    
    3,819Corporate and other
    
    
    2,321
    
    
    
    1,024
    
    
    
    3,474
    
    
    
    (18,881
    )Eliminations
    
    
    
    
    
    
    (7,485
    )
    
    
    
    
    
    
    (639
    )Total per consolidated
financial statements
    
    $
    232,662
    
    
    $
    
    
    
    $
    21,473
    
    
    $
    8,466
 Identifiable Assets
    
    Goodwill and TrademarksJune 30,
    
    Sept. 30,
    
    June 30,
    
    Sept. 30,2005
    
    2004
    
    2005
    
    2004Domestic die-cast (a)
    
    $
    92,217
    
    
    $
    113,645
    
    
    $
    39,404
    
    
    $
    45,660Domestic apparel and memorabilia
    
    
    99,711
    
    
    
    106,092
    
    
    
    55,669
    
    
    
    55,669Foreign die-cast
    
    
    59,401
    
    
    
    61,292
    
    
    
    18,854
    
    
    
    19,438Corporate and other (b)
    
    
    48,044
    
    
    
    60,059
    
    
    
    
    
    
    
    Assets to be disposed
    
    
    13,588
    
    
    
    23,360
    
    
    
    
    
    
    
    Eliminations
    
    
    (8,259
    )
    
    
    (10,165
    )
    
    
    
    
    
    
    Total per consolidated
financial statements
    
    $
    304,702
    
    
    $
    354,283
    
    
    $
    113,927
    
    
    $
    120,767
 
 (a)
    
    Domestic die-cast identifiable assets include the Winners Circle trademark, purchased
from Hasbro in May 2001. As additional consideration for the trademark purchase, we pay
1.5% or 3% of certain Winners Circle product net sales to Hasbro, quarterly, through May
2006. The additional consideration is added to the cost of the trademark quarterly.
Domestic die-cast identifiable assets also include Funline trademarks. During the first
quarter of fiscal 2005, $2.1 million was accrued as additional consideration payable under
the earn-out provisions of the Funline acquisition agreement. The amount recorded for the
Funline trademarks was increased by the amount of the additional consideration.(b)
    
    Corporate and other identifiable assets includes $1.7 million in cash at June 30, 2005,
and $8.5 million in cash at September 30, 2004.(c)
    
    Domestic die-cast during the quarter ended June 30, 2005, includes an impairment loss
on the Funline trademarks of $10.0 million.(d)
    
    Corporate and other during the quarter ended June 30, 2005, includes $2.7 million of
impairment losses on two licenses. Corporate and other also includes incremental
Sarbanes-Oxley implementation costs of $0.6 million in the three months ended June 30,
2005, and $0.9 million in the nine months ended June 30, 2005. 10




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EARNINGS PER COMMON SHARE (EPS)
  Three Months Ended
    
    Nine Months Ended2005
    
    2004
    
    2005
    
    2004NUMERATOR:Basic and diluted  income (loss) from
continuing operations
    
    $
    (9,478
    )
    
    $
    4,701
    
    
    $
    (13,814
    )
    
    $
    5,076DENOMINATOR:Basic  weighted average shares
    
    
    18,574
    
    
    
    18,336
    
    
    
    18,516
    
    
    
    18,315Effect of dilutive stock options and warrants
    
    
    
    
    
    
    270
    
    
    
    
    
    
    
    304Diluted  adjusted weighted average shares
    
    
    18,574
    
    
    
    18,606
    
    
    
    18,516
    
    
    
    18,619
 3 4
 OFF-BALANCE SHEET ARRANGEMENTS
  JOINT VENTURE
  COMMITMENTS AND CONTINGENCIES
    11




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Current Events
   
    
    Improving the way our die-cast product is marketed and distributed;
    
    Controlling expenditures; and
    
    Expanding our traditional retail channels.
 Significant actions we have taken to date to improve the way our die-cast products are marketed and
distributed include:
 
    
    Eliminated over 60% of our NASCAR die-cast SKUs. As a result of focusing our product
line on the most popular and profitable SKUs, we believe that we will realize the following
benefits.
 o
    
    Reduced future capital expenditures to support the business.o
    
    Better utilization of those future capital expenditures.o
    
    A simplified and more efficient approval and production process.
  
    
    Reorganized the departments that handle the product design, approval, and production
process of die-cast.
    
    Announced our plan to restructure our wholesale NASCAR die-cast distribution model from
a distributor-based model to a direct-to-retail model. We announced that our existing
Charlotte, North Carolina operations, which currently manages wholesale apparel operations,
would also handle fulfillment for wholesale NASCAR die-cast and apparel effective October
1, 2005. We will also add a call center at that facility for order processing and customer
service. We believe the benefits of bringing in-house our distribution are as follows:
 o
    
    A significantly lower cost profile for the business. These lower costs
should allow us to invest in both retail level marketing and sales efforts to
improve the longer-term volume potential of the business, as well as improve the
profitability of the business.o
    
    Allow us to communicate and deal directly with the retailer of our
products to improve our speed
to market, as well as recognize consumer trends, preferences, and buying habits
sooner.o
    
    We have restricted credit to seven of our fifteen distributors and
recorded a $2.5 million allowance for doubtful accounts in the first quarter of
2005 to reserve for estimated uncollectible receivables
 12




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as a result of changing
distribution models.
  
    
    Reduced the workforce at our Tempe headquarters by approximately 20%. In addition,
we anticipate selling our 12.5% fractional ownership in a corporate aircraft in August
of 2005, from which we will receive proceeds of approximately $0.8 million.
    
    Decided not to declare a dividend in the quarter ended June 30, 2005. The
evaluation of paying dividends will be made on a quarter-by-quarter basis, although at
the current time we do not anticipate paying a dividend for the foreseeable future.
    
    Established a policy for capital expenditures to limit future annual spending to a
level below annual depreciation.
    
    Initiated plans to close the Los Angeles location of Funline and consolidate its
administrative functions in Phoenix and Atlanta. We expect this consolidation to take
place by January 2006 and be complete during that quarter. Annual savings are expected
to approximate $2.5 to $3.0 million.
    
    Initiated plans to open a sourcing office in mainland China to reduce the cost of
production.
  
    
    Consolidating procurement, marketing, sales, and distribution functions of our
Winners Circle die-cast and Funline brands to better leverage the combined size of
these two businesses. Recruiting for individuals with sales and/or marketing expertise
to help realize the potential of these two businesses. During the third quarter of
2005, we announced the hiring of Mike Smith as our new Vice President of Mass Sales.
Mr. Smith has 30 years of experience in selling to Mass customers with such companies
as Fisher Price, Champion Sportswear, and Rauch Industries.
    
    Consolidating our mass apparel and novelty logistics and distribution function in
our facility in Atlanta, Georgia. Such consolidation is currently underway and is
expected to be substantially complete by the end of the fourth quarter.
  
    
    We are in negotiations to sell our McArthur towel subsidiary and believe that such
sale will occur in the fourth quarter of 2005. McArthur has historically operated as a
stand-alone subsidiary in Baraboo, Wisconsin, and there has been little, if any, mutual
benefit between our products and customers and McArthurs. In addition, we have
determined that for McArthur to produce an acceptable level of cash flow, the
stand-alone operations would have to be consolidated with our Charlotte location.
Given the risk of disruption to the business, the potential loss of key personnel in
such a move, and that the Charlotte facility was in the middle of the dealer direct
project, we determined that the sale of McArthur represented the best alternative.
    
    We have decided to discontinue two businesses: Hamilton and Castaway. Each of these
businesses have had declining sales for the prior three quarters, and we have
determined that each business was outside of our core NASCAR licensed products
business, and that the additional investment necessary to bring those businesses to an
acceptable level of sales would likely not be recovered.
 Overview
  13




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
    
    NASCAR die-cast unit manufacturing costs are largely fixed due to outsourcing under
fixed-price contracts.
    
    Royalties are paid generally as a percentage of sales, although often subject to
guaranteed minimums.
    
    Due to our agreements with distributors and QVC, incremental volume does not
proportionately increase our operating expenses.
    
    Research and development is limited to basic design and engineering.
    
    Capital expenditures are principally limited to tooling for die-cast.
    
    Functions, such as manufacturing and others outside of our core skills, are generally outsourced.
 Revenue
    Cost of Sales
   14




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##### Table of Contents




    
    product mix;
    
    our ability to price our product appropriately;
    
    the effect of amortizing the fixed cost components of cost of sales, primarily
depreciation of tooling and dies, over varying levels of net sales;
    
    the type of freight charges;
    
    additional charges related to lower than minimum order quantities and cancellation of
specific purchase orders; and
    
    the impact of minimum royalty guarantees.
 Gross Margin
  Selling, General, and Administrative Expenses
  Seasonality
  Application of Critical Accounting Policies
   Allowance for Doubtful Accounts
  15




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Inventory
  Royalties
  Goodwill and Other Intangibles
  Deferred Tax Assets
  Stock-Based Compensation
  Results of Operations
  16




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Three Months Ended
    
    Nine Months Ended2005
    
    2004
    
    2005
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    69.6
    
    
    
    66.6
    
    
    
    72.2
    
    
    
    70.5Gross profit
    
    
    30.4
    
    
    
    33.4
    
    
    
    27.8
    
    
    
    29.5Selling, general, and administrative
expenses
    
    
    28.9
    
    
    
    23.0
    
    
    
    28.9
    
    
    
    24.7Amortization of licenses and other
intangibles
    
    
    1.2
    
    
    
    1.1
    
    
    
    1.2
    
    
    
    1.2Impairment losses on trademark and
licenses
    
    
    17.5
    
    
    
    
    
    
    
    5.9
    
    
    
    Operating income (loss)
    
    
    (17.2
    )
    
    
    9.3
    
    
    
    (8.2
    )
    
    
    3.6Interest expense
    
    
    (0.4
    )
    
    
    (0.5
    )
    
    
    (0.5
    )
    
    
    (0.6
    )Foreign exchange gains (losses)
    
    
    (1.5
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    0.4Earnings (losses) from joint venture
    
    
    (0.1
    )
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.4Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Other expense
    
    
    (0.7
    )
    
    
    (0.2
    )
    
    
    (0.6
    )
    
    
    (0.4
    )Income (loss) from continuing
operations before income taxes
    
    
    (19.9
    )
    
    
    8.6
    
    
    
    (9.2
    )
    
    
    3.5Income taxes
    
    
    (6.9
    )
    
    
    3.3
    
    
    
    (2.8
    )
    
    
    1.3Income (loss) from continuing operations
    
    
    (13.0
    )
    
    
    5.3
    
    
    
    (6.4
    )
    
    
    2.2Loss from discontinued operations, net
of income taxes
    
    
    (7.6
    )
    
    
    (1.0
    )
    
    
    (3.5
    )
    
    
    (0.7
    )Net income (loss)
    
    
    (20.6
    )%
    
    
    4.3
    %
    
    
    (9.9
    )%
    
    
    1.5
    %
  Three Months Ended
    
    Nine Months Ended2005
    
    2004
    
    2005
    
    2004Domestic Die-cast:Wholesale distribution and promotion
    
    $
    19,234
    
    
    $
    25,651
    
    
    $
    43,264
    
    
    $
    48,973Wholesale to mass-merchant retailers
    
    
    4,492
    
    
    
    9,389
    
    
    
    29,859
    
    
    
    40,884Retail through collectors catalog club
    
    
    4,009
    
    
    
    5,701
    
    
    
    11,878
    
    
    
    13,750Total domestic die-cast
    
    
    27,735
    
    
    
    40,741
    
    
    
    85,001
    
    
    
    103,607Foreign Die-cast  wholesale
distribution and promotion
    
    
    9,430
    
    
    
    8,698
    
    
    
    29,530
    
    
    
    27,135Total die-cast
    
    
    37,165
    
    
    
    49,439
    
    
    
    114,531
    
    
    
    130,742Domestic Apparel and Memorabilia:Wholesale distribution and promotion
    
    
    9,278
    
    
    
    14,705
    
    
    
    32,769
    
    
    
    39,520Wholesale to mass-merchant retailers
    
    
    6,887
    
    
    
    6,745
    
    
    
    28,646
    
    
    
    26,462Total apparel and memorabilia
    
    
    16,165
    
    
    
    21,450
    
    
    
    61,415
    
    
    
    65,982Retail at Trackside
    
    
    18,715
    
    
    
    16,695
    
    
    
    37,698
    
    
    
    33,617Royalties and Other
    
    
    648
    
    
    
    750
    
    
    
    2,406
    
    
    
    2,321Net Sales
    
    $
    72,693
    
    
    $
    88,334
    
    
    $
    216,050
    
    
    $
    232,662
 17




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Three Months Ended June 30, 2005, Compared with Three Months Ended June 30, 2004
      WeightedGross
    
    Gross% of
    
    Margin
    
    MarginNet
    
    Increase
    
    IncreaseSales
    
    (Decrease)
    
    (Decrease)Domestic die-cast
    
    
    39.9
    %
    
    
    (9.0
    )%
    
    
    (3.6
    )%Domestic apparel and memorabilia
    
    
    49.7
    
    
    
    1.3
    
    
    
    0.7Foreign die-cast
    
    
    13.0
    
    
    
    3.7
    
    
    
    0.5Corporate and other
    
    
    (2.6
    )
    
    
    
    
    
    
    (0.6
    )Consolidated Total
    
    
    100.0
    %
    
    
    
    
    
    
    (3.0
    )%
   18




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##### Table of Contents



Nine Months Ended June 30, 2005, Compared with Nine Months Ended June 30, 2004
     19




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WeightedGross
    
    Gross% of
    
    Margin
    
    MarginNet
    
    Increase
    
    IncreaseSales
    
    (Decrease)
    
    (Decrease)Domestic die-cast
    
    
    41.1
    %
    
    
    (6.8
    )%
    
    
    (2.8
    )%Domestic apparel and memorabilia
    
    
    47.7
    
    
    
    0.3
    
    
    
    0.2Foreign die-cast
    
    
    13.7
    
    
    
    2.1
    
    
    
    0.3Corporate and other
    
    
    (2.5
    )
    
    
    
    
    
    
    0.6Consolidated Total
    
    
    100.0
    %
    
    
    
    
    
    
    (1.7
    )%
      Liquidity and Capital Resources
  20




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21




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##### Table of Contents



Financial Covenant
    
    Period
    
    Requirement
    
    ActualMinimum tangible net worth
    
    As of June 30, 2005
    
    > $105.2 million
    
    $110.6 millionMinimum fixed charge
coverage ratio
    
    January 1, 2005 
June 30, 2005
    
    > 0.81
    
    0.93Limitation on capital
expenditures
    
    October 1, 2004 to
September 30, 2005
    
    < $35.0 million
    

$18.8  million
    Amount
    
    Rate Per Share
    
    Declaration Date
    
    Record Date
    
    Paid$919
    
    $
    0.05
    
    
    August 19, 2004
    
    September 17, 2004
    
    October 18, 2004$924
    
    $
    0.05
    
    
    November 12, 2004
    
    December 17, 2004
    
    January 5, 2005
  Cautionary Statement Regarding Forward-Looking Statements
   22




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   
 ITEM 4. Controls and Procedures
  23




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
   
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submissions of Matters to a Vote of Security Holders
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 10.1
    
    Change of Control Agreement/Severance Agreement between David M. Riddiford and
Action Performance Companies, Inc. (1)10.2
    
    Change of Control Agreement/Severance Agreement between Melodee L. Volosin and
Action Performance Companies, Inc. (1)10.3
    
    First Amendment to Employment Agreement between Fred W. Wagenhals and Action
Performance Companies, Inc. (1)31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
    
    Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer32.1
    
    Section 1350 Certification of Chief Executive Officer32.2
    
    Section 1350 Certification of Chief Financial Officer99.1
    
    Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance
Statement for Forward-Looking Statements
 
 (1)
    
    Incorporated by reference to the Registrants Form 8-K dated June 2, 2005, as
filed with the Securities and Exchange Commission on June 6, 2005. 24




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SIGNATURES
   Signature
    
    Capacity
    
    Date/s/ Fred W. Wagenhals

Fred W. Wagenhals
    
    Chairman of the Board, President, and
Chief Executive Officer
(Duly Authorized Officer)
    
    August 9, 2005/s/ David M. Riddiford

David M. Riddiford
    
    Chief Financial Officer, Secretary, and Treasurer
(Principal Financial and Accounting Officer)
    
    August 9, 2005
 25