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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 December 31, 2004 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.)
 1480 South Hohokam Drive
Tempe, AZ
85281   (602) 337-3700   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.
Yesþ Noo 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. CLASS
    
    OUTSTANDING AT JANUARY 31, 2005Common Stock, $0.01 par value
    
    18,559,978 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 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. Exhibits and Reports on Form 8-KSIGNATURESEXHIBIT INDEXEX-10.77EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1    Table of Contents  
 PART I- FINANCIAL INFORMATION 
 ITEM 1. Financial Statements 2




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ACTION PERFORMANCE COMPANIES, INC.
Unaudited Condensed Consolidated Balance Sheets
December 31, 2004 and September 30, 2004
(in thousands, except per share data) December 31,
    
    
    September 30,2004
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    12,795
    
    
    $
    12,580Accounts receivable, net
    
    
    43,738
    
    
    
    51,769Inventories
    
    
    53,407
    
    
    
    56,947Prepaid royalties
    
    
    3,678
    
    
    
    2,834Taxes receivable
    
    
    3,174
    
    
    
    2,126Deferred income taxes
    
    
    8,784
    
    
    
    8,766Prepaid expenses and other
    
    
    4,443
    
    
    
    5,920Total current assets
    
    
    130,019
    
    
    
    140,942Long-Term Assets:Property and equipment, net
    
    
    67,571
    
    
    
    64,878Goodwill
    
    
    90,536
    
    
    
    88,653Licenses and other intangibles, net
    
    
    59,213
    
    
    
    56,614Other
    
    
    3,229
    
    
    
    3,196Total long-term assets
    
    
    220,549
    
    
    
    213,341$
    350,568
    
    
    $
    354,283LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    27,091
    
    
    $
    28,778Accrued royalties
    
    
    9,081
    
    
    
    10,702Accrued expenses
    
    
    7,485
    
    
    
    8,757Taxes payable
    
    
    2,612
    
    
    
    1,742Current portion of long-term debt
    
    
    4,041
    
    
    
    4,009Total current liabilities
    
    
    50,310
    
    
    
    53,988Long-Term Liabilities:Long-term debt
    
    
    10,934
    
    
    
    11,882Deferred income taxes and other
    
    
    27,015
    
    
    
    25,277Total long-term liabilities
    
    
    37,949
    
    
    
    37,159Commitments and ContingenciesMinority Interests
    
    
    2,349
    
    
    
    2,509Shareholders Equity:Common stock, $.01 par value: 62,500 shares authorized; 18,731 and
18,560 shares issued
    
    
    187
    
    
    
    186Additional paid-in capital
    
    
    159,802
    
    
    
    158,429Treasury stock, at cost, 190 and 190 shares
    
    
    (3,999
    )
    
    
    (3,999
    )Accumulated other comprehensive income (loss)
    
    
    962
    
    
    
    (1,456
    )Retained earnings
    
    
    103,008
    
    
    
    107,467Total shareholders equity
    
    
    259,960
    
    
    
    260,627$
    350,568
    
    
    $
    354,283
 The accompanying notes are an integral part of these consolidated financial statements. 3




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ACTION PERFORMANCE COMPANIES, INC.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
Three Months Ended December 31, 2004 and 2003
(in thousands, except per share data) 2004
    
    
    2003Net sales
    
    $
    76,054
    
    
    $
    71,207Cost of sales
    
    
    59,602
    
    
    
    54,251Gross profit
    
    
    16,452
    
    
    
    16,956Operating expenses:Selling, general, and administrative
    
    
    22,901
    
    
    
    19,906Amortization of licenses and other intangibles
    
    
    878
    
    
    
    941Total operating expenses
    
    
    23,779
    
    
    
    20,847Loss from operations
    
    
    (7,327
    )
    
    
    (3,891
    )Interest expense
    
    
    (301
    )
    
    
    (431
    )Foreign exchange gains
    
    
    1,652
    
    
    
    829Earnings from joint venture
    
    
    293
    
    
    
    564Other income
    
    
    143
    
    
    
    621Other expense
    
    
    (260
    )
    
    
    (433
    )Loss before income taxes
    
    
    (5,800
    )
    
    
    (2,741
    )Income taxes
    
    
    (2,262
    )
    
    
    (1,036
    )Net loss
    
    
    (3,538
    )
    
    
    (1,705
    )Other comprehensive income
    
    
    2,418
    
    
    
    1,405Comprehensive loss
    
    $
    (1,120
    )
    
    $
    (300
    )Loss Per Common Share:Basic
    
    $
    (0.19
    )
    
    $
    (0.09
    )Diluted
    
    $
    (0.19
    )
    
    $
    (0.09
    )
 The accompanying notes are an integral part of these consolidated financial statements. 4




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ACTION PERFORMANCE COMPANIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
Three Months Ended December 31, 2004 and 2003
(in thousands) 2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (3,538
    )
    
    $
    (1,705
    )Adjustments to reconcile net loss to cash provided by (used in) operations-Depreciation and amortization
    
    
    7,690
    
    
    
    7,566Provision for doubtful accounts
    
    
    2,821
    
    
    
    204Other
    
    
    195
    
    
    
    (57
    )Changes in assets and liabilities, net of businesses acquired and disposed-Accounts receivable
    
    
    5,427
    
    
    
    16,007Accounts payable and accrued expenses
    
    
    (4,534
    )
    
    
    (3,835
    )Taxes payable and receivable, net
    
    
    (405
    )
    
    
    (4,264
    )Inventories
    
    
    3,910
    
    
    
    (8,081
    )Prepaid royalties and accrued royalties
    
    
    (2,528
    )
    
    
    (6,841
    )Other
    
    
    254
    
    
    
    (2,723
    )Net cash provided by (used in) operating activities
    
    
    9,292
    
    
    
    (3,729
    )CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, net
    
    
    (7,114
    )
    
    
    (7,703
    )Acquisitions of businesses and intangibles, net of costs
    
    
    (430
    )
    
    
    (251
    )Other
    
    
    
    
    
    
    (47
    )Net cash used in investing activities
    
    
    (7,544
    )
    
    
    (8,001
    )CASH FLOWS FROM FINANCING ACTIVITIES:Long-term debt repayments
    
    
    (1,340
    )
    
    
    (320
    )Dividends paid - common shareholders
    
    
    (919
    )
    
    
    (915
    )Dividends paid - minority interest shareholders
    
    
    (420
    )
    
    
    (1,003
    )Stock option and other exercise proceeds
    
    
    712
    
    
    
    100Net cash used in financing activities
    
    
    (1,967
    )
    
    
    (2,138
    )Effect of exchange rates on cash and cash equivalents
    
    
    434
    
    
    
    157Net change in cash and cash equivalents
    
    
    215
    
    
    
    (13,711
    )Cash and cash equivalents, beginning of period
    
    
    12,580
    
    
    
    49,462Cash and cash equivalents, end of period
    
    $
    12,795
    
    
    $
    35,751Supplemental Disclosures:Interest paid
    
    $
    242
    
    
    $
    785Income taxes paid (refunded), net
    
    
    (2,371
    )
    
    
    3,830
 The accompanying notes are an integral part of these consolidated financial statements. 5




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ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 INTERIM FINANCIAL REPORTING The accompanying interim condensed consolidated financial statements for Action Performance
Companies, Inc. and subsidiaries have been prepared by management without audit by an independent
registered public accounting firm pursuant to the rules and regulations of the Securities and
Exchange Commission. In our opinion, all normal and recurring adjustments necessary for a fair
statement of financial position and results of operations for the interim periods included herein
have been made. Certain information and note disclosures normally included in the financial
statements prepared in accordance with accounting principles generally accepted in the United
States have been condensed or omitted from these statements pursuant to such rules and regulations.
Accordingly, these financial statements should be read in conjunction with our Form 10-K for the
fiscal year ended September 30, 2004. The results of operations for the interim periods are not
necessarily indicative of the operating results that may be expected for the fiscal year ending
September 30, 2005. Certain prior period amounts have been reclassified to conform to the current year
presentation. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, FASB
issued SFAS No. 123(R), Share-Based Payment. FASB
No. 123(R) revises FASB
Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123) and requires companies to
expense the fair value of employee stock options and other forms of stock-based compensation. We
will adopt SFAS 123(R) effective July 1, 2005. We are currently
evaluating SFAS 123(R) to
determine our transition method and the impact on our financial position, results of operations,
and cash flows. The American Jobs Creation Act of 2004 (the Act) creates a temporary incentive for U.S.
corporations to repatriate accumulated income earned abroad. Beginning in May 2002, U.S. federal
income taxes have been provided on undistributed earnings of German subsidiaries. Accordingly,
this act has no impact on our financial statements. SHAREHOLDERS EQUITY We currently account for stock-based compensation plans under APB No. 25, Accounting for Stock
Issued to Employees and related interpretations, under which no compensation expense has been
recognized, as all options have been granted with an exercise price equal to or exceeding the fair
value of the common stock on the date of grant. Pursuant to SFAS 123, we estimated the fair value
of each option grant as of the date of grant using the Black-Scholes option pricing method using
the following assumptions: Three Months Ended December 31,2004
    
    2003 (a)Volatility
    
    
    57.8
    %
    
    N/ARisk-free interest rate
    
    
    3.1
    %
    
    N/ADividend rate
    
    
    1.0
    %
    
    N/AExpected life of options
    
    3 years
    
    N/A
   Options generally vest ratably over three years. Options granted to independent directors
generally vest immediately upon grant. Had compensation costs been determined consistent with SFAS
123, utilizing the assumptions detailed above and amortizing the resulting fair value of stock
options granted over the respective vesting period of the options, the net loss and per share
amounts would have been the following pro forma amounts (in thousands, except per share data): 6




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Three Months Ended December 31,2004
    
    
    2003Net Loss as reported:
    
    $
    (3,538
    )
    
    $
    (1,705
    )Total stock-based employee compensation expense
determined under fair value method for all
awards, net of related tax effects
    
    
    (787
    )
    
    
    (913
    )Pro Forma net loss
    
    $
    (4,325
    )
    
    $
    (2,618
    )Basic Loss Per Share:As Reported
    
    $
    (0.19
    )
    
    $
    (0.09
    )Pro Forma
    
    $
    (0.23
    )
    
    $
    (0.14
    )Diluted Loss Per Share:As Reported
    
    $
    (0.19
    )
    
    $
    (0.09
    )Pro Forma
    
    $
    (0.23
    )
    
    $
    (0.14
    )
 SEGMENT INFORMATION Reportable segments are based on divisions operating geographically, domestic and abroad, and
specializing in either die-cast or apparel and memorabilia. The domestic die-cast operations are
based in Phoenix, Arizona and Los Angeles, California areas. The domestic apparel and memorabilia
operation is based in Charlotte, North Carolina with a mass-merchant retail distribution center in
Atlanta, Georgia and warehouse and distribution facilities in Charlotte, North Carolina and
Baraboo, Wisconsin. Trackside operations are included in the domestic apparel and memorabilia
segment. The foreign die-cast operation is based in Aachen, Germany. We evaluate performance and allocate resources based on segment operating income (loss). The
accounting policies of the reportable segments are the same as those used in the consolidated
financial statements. Domestic licensing costs and certain management costs are not allocated to
the domestic operating segments and are included in corporate and other. Intangible licenses are
included in corporate and other assets. Each domestic segment is allocated royalty expense based
on the incremental royalty due on that segments sales. Domestic royalty guarantees advanced and
unearned are allocated as an expense of the domestic segments. Financial information for the
reportable segments follows (in thousands): Three Months Ended December 31,Depreciation
    
    
    OperatingExternal
    
    
    Inter-segment
    
    
    and
    
    
    IncomeRevenues
    
    
    Revenues
    
    
    Amortization
    
    
    (Loss)2004:Domestic die-cast
    
    $
    33,617
    
    
    $
    770
    
    
    $
    3,812
    
    
    $
    (1,131
    )Domestic apparel and memorabilia
    
    
    31,310
    
    
    
    18
    
    
    
    694
    
    
    
    (782
    )Foreign die-cast
    
    
    10,333
    
    
    
    
    
    
    
    2,089
    
    
    
    1,663Corporate and other
    
    
    794
    
    
    
    244
    
    
    
    1,095
    
    
    
    (7,490
    )Eliminations
    
    
    
    
    
    
    (1,032
    )
    
    
    
    
    
    
    413Total per consolidated
financial statements
    
    $
    76,054
    
    
    $
    
    
    
    $
    7,690
    
    
    $
    (7,327
    )2003 (c):Domestic die-cast
    
    $
    33,571
    
    
    $
    1,147
    
    
    $
    3,677
    
    
    $
    3,454Domestic apparel and memorabilia
    
    
    27,639
    
    
    
    462
    
    
    
    769
    
    
    
    (1,564
    )Foreign die-cast
    
    
    9,437
    
    
    
    
    
    
    
    1,920
    
    
    
    1,499Corporate and other
    
    
    560
    
    
    
    320
    
    
    
    1,200
    
    
    
    (7,006
    )Eliminations
    
    
    
    
    
    
    (1,929
    )
    
    
    
    
    
    
    (274
    )Total per consolidated
financial statements
    
    $
    71,207
    
    
    $
    
    
    
    $
    7,566
    
    
    $
    (3,891
    )
 7




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Identifiable Assets
    
    
    Goodwill and TrademarksDec. 31,
    
    
    Sept. 30,
    
    
    Dec. 31,
    
    
    Sept. 30,2004
    
    
    2004
    
    
    2004
    
    
    2004Domestic die-cast (a)
    
    $
    115,062
    
    
    $
    114,157
    
    
    $
    49,138
    
    
    $
    45,661Domestic apparel and memorabilia
    
    
    117,343
    
    
    
    125,319
    
    
    
    61,840
    
    
    
    61,840Foreign die-cast
    
    
    67,233
    
    
    
    61,292
    
    
    
    21,320
    
    
    
    19,438Corporate and other (b)
    
    
    59,725
    
    
    
    63,680
    
    
    
    
    
    
    
    Eliminations
    
    
    (8,795
    )
    
    
    (10,165
    )
    
    
    
    
    
    
    Total per consolidated
financial statements
    
    $
    350,568
    
    
    $
    354,283
    
    
    $
    132,298
    
    
    $
    126,939
  (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 $7.5 million in cash at December 31,
2004, and $8.5 million in cash at September 30, 2004.(c)
    Certain prior period amounts have been reclassified to conform to the current year
presentation. EARNINGS PER COMMON SHARE (EPS) Reconciliations of the numerators and denominators in the EPS computations for net loss follow (in
thousands): Three
Months Ended December 31,2004
    
    
    2003NUMERATOR:Basic and diluted  net loss
    
    $
    (3,538
    )
    
    $
    (1,705
    )DENOMINATOR:Basic and diluted  adjusted weighted average shares
    
    
    18,408
    
    
    
    18,281
 The impact of certain options and warrants outstanding for the purchases of 2.1 million and 1.3
million shares of common stock at an average price of $23.52 and $30.65 were not included in the
calculation of diluted EPS for the three months ended December 31, 2004 and 2003, because to do so
would be antidilutive. The options and warrants had exercise prices greater than the average
market price of the common stock for the three months ended December 31, 2004 and 2003, but could
potentially dilute EPS in the future. The impact of outstanding 43/4% convertible subordinated notes
were not included in the calculation of diluted EPS for the three months ended December 31, 2003,
because to do so would have been antidilutive. OFF-BALANCE SHEET ARRANGEMENTS We are not currently a party to any off-balance sheet arrangements and do not anticipate being a
party to any off-balance sheet arrangements in the future. JOINT VENTURE We have an investment in a joint venture, Action-McFarlane LLC. The joint venture distributes
action figurines based on NASCAR driver likenesses. All of the figurines are manufactured by third
parties. Our investment in the 8




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joint venture, which is included in other long-term assets, was $0.9 million at December 31, 2004,
and $0.6 million at September 30, 2004, and earnings on our investment in the joint venture, which
is included in other income, were $0.3 million and $0.6 million for the three months ended December
31, 2004 and 2003. SUPPLEMENTAL CASH FLOW INFORMATION During the quarter ended December 31, 2004, we recorded a $2.5 million allowance for doubtful
accounts to reserve for estimated uncollectible receivables from distributors and recorded a $1.2
million write-down of Jeff Hamilton inventory. COMMITMENTS AND CONTINGENCIES In the ordinary course of business, we are subject to certain lawsuits and asserted and unasserted
claims. We believe that the resolution of any such matters will not have a material adverse effect
on financial position, results of operations, or cash flows. In October 2004, we settled a lawsuit with New Hampshire Speedway, Inc. (NHS), filed in May 2004
against us in the United States District Court for the District of New Hampshire for $0.8 million.
The $0.8 million was accrued as of September 30, 2004 and paid in October 2004. During December 2004, we were served with a class action securities lawsuit entitled The Cornelia
Crowell, GST Trust v. Action Performance Companies, Inc., et al., which was filed in the United
States District Court of New Mexico. The complaint names as defendants our company and certain of
our officers, including a former officer. The complaint alleges that we made false and misleading
statements concerning our financial results and business during the period from July 23, 2003 to
October 22, 2003, resulting in violations of Section 10(b) and 20(a) of the Securities Exchange Act
of 1934. The complaint seeks unspecified monetary damages and equitable relief. We dispute the
claims and intend to defend the lawsuit vigorously. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Current Events We have announced our plans to improve our financial performance. These plans include the
following:  
    Improving the way our die-cast product is marketed and distributed;
    Expanding our traditional retail channels; and
    Controlling expenditures. 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 have decreased planned
capital expenditures;
    Reorganized the departments that handle the product design, approval, and production
process of die-cast; and
    Announced our intent to restructure our wholesale NASCAR die-cast distribution model
from a distributor-based model to a direct-to-retail model. We have restricted credit to
five 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 as
a result of changing distribution models. 9




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Actions taken to control expenditures include:  
    Reduced the workforce at our Tempe headquarters by
approximately 20%;
    Closed the Los Angeles location of Jeff Hamilton Collections and consolidated the
operations. The Jeff Hamilton product line is now distributed through our other divisions;
    Decided not to declare a dividend in the quarter ending
March 31, 2005,
    Established a policy for capital expenditures to limit annual spending to a level below
annual depreciation; and
    Initiated plans to open a sourcing office in mainland China to reduce the cost of
production. We are also evaluating the
profitability of, and synergies among, our various product lines, and
may determine to dispose of one or more of them, or to acquire other
complimentary businesses, as we move forward with our business plan. Overview We are the leading designer and marketer of licensed motorsports products related to NASCAR,
including die-cast scaled replicas of motorsports vehicles, apparel, and memorabilia. We currently
have exclusive license agreements with many of the most recognized names in NASCAR. We also design
and sell products relating to other motorsports, including racing sanctioned by the NHRA, Formula
One, the IRL, IROC, and the World of Outlaws. In Germany, we merchandise Formula One and high-end
auto manufacturer die-cast replica vehicles. We work closely with drivers, team owners, track
operators, and sponsors to design and merchandise our products. Third parties manufacture all of
the replica motorsports vehicles and most apparel and memorabilia, generally utilizing our designs,
tools, and dies. We retain ownership and control over designs and tooling and have close working
relationships with our third-party manufacturers to help assure product quality. We have structured our operations to enable us to achieve higher levels of sales with limited
increases in operating expenses and capital investments. The principal elements of this operating
structure include the following:  
    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 We derive revenue primarily from the sale of our licensed motorsports products. The popularity and
performance of drivers and teams under license, the popularity of motorsports in general and NASCAR
in particular, the general demand for licensed sports merchandise, and our ability to design,
produce, and distribute our products in a timely manner influence the level of our net sales. We distribute our products through a broad range of channels, including a network of wholesale
distributors, leading mass-merchant retailers, mobile trackside stores, QVC, and our collectors
club catalog. We recognize revenue when persuasive evidence of an arrangement exists, title passes
to the customer, the amount is fixed or determinable, and collection is probable. Most distributor
sales are recognized when product is shipped to a distributor because title to the product passes
to the distributors at shipment. Sales to mass-merchant retailers are recognized when title to
product passes to the retailer, either at time of shipment to the retailer or receipt by the
retailer. Under terms of our consignment agreement with QVC, collectors club catalog sales are
recognized when title passes to QVC, which occurs when QVC ships product to the consumer. We
recognize trackside sales when the consumer 10




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purchases product at the point of sale. A portion of the product sold through television
programming is consignment product, for which sales are recognized when title passes to QVC, which
occurs when QVC ships the product to the consumer. Internet and other sales are generally
recognized when delivered to the consumer. Net sales include sales net of estimated sales returns, discounts, advertising, and other
allowances. Advertising allowances are amounts paid primarily to mass-merchant retailers in
connection with promoting and selling our product. These amounts are recorded as a reduction from
sales when revenue is recognized. Cost of Sales Cost of sales includes product cost, shipping and freight forwarding costs paid to third parties,
depreciation of tooling and dies, royalties to third party licensors, product testing and sample
expense, and fees paid to QVC for shipping and handling. We incur costs to screen print or
embroider certain inventory, which are also included in cost of sales, although most of our product
is procured in its finished state. Substantial portions of our die-cast products are manufactured
under an exclusive agreement with Early Light, a third-party manufacturer in China. We obtain
substantially all of our apparel and memorabilia products on a purchase order basis from several
third-party manufacturers and suppliers. Most of the components of our cost of sales are variable in nature. However, certain factors do
affect our gross margin, including the following:  
    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 guarantees. Gross Margin Our gross margins may not be comparable to those of other entities, since some entities include all
handling and warehousing costs in cost of sales and others exclude a portion of such costs from
gross margin, including them instead in line items such as selling, general, and administrative
expenses. Selling, General, and Administrative Expenses Selling, general, and administrative expenses include salaries and benefits, use and occupancy
expenses, creative services costs, advertising and promotion costs, sponsorship costs, and other
general and administrative expenses. Included are the salaries, benefits and other costs of our
procurement, receiving, and warehouse personnel. Selling, general, and administrative expenses
include internal handling costs, incurred to store, move, and prepare our products for shipment.
The majority of these costs are fixed and, as a result, incremental sales volume generally results
in a decline in selling, general, and administrative expenses as a percentage of net sales. 11




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##### Table of Contents



Seasonality Because the auto-racing season is concentrated between the months of February and November, the
second and third calendar quarters of each year (our third and fourth fiscal quarters) are
historically characterized by higher sales. Application of Critical Accounting Policies Our discussion and analysis of financial condition and results of operations are based upon our
financial statements, which have been prepared in accordance with generally accepted accounting
principles in the United States. During preparation of these financial statements, we are required
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to bad debts, inventories, fixed assets,
goodwill and other intangible assets, income taxes, royalties, contingencies, and litigation. We
base our estimates on historical experience and various other assumptions that we believe are
reasonable under the circumstances. The results form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. The following critical accounting policies require us to make significant judgments and estimates
used in the preparation of our financial statements. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of
our customers to make required payments. We determine the adequacy of this allowance by regularly
evaluating individual customer receivables and considering a customers financial condition, credit
history, and current economic conditions. If the financial condition of our customers were to
deteriorate, additional allowances may be required. Our accounts receivable are written-off
against the allowance once the account is deemed to be uncollectible. This typically occurs once
we have exhausted all efforts to collect the account, which includes collection attempts by company
employees and outside collection agencies. Inventory We write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal
to the difference between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual market conditions are less
favorable than those projected, additional inventory write-downs may be required. Royalties Our license agreements generally require payments of royalties to drivers, sponsors, teams, and
other parties. Contracts generally provide for royalties to be calculated as a specified
percentage of sales. Some contracts, however, provide for guaranteed minimum royalty payments.
Royalties payable calculated using the contract percentage rates are recognized as cost of sales
when the related sales are recognized. To the extent we project that royalties payable under a
contract, calculated using the contract percentage rate, will be lower than guaranteed minimums
during the guarantee period, we recognize additional cost of sales over the guarantee period,
generally a calendar year. Guarantees advanced under the license agreements are carried as prepaid
royalties until earned by the third party, or considered to be unrecoverable. We evaluate prepaid
royalties regularly and expense prepaid royalties to cost of sales to the extent projected to be
unrecoverable through sales. Goodwill and Other Intangibles We evaluate goodwill and other intangibles for impairment annually, and when impairment indicators
arise, in accordance with SFAS 142, Goodwill and Other Intangible Assets. For goodwill, we first
compare the fair value of a reporting unit with its carrying amount, including goodwill. If the
carrying amount of a reporting unit exceeds the fair value of a reporting unit, additional tests
would be used to measure the amount of impairment loss, if any. We 12




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use a present value technique to measure reporting unit fair value. If the carrying amount of any
other intangible asset exceeds its fair value, we would recognize an impairment loss for the
difference between fair value and the carrying amount. We have not recognized any impairment
losses to date. If events occur and circumstances change, causing the fair value of a reporting
unit to fall below its carrying amount, impairment losses may be recognized in the future. Deferred Tax Assets We estimate our actual current tax exposure together with the temporary differences that have
resulted from the differing treatment of items dictated by generally accepted accounting principles
versus U.S. and German tax laws. These temporary differences result in deferred tax assets and
liabilities. On an on-going basis, we assess the likelihood that our deferred tax assets will be
recovered from future taxable income. If we were to believe the recovery was less than likely, we
would establish a valuation allowance against the deferred tax asset and charge the amount as an
income tax expense in the period in which such a determination was made. Stock-Based Compensation We currently account for employee stock-based compensation in accordance with Accounting Principles
Board Opinion 25, Accounting for Stock Issued to Employees and related interpretations (APB No.
25). Under APB No. 25, common stock options issued under our plans generally do not result in
compensation expense because the exercise price of the stock options equals the market price of the
underlying stock on the date of grant. Were we required to record compensation expense for these
options, the charge to earnings might be significant (See Shareholders Equity Note). Results of Operations The following table sets forth the percentage of net sales represented by certain expense and
revenue items for the periods ended December 31: Three Months Ended2004
    
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    78.4
    
    
    
    76.2Gross profit
    
    
    21.6
    
    
    
    23.8Selling, general, and administrative expenses
    
    
    30.1
    
    
    
    28.0Amortization of licenses and other intangibles
    
    
    1.2
    
    
    
    1.3Loss from operations
    
    
    (9.7
    )
    
    
    (5.5
    )Interest expense
    
    
    (0.4
    )
    
    
    (0.6
    )Foreign exchange gains
    
    
    2.2
    
    
    
    1.2Earnings from joint venture
    
    
    0.4
    
    
    
    0.8Other income
    
    
    0.2
    
    
    
    0.9Other expense
    
    
    (0.3
    )
    
    
    (0.7
    )Loss before income taxes
    
    
    (7.6
    )
    
    
    (3.9
    )Income taxes
    
    
    3.0
    
    
    
    1.5Net loss
    
    
    (4.6
    )%
    
    
    (2.4
    )%
 13




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##### Table of Contents



The following table sets forth net sales by channel of distribution for the periods ended December
31 (in thousands): Three Months Ended2004
    
    
    2003Domestic Die-cast:Wholesale distribution and promotion
    
    $
    12,308
    
    
    $
    11,831Wholesale to mass-merchant retailers
    
    
    17,538
    
    
    
    17,836Retail through collectors catalog club
    
    
    3,771
    
    
    
    3,904Total domestic die-cast
    
    
    33,617
    
    
    
    33,571Foreign Die-cast  wholesale distribution and promotion
    
    
    10,333
    
    
    
    9,437Total die-cast
    
    
    43,950
    
    
    
    43,008Domestic Apparel and Memorabilia:Wholesale distribution and promotion
    
    
    13,669
    
    
    
    13,253Wholesale to mass-merchant retailers
    
    
    9,022
    
    
    
    8,290Total apparel and memorabilia:
    
    
    22,691
    
    
    
    21,543Domestic Apparel and Memorabilia  Retail at Trackside
    
    
    8,619
    
    
    
    6,096Royalties and Other
    
    
    794
    
    
    
    560Net Sales
    
    $
    76,054
    
    
    $
    71,207
 Three Months Ended December 31, 2004, Compared with Three Months Ended December 31, 2003 Net sales increased $4.8 million, or 6.8%, to $76.1 million for the three months ended December 31,
2004, compared to $71.2 million in the prior year quarter. Domestic die-cast sales increased $0.1 million, or 0.1%, from the prior year quarter while foreign
die-cast sales increased $0.9 million, or 9.5%. The domestic die-cast segment sales increase of
$0.1 million is comprised of a $0.5 million increase in our wholesale distribution and promotion
revenues, offset by a $0.1 million decrease in our die-cast retail collectors catalog club
revenues, and a $0.3 million decrease in domestic die-cast wholesale sales to mass-merchant
retailers. We expect our domestic die-cast wholesale distribution and promotion revenues and
collectors catalog club revenues in 2005 to remain comparable to 2004 as we continue to work to
improve our die-cast distribution model and reduce the number of die-cast SKUs. Domestic die-cast
wholesale sales to mass-merchant retailers consisted of $13.0 million and $4.5 million of Funline
and NASCAR die-cast sales in the first quarter of 2004, compared to $13.2 million and $4.6 million
of Funline and NASCAR die-cast sales in the first quarter of 2003. We
now expect NASCAR die-cast sales to mass-merchant retailers to
increase over 2004 and Funline die-cast
sales to mass-merchant retailers to total at or below 2004 levels, based on recent merchant feedback. The 9.5% increase in foreign
die-cast sales from the prior year first quarter, was primarily the result of the 8.9% change in
the euro-to-U.S. dollar exchange rate between the periods. Domestic apparel and memorabilia segment sales, exclusive of trackside, increased $1.1 million, or
5.3%, to $22.7 million in the quarter ended December 31, 2004, compared to $21.5 million in the
quarter ended December 31, 2003. Trackside sales increased $0.9 million, or 14.1%, after considering the impact of the timing of the
fall Talladega Superspeedway race ($1.7 million of 2005 sales), which occurred in October 2004 and
September 2003. Trackside sales increased year over year, at all but one of the seven races during
the first quarter. The 2.2% decline in gross profit, to 21.6% of net sales in the first quarter of 2005, from 23.8% in
the first quarter of 2004, was impacted by changes in segment gross margins as follows: 14




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Weighted% of
    
    
    Gross
    
    
    GrossNet
    
    
    Margin
    
    
    MarginSales
    
    
    Decline
    
    
    DeclineDomestic die-cast
    
    
    45.7
    %
    
    
    (5.6
    )%
    
    
    (2.5
    )%Domestic apparel and memorabilia
    
    
    41.6
    
    
    
    (2.7
    )
    
    
    (1.1
    )Foreign die-cast
    
    
    13.6
    
    
    
    2.1
    
    
    
    0.3Corporate and other
    
    
    (0.9
    )
    
    
    
    
    
    
    1.1Consolidated Total
    
    
    100.0
    %
    
    
    
    
    
    
    (2.2
    )%
 Domestic die-cast gross margins declined 5.6% as a result of lower gross margins on Funline product
sales. Results included write-downs of one Funline product line to net realizable value in the
first quarter of 2005 and lower margins on other Funline product lines. Domestic apparel and
memorabilia margins declined 2.7% as a result of first quarter write-downs of Jeff Hamilton
inventory of $1.2 million, offset by other margin improvements. The 2.1% increase in foreign
die-cast gross margins was principally a result of lower tooling charges as a percentage of
revenue, in part as a result of changes in the euro-to-dollar exchange rate. Selling, general, and administrative expenses were $22.9 million, or 30.1% of net sales, in the
three months ended December 31, 2004, compared to $19.9 million, or 28.0% of net sales, in the
three months ended December 31, 2003. The increase was $3.0 million, or 15.1%, from the prior year
quarter. Selling, general, and administrative expenses in the first quarter of 2005 included a
$2.5 million provision for doubtful accounts for distributor receivables, a $0.4 million severance
expense for our former Chief Financial Officer compared to the first quarter of 2004, which
included the $0.9 million settlement of litigation with Dover International Speedway. The
remaining net increase in selling, general and administrative expenses was primarily due to
incremental operating costs associated with the increase in trackside sales. Interest expense of $0.3 million in the three months ended December 31, 2004, was $0.1 million
lower than interest expense in the comparable prior year period, as a result of convertible
subordinated note repurchases. Foreign currency gains were $1.7 million for the three months ended December 31, 2004, versus a
foreign currency gain of $0.8 million for the three months ended December 31, 2003. Changes in the
euro-to-U.S. dollar exchange rate resulted in translation gains of $1.7 million and $1.3 million
for the three months ended December 31, 2004 and 2003. These gains resulted from translation of
German advances payable, which are denominated in U.S. dollars. In the three months ended December
31, 2003, these translation gains were offset by a loss of $0.5 million on a forward exchange
contract. The effective tax rate of 39% for the three months ended December 31, 2004 was higher than the
37.8% effective tax rate for the three months ended December 31, 2003, primarily due to the impact
of nondeductible expenses on lower projected pre-tax income and foreign subsidiary income
comprising a larger portion of projected total taxable income in 2005 then 2004. Our foreign
subsidiary is subject to higher tax rates than our domestic operations. Liquidity and Capital Resources Working capital decreased $7.3 million to $79.7 million at December 31, 2004, from $87.0 million at
September 30, 2004. Cash increased $0.2 million to $12.8 million at December 31, 2004, from $12.6
million at September 30. Cash increased as a result of decreases in accounts receivable, net
of allowances ($8.2 million) and decreases in inventories ($3.9 million). The increase in cash was
offset by reductions in cash used for net property and equipment expenditures ($7.1 million),
payments for acquisitions of businesses and intangibles ($0.4 million), dividends to common and
minority interest shareholders ($1.3 million), increases in other current assets, and decreases in
other current liabilities. Days sales outstanding, calculated on quarterly sales, was 52.9 days as of December 31, 2004,
compared to 48.9 days as of September 30, 2004, and 69.8 days as of December 31, 2003. The
increase from September 30, 2004, reflects the larger portions of revenues coming from retail
channels that have longer dating terms and the timing of die-cast shipments. 15




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##### Table of Contents



Inventories at December 31, 2004, decreased $3.5 million from amounts at September 30, 2004. Of
this decrease, $1.5 million was attributable to a reduction of Jeff Hamilton inventory levels and
$1.2 million was attributable to a write-down of Jeff Hamilton inventory to net realizable value.
During the first quarter of 2005, we closed our Jeff Hamilton operations in California. Jeff
Hamilton trademarked product is now distributed through our other divisions. Except for Funline and collectors catalog club die-cast, we generally produce domestic and foreign
die-cast based upon orders received from customers. The timing of receiving orders is directly
related to the timing of the completion of product program approvals and is not necessarily
indicative of product demand or future sales. We produce Funline die-cast for inventory based on
customer-projected orders. We receive Funline customer orders weekly, which are fulfilled in the
following week. We report as backlog orders received from customers, which for Funline, is limited
to the weekly orders. Apparel and memorabilia product, except Trevco product, is generally ordered from stock inventory.
Trevco products are seasonal in nature and orders are received in our second and third fiscal
quarters and shipped in our third and fourth fiscal quarters. Domestic and foreign die-cast backlog, including Funline product, was $42 million and $43 million
at December 31, 2004 and 2003. Apparel and memorabilia backlog was approximately $24 million and
$12 million at December 31, 2004 and 2003. Backlog on any date in a given year is not necessarily
indicative of future sales. Capital expenditures related principally to ongoing investments in tooling were $7.1 million for
the three months ended December 31, 2004, and included $3.4 million applicable to foreign
operations and $2.8 million for Funline capital expenditures. Capital expenditures for 2005 are
expected to total approximately $21 million. During the first quarter of 2005, the results of Funlines operations were sufficient to meet
earn-out targets established in the Funline acquisition agreement. As a result, we issued 40
thousand shares of our common stock with a value of $0.4 million at December 31, 2004 and accrued
$1.7 million as additional consideration payable in cash. The additional consideration increased
the amount recorded for the Funline trademarks at December 31, 2004. On June 30, 2004, we entered into an amended loan and security agreement. The amended agreement
increased available borrowings from $35.0 million to $75.0 million. The agreement consisted of a
$63.3 million, four-year revolving credit facility, which is subject to a borrowing base
calculation, a four-year term loan of $1.7 million (Term Loan A) and a three-year term loan of
$10.0 million (Term Loan B). As the term loans are repaid, the available revolving credit facility
will increase by an equivalent amount, subject to the borrowing base calculation. The agreement
provides for issuance of up to $30.0 million of letters of credit, to the extent not utilized for
borrowings. Outstanding letters of credit totaled $15.3 million at December 31, 2004. Repayment of borrowings under this facility is secured by a first lien on substantially all of our
assets. We are required to meet certain financial tests related to minimum tangible net worth and
minimum fixed charge coverage ratio. We did not meet the agreements required minimum fixed charge coverage ratio of 1.15 for the nine
months ended December 31, 2004, however, the agreement was amended in February 2005 to eliminate
that test. Under the amended agreement, we will be required to meet a minimum fixed charge
coverage ratio for the three months ended March 31, 2005, of 0.80 and a minimum fixed coverage
ratio of 1.50 for the six months ended June 30, 2005 and the nine months ended September 30, 2005.
Based on current projections, we expect to be in compliance with our covenants through December 31,
2005, however, we expect our actual fixed charge coverage ratio to be close to the requirement
throughout that period. 16




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##### Table of Contents



As of December 31, 2004, results of the other covenant calculations were as follows: Financial Covenant
    
    Period
    
    Requirement
    
    ActualMinimum tangible net worth
    
    As of December 31, 2004
    
    > $105.2 million
    
    $108.3 millionLimitation on capital
    
    October 1, 2004 toexpenditures
    
    September 30, 2005
    
    < $35.0 million
    
    $7.1 million
 As amended, until December 31, 2005, our credit facility bears interest at 2.25% or prime plus
0.00%, Term Loan A bears interest at LIBOR plus 2.50% or prime plus 0.50%, and Term Loan B bear
interest at LIBOR plus 3.25% or prime plus 1.00%. After December 31, 2005, the revolving credit
facility bears interest at LIBOR plus 1.75%  2.50% or prime
plus 0.00%  0.25% (5.25% at December
31, 2004), and the term loans bear interest at LIBOR plus 2.00%
 3.50% or prime plus 0.00%  1.25%
(Term Loan A 5.75% and Term Loan B 6.25% at December 31, 2004), depending on our fixed coverage
ratio, as defined. We pay a commitment fee of 0.375% of the average unused revolving credit
facility and a fee of 1.0% of the average undrawn letters of credit. Based on our current forecast and historical results, we believe that we have adequate credit
availability and cash flow from operations to fund our operating needs for the foreseeable future.
We do not currently anticipate a change in our capital structure or the use of off-balance sheet
financing arrangements. In September 2002, we initiated an ongoing quarterly dividend policy with an initial dividend of
$0.03 per share. A summary of dividends paid on common stock after September 30, 2004, follows (in
thousands, except per share data): Amount
    
    Rate Per Share
    
    Declaration Date
    
    Record Date
    
    Paid$919
    
    $
    0.05
    
    
    August 19, 2004
    
    September 17, 2004
    
    October 18, 2004$921
    
    $
    0.05
    
    
    November 12, 2004
    
    December 17, 2004
    
    January 5, 2005
 Under our amended loan and security agreement, we are required to obtain written consent prior to
declaring dividends on our common stock. We do not intend to have a
dividend declared in the quarter ending March 31, 2005. The
evaluation of paying a dividend will be made on a quarter-by-quarter
basis. Cautionary Statement Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements. The words believe,
expect, anticipate, forecast, plan and project and similar expressions identify
forward-looking statements, which speak only as of the date the statement was made. All such
statements are within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements may include, but are not limited to, projections of sales; capital expenditures and
backlog; plans for future operations; financing needs or plans and liquidity; the impact of changes
in interest rates; the impact of changes in currency exchange rates; plans relating to our
products; the expected outcome of legal proceedings against us; the sufficiency of our capital
resources to support our operating strategy; and the impact of new accounting principles, as well
as assumptions relating to the foregoing. Actual events and results may differ materially from those expressed in forward-looking statements
due to a number of factors. Risks identified in Exhibit 99.1 to this Quarterly Report on Form 10-Q
and in our Annual Report on Form 10-K for the year ended September 30, 2004, including those under
the caption Managements Discussion and Analysis of Financial Condition and Results of Operations
describe factors, among others, that could contribute to or cause such differences. These factors
may also affect our business generally and as a result, our stock may fluctuate dramatically. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no significant change in our exposure to market risk since year-end. Our exposure
to market risk is limited to interest rate risk associated with our credit instruments and foreign
currency exchange rate risk associated with operations in Germany. Our debt is comprised of fixed
interest rate and variable interest rate debt. A 100 basis point change in the variable interest
rates (which fluctuate with either LIBOR or prime, at our discretion) would 17




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##### Table of Contents



change our annual interest expense $0.1 million, if our variable rate debt remains at December 31,
2004, levels. The functional currency for our foreign operations is the euro. As such, changes in
exchange rates between the euro and the U.S. dollar could affect our future earnings. An 8% change
in the euro exchange rate would have changed the net income from that operation in the twelve
months ended December 31, 2004 by $0.1 million. During 2004 we used a derivative as part of our risk management strategy related to a portion of
our exposure to currency fluctuations on intercompany advances to our German subsidiary,
denominated in dollars, for which the euro exchange rate gain or loss is included in operations.
These advances totaled $16.4 million at December 31, 2004. In the three months ended December 31,
2004, a 1% change in the euro exchange rate would have resulted in a $0.1 million change in net
income. We had entered into foreign currency forward contracts designed to partially offset the
effect changes in the euro exchange rate have on earnings related to these advances. These forward
contracts did not qualify for hedge accounting and were recorded on the balance sheet at fair
value. Changes in fair value were recorded each period in foreign exchange gains (losses). 
 ITEM 4. CONTROLS AND PROCEDURES We have evaluated, with the participation of our Chief Executive Officer and Chief Financial
Officer, the effectiveness of our disclosure controls and procedures as of December 31, 2004.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have each
concluded that our disclosure controls and procedures are effective to ensure that we record,
process, summarize, and report information required to be disclosed by us in our quarterly reports
filed under the Securities Exchange Act within the time periods specified by the Securities and
Exchange Commissions rules and forms. During the quarterly period covered by this report, there
have not been any changes in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting. 18




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##### Table of Contents



PART II  OTHER INFORMATION 
 ITEM 1. Legal Proceedings In October 2004, we settled a lawsuit with New Hampshire Speedway, Inc. (NHS), filed in May 2004
against us in the United States District Court for the District of New Hampshire for $0.8 million.
The $0.8 million was accrued as of September 30, 2004 and paid in October 2004. During December 2004, we were served with a class action securities lawsuit entitled The Cornelia
Crowell, GST Trust v. Action Performance Companies, Inc., et al., which was filed in the United
States District Court of New Mexico. The complaint names as defendants our Company and certain of
our officers, including a former officer. The complaint alleges that we made false and misleading
statements concerning our financial results and business during the period from July 23, 2003 to
October 22, 2003, resulting in violations of Section 10(b) and 20(a) of the Securities Exchange Act
of 1934. The complaint seeks unspecified monetary damages and equitable relief. We dispute the
claims and intend to defend the lawsuit vigorously. 
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds Effective December 31, 2004, we issued 40 thousand shares of Action Performance common stock in
connection with our previous acquisition of Funline. The issuance of these shares represented
additional consideration as the result of meeting earn-out targets established in the Funline
acquisition agreement. The value of the shares issued was $0.4 million. This transaction was
exempt from registration under Section 4(2) of the Securities Act of 1933. We have filed a
registration statement with the Securities and Exchange Commission for these shares. This
registration statement was filed on January 15, 2004 and became effective on February 3, 2004. 
 ITEM 3. Defaults Upon Senior Securities Not applicable 
 ITEM 4. Submissions of Matters to a Vote of Security Holders Not applicable 
 ITEM 5. Other Information Not applicable 
 ITEM 6. Exhibits and Reports on Form 8-K  (a)
    Exhibits -  10.77
    Second Amendment to Amended and Restated Credit Agreement, dated February 8,
2005, by and among Action Performance Companies, Inc. and certain subsidiaries and
affiliates, as guarantors, and Bank One, NA.31.1
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended31.2
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended32.1
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 19




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##### Table of Contents



99.1
    Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance
Statement for Forward-Looking Statements  (b)
    Reports on Form 8-K - We filed a current report on Form 8-K, dated October 8, 2004, announcing the resignation of
R. David Martin as Chief Financial Officer, Secretary, Treasurer, and Director. We filed a current report on Form 8-K, dated October 12, 2004, announcing the appointment of
David M. Riddiford as Chief Financial Officer, Secretary, Treasurer, and Director. We filed a current report on Form 8-K, dated November 12, 2004, reporting that our board of
directors declared a quarterly dividend of five cents ($0.05) per share of common stock. We filed a current report on Form 8-K, dated November 15, 2004, reporting that we issued a
press release announcing our fourth quarter and twelve months ended September 30, 2004,
results. 20




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACTION PERFORMANCE COMPANIES, INC. Signature
    
    Capacity
    
    Date/s/ Fred W. Wagenhals
    
    Chairman of the Board, President, and
    
    February 9, 2005Chief Executive OfficerFred W. Wagenhals
    
    (Principal Executive Officer)/s/ David M. Riddiford
    
    Chief Financial Officer, Secretary, and Treasurer
    
    February 9, 2005(Principal Financial and Accounting Officer)David M. Riddiford
 21




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##### Table of Contents



EXHIBIT INDEX  10.77
    Second Amendment to Amended and Restated Credit Agreement, dated February 8,
2005, by and among Action Performance Companies, Inc. and certain subsidiaries and
affiliates, as guarantors, and Bank One, NA.31.1
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended31.2
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended32.1
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200299.1
    Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance
Statement for Forward-Looking Statements