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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended March 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. Yes [X] No [  ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ] 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 APRIL 23, 2004Common Stock, $0.01 Par Value
    
    18,333,929 Shares




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TABLE OF CONTENTS  PART I- FINANCIAL INFORMATIONITEM 1. Financial StatementsUnaudited Condensed Consolidated Balance SheetsUnaudited Condensed Consolidated Statements of Operations and Comprehensive IncomeUnaudited Condensed Consolidated Statements of Cash FlowsNOTES TO CONDENSED CONSOLIDATED 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. Changes in 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-KSIGNATURESEX-31.1EX-31.2EX-32.1EX-32.2    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
 March 31,
    
    September 30,2004
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    33,960
    
    
    $
    49,462Accounts receivable, net
    
    
    52,753
    
    
    
    69,890Inventories
    
    
    56,401
    
    
    
    43,232Prepaid royalties
    
    
    7,942
    
    
    
    6,540Taxes receivable
    
    
    2,462
    
    
    
    Deferred income taxes
    
    
    5,294
    
    
    
    5,291Prepaid expenses and other
    
    
    3,676
    
    
    
    3,161Total current assets
    
    
    162,488
    
    
    
    177,576Long-Term AssetsProperty and equipment, net
    
    
    63,456
    
    
    
    62,951Goodwill
    
    
    88,445
    
    
    
    87,448Licenses and other intangibles, net
    
    
    41,075
    
    
    
    44,426Other
    
    
    2,445
    
    
    
    2,357Total long-term assets
    
    
    195,421
    
    
    
    197,182$
    357,909
    
    
    $
    374,758LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    29,525
    
    
    $
    36,734Accrued royalties
    
    
    9,915
    
    
    
    11,762Accrued expenses
    
    
    7,852
    
    
    
    11,764Taxes payable
    
    
    762
    
    
    
    3,156Current portion of long-term debt
    
    
    313
    
    
    
    567Total current liabilities
    
    
    48,367
    
    
    
    63,983Long-Term Liabilities:Long-term debt
    
    
    34,531
    
    
    
    34,425Deferred income taxes and other
    
    
    11,520
    
    
    
    11,816Total long-term liabilities
    
    
    46,051
    
    
    
    46,241Commitments and ContingenciesMinority Interests
    
    
    2,529
    
    
    
    2,941Shareholders Equity:Common stock, $.01 par value, 62,500 shares authorized,
18,524 and 18,464 shares issued
    
    
    185
    
    
    
    185Additional paid-in capital
    
    
    158,104
    
    
    
    157,301Treasury stock, at cost, 190 and 190 shares
    
    
    (3,999
    )
    
    
    (3,999
    )Accumulated other comprehensive loss
    
    
    (1,674
    )
    
    
    (2,488
    )Retained earnings
    
    
    108,346
    
    
    
    110,594Total shareholders equity
    
    
    260,962
    
    
    
    261,593$
    357,909
    
    
    $
    374,758
 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 Income
 Three Months Ended
    
    Six Months Ended2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    83,919
    
    
    $
    91,056
    
    
    $
    155,358
    
    
    $
    176,855Cost of sales
    
    
    59,434
    
    
    
    59,005
    
    
    
    113,685
    
    
    
    114,282Gross profit
    
    
    24,485
    
    
    
    32,051
    
    
    
    41,673
    
    
    
    62,573Operating expenses:Selling, general and administrative
    
    
    20,700
    
    
    
    19,799
    
    
    
    40,838
    
    
    
    37,161Amortization of licenses and other intangibles
    
    
    943
    
    
    
    835
    
    
    
    1,884
    
    
    
    1,735Total operating expenses
    
    
    21,643
    
    
    
    20,634
    
    
    
    42,722
    
    
    
    38,896Income (loss) from operations
    
    
    2,842
    
    
    
    11,417
    
    
    
    (1,049
    )
    
    
    23,677Interest expense
    
    
    (471
    )
    
    
    (610
    )
    
    
    (902
    )
    
    
    (1,189
    )Foreign currency gains and losses
    
    
    (256
    )
    
    
    926
    
    
    
    573
    
    
    
    2,287Earnings from joint venture
    
    
    198
    
    
    
    
    
    
    
    762
    
    
    
    Other income and expenses
    
    
    (242
    )
    
    
    (227
    )
    
    
    (54
    )
    
    
    (462
    )Income (loss) before income taxes
    
    
    2,071
    
    
    
    11,506
    
    
    
    (670
    )
    
    
    24,313Income taxes
    
    
    783
    
    
    
    4,252
    
    
    
    (253
    )
    
    
    9,093Net income (loss)
    
    
    1,288
    
    
    
    7,254
    
    
    
    (417
    )
    
    
    15,220Other comprehensive income (loss)
    
    
    (591
    )
    
    
    191
    
    
    
    814
    
    
    
    974Comprehensive income
    
    $
    697
    
    
    $
    7,445
    
    
    $
    397
    
    
    $
    16,194Earnings (Loss) Per Common Share:Basic
    
    $
    0.07
    
    
    $
    0.41
    
    
    $
    (0.02
    )
    
    $
    0.85Diluted
    
    $
    0.07
    
    
    $
    0.40
    
    
    $
    (0.02
    )
    
    $
    0.83
 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
 Six Months Ended March 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (417
    )
    
    $
    15,220Adjustments to reconcile net income (loss) to cash provided by
operations-Depreciation and amortization
    
    
    14,713
    
    
    
    12,942Stock option tax benefits
    
    
    86
    
    
    
    446Undistributed earnings from joint venture
    
    
    (762
    )
    
    
    Other
    
    
    716
    
    
    
    248Changes in assets and liabilities, net of businesses
acquired and disposed-Accounts receivable, net
    
    
    17,351
    
    
    
    10,561Accounts payable and accrued expenses
    
    
    (6,276
    )
    
    
    (9,932
    )Income taxes receivable and payable
    
    
    (4,934
    )
    
    
    949Inventories
    
    
    (12,144
    )
    
    
    (2,496
    )Prepaid royalties and accrued royalties
    
    
    (3,320
    )
    
    
    (6,396
    )Other
    
    
    (2,080
    )
    
    
    (5,046
    )Net cash provided by operating activities
    
    
    2,933
    
    
    
    16,496CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures, net
    
    
    (13,443
    )
    
    
    (20,307
    )Acquisition of businesses and intangibles, net of costs
    
    
    (2,439
    )
    
    
    (603
    )Other
    
    
    503
    
    
    
    Net cash used in investing activities
    
    
    (15,379
    )
    
    
    (20,910
    )CASH FLOWS FROM FINANCING ACTIVITIES:Long-term debt borrowings  German mortgage
    
    
    
    
    
    
    3,001Long-term debt repayments
    
    
    (403
    )
    
    
    (422
    )Common stock purchases for treasury
    
    
    
    
    
    
    (2,024
    )Dividends
paid - common shareholders
    
    
    (1,829
    )
    
    
    (1,070
    )Dividends
paid - minority interest shareholders
    
    
    (1,149
    )
    
    
    (730
    )Stock option and other exercise proceeds
    
    
    145
    
    
    
    394Net cash used in financing activities
    
    
    (3,236
    )
    
    
    (851
    )Effect of exchange rates on cash and cash equivalents
    
    
    180
    
    
    
    477Net change in cash and cash equivalents
    
    
    (15,502
    )
    
    
    (4,788
    )Cash and cash equivalents, beginning of period
    
    
    49,462
    
    
    
    69,585Cash and cash equivalents, end of period
    
    $
    33,960
    
    
    $
    64,797Supplemental Disclosures:Interest paid
    
    $
    861
    
    
    $
    1,078Income taxes paid, net
    
    
    4,225
    
    
    
    8,260
 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
MARCH 31, 2004
 INTERIM FINANCIAL REPORTING The accompanying interim condensed consolidated financial statements for Action
Performance Companies, Inc. and subsidiaries have been prepared without audit
by independent auditors 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, 2003.
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, 2004. Certain prior period amounts have been reclassified to conform to the current
year presentation. SHAREHOLDERS EQUITY We 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. 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 No. 123, Accounting
for Stock-Based Compensation (SFAS 123), utilizing the assumptions detailed
below and amortizing the resulting fair value of stock options granted over the
respective vesting period of the options, the net income (loss) and per share amounts
would have been the following pro forma amounts for the periods ended March 31
(in thousands, except per share data): Three Months Ended
    
    Six Months Ended2004
    
    2003
    
    2004
    
    2003Net Income (Loss):As Reported
    
    $
    1,288
    
    
    $
    7,254
    
    
    $
    (417
    )
    
    $
    15,220Pro Forma
    
    $
    258
    
    
    $
    6,351
    
    
    $
    (2,360
    )
    
    $
    13,391Basic Earnings (Loss) Per Share:As Reported
    
    $
    0.07
    
    
    $
    0.41
    
    
    $
    (0.02
    )
    
    $
    0.85Pro Forma
    
    $
    0.01
    
    
    $
    0.36
    
    
    $
    (0.11
    )
    
    $
    0.75Diluted Earnings (Loss) Per Share:As Reported
    
    $
    0.07
    
    
    $
    0.40
    
    
    $
    (0.02
    )
    
    $
    0.83Pro Forma
    
    $
    0.01
    
    
    $
    0.35
    
    
    $
    (0.11
    )
    
    $
    0.73
 For SFAS 123, we estimated the fair value of each option grant as of the date
of grant using the Black-Scholes option pricing method with the following
assumptions for the periods ended March 31: Three Months Ended
    
    Six Months Ended2004
    
    2003
    
    2004
    
    2003Volatility
    
    
    40.2
    %
    
    
    56.1
    %
    
    
    40.2
    %
    
    
    56.3
    %Risk-free interest rate
    
    
    2.7
    %
    
    
    2.1
    %
    
    
    2.7
    %
    
    
    2.1
    %Dividend rate
    
    
    1.0
    %
    
    
    0.7
    %
    
    
    1.0
    %
    
    
    0.7
    %Expected life of options
    
    3 years
    
    3 years
    
    3 years
    
    3 years
 6




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RECENT ACCOUNTING PRONOUNCEMENTS In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51 (FIN 46). In December
2003, FASB issued a revised interpretation of FIN 46 (FIN 46-R), which
supercedes FIN 46 and clarifies and expands current accounting guidance for
variable interest entities (VIEs). Adoption of FIN 46 and FIN 46-R had no
effect on our financial position, results of operations, or cash flows. We
have interests in unconsolidated partnerships, which remain unconsolidated
under FIN No. 46. 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 the Phoenix, Arizona and Los
Angeles, California areas. The domestic apparel and memorabilia operation is
based in Charlotte, North Carolina with a mass-market retail distribution
center in Atlanta, Georgia and warehouse and distribution facilities in
Charlotte, North Carolina, Baraboo, Wisconsin and Los Angeles, California.
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 March 31,Depreciation
    
    OperatingExternal
    
    Inter-segment
    
    and
    
    IncomeRevenues
    
    Revenues
    
    Amortization
    
    (Loss)2004:Domestic die-cast
    
    $
    30,036
    
    
    $
    1,909
    
    
    $
    3,129
    
    
    $
    3,083Domestic apparel and memorabilia
    
    
    43,872
    
    
    
    153
    
    
    
    751
    
    
    
    4,199Foreign die-cast
    
    
    9,000
    
    
    
    
    
    
    
    2,122
    
    
    
    1,203Corporate and other
    
    
    1,011
    
    
    
    468
    
    
    
    1,145
    
    
    
    (5,476
    )Eliminations
    
    
    
    
    
    
    (2,530
    )
    
    
    
    
    
    
    (167
    )Total per consolidated
financial statements
    
    $
    83,919
    
    
    $
    
    
    
    $
    7,147
    
    
    $
    2,8422003:Domestic die-cast
    
    $
    34,656
    
    
    $
    2,639
    
    
    $
    2,834
    
    
    $
    9,590Domestic apparel and memorabilia
    
    
    47,279
    
    
    
    182
    
    
    
    820
    
    
    
    7,391Foreign die-cast
    
    
    8,149
    
    
    
    
    
    
    
    1,655
    
    
    
    1,532Corporate and other
    
    
    972
    
    
    
    533
    
    
    
    1,384
    
    
    
    (6,406
    )Eliminations
    
    
    
    
    
    
    (3,354
    )
    
    
    
    
    
    
    (690
    )Total per consolidated
financial statements
    
    $
    91,056
    
    
    $
    
    
    
    $
    6,693
    
    
    $
    11,417
 7




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Six Months Ended
March 31,Inter-
    
    Depreciation
    
    OperatingExternal
    

    segment
    
    and
    
    IncomeRevenues
    

    Revenues
    
    Amortization
    
    (Loss)2004:Domestic die-cast
    
    $
    63,661
    
    
    $
    3,056
    
    
    $
    6,806
    
    
    $
    6,537Domestic apparel and memorabilia
    
    
    71,689
    
    
    
    615
    
    
    
    1,520
    
    
    
    2,635Foreign die-cast
    
    
    18,437
    
    
    
    
    
    
    
    4,042
    
    
    
    2,702Corporate and other
    
    
    1,571
    
    
    
    788
    
    
    
    2,345
    
    
    
    (12,482
    )Eliminations
    
    
    
    
    
    
    (4,459
    )
    
    
    
    
    
    
    (441
    )Total per consolidated
financial statements
    
    $
    155,358
    
    
    $
    
    
    
    $
    14,713
    
    
    $
    (1,049
    )2003:Domestic die-cast
    
    $
    75,064
    
    
    $
    4,709
    
    
    $
    5,288
    
    
    $
    22,002Domestic apparel and memorabilia
    
    
    82,919
    
    
    
    182
    
    
    
    1,690
    
    
    
    11,793Foreign die-cast
    
    
    17,301
    
    
    
    
    
    
    
    3,122
    
    
    
    3,170Corporate and other
    
    
    1,571
    
    
    
    1,052
    
    
    
    2,842
    
    
    
    (12,569
    )Eliminations
    
    
    
    
    
    
    (5,943
    )
    
    
    
    
    
    
    (719
    )Total per consolidated
financial statements
    
    $
    176,855
    
    
    $
    
    
    
    $
    12,942
    
    
    $
    23,677
 Identifiable Assets
    
    Goodwill and TrademarksMarch 31,
    
    Sept. 30,
    
    March 31,
    
    Sept. 30,2004
    
    2003
    
    2004
    
    2003Domestic die-cast (a)
    
    $
    96,979
    
    
    $
    98,847
    
    
    $
    33,460
    
    
    $
    33,953Domestic apparel and memorabilia (b)
    
    
    129,213
    
    
    
    131,845
    
    
    
    61,840
    
    
    
    62,840Foreign die-cast
    
    
    58,130
    
    
    
    58,619
    
    
    
    19,229
    
    
    
    18,232Corporate and other (c)
    
    
    81,979
    
    
    
    93,387
    
    
    
    
    
    
    
    Eliminations
    
    
    (8,392
    )
    
    
    (7,940
    )
    
    
    
    
    
    
    Total per consolidated
financial statements
    
    $
    357,909
    
    
    $
    374,758
    
    
    $
    114,529
    
    
    $
    115,025
  (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 sales to Hasbro, quarterly, through May 2006.
The additional consideration is added to the cost of the trademark
quarterly. During fiscal 2004, $1.7 million was accrued as additional
consideration payable under the earn-out provisions of the Funline
acquisition agreement. The amount recorded for the Funline trademarks,
included in the domestic die-cast segment, was increased by the amount
of the additional consideration. In addition, during the first quarter
of fiscal 2004, a revision of the preliminary purchase price allocation
for the initial consideration for Funline resulted in a $3.6 million
reduction in the amount allocated to the Funline trademarks.(b)
    
    During the second quarter of fiscal 2004, the Jeff Hamilton
trademark was decreased by $1.0 million when an accrual for expected
contingent consideration was reversed.(c)
    
    Corporate and other identifiable assets includes $30.3 million in
cash and cash equivalents at March 31, 2004, and $45.4 million in cash
and cash equivalents at September 30, 2003. 8




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EARNINGS PER COMMON SHARE (EPS) Reconciliations of the numerators and denominators in the EPS computations for
net income (loss) for the periods ended March 31 follows (in thousands): Three Months Ended
    
    Six Months Ended2004
    
    2003
    
    2004
    
    2003NUMERATOR:Basic  net income (loss)
    
    $
    1,288
    
    
    $
    7,254
    
    
    $
    (417
    )
    
    $
    15,220Effect of dilutive 43/4% convertible subordinated
notes, tax effected interest
    
    
    
    
    
    
    324
    
    
    
    
    
    
    
    643Diluted  adjusted net income (loss) before assumed
conversions
    
    $
    1,288
    
    
    $
    7,578
    
    
    $
    (417
    )
    
    $
    15,863DENOMINATOR:Basic  weighted average shares
    
    
    18,327
    
    
    
    17,847
    
    
    
    18,304
    
    
    
    17,819Effect of dilutive stock options and warrants
    
    
    275
    
    
    
    343
    
    
    
    
    
    
    
    382Effect of dilutive 43/4% convertible subordinated notes
    
    
    
    
    
    
    808
    
    
    
    
    
    
    
    808Diluted  adjusted weighted average shares
and assumed conversion of 43/4%
convertible subordinated notes
    
    
    18,602
    
    
    
    18,998
    
    
    
    18,304
    
    
    
    19,009
 The impact of options and warrants outstanding for the purchase of 2.0 million
and 1.4 million shares of common stock, at an average price of $25.93 and
$28.79, were not included in the calculation of diluted EPS for the three
months ended March 31, 2004 and 2003, because to do so would be antidilutive.
The impact of options and warrants outstanding for the purchase of 1.4 million
and 1.3 million shares of common stock, at an average price of $29.31 and
$30.09 were not included in the calculation of diluted EPS for the six months
ended March 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 and six months ended March 31, 2004 and 2003,
but could potentially dilute EPS in the future. The impacts of outstanding
43/4% convertible
subordinated notes were not included in the calculation of
diluted EPS for the three and six months ended March 31, 2004 because to do so
also would be antidilutive. The notes could potentially dilute EPS in the
future. 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. On April 26, 2004, we filed a complaint for declaratory judgment in the state of
North Carolina, county of Cabarrus against New Hampshire Speedway, Inc. (NHS)
to settle a dispute regarding trackside payments between the parties, and
requesting that the court rule as a matter of law that NHS be precluded from
asserting any claims against us. Subsequently, on May 5, 2004,
Action was served with a lawsuit filed by NHS in the U.S. District Court for the District of New
Hampshire claiming we underpaid certain trackside expenses. We intend to seek
a stay or dismissal on the New Hampshire action and resolve whatever dispute
may still exist in the North Carolina case. We do not believe that the
resolution of this matter will have a material adverse effect on our
consolidated financial position or results of operations. In December 2003, we settled a lawsuit, with Dover International Speedway,
filed in October 2003 against us in the U.S. District Court for the District of
Delaware for $0.9 million. 9




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 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 service higher levels of
sales with limited increases in operating expenses and capital investments.
The principal elements of this operating structure include the following:  
    
    Our exclusive licenses allow us to exert a high degree of control over product pricing.
    
    Manufacturing costs are largely fixed due to outsourcing under fixed-price contracts.
    
    Royalties are paid generally as a percentage of sales.
    
    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-market 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 fee 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 distributor at shipment. Sales to
mass-market 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 QVC ships product to the consumer. We
recognize trackside sales when the consumer 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 QVC ships the product
to the consumer. Internet and other sales are generally recognized when
delivered to the consumer. 10




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##### Table of Contents



Cost of Sales Cost of sales consists primarily of the cost of products procured from
third-party manufacturers, royalty payments to licensors, depreciation of
tooling and dies, and freight charges. 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, and
    
    additional charges related to lower than minimum order quantities
and cancellation of specific purchase orders. Selling, General, and Administrative Expenses Selling, general, and administrative expenses consist primarily of employee
compensation, advertising and promotion, rent and other facility costs, and
depreciation and amortization. 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. 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. 11




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##### Table of Contents



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 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. 12




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##### Table of Contents



Stock-Based Compensation We 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). 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 total revenue represented by
certain expense and revenue items for the periods ended March 31: Three Months Ended
    
    Six Months Ended2004
    
    2003
    
    2004
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    70.8
    
    
    
    64.8
    
    
    
    73.2
    
    
    
    64.6Gross profit
    
    
    29.2
    
    
    
    35.2
    
    
    
    26.8
    
    
    
    35.4Selling, general and administrative
    
    
    (24.7
    )
    
    
    (21.7
    )
    
    
    (26.3
    )
    
    
    (21.0
    )Amortization of licenses and other
intangibles
    
    
    (1.1
    )
    
    
    (0.9
    )
    
    
    (1.2
    )
    
    
    (1.0
    )Income (loss) from operations
    
    
    3.4
    
    
    
    12.6
    
    
    
    (0.7
    )
    
    
    13.4Interest expense
    
    
    (0.6
    )
    
    
    (0.7
    )
    
    
    (0.6
    )
    
    
    (0.7
    )Foreign currency gains and losses
    
    
    (0.3
    )
    
    
    1.0
    
    
    
    0.4
    
    
    
    1.3Earnings from joint venture
    
    
    0.2
    
    
    
    
    
    
    
    0.5
    
    
    
    Other income and expenses
    
    
    (0.3
    )
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.3
    )Income (loss) before income taxes
    
    
    2.4
    
    
    
    12.7
    
    
    
    (0.4
    )
    
    
    13.7Income taxes
    
    
    0.9
    
    
    
    4.7
    
    
    
    (0.1
    )
    
    
    5.1Net income (loss)
    
    
    1.5
    
    
    
    8.0
    
    
    
    (0.3
    )
    
    
    8.6
 The following table sets forth net sales by channel of distribution and net
sales from the operations of acquired businesses for the periods ended March 31
(in thousands): Three Months Ended
    
    Six Months Ended2004
    
    2003
    
    2004
    
    2003Domestic Die-cast:Wholesale distribution and promotion
    
    $
    12,120
    
    
    $
    24,353
    
    
    $
    24,005
    
    
    $
    45,333Wholesale to mass-merchant retailers
    
    
    13,771
    
    
    
    5,942
    
    
    
    31,607
    
    
    
    19,147Retail through collectors catalog club
    
    
    4,145
    
    
    
    4,361
    
    
    
    8,049
    
    
    
    10,584Foreign Die-cast  wholesale distribution and
promotion
    
    
    9,000
    
    
    
    8,149
    
    
    
    18,437
    
    
    
    17,301Total die-cast
    
    
    39,036
    
    
    
    42,805
    
    
    
    82,098
    
    
    
    92,365Domestic Apparel and Memorabilia:Wholesale distribution and promotion
    
    
    21,430
    
    
    
    21,833
    
    
    
    34,683
    
    
    
    38,452Wholesale to mass-merchant retailers
    
    
    11,616
    
    
    
    11,455
    
    
    
    20,084
    
    
    
    24,040Total apparel and memorabilia
    
    
    33,046
    
    
    
    33,288
    
    
    
    54,767
    
    
    
    62,492Retail at Trackside
    
    
    10,826
    
    
    
    13,991
    
    
    
    16,922
    
    
    
    20,427Royalties and Other
    
    
    1,011
    
    
    
    972
    
    
    
    1,571
    
    
    
    1,571Net Sales
    
    $
    83,919
    
    
    $
    91,056
    
    
    $
    155,358
    
    
    $
    176,855Net Sales from Businesses Acquired in Fiscal 2003
    
    $
    10,594
    
    
    $
    
    
    
    $
    23,784
    
    
    $
    
 13




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Three Months Ended March 31, 2004, Compared with Three Months Ended March 31, 2003 Net sales decreased to $83.9 million in the quarter ended March 31, 2004, from
$91.1 million in the prior year quarter. Excluding $10.6 million in revenues
from Funline operations, acquired in September 2003, net sales declined $17.7
million, or 19.5%, from the prior year quarter. Domestic die-cast sales,
excluding the $10.6 million Funline revenues, decreased $15.2 million, or
43.9%, from the prior year quarter. Foreign die-cast sales increased $0.9
million, or 10.4%, from the prior quarter. The decrease in domestic die-cast
sales resulted, in part, from timing issues surrounding the finalization of
sponsor relationships and promotional strategies, compounded by cautious orders
by both wholesale distributors and mass retailers for motorsports die-cast.
These factors led to reduced die-cast order quantities for individual programs
and delayed our ability to produce and ship motorsports die-cast. Domestic
apparel and memorabilia segment sales, exclusive of trackside, decreased $0.2
million, or 0.7%, from the prior year quarter. Trackside sales decreased $3.2
million in the second quarter compared to the prior year quarter, to $10.8
million, primarily because the Texas race ($3.0 million revenue) occurred in
our third quarter in 2004 rather than our second quarter as in 2003. Gross profit was
29.2% of net sales in the second quarter of 2004, compared to 35.2% in the 2003 second quarter.
The decline reflected
the effects of product mix in which our lower margin products represented a
higher percentage of total revenues, unanticipated charges, the impact of ratable amortization of
annual tooling depreciation, which will reduce the margins in quarters of lower
revenues, and lower margins from our NASCAR die-cast and stylized die-cast
businesses. Selling, general, and administrative expenses were $20.7 million, or 24.7% of
sales, in the quarter ended March 31, 2004, compared to $19.8 million, or 21.7%
of sales, in the prior year quarter. Excluding the operating expenses of
Funline, acquired in September 2003, expenses in the 2004 second quarter
decreased $0.5 million, or 2.5%, from the prior year second quarter. Interest expense of $0.5 million for the three months ended March 31, 2004, was
$0.1 million lower than the prior year period, primarily as a result of
convertible subordinated note repurchases after March 31, 2003. Foreign currency losses were $0.3 million in the three months ended March 31,
2004, versus a foreign currency gain of $0.9 million in the prior year quarter.
Changes in the euro-to-U.S. dollar exchange rate resulted in $0.4 million in
translation losses in the 2004 second quarter compared to $0.9 million in
translation gains in the prior year quarter. These gains and losses resulted
from translation of German advances payable, which are denominated in U.S.
dollars. In 2004, these translation losses were offset by a gain of $0.1
million on a forward exchange contract. The effective tax rate of 37.8% in the second fiscal quarter reflects current
expectations for the effective tax rate for fiscal 2004 and is approximately
the same effective tax rate for the prior year quarter. Six Months Ended March 31, 2004, Compared with Six Months Ended March 31, 2003 Net sales decreased to $155.4 million in the six months ended March 31, 2004,
from $176.9 million in the prior year period. Excluding $23.8 million in
revenues from Funline operations, acquired in September 2003, net sales in the
six months declined $45.3 million, or 25.6%, from the prior year period.
Domestic die-cast sales, excluding the $23.8 million Funline revenues,
decreased $35.2 million, or 46.9%, from the prior year period while foreign
die-cast sales increased $1.1 million, or 6.6%, from the prior period. The
decrease in domestic die-cast sales resulted, in part, from timing issues
surrounding the finalization of sponsor relationships and promotional
strategies, compounded by cautious orders by both wholesale distributors and
mass retailers for motorsports die-cast. These factors led to reduced die-cast
order quantities for individual programs and delayed our ability to produce and
ship motorsports die-cast. Domestic apparel and memorabilia segment sales,
exclusive of trackside, decreased $7.7 million, or 12.4%, in the 2004 first
half compared to the 2003 first half. Apparel and memorabilia revenues were
down due to reduced mass retail apparel orders, and reduced wholesale apparel
and Jeff Hamilton Collection jacket demand. Trackside sales decreased $3.5
million in the first six months of 2004 to $16.9 million, primarily because the
Texas race ($3.0 million revenue) occurred in our third quarter in 2004 rather
than our second quarter as in 2003. 14




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##### Table of Contents



Gross profit declined to 27.9% of sales in the six months ended March 31, 2004,
excluding a $1 million charge to increase estimated royalty reserves applicable
to calendar year 2003 and a $0.6 million write-off of Pontiac NASCAR tooling
due to the withdrawal of Pontiac from NASCAR, compared to 35.4% in the
comparable fiscal 2003 period. The decline reflected the effects of product
mix in which our lower margin products represented a higher than normal
percentage of total revenues, lower margins from our NASCAR die-cast and
stylized die-cast businesses and the impact of ratable amortization of annual
tooling depreciation, which will reduce the margins in periods of lower
revenues. Selling, general, and administrative expenses were $40.8 million, or 26.3% of
sales, in the six months ended March 31, 2004, compared to $37.2 million, or
21.0% of sales, in the prior year period. Selling, general, and administrative
expenses included the $0.9 million settlement of litigation with Dover
International Speedway in the first quarter of 2004. Excluding this settlement
charge and the operating expenses of Funline, acquired in September 2003,
expenses in the first six months of 2004 were $37.1 million, which was
comparable to the prior year period. Interest expense of $0.9 million for the six months ended March 31, 2004, was
$0.3 million lower than the prior year period, primarily as a result of the
convertible subordinated note repurchases after March 31, 2003. Foreign currency gains were $0.6 million in the six months ended March 31,
2004, versus a foreign currency gain of $2.3 million in the prior year six
months. Changes in the euro-to-U.S. dollar exchange rate resulted in
translation gains of $0.9 million in the 2004 six months and $2.2 million in
the 2003 six months. These gains resulted from translation of German advances
payable, which are denominated in U.S. dollars. In 2004, these translation
gains were offset by losses of $0.3 million on a forward exchange contracts. The effective tax rate of 37.8% in the six months ended March 31, 2004,
reflects current expectations for the effective tax rate for fiscal 2004 and is
approximately the same effective tax rate for the prior year period. Liquidity and Capital Resources Working capital increased $0.5 million to $114.1 million at March 31, 2004,
from $113.6 million at September 30, 2003. Cash decreased $15.5 million to
$34.0 million at March 31, 2004, from $49.5 million at September 30, 2003.
Cash increased as a result of decreases in accounts receivable ($17.4 million).
This increase in cash was offset by reductions in cash for net property and
equipment expenditures ($13.4 million), payments for acquisitions of businesses
and intangibles ($2.4 million), increases in inventory ($12.1 million),
dividends to common and minority interest shareholders ($3.0 million),
increases in other current assets, and decreases in other current liabilities. Days sales outstanding, calculated on quarterly sales, were 57.2 days as of
March 31, 2004, compared to 60.6 days as of September 30, 2003, and 50.6 days
at March 31, 2003. The increase in DSOs from March 31, 2003, reflects the
larger portion of revenues coming from retail channels that have longer dating
terms and the timing of die-cast shipments. Inventories at March 31, 2004, increased $13.2 million over amounts at
September 30, 2003. Of this increase, $4.5 million was attributable to Funline
due to inventory requirements for the mass retailers, $1.2 million was due to
in-transit inventories, and a $2.9 million increase in Jeff Hamilton Collection
jacket inventories. Except for Funline and collectors 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 record 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 inventory. Trevco is a seasonal business in which orders are received in
our second and third fiscal quarters and shipped in our third and fourth fiscal
quarters. 15




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##### Table of Contents



Domestic and foreign die-cast, including Funline product, backlog was $71
million and $67 million at March 31, 2004 and 2003. Apparel and memorabilia
backlog was $18 million and $19 million at March 31, 2004 and 2003. Backlog on
any date in a given year is not necessarily indicative of future sales. As of
March 31, 2004, 43/4%
convertible subordinated notes with a face value
of $29.9 million remained outstanding. The subordinated notes are convertible,
at the option of the holders, into shares of common stock at the initial
conversion price of $48.20 per share, subject to adjustments in certain events.
Interest on notes is payable semi-annually on April 1 and October 1 of each
year. The notes mature on April 1, 2005. The notes are general unsecured
obligations of our company, subordinated in right of payment to all existing
and future senior indebtedness, as defined in the notes. The indenture
governing the notes does not limit or prohibit our company or our subsidiaries
from incurring additional debt, including senior indebtedness. We have the
option to redeem the notes in whole or in part at any time, at redemption
prices set forth in the indenture governing the notes. Upon the occurrence of
a change in control or a termination of trading, as defined in the
indenture, the holders of the subordinated notes will have the right to require
us to repurchase all or any part of such holders notes at 100% of their
principal amount, plus accrued and unpaid interest. Capital expenditures related principally to ongoing investments in tooling and
building additions in Aachen, Germany, $13.4 million for the six months ended
March 31, 2004, and included $3.8 million applicable to foreign operations and
$4.1 million for Funline capital expenditures, which included $1.6 million of
tooling existing at the acquisition date that was acquired from one of
Funlines contract manufacturers. Capital expenditures for 2004 are expected
to total between $20 million to $24 million. Under our loan and security agreement with Bank One, we are required to meet
certain financial tests, principally related to debt coverage, tangible net
worth, and funded indebtedness to EBIDA (earnings before interest,
depreciation, and amortization). We were in compliance with those covenants at
March 31, 2004. We have never borrowed under the agreement, originally dated
September 2000. Outstanding letters of credit totaled $2.2 million at March
31, 2004. Cash
requirements over the next twelve months include the requirement to
repay the $29.9 million of
43/4%
convertible subordinated notes due April 1, 2005. We believe that available cash, the
loan and security agreement, cash generated
from operations, and access to debt markets will be adequate to fund our
capital requirements for this purpose and the foreseeable future. During the first quarter of 2004, the results of Funlines operations were
sufficient to meet earn-out targets established in the Funline acquisition
agreement. As a result, we issued 28 thousand shares of our common stock with
a value of $0.5 million in the first quarter of 2004 and paid $1.2 million as
additional consideration in the second quarter. The additional consideration
increased the amount recorded for the Funline trademarks. In July 2003, the Board of Directors approved a one-year program under which we
may purchase up to 1.0 million shares of our common stock in the open market or
in privately negotiated transactions. A summary of dividends paid on common stock since September 30, 2003, follows
(in thousands, except per share data): Amount
    
    Rate Per Share
    
    Declaration Date
    
    Record Date
    
    Paid$914
    
    $
    0.05
    
    
    September 22, 2003
    
    September 26, 2003
    
    October 13, 2003$915
    
    $
    0.05
    
    
    December 10, 2003
    
    December 19, 2003
    
    January 12, 2004$917
    
    $
    0.05
    
    
    March 5, 2004
    
    March 19, 2004
    
    April 12, 2004
 Cautionary Statement Regarding Forward-Looking Statements This report contains forward-looking statements, including statements regarding
business strategies, business, and the industry in which we operate. These
forward-looking statements are based primarily on our expectations and are
subject to a number of risks and uncertainties, some of which are beyond our
control. Actual results could differ materially from the forward-looking
statements as a result of numerous factors, including those set forth in our
Form 10-K for the year ended September 30, 2003, as filed with the Securities
and Exchange Commission. 16




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no significant change in our exposure to market risk since
year-end. The risk is limited to interest rate risk associated with our credit
instruments and foreign currency exchange rate risk associated with operations
in Germany. The functional currency for our foreign operation is the euro. As such,
changes in exchange rates between the euro and the U.S. dollar could adversely
affect our future earnings. Given the level of income we currently derive from
our foreign operations, we consider this exposure to be minimal. We currently use 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 $18.3
million at March 31, 2004. We have 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 do
not qualify for hedge accounting and is recorded on the balance sheet at fair
value. Changes in fair value are recorded each period in foreign currency
gains and losses. At March 31, 2004, we were party to a forward with a notional value of 5.0
million euros ($6.2 million as of March 31, 2004), maturing in May 2004, which
remained unsettled. The notional amount does not quantify risk or represent
our liability, but is used in calculation of cash settlements under the
contract. As of March 31, 2004, $0.4 million of net unrealized losses on the
contract were accrued on this forward. We realized $0.2 million of losses in
May 2004 on a contract, which settled at maturity. We are exposed to credit risk on this contract in the event of non-performance
by the counterparty. However, the counterparty to this transaction is a major
financial institution we deem credit worthy. We do not anticipate
non-performance. 
 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 March 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 controls over financial reporting that have materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. 17




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PART II  OTHER INFORMATION 
 ITEM 1. Legal Proceedings Not applicable 
 ITEM 2. Changes in Securities and Use of Proceeds Not applicable 
 ITEM 3. Defaults Upon Senior Securities Not applicable 
 ITEM 4. Submissions of Matters to a Vote of Security Holders The annual meeting of shareholders was held on March 5, 2004. The following
nominees were elected to the board of directors to serve as directors until
their successors are elected and qualified: Fred W. Wagenhals, R. David Martin,
Melodee L. Volosin, John S. Bickford, Sr., Edward J. Bauman, Herbert M. Baum,
Lowell L. Robertson, Robert L. Matthews, Roy A. Herberger, Jr. The
shareholders also ratified the appointment of PricewaterhouseCoopers LLP as
independent public accountants of our company for fiscal 2004, by the following
vote: 16,975,446 for, 217,396 against, and 2,221 abstaining. 
 ITEM 5. Other Information Not applicable 
 ITEM 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits 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
  (b)
    
    Reports on Form 8-KWe filed a current report on Form 8-K, dated January 13, 2004, reporting
that we issued a press release announcing anticipated net sales for the
quarter ending December 31, 2003 and reiterated guidance for the year
ending September 30, 2004.We filed a current report on Form 8-K, dated February 2, 2004, reporting
that we issued a press release announcing our first quarter ended
December 31, 2003, results.We filed a current report on Form 8-K, dated March 5, 2004, reporting
that we issued a press release announcing that the Board of Directors
declared a quarterly dividend of five cents ($0.05) per share of common
stock for the quarter ending March 31, 2004. 18




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. ACTION PERFORMANCE COMPANIES, INC. Signature
    
    Capacity
    
    Date/s/ Fred W. Wagenhals

Fred W. Wagenhals
    
    Chairman of the Board, President, and
Chief Executive Officer
(Principal Executive Officer)
    
    May 13, 2004/s/
R. David Martin

R. David Martin
    
    Chief Financial Officer, Secretary and Treasurer
(Principal Financial and Accounting Officer)
    
    May 13, 2004
 19