##### 



SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
    FORM 10-K x
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended September 30, 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, Arizona 85281
(602) 337-3700
(Address, including zip code, and telephone number, including area code, of principal executive offices) Securities registered pursuant to Section 12(b) of the Exchange Act: Title of Each Class
    
    Name of Each Exchange on Which RegisteredCommon Stock, par value $.01 per share
    
    New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act: None 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 o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes x No o The aggregate market value of Common Stock held by nonaffiliates of the
registrant (16,477,322 shares) based on the closing price of the registrants
Common Stock as reported on the New York Stock Exchange on March 31, 2004,
which was the last business day of the registrants most recently completed
second fiscal quarter, was $251,608,707. For purposes of this computation, all
officers, directors and 10% beneficial owners of the registrant are deemed to
be affiliates. Such determination should not be deemed to be an admission that
such officers, directors or 10% beneficial owners are, in fact, affiliates of
the registrant. As of December 10, 2004,
there were outstanding 18,468,848 shares of
registrants common stock, par value $.01 per share. Documents incorporated by reference: Portions of the registrants definitive
Proxy Statement for the 2005 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Report.




---



##### 



ACTION PERFORMANCE COMPANIES, INC. ANNUAL REPORT ON FORM 10-K FISCAL YEAR ENDED SEPTEMBER 30, 2004 TABLE OF CONTENTS PagePART IITEM 1.
    
    BUSINESS
    
    
    1ITEM 2.
    
    PROPERTIES
    
    
    23ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    23ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    23PART IIITEM 5.
    
    MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    24ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    25ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    26ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    37ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    37ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    37ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    37ITEM 9B.
    
    OTHER INFORMATION
    
    
    37PART IIIITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    38ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    38ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
    
    
    38ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    38ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    38PART IVITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
    
    
    38SIGNATURES
    
    
    
    
    42INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
    
    
    F-1
    Statement Regarding Forward-Looking Statements The statements contained in this report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of applicable
securities laws. Forward-looking statements include statements regarding our
expectations, anticipation, intentions, beliefs, or strategies regarding the
future. Forward-looking statements also include statements regarding revenue,
margins, expenses, and earnings analysis for fiscal 2005 and thereafter; our
strategy to cultivate new and existing license agreements, improve and expand the
collectable die-cast marketplace, enhance our distribution model,
improve our cost structure, and
enhance existing and introduce new products; and the success of
particular product or marketing programs. All forward-looking statements
included in this report are based on information available to us as of the
filing date of this report, and we assume no obligation to update any such
forward-looking statements. Our actual results could differ materially from
the forward-looking statements. Among the factors that could cause actual
results to differ materially are the factors discussed in Item 1, Business -
Risk Factors.  i




---



##### 



PART I 
 ITEM 1. BUSINESS Introduction 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. NASCAR is the most prominent motorsports sanctioning
body in the United States and sanctions the Nextel Cup (formerly Winston Cup)
series of stock car races. 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. 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 members-only collectors club catalog. Sales of our products related to
NASCAR represented approximately 70% of our revenue during fiscal 2004, down
from 80% in 2003, in part as a result of the Funline acquisition (See Recent
Acquisitions). We focus on securing long-term license agreements with top motorsports drivers
and team owners. These license agreements generally provide us with an
exclusive right to market certain die-cast, apparel, and other products bearing
the drivers name, likeness, and image for periods typically ranging from six
to ten years. Racing fans are interested in purchasing products associated
with top drivers and team owners. As a result, we believe these license
agreements provide us with a significant competitive advantage. We derive approximately 40% of our revenue from sales of licensed die-cast
scaled replicas of motorsports vehicles in the collectible and
mass-merchant retail
markets. In the United States, we market our Action Racing Collectables, AP,
Revell, and Brookfield Collectors Guild collectible die-cast brands primarily
through our network of wholesale distributors. We market our Winners Circle
NASCAR die-cast and Funline brand stylized die-cast products to mass-merchant
retailers and our RCCA brand though our collectors club, which is managed by
QVC. In Germany, we market our Minichamps collectible die-cast brand primarily
through a worldwide network of wholesale distributors. We derive approximately 45% of our revenue from sales of licensed apparel,
gifts, and memorabilia. These products are marketed in the United States
primarily under our Chase Authentics brand, Trevco brand, and Winners Circle
brand. We market our Chase Authentics brand products through wholesale
distributors and our Winners Circle brand products to mass-merchant retailers. We derive approximately 15% of our revenue from trackside sales in the United
States. We market Chase Authentics brand apparel and memorabilia and Action
Racing Collectables brand die-cast at mobile trackside stores. Approximately
90% of our trackside sales are derived from the sale of apparel and
memorabilia. In this report, we refer to various distinct segments of motorsports racing,
including the National Association of Stock Car Auto Racing, or NASCAR; the
National Hot Rod Association, or NHRA; Formula One; the Indy Racing League, or
IRL; and International Race of Champions, or IROC; and the World of Outlaws. Our fiscal year ends September 30. In this report, unless otherwise noted,
2004, 2003, 2002, 2001, and 2000, refer to our fiscal years. Our website is located at www.action-performance.com. Through our website, we
make available free of charge our annual reports on Form 10-K, our proxy
statements, our quarterly reports on Form 10-Q, our current reports on Form
8-K, and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) under the Securities Exchange Act. These reports are available
as soon as reasonably practicable after we electronically file those materials
with the Securities and Exchange Commission. We also post on our website the
charters of our Audit, Compensation, and Nominating/Corporate Governance
Committees; our Corporate Governance Guidelines, Code of Business Conduct and
Ethics, and Code of Ethics for the CEO and Senior Financial Officers, and any
amendments or waivers thereto; and any other corporate governance materials
contemplated by SEC or NYSE regulations. The documents are also available in
print to any shareholder who requests them by contacting our 1




---



##### 



corporate secretary at the company offices. The Motorsports Industry Motorsports is one of the fastest growing spectator sports in the United
States. Racing formats in the United States include, among others, NASCAR,
NHRA, IRL, IROC, and World of Outlaws. The most popular auto racing format in the United States is stock car racing,
the racing of specially equipped standard passenger automobiles. The most
prominent stock car sanctioning organization is NASCAR, which was founded and
developed in the late 1940s in the southeastern United States. Today, NASCAR
operates three primary racing series: The Nextel Cup (formerly Winston Cup),
the Busch Grand National, and the Craftsman Truck Series, each with races
throughout the United States. Of these, the Nextel Cup, which in the 2004
season consisted of 39 televised events, is the most popular in terms of
attendance and television viewership. The Busch series included 34 racing
events in the 2004 season, and the Craftsman Truck series included 25 events.
We focus our product offerings on the Nextel Cup (formerly Winston Cup) items.
Busch series and Craftsman Truck series product offerings are limited primarily
to promotional items. Sales of our products related to NASCAR represented approximately 70% of our
revenue during fiscal 2004. Based on television viewership and trackside
attendance, motorsports racing is one of the most attended and most watched
professional sports in the world. Over the last three years, network
television ratings for the Nextel Cup series have consistently ranged between
5.4 and 5.7 and cable television ratings have consistently ranged between 4.3
and 4.5. NASCAR is the second most watched regular season sport, second only
to the NFL. NASCAR Nextel Cup viewership is approximately 8 million per event.
Over the last three years, network television ratings for the Busch series
have consistently ranged between 2.1 and 2.2 and cable television ratings have
consistently ranged between 1.3 and 1.6. The NASCAR Busch Series viewership
is approximately 2 million per event. Since 2000, new speedways have been opened in the Kansas City and Chicago
metropolitan areas. These new speedways are bringing NASCAR and other major
motorsports events to new geographic markets with much larger population bases
than many of the traditional NASCAR venues located in the southeastern United
States, further expanding the awareness of NASCAR racing. In addition NASCAR
has been moving events from tracks in a geographic market with a smaller
population base to tracks in geographic markets with a larger population base,
such as Phoenix International Raceway and Texas Motor Speedway. In June 2003, NASCAR changed the name of its top racing series from the
Winston Cup to the Nextel Cup. The change was the result of NASCAR signing
Nextel as the sponsor of its top series for a 10-year period, starting with the
2004 season. According to NASCAR research, NASCAR boasts more Fortune 500 primary and major
associate sponsors than any other sport in the United States and NASCAR ranks
fourth in major sports licensed product sales, reporting an estimated $2.1
billion in calendar 2003. The demographic profiles and loyal fan bases in
motorsports have attracted significant corporate sponsorship to many aspects of
the motorsports industry. Sponsors support racing team and venue operations,
seek driver endorsements, and sponsor major media coverage of motorsports.
Major corporate sponsors of motorsports include the major automobile
manufacturers, consumer product companies, and nationally recognized retail
organizations. We believe that the long-term nature of the broadcast contracts will provide
the incentive for networks to promote events heavily to increase ratings,
further the reach of NASCAR popularity into less penetrated markets, and
accelerate corporate sponsorship. Our Competitive Strengths We believe our leading market position is a result of the following competitive
strengths: 2




---



##### 



Ability to Attract Additional Licensors and Distribution Partners Our position as the leading designer and marketer of NASCAR-related motorsports
products enhances our appeal to new and existing licensors and distribution
partners. We believe our market-leading position enables us to maintain
advantageous license agreements with existing licensors and to secure new
license agreements with up-and-coming drivers; to enhance our distribution
channels; to secure additional shelf space in mass-retail establishments; and
to conduct successful special promotional programs. License Agreements We have exclusive license agreements with many of the most recognized names in
NASCAR, such as the Estate of Dale Earnhardt Sr., Dale Earnhardt Jr., Jeff
Gordon, Dale Jarrett, Bobby Labonte, Tony Stewart, Rusty Wallace, and various
other drivers and teams. These license agreements generally provide us with an
exclusive right to market certain die-cast, apparel, and other products bearing
the drivers name, likeness, and image for periods typically ranging from six
to ten years. Racing fans generally are interested in purchasing products
associated with top drivers and teams. As a result, we believe these license
agreements provide us with a significant competitive advantage. Significant Design and Development Expertise We have significant expertise in product design and in the development of
innovative marketing and special promotional programs for our drivers, teams,
and large corporate sponsors. This expertise enables us to offer products with
significant customer appeal, to develop innovative marketing campaigns and
special promotional programs to promote the sale of our products, and to
attract additional consumer interest and revenue opportunities for our
licensors and the corporate sponsors of our promotional programs. High Quality and Authenticity Our well-recognized brands are known for high quality and authenticity,
providing us with a solid base of existing customers as well as an attractive
platform to launch new products. We believe that the significant time and
effort we devote to the quality and authenticity of our products enhances their
appeal and attractiveness to motorsports fans. Broad Distribution We have established a broad range of distribution channels through which our
products are marketed, including a network of wholesale distributors that sell
to thousands of specialty retailers; leading mass-market retailers, including
Wal-Mart, Kmart, Target, and Toys R Us; mobile trackside stores; QVC; our
collectors catalog club; and the goracing.com Internet site. Highly Scalable Operating Model Our operating model allows us to service higher levels of sales with limited
increases in operating expenses and capital investment. 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. 3




---



##### 



This model allows us to focus on our core strengths, which are the design and
marketing of motorsports products and innovative programs that appeal to
motorsports fans. Because we strive to structure our operations, so that many
of our operating expenses are fixed, increases in sales generally will result
in increased operating margins. We can limit advertising expenditures and
still increase revenues given the nature of our licensed products. Our Growth Strategy Our objective is to grow by leveraging our competitive strengths to maximize
our business opportunities resulting from the continued growth and popularity
of motorsports in general, and NASCAR in particular. Key elements of our
strategy include the following: Capitalizing on Existing License Agreements and Cultivating New License
Agreements We intend to capitalize on our existing license agreements and cultivate new
relationships with up-and-coming drivers and teams to assure we continue to
have the leading portfolio of license agreements. We currently have license
agreements with many of the leading racecar drivers, car owners, manufacturers,
sanctioning bodies, racetrack operators, and corporate sponsors. These license
agreements enable us to design and sell distinctive products that appeal to
motorsports enthusiasts. We believe that these relationships provide us with a
competitive advantage. Improve and Expand the Collectable Die-cast Marketplace We plan to increase the sales of our die-cast products while enhancing their
value as collectibles. This strategy will involve limiting the variety and
size of production runs of individual products, and better matching product
supply and demand. We also plan to increase our consumer marketing activities
at the retail level in order to increase customer demand, increase sales at the
dealer level, speed the velocity of our products through our distribution
channels, and introduce new consumers to NASCARthemed products and the
attractiveness of the hobby of collecting die-cast products. Enhance our Distribution Model We plan to broaden the distribution reach of our Winners Circle brand, which
currently is distributed through mass-merchant retailers, such as Wal-Mart,
Kmart, and Target. We intend to sell more products through our existing
mass-merchant retail customers and through additional mass-merchant retail
customers. In addition, we intend to enlarge our distribution network in high
foot traffic retail outlets, such as department stores, drug stores, grocery
stores, dollar stores, club stores, and auto parts stores. We believe that the sale of our products through a wide range of retail outlets
will enhance our ability to reach casual NASCAR fans who may not visit
specialty hobby stores or attend NASCAR race events. In addition, we intend to
utilize our value priced Winners Circle die-cast products as a low-cost
introduction to the hobby of collecting die-cast and to migrate a portion of
those buyers to our premium ARC and Elite products. We currently distribute our wholesale die-cast collectable products through a
15-member distributor group that in turn distributes these products at the
retail dealer level. We plan to take steps to make our wholesale distribution
channel more efficient in order to reduce overall costs, gain better visibility
at the dealer level, and improve our speed to market. Improve Cost Structure We plan to reduce our costs. This includes consolidating redundant functions
across our various subsidiaries, pooling the purchase of like goods on a
company-wide basis to achieve cost advantages, and keeping tight controls on
discretionary spending of all kinds. Our goal is for selling, general, and administrative expenses to grow at a rate
lower than the sales growth rate of our company. 4




---



##### 



Continuing to Enhance Existing and Introducing New Products We continually seek to enhance our existing products and to introduce new
products that appeal to motorsports enthusiasts. During the last three years,
we have launched several new products, such as die-cast replicas of raced
versions of motorsports vehicles, replica die-cast engines, and a NASCAR gift
line. We added the existing product lines of the acquired entities and intend
to expand each of the acquired product lines by adding NASCAR-licensed product. Recent Acquisitions In June 2002, we acquired Trevco Trading Corp. Trevco designs and distributes
primarily licensed seasonal gift products, including products under NASCAR
driver and team licenses. Products are produced by a contract manufacturer in
China and sold on a direct import basis, by both in-house and independent sales
representatives to mass retailers, many of which were not our customers
historically. We have entered into a long-term outsourcing agreement with
Trevcos contract manufacturer to continue current production and to design and
produce future product lines. We have enhanced the historical product line
with our licenses and sell those products to mass-merchant retailers and
through our domestic distributors. We believe we broadened our management
depth in gift design, procurement, and marketing with this acquisition. In July 2002, we acquired terry and golf product businesses, which operate as
McArthur Towel and Sports, Inc. McArthur distributes terry and golf products
primarily to specialty retailers and institutions. A portion of the acquired
product line is decorated with team logos under licenses with professional
teams in the National Football League, National Hockey League, National
Basketball Association, Major League Baseball, Professional Golf Association,
and colleges and universities. We distribute the products to teams for
in-stadium promotions and to specialty and mass-merchant retailers, golf pro
shops, and other organizations that promote and sponsor events with licensed
premiums and gifts. We are expanding the existing products by designing and
producing similar specialty licensed products with our licensed NASCAR driver
and team logos and images. We are also designing and distributing to the
specialty retailers die-cast decorated with team logos under licenses with
professional teams. We also believe the acquisition allowed us to broaden our
management depth in corporate promotions. In September 2002, we acquired a producer of premium leather jackets and other
apparel, which we operate as Jeff Hamilton Collection, Inc. In connection with
the acquisition, we purchased the Jeff Hamilton marks. A portion of the
product line is decorated with team logos under licenses with the National
Basketball Association, National Football League, and other major sports
leagues. The product is marketed primarily to specialty fashion and other
upstairs retail channels. In the fourth quarter of 2004, we determined the
Jeff Hamilton operation should be managed as a product line of our existing
apparel operations and not as a stand-alone subsidiary. In 2005, we will be
integrating the related operations into our existing apparel operations. In
2005 we also intend to expand the Jeff Hamilton product line by leveraging our
existing NASCAR licenses into new, high-margin apparel. At September 30, 2004,
we had intangibles totaling $4.3 million related to the Jeff Hamilton marks.
Our ability to recover these marks is dependent on the success of the
integration and the new NASCAR line. In September 2003, we acquired Funline Merchandise Co., Inc., a distributor of
stylized non-NASCAR motorsports die-cast. Funline distributes Muscle Machines,
Jesse James WEST COAST CHOPPERS, and other popular die-cast collectible
vehicles. Funline distributes its products primarily to the mass-merchant
retail market. Since these products are sold at lower price-points than our
NASCAR die-cast product lines, we intend to use the Funline products and price
points with our existing distribution channels. We are expanding the existing
products by designing and distributing similar stylized die-cast vehicles with
our licensed NASCAR driver and team logos and images to sell in other
distribution channels. We believe we have enhanced our product line as a
result of the acquisition. We also believe the acquisition allowed us to
broaden our management depth in dealing with product design and trade processes
in China. Licenses We focus on developing long-term relationships with, and we engage in
comprehensive efforts to license, popular drivers, team owners, and other
personalities in each top racing category, their sponsors, various sanctioning
bodies, and others in the motorsports industry. Through these licensing
efforts, we develop opportunities to market 5




---



##### 



innovative products that appeal to motorsports enthusiasts. We believe that
our license agreements with top racecar drivers and other licensors
significantly enhance the consumer appeal and marketability of our products.
By aligning our company with top racing personalities and providing them with a
broad range of revenue opportunities, we believe that we will be able to
leverage those relationships to attract additional licensors in order to
generate increased revenue for our company as well as increased earnings for
the licensors. Significant Driver License and Endorsement Agreements; Significant Team Owner
Licenses We have long-term license agreements with former NASCAR Winston Cup Points
champions Dale Earnhardt, Jeff Gordon, Dale Jarrett, Bobby Labonte, Tony
Stewart, Rusty Wallace, and 13-time NHRA Funny Car champion John Force. These
licenses generally provide us with a right of first refusal to market certain
die-cast, apparel, and other products bearing the drivers name and likeness.
The license agreements also generally provide that, to the extent that we
exercise our right of first refusal, the driver will not personally market and
will not permit others to market, through the same channels of distribution
used by our company, any products bearing the drivers likeness that are the
same or similar to products marketed by our company. Each of the license
agreements requires us to pay the licensor royalties based on a percentage of
the wholesale or retail price of licensed products that we sell. Certain of
the license agreements also provide for minimum guaranteed royalty payments
each year during the term of the agreement. Certain of these license
agreements give the licensors the right to terminate or significantly shorten
the term of the agreements if our business is sold or transferred or if there
is a significant change in our management team. We also have personal service and endorsement agreements with popular racecar
drivers. During the term of the endorsement agreements, we have the right to
use the drivers name, likeness, signature, and endorsement in connection with
the advertisement, promotion, and sale of the die-cast collectibles and other
products approved by the driver and marketed by our company. We also have license agreements with several of the most popular NASCAR race
car team owners, including Chip Ganassi Racing with Felix Sabates; Dale
Earnhardt, Inc. and The Estate of Dale Earnhardt, Inc.; Evernham Motorsports,
LLC; Hendrick-Gordon Licensing, LLC, which is the licensing entity for Hendrick
Motorsports, Inc. and JG Motorsports, Inc.; Redline Sports Marketing, Inc.,
which is the licensing entity for the Joe Gibbs race teams; Richard Childress
Racing Enterprises, Inc.; and Robert Yates Racing, Inc. The team owner
licenses provide us with either the exclusive right or a right of first refusal
to market certain products bearing the likeness and number of each owners
NASCAR cars and other racing vehicles. To the extent that we exercise our
right of first refusal, the team owner licenses provide that the licensor will
not permit others to market, through the same distribution channels used by our
company, any of the licensed products. Certain of the team owner licenses also
provide that the licensors will not directly market any of the licensed
products through such channels. Each of the license agreements with the team
owners requires us to pay the licensor royalties based on a percentage of the
wholesale or retail price of licensed products that we sell. Certain of the
license agreements also provide for minimum guaranteed royalty payments to the
licensors. 6




---



##### 



The following table sets forth certain information with respect to the license
or personal service agreements with the drivers and team owners described
above: Licensor
    
    Driver
    
    Expiration DateThe Estate of Dale Earnhardt and Dale Earnhardt, Inc.
    
    Dale Earnhardt
    
    November 7, 2011Hendrick-Gordon Licensing, LLC (1)
    
    Jeff Gordon
    
    December 31, 2010Jimmie Johnson (1)Rusty Wallace and Rusty Wallace, Inc.
    
    Rusty Wallace
    
    December 31, 2007John Force Racing, Inc.
    
    John Force
    
    December 31, 2007Robert Yates Racing, Inc.
    
    Dale Jarrett
    
    December 31, 2017Elliott SadlerRichard Childress Racing Enterprises, Inc.
    
    Kevin Harvick
    
    May 23, 2012Jeff BurtonDave BlaneyRedline Sports Marketing, Inc. (Joe Gibbs race teams)
    
    Bobby Labonte
    
    December 31, 2006Tony StewartJason LefflerDale Earnhardt, Inc.
    
    Dale Earnhardt, Jr.
    
    December 31, 2005Evernham Motorsports, LLC
    
    Bill Elliott, Jr.
    
    May 23, 2012Jeremy MayfieldKasey KahneChip Ganassi Racing with Felix Sabates
    
    Sterling Marlin
    
    December 31, 2011Casey MearsJamie McMurray
 (1) We hold a license with JG Motorsports, Inc. through December 31, 2005, for
Jeff Gordon product. The license with Hendrick-Gordon Licensing, LLC begins
January 1, 2006. The license with Hendrick-Gordon Licensing, LLC provides
additional rights with regard to Jimmie Johnson product and other Hendrick
Motorsport drivers. Prior to January 1, 2006, we do not have an exclusive
long-term license for Jimmie Johnson product. Additional Product Licenses We maintain other licenses with various other drivers, car owners, sponsors,
and manufacturers, including other NASCAR drivers, on a non-exclusive basis,
NHRA drivers and teams, Formula One teams, Ford Motor Company, several
divisions of General Motors Corp., and Daimler-Chrysler. We also maintain
licenses for some products with professional sports organizations, such as the
National Basketball Association, National Football League, National Hockey
League, Major League Baseball, and various professional sports franchises and
collegiate sports teams. We maintain a license with Payupsucker, Inc., the
licensing entity for Jesse James, under which we make WEST COAST
CHOPPERS(TM) vehicles. Other License Agreements We have a license agreement with Revell-Monogram, Inc. that gives us the
exclusive right to use the Revell Racing, Revell Select, and Revell
Collection trademarks in connection with sales of NASCAR, NHRA, and certain
other motorsports-related die-cast collectibles in the United States and
Canada. The license also gives us an 7




---



##### 



exclusive right to use the Revell trademarks described above in connection with
NASCAR, NHRA, and certain motorsports-related die-cast products. The term of
the Revell license runs through December 31, 2007, at which time we may
automatically extend for successive one-year terms if sales exceed $12 million
annually. We have a license agreement with NASCAR that gives us the non-exclusive right
to use the NASCAR name and logo on all of our NASCAR-related products and
product packaging as well as on related sales, marketing, and promotional
materials. We pay NASCAR royalty payments based on a percentage of the
wholesale or retail price of licensed products that we sell. The license
agreement had an original expiration of October 7, 2003, with respect to
licensed products that bear both the NASCAR mark and the name, image, or
likeness of a NASCAR driver, team, or track, automatically renewed for a five
year period beginning October 7, 2003, and automatically renews for an
additional five-year period beginning October 7, 2008, unless there is an event
of default, as defined in the license agreement. Our license agreement with VF Imagewear (east), Inc. (VFI), formerly VF
Knitwear, gives VFI the right to use the Chase brands in a variety of retail
distribution channels. In some distribution channels, VFI has the exclusive
right to use certain of the Chase brands. VFI pays us royalties based on its
sales of Chase-branded apparel. VFI pays us a higher royalty in those
distribution channels where its rights are exclusive. The license agreement
expires on December 31, 2008, subject to VFIs right to extend the agreement
for two successive five-year terms. Products Our principal products are NASCAR-related die-cast scaled replicas of actual
motorsports vehicles, apparel, and memorabilia. We added seasonal gifts,
leather jackets, terry products, and stylized die-cast motorsports vehicles to
our product lines through acquisitions in 2002 and 2003. Die-cast We design our collectible die-cast products as high-quality collectible items.
We design and market replicas of motorsports-related vehicles that are
constructed using die-cast bodies and chassis with free-spinning wheels and
tires. The die-cast replicas that we offer in the United States relate
principally to the NASCAR Nextel Cup (formerly Winston Cup) and NHRA drag
racing. In Germany, we offer Formula One and high-end auto manufacturer
die-cast replicas. Since our September 2003 acquisition of Funline, we also
offer stylized non-NASCAR motorsports die-cast. Our die-cast replicas are scaled replicas of actual racing vehicles, pit
wagons, trucks and trailers, and vehicle transporters. We produce our die-cast
replicas to a reduced scale of the actual size of the vehicle, ranging from
scales of 1:9 to 1:96, with the predominant scales being 1:24 and 1:64. Many
of our die-cast replicas include features, such as opening hoods and trunks,
detailed engines, and working suspensions. We also devote a significant amount
of time and effort to the production of our die-cast replicas to assure that
the resulting products display a level of quality and detail that is superior
to competing products. We sell approximately 90% of our die-cast replicas on a wholesale basis. At
retail, our die-cast replicas price ranges vary depending on size, type of
vehicle, and level of detail. Our 1:24 scale product is priced at retail at
prices ranging from approximately $40.00 to $120.00, with most product
retailing at prices of $60.00 to $70.00. We offer our die-cast replicas
primarily through our wholesale distributor network to specialty retailers, our
collectors club, and direct response television through our relationship with
QVC, our trackside stores, and special promotional programs. We enhance the collectible value and appeal of our products through various
measures. These measures include the following:  
    
    designing die-cast collectibles that include features that are not offered by our competitors;
    
    limiting the quantities of each collectible item that we produce and sell;
    
    specifying, on certain products themselves and on the packaging
material of certain other die-cast collectibles, the quantity of that
limited-edition item actually produced; 8




---



##### 




    
    offering certain items for specified periods only through our collectors club; and
    
    designing packaging concepts to improve the display of each collectible item. We design and market licensed miniature die-cast replicas for the mass-merchant
retail market through our Winners Circle brand of products. Our Winners
Circle die-cast products range in price at retail from $5.00 to $20.00,
depending on size, type of vehicle, and level of detail. We believe that our presence in the mass-merchant retail die-cast market
furthers our strategy to expand our presence in licensed die-cast racecar
replica marketing channels and expands our line of licensed motorsports
merchandise for mass-merchant retail customers to include both die-cast
products and apparel. Prior to our acquisition of the Winners Circle brand
and related die-cast inventory and tooling from Hasbro Inc. in May 2001, we
licensed to Hasbro the rights to produce specific motorsports-related products
for sale in the mass-merchant retail market. The mass-merchant retail market
die-cast products manufactured and marketed under the Winners Circle brand are
distinct from and are designed not to compete directly with our limited edition
motorsports die-cast collectible products. The Funline die-cast product line, acquired in late 2003, has been designed and
marketed for the mass-merchant retail market and ranges in price at retail from
$2.00-$20.00, depending on size, type of vehicle, and level of detail. The
Funline product line includes hot-rod cars, monster trucks, motorcycles,
military vehicles, and choppers in scales ranging primarily from 1:5 to 1:64
scales. Apparel and Memorabilia We design and market various licensed motorsports apparel, including tee
shirts, jackets, hats, and memorabilia, such as coffee mugs, ornaments, towels,
key chains, and tote bags. Each of these products generally features the name,
likeness, image, and car number of a popular racecar driver or other licensed
logos and images. Our licensed motorsports apparel items utilize creative designs that are
printed or applied to high-quality shirts, hats, jackets, and other products.
We design and sell our motorsports apparel products in a wide range of styles
and sizes. We distribute our apparel and memorabilia products to mass-merchant
retailers, through mobile trackside stores, and to wholesale distributors. We sell Winners Circle branded apparel to mass-merchant retailers. Most of
our apparel that is sold in other distribution channels bears our Chase brand
marks, including Chase Authentics and a stylized C, which is generally
embroidered on the shirt cuff or pocket. NASCAR drivers, including Jeff
Gordon, Dale Jarrett, Bobby Labonte, Terry Labonte, and Rusty Wallace, have
agreed, subject to certain exceptions, to assure that licensed apparel products
bearing their names, likeness, or signatures will also bear Chase brand
marks. These drivers have also agreed to endorse Chase-branded apparel as the
exclusive trackside apparel of the top NASCAR drivers. Sales and Distribution We distribute our products through a broad range of channels, including a
network of wholesale distributors, leading mass-market retailers, our
collectors club, QVC, and mobile trackside stores. We advertise our die-cast
collectibles in newspapers and magazines covering motorsports and the
collectibles markets. We also take measures to increase consumer awareness of
our products through radio and television advertising targeted at programs of
interest to motorsports enthusiasts. Wholesale Distribution Network Die-cast collectibles, apparel, and memorabilia products are marketed on a
wholesale basis through distributors. Virtually all of the products of our
U.S. operations are distributed by 15 U.S. distributors to dealers in the
United States and Canada. The products of our German operations are
distributed worldwide through a network of 48 distributors operating in 45
countries throughout the world. The distributors solicit orders for our
die-cast and apparel products from thousands of specialty retailers throughout
the United States and thousands of specialty retailers in other countries
throughout the world. The retailers include stores specializing in motorsports
collectibles and apparel, stores specializing in other sports collectible
items, and a limited number of hobby shops. 9




---



##### 



Mass-Merchant Retailers Our in-house sales force and independent representatives market our Winners
Circle die-cast products on a wholesale basis to major discount and department
stores, such as Wal-Mart, Kmart, Toys R Us, and Target. We also utilize our
in-house sales force and independent representatives to market motorsports
apparel and memorabilia products on a wholesale basis to the same discount and
department stores and to automotive retail stores and convenience stores. Collectors Club We market certain of our die-cast collectibles, for exclusive periods, through
our collectors club. Club members pay a lifetime membership fee to QVC that
entitles them to receive a membership kit and monthly catalogs. The
collectors club has approximately 80 thousand active members who have made a
purchase in the last year. Under a ten-year outsourcing and exclusive supply agreement, QVC assumed
responsibilities for the day-to-day marketing and distribution operations of
our collectors club in 2001. Under the agreement, we retain ultimate control
over the decision-making processes regarding pricing, production quantities,
marketing, and promotion of the products to be sold to club members. QVC Direct Response Television and Internet We sell our products to QVC, which markets and sells our die-cast collectible
products during a weekly television program on QVC called For Race Fans Only.
Viewers can order our products, which are generally products that we sell to
our wholesale distributors, but have been specially produced and packaged, and
are marked For Race Fans Only. We market our die-cast, apparel, and memorabilia products through our
goracing.com Internet site, which serves as an online motorsports retail store.
Through a ten-year agreement, QVC has assumed the day-to-day responsibility
for operating and promoting our Internet site and processing online orders. Mobile Trackside Stores We operate approximately 30 fully equipped trackside stores to capitalize on
the large base of potential customers that attend NASCAR-sanctioned races and
other events throughout the United States. Some or all of our mobile trackside
stores travel to each NASCAR Nextel Cup race (39 events in 2004) as well as to
other selected racing events. Each mobile trackside store is decorated with
the logos and color scheme of a particular racing team and driver and sells a
complete assortment of licensed motorsports die-cast collectibles, apparel, and
memorabilia dedicated to that team and driver. These mobile stores represent
the only authorized trackside opportunities for racing enthusiasts to purchase
motorsports products using the name and likeness of the driver and racing team
featured in the store. Promotional Programs We develop, design, and implement special promotional programs that feature
themes or events intended to reinforce brand and corporate awareness for
sponsors and other entities, while increasing the market for our companys
products. These promotions often involve the top drivers in a variety of
motorsports series. We design and market a broad variety of specially designed
die-cast vehicles, apparel, and memorabilia for these programs. For example,
in association with DreamWorks, we designed racecars themed around Shrek 2
that were raced in NASCAR and NHRA events during 2004. In addition to our special promotional programs, we work with large corporate
sponsors to design and create promotional programs aimed at increasing the
awareness of their brands and encouraging consumers to purchase their products.
We provide all levels of creative services (design, graphic layout, and
advertising support) and have the capacity to produce a wide array of
promotional products, such as die-cast replica racecars, tee-shirts, and hats.
We also provide in-house marketing and distribution support for these
promotional programs, including in-bound order processing and order
fulfillment. For some programs, corporate sponsors use our products developed
for their program as a free or low-cost award with the purchase of their own
products, as sweepstakes offers, as employee 10




---



##### 



gifts, or other promotions. We have successfully completed recent programs
with NAPA Auto Parts and General Motors. The products that we develop and sell
in conjunction with these programs generally are sold directly to the sponsors
rather than through our usual distribution channels. Design and Production Die-cast Scaled Vehicles We design each die-cast replica that we market. Many of our die-cast replicas
include features, such as opening hoods and trunks, detailed engines, and
working suspensions. We also devote a significant amount of time and effort to
the production of our die-cast replicas to assure that the resulting products
display a level of quality and detail that is superior to competing products.
For example, we produce most of our die-cast replicas with pad printing instead
of stickers or decals. Our mass-merchant retail die-cast replicas have fewer
features than our die-cast replicas. Our design artists take numerous photographs of the actual racing cars, trucks,
and other vehicles to be produced as die-cast replicas. Working from these
photographs, our artists and engineers use computer software to create detailed
scale renderings of the vehicles. After approval of the rendering by the
vehicle owner, driver, team sponsor, and other licensors whose approval may be
required, we supply computerized renderings to one of our manufacturers in
China. The manufacturer produces a sample or model, which we then inspect for
quality and detail. After final approval, the manufacturer produces the
die-cast replicas, packages them, and ships the finished products to us or, in
certain instances, directly to our customers. Virtually all of our die-cast replicas marketed in the United States are
manufactured under an agreement with Early Light Industrial Co. Ltd., a
manufacturer in China. We have had a relationship with Early Light since 1994.
The term of the agreement currently extends through October 31, 2006 and
automatically renews for five successive one-year periods unless terminated by
either party by giving written notice to the other party at least 90 days prior
to the end of the then-current term. We own the tooling that Early Light uses to produce die-cast replicas for our
company under the manufacturing agreement. We invested $7.5 million in 2004
for tooling used in manufacturing by Early Light. We believe the breadth and
quality of the tooling program provides us with a competitive advantage in the
motorsports collectible market. We believe that Early Light is dedicated to high quality and productivity as
well as support for new product development. There are significant risks,
however, inherent in relying on a single manufacturer for a substantial portion
of our die-cast products. We source the die-cast collectibles marketed by our German operations from
other manufacturers in China. We invested $7.0 million in 2004 for tooling
used by these manufacturers. We currently do not have a formal, long-term
agreement with any of these manufacturers. We source the die-cast stylized vehicles marketed under the Funline brand from
four manufacturers in China. We invested $7.2 million in 2004 for tooling used
by these manufacturers. We have no formal, long-term agreements with any of
these manufacturers. We are in the process of consolidating the manufacture of
Funline product with Early Light. Apparel and Memorabilia We currently obtain substantially all of our licensed motorsports apparel and
memorabilia products on a purchase order basis from approximately 200
third-party manufacturers and suppliers located primarily in the United States.
The apparel and memorabilia suppliers present product ideas and artistic
designs to us. We then select those products and artistic designs that we
believe will appeal to motorsports enthusiasts and distinguish our apparel and
memorabilia products from those of our competitors. We engage in a bidding
process for certain items, such as embroidered hats or tee shirt blanks, in
order to negotiate favorable prices and other terms. We also purchase and
resell certain finished items, such as tote bags and coolers, from domestic and
foreign companies under licenses with drivers and other licensors. 11




---



##### 



We work closely with the third-party apparel and memorabilia manufacturers in
order to assure that products conform to design specifications and meet or
exceed our quality requirements. We believe that a number of alternative
manufacturers for each of these products are readily available in the event
that we are unable to obtain products from any particular manufacturer. We own
the tooling and dies used to manufacture certain of our motorsports consumer
products. As we develop new motorsports apparel and memorabilia products that
require specialized tooling, we intend to build or purchase the new tooling
that will be required to permit the third-party manufacturers to produce those
items. In connection with our acquisition of Trevco Trading Corporation, we entered
into a manufacturing agreement with a Hong Kong company, expiring in September
2006, for the manufacture and design of licensed ornaments, figurines, and
other gifts. Competition Our motorsports die-cast products compete with similar licensed and unlicensed
product, marketed as collectibles, and, to a lesser extent, marketed as toys.
Our motorsports apparel and memorabilia compete with similar products sold or
licensed by drivers, team owners, sponsors, and other licensors with which we
currently do not have licenses as well as with sports apparel licensors and
manufacturers in general, and with unlicensed products. Other companies also
may increase their participation in our markets. Our promotional products
compete for advertising dollars against other specialty advertising programs
and media, such as television, radio, newspapers, magazines, and billboards. We believe that our relationships and licenses with top racecar drivers, car
owners, and other popular licensors represent a significant advantage over our
competitors in the motorsports collectible and consumer products industry. We
strive to expand and strengthen these relationships and to develop
opportunities to market innovative licensed collectible and consumer products
that appeal to motorsports enthusiasts. Our ability to compete successfully
depends on a number of factors both within and outside our control. Intellectual Property Our business depends upon valuable trademarks and other rights that we license
from third parties. We regard our trademarks, trade dress, copyrights, and
other intellectual properties as important to our success. Our intellectual
property rights consist primarily of our trademarks, trade names, logos, and
art. We have copyright protection for all original material that we produce to
promote our products and services. We have registered trademarks for certain of our Action names and logos, and
our Winners Circle, Chase, Trevco, Muscle Machines, and certain goracing.com
brands. We have applied for federal registration in the United States for
various other Action names and logos, as well as goracing.com and other
marks. Employees As of September 30, 2004, we had approximately 590 full-time employees. We have
experienced no work stoppages, and we are not a party to a collective
bargaining agreement. We believe that we maintain good relations with our
employees. Executive Officers The following table sets forth certain information regarding each of our executive officers. Name
    
    Age
    
    Position HeldFred W. Wagenhals
    
    
    63
    
    
    Chairman of the Board, President, and Chief Executive OfficerDavid M. Riddiford
    
    
    39
    
    
    Chief Financial Officer, Secretary, Treasurer, and DirectorMelodee L. Volosin
    
    
    40
    
    
    Chief Operating Officer, Executive Vice President, and Director
 12




---



##### 



Fred W. Wagenhals, founded our company during 1992, and has served as our
Chairman of the Board, President, and Chief Executive Officer for more than
five years. David M. Riddifordhas served as our Chief Financial Officer, Secretary,
Treasurer, and Director since November 2004. Mr. Riddiford served from August
2001 until October 2004 as Senior Vice President and Treasurer of The Dial
Corporation, a consumer goods company marketing a diversified line of consumer
products under various brand names. The Dial Corporation was public until
acquired by Henkel KgaA in March 2004. From 1998 to August 2001, Mr. Riddiford
served as Vice President and Treasurer of The Dial Corporation. Melodee L. Volosinhas served as our Chief Operating Officer since August 2004,
as our Executive Vice President  Sales since December 1999 and as a director
since January 1997. Ms. Volosin served as our Vice President  Wholesale
Division from September 1997 until December 1999. 13




---



##### 



Risk Factors The following factors, in addition to those discussed elsewhere in this report,
should be carefully considered in evaluating our company and our business. Any decrease in popularity or growth rate of motorsports, and NASCAR racing in
particular, could adversely affect our business, including our net sales. The popularity of motorsports and its appeal to consumers have a significant
effect on sales of our products. Motorsports competes for television
viewership, event attendance, merchandise sales, and sponsorship funding with
other sports, entertainment, and recreational events. The competition for the
attention of consumers in the sports, entertainment, and recreation industries
is intense. Sales of licensed merchandise related to NASCAR racing accounted
for approximately 70% of our revenue during 2004. We expect that products
related to NASCAR racing will continue to account for a significant portion of
our revenue for the foreseeable future. As a result, the popularity of NASCAR
sanctioned racing is critical to the success of our business. The popularity
of NASCAR racing depends on many factors, including the extent and popularity
of television coverage of NASCAR racing events. Any decrease in the popularity
or growth rate of motorsports, and NASCAR racing in particular, could have a
material adverse effect on our business, including our net sales. If our existing license agreements are not profitable, or if we are unable to
enter into profitable license agreements in the future or renew our existing
profitable license agreements, our business could be adversely affected. We market our products under license agreements with racecar drivers, team
owners, sponsors, automobile and truck manufacturers, NASCAR, NHRA, and other
entities. We believe these license agreements are critical to the consumer
appeal and marketability of our products because most racing fans are
interested in purchasing products associated with top drivers and teams. The
license agreements vary in scope and duration, but generally authorize us to
sell specified licensed products for designated periods of time. Some license
agreements require us to pay minimum royalties or other fixed amounts
regardless of the level of sales of the licensed products or the profitability
of those sales. The success of any particular license agreement depends on many factors,
including the following:  
    
    the reasonableness of the license fees under the applicable license
agreement to revenue generated by sales of the licensed products under
the agreement;
    
    the popularity and success of the particular licensor; and
    
    in the case of driver licensors, the performance, public image, and health of the driver. A drivers popularity could be adversely affected if the driver fails to
maintain a successful racing career or engages in behavior that the general
public considers objectionable. If our existing license agreements were not
profitable, our business would be adversely affected. Our business also depends on our ability to enter into profitable license
agreements with new licensors, including up-and-coming drivers, and to renew
our existing profitable license agreements on advantageous terms in the future.
It is difficult to predict which car drivers, team owners, and other licensors
will prove to be successful licensors, particularly in the case of
up-and-coming drivers. In some cases the process for obtaining the license
rights from potential licensors is competitive. Our ability to renew our
existing profitable license agreements depends largely on our relationship with
the particular licensor, which may be affected by a number of factors outside
our control. If we are unable to enter into profitable license agreements with
new licensors or renew our existing profitable license agreements, particularly
our licenses for Dale Earnhardt, Jr. products that expires December 31, 2005,
our business could be materially adversely affected. 14




---



##### 



If we were unable to enforce and preserve our rights under our license
agreements, we would lose the competitive advantage provided by these
agreements. The ability to enforce our rights under our license agreements may be limited
by the interpretation and enforcement of those agreements. Some license
agreements contain provisions that allow the licensor to terminate the
agreement upon the occurrence of certain events, including a change in the
drivers team owner or sponsor, a change of control of our company, or
designated changes in our management team. Other license agreements contain
provisions that depend upon our achieving designated performance levels. For
example, some of our exclusive license agreements become non-exclusive if
designated sales figures are not met. The termination, cancellation, or
inability to renew or enforce any of our material license agreements would have
a material adverse effect on our business. If we were unable to maintain and capitalize on our key license agreements, our
business would be adversely affected. A large portion of our revenue is generated under a relatively small number of
our most successful license agreements. Products sold under licenses from our
top five drivers under license accounted for approximately 50% to 60% of our
sales in 2004. Our success depends, in part, on our ability to capitalize on
revenue opportunities from these licenses, which involves various factors,
including the following:  
    
    our ability to maintain our relationships with these licensors; and
    
    our ability to develop and market motorsports products and special
promotions that appeal to our customers and that capitalize on the
success of these licensors. Our failure to maintain these key licenses or to capitalize on the revenue
opportunities utilizing these licenses would have a material adverse effect on
our business. Any disruptions in the business of our third-party manufacturers, particularly
Early Light Industrial Co. Ltd., could adversely affect our business. We depend on third parties to manufacture all of our motorsports die-cast
replicas and most of our apparel and racing fan memorabilia. As a result, we
have limited control over the manufacturing processes themselves and any
significant difficulties encountered by the third-party manufacturers that
result in product defects, production delays, cost overruns, or the inability
to fulfill orders on a timely basis could have a material adverse effect on our
business. In particular, we rely on one manufacturer, Early Light Industrial Co. Ltd.,
which operates facilities in one town in China, to produce most of our die-cast
products. In 2004, products manufactured by Early Light accounted for
approximately 30% of our revenue (40% in 2003). Our manufacturing agreement
with Early Light extends through October 31, 2006, and then automatically
renews for successive one-year periods unless terminated by either party. We
generally do not have long-term contracts with our other third-party
manufacturers. We own most of the tools and dies used in the manufacturing process, but we
believe that it would take a period of time for us to secure other third-party
manufacturers to produce our products with our tools and dies in the event our
relationship with Early Light was terminated. Our operations would be
adversely affected by the following:  
    
    the loss of our relationship with certain of our current
manufacturers, particularly Early Light;
    
    the disruption or termination of the operations of one or more of
our current key manufacturers, particularly Early Light; or
    
    the disruption or termination of sea or air transportation with our
China-based die-cast manufacturers, even for a relatively short period
of time. 15




---



##### 



Furthermore, a material portion of the tools, dies, and molds used to
manufacture our die-cast products and certain of our apparel and memorabilia
products are located in the facilities of our third-party manufacturers. Any
significant damage to the facilities of our third-party manufacturers,
particularly to Early Lights facility, could result in the loss of or damage
to a material portion of our key tools, dies, and molds and the resultant
production delays while new facilities are being arranged and replacement
tools, dies, and molds are being produced. We do not maintain an inventory of
sufficient size to provide protection for any significant period against an
interruption of manufacturing resources, particularly if we are required to
obtain alternative manufacturing sources. Therefore, any significant damage to
the facilities of our third-party manufacturers, particularly to Early Lights
facility, would have a material adverse effect on our business. Our business could be adversely affected if we are unable to continue to design
and market high-quality products that appeal to our customers. Our success depends on our ability to continue to create and market new
products, especially those related to our most popular licensors. Demand for
our motorsports products depends on a wide variety of factors, including the
following:  
    
    the popularity of motorsports, particularly NASCAR racing;
    
    the popularity of the drivers, teams, and others with which we have licenses;
    
    the success of our special promotional programs;
    
    marketing and advertising expenditures devoted to motorsports;
    
    cultural and demographic trends; and
    
    general economic conditions. Because these factors can change rapidly, customer demand also can shift
quickly. We frequently are able to market new products successfully for only a
limited time. Our ability to increase our sales and marketing efforts to stimulate customer
demand and our ability to monitor third-party manufacturing arrangements to
maintain satisfactory delivery schedules and product quality are important
factors in our long-term prospects. Because of the amount of time and
financial resources that may be required to bring new products to market, we
may not always be able to forecast accurately required production quantities or
to respond to changes in customer tastes and demands. We could experience a
material adverse effect on our business, financial condition, and operating
results if we are unable to respond quickly to market changes or a slowdown in
demand for our products. The demand for certain of our die-cast products depends, in part, on their
collectible value and appeal. We cannot assure that these products will
achieve or maintain long-term collectible appeal or value. We face a variety of risks associated with the acquisition and integration of
new business operations. We plan to consider opportunities to acquire other businesses. Our growth may
be slower than anticipated if we are unable to identify suitable acquisition
candidates and make acquisitions on commercially acceptable terms. The integration of the management, personnel, operations, products, services,
technologies, and facilities of any businesses that we acquire in the future
could involve unforeseen difficulties. These difficulties could disrupt our
ongoing business, distract our management and employees, and increase our
expenses. 16




---



##### 



Unforeseen liabilities and difficulties can arise in connection with the
operation of acquired businesses. Contractual or other remedies may not be
sufficient to compensate us in the event unforeseen liabilities or other
difficulties arise. We may not be able to achieve revenue increases, integrate
facilities, functions, and personnel in order to achieve operating
efficiencies; or otherwise realize anticipated strategic advantages or cost
savings as a result of acquisitions. The inability to achieve revenue
increases or cost savings could have a material adverse effect on our business,
financial condition, and operating results. We face risks associated with our exclusive relationship with QVC and the
outsourcing of the operations of our collectors club. We have outsourced the day-to-day operations and distribution of our
collectors club products to QVC since 2001 under a ten-year exclusive
agreement, although we remain responsible for acquisition of licenses, product
selection, development, and manufacturing. We face risks associated with our
agreement with QVC, including the following:  
    
    the ability of QVC to operate the collectors club in a successful manner;
    
    potential damage to our reputation as a result of reduced levels of customer service; and
    
    reduced sales generated from collectors club products. Any disruption in the operations and distribution of collectors club products
by QVC could have a material adverse effect on our business. Our business could be adversely affected by the loss of key members of our
senior management, particularly Fred W. Wagenhals. Our future success depends substantially upon the efforts and abilities of Fred
W. Wagenhals, our Chairman of the Board, President, and Chief Executive
Officer. In particular, Mr. Wagenhals relationships with our licensors and
third-party manufacturers are important to the success of our business. Some
of our license agreements provide the licensor with the option to terminate or
materially modify the terms of the agreement in the event that Mr. Wagenhals no
longer serves our company in certain designated capacities. The loss of
services of Mr. Wagenhals would have a material adverse effect on our company.
We maintain key person insurance on the life of Mr. Wagenhals in the amount of
$3.0 million. We depend on a limited number of mass-merchant retailers to purchase a
significant portion of our products. Sales to our largest customer, Wal-Mart Stores, Inc., were approximately 17.4%
of revenue in 2004. Accounts receivable from Wal-Mart at September 30, 2004,
totaled $14.1 million. Sales to our second largest customer were approximately
3.5% of revenue in 2004. If a significant customer discontinues selling our
products, performs poorly, does not pay for purchased products, reorganizes, or
liquidates and is unable to continue selling our products, our business,
financial condition, operating results, and cash flows could be adversely
affected. Our failure or inability to replace a customer could have a material
adverse effect on our business. We depend on a limited number of wholesale distributors to sell a significant
portion of our products. We currently market our products on a wholesale basis through 15 distributors
operating in the United States. Sales to our 15 wholesale distributors were
approximately 15.5% of revenue in 2004. Accounts receivable from our 15
wholesale distributors at September 30, 2004, totaled $9.5 million, net of
allowance. We depend on these distributors to sell our products to thousands
of specialty retailers throughout the United States. If a significant
distributor discontinues selling our products, performs poorly, does not pay
for purchased products, reorganizes, or liquidates and is unable to continue
selling our products, our business, financial condition, operating results, and
cash flows could be adversely affected. Our failure or inability to replace
poorly performing distributors could have a material adverse effect on our
business. 17




---



##### 



We may experience seasonal fluctuations in sales that could affect our earnings
and the trading price of our common stock. We may experience seasonality in our business, which could result in
unfavorable quarterly earnings comparisons and affect the trading price of our
common stock. Because the auto-racing season is concentrated between the
months of February and November, the second and third calendar quarters of each
calendar year (our third and fourth fiscal quarters) generally are
characterized by higher sales of motorsports products. In addition, variances
in our quarter-to-quarter operating results may result from various factors,
including the following:  
    
    the timing and extent of body changes to racecars;
    
    the timing and extent of driver, sponsor and team changes;
    
    the timing of and ability to complete special promotional programs,
which typically result in significant levels of revenue and expense and
involve difficult coordination and scheduling issues with multiple
parties;
    
    the timing of major races, which generally generate significant
levels of revenue and income; and
    
    the timing of Chinese New Year, which affects our ability to work
with Early Light to bring our products to market in time for the
beginning of the racing season. As a result of these and other factors, we may experience seasonality and
quarterly fluctuations in our business, which could result in unfavorable
quarterly earnings comparisons and affect the trading price of our common
stock. Fluctuations in quarterly sales may require us to take temporary
measures, including changes in personnel levels and production and marketing
activities. These factors and any seasonal and cyclical patterns that emerge
in consumer purchasing could result in unfavorable quarterly earnings
comparisons. Any shortfall in revenue or fluctuations in operating results may
have an adverse effect on our business and stock price. You should not rely on
quarter-to-quarter comparisons of our operating results as an indication of
future performance. Our competitive position depends on a number of factors, and we may encounter
competition from companies that are able to devote greater resources to
marketing and promotional campaigns than we do. Our competitive position depends on a number of factors, both within and
outside our control, including the following:  
    
    our relationships with and the popularity of race car drivers,
teams, and other licensors of the products we sell;
    
    our ability to develop and maintain effective marketing programs
that enable us to sell products to motorsports fans;
    
    the success of our distribution channels; and
    
    our ability to recognize industry trends, anticipate shifts in
consumer demands, and identify and market new products. Other companies may increase their participation in the motorsports markets.
Certain current and potential competitors may be able to devote greater
resources to marketing and promotional campaigns, adopt more aggressive pricing
or inventory availability policies, and devote substantially more resources to
their business than we do. Our motorsports die-cast collectibles and mass-merchant retail die-cast
replicas compete with die-cast and other motorsports collectibles and die-cast
replicas of motorsports vehicles that are sold through mass-merchant retail
channels. Our motorsports apparel and memorabilia compete with similar
products sold or licensed by drivers, 18




---



##### 



owners, sponsors, and other licensors with which we currently do not have
licenses as well as with sports apparel licensors and manufacturers in general.
Our promotional programs must compete for advertising dollars against other
specialty advertising programs and media, such as television, radio,
newspapers, magazines, and billboards. We face risks associated with our international operations. We obtain our die-cast products from overseas manufacturers, particularly Early
Light, the primary China-based third-party manufacturer of our die-cast
products. Because of the manufacturing of these products overseas, we face
risks in addition to the risks generally involved in utilizing third-party
manufacturers. We also maintain business operations in Germany, and we market
motorsports products throughout the world. Our reliance on third-party
manufacturers to provide personnel and facilities in China; our maintenance of
personnel, equipment, and inventories abroad; and our plans to expand our
product sales in international markets expose us to certain economic and
political risks and operating challenges. These risks and challenges include
the following:  
    
    coordination of multi-national operations;
    
    compliance with local laws and regulatory requirements, as well as
changes in such laws and requirements;
    
    difficulties in supervising foreign operations;
    
    the requirement to provide an international letter of credit in an
amount equal to the purchase order for purchases of die-cast products
from China-based manufacturers;
    
    overlap of tax issues;
    
    political and economic conditions abroad; and
    
    the possibility of expropriation or nationalization of assets. To the extent we are unable to adequately address these risks and challenges,
some of which are beyond our control, our business may be adversely affected. Because we import our die-cast products, our business is subject to potential
adverse trade regulations and restrictions. Protectionist trade legislation in either the United States or China, such as a
change in the current tariff structures, export compliance laws, or other trade
policies, could adversely affect our ability to obtain our products from our
third-party manufacturers or the price at which we can obtain those products.
Any developments that adversely affect trade relations between the United
States and China in the future could impact our ability to obtain die-cast
products from our third-party manufacturers. Substantially all of our products are subject to U.S. Customs Service duties
and regulations. These regulations include requirements that we disclose
information regarding the country of origin on our products, such as Made in
China. Within its discretion, the U.S. Customs Service may also establish new
regulations, including regulations regarding the amount of duty to be paid and
the value of merchandise to be reported. Our costs could increase if the
Generalized System of Preferences program is not renewed or extended each year.
The Generalized System of Preferences allows selected products of beneficiary
countries to enter the United States duty free. In addition, we could be
adversely affected if countries that are currently accorded Most Favored
Nation status by the United States, such as China, cease to have such status.
We cannot predict what regulatory changes may occur or the type or amount of
any financial impact these changes may have on us in the future. Failure to
comply with these regulations may result in the imposition of additional duties
or penalties or forfeiture of merchandise. In addition, China may impose new quotas, duties, tariffs, or other changes or
restrictions. This could adversely affect our business, financial condition,
results of operations, and ability to continue to import products at current or
increased levels. 19




---



##### 



We have exposure to Chinese and European currency rate fluctuations. Our die-cast manufacturers invoice us in U.S. dollars. These manufacturers may
be subject to the effects of exchange rate fluctuations should the Chinese
currency not be stable with the U.S. dollar. The value of the Chinese currency
depends to a large extent on the Chinese government policies and Chinas
domestic and international economic and political developments. Since 1994,
the official exchange rate for the conversion of the Chinese currency to U.S.
dollars has generally been stable. However, we can offer no assurance that
this currency will continue to remain stable against the U.S. dollar. The cost
of our products could ultimately be affected by changes in the value of Chinese
currency. Substantially all of our sales are denominated in either U.S. dollars or euros,
with less than 10% being denominated in euros. As a result, international
customers for our products primarily bear any risks associated with exchange
rate fluctuations subsequent to the date of the purchase order. We may,
however, experience losses as a result of exchange rate fluctuations between
the dollar and the euro. We have sought to partially manage such exposure by
entering into forward exchange contracts or engaging in similar hedging
strategies and may do so in the future. Any currency exchange strategy may be
unsuccessful in avoiding exchange-related losses, and the failure to manage
currency risks effectively may have a material adverse effect on our business,
financial condition, and operating results. In addition, revenue earned in
foreign countries may be subject to taxation by more than one jurisdiction,
which would adversely affect our earnings. Any material increase in the cost of the raw materials used to manufacture our
products could have a material adverse effect on our cost of sales. We do not directly purchase the raw materials used to manufacture most of our
products. We may, however, be subject to variations in the prices we pay our
third-party manufacturers for products if their raw materials, labor, or other
costs increase. We may not be able to pass along cost increases to our
customers. As a result, any material increase in the cost of raw materials,
labor, or other costs associated with the manufacturing of our products could
have a material adverse effect on our cost of sales. Our ability to recover the value of our goodwill and other intangibles is
dependent on the success of our strategies. 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. Specifically, in the fourth quarter of 2004, we determined the Jeff Hamilton
products should be managed as a product line of our existing apparel operations
and not as a stand-alone subsidiary. In 2005, we will be integrating the
related operations into our existing apparel operations. In 2005 we also
intend to expand the Jeff Hamilton product line by leveraging our existing
NASCAR licenses into new, high-margin apparel. At September 30, 2004, we had
intangibles totaling $4.3 million related to the Jeff Hamilton marks. Our
ability to recover these marks is dependent on the success of the integration
and the new NASCAR line. We have limited protection of our intellectual property, and others could
infringe on or misappropriate our rights. We regard our trademarks, trade dress, copyrights, and other intellectual
properties as important to our success. Our failure to protect our
intellectual property could adversely affect our business, operating results,
and financial position. Our intellectual property rights consist primarily of
our trademarks, trade names, logos, and art. We have 20




---



##### 



copyright protection for all original material that we produce to promote our
products. We have registered trademarks for certain of our Action names and logos, and
our Winners Circle, Chase, and certain goracing.com brands. We have applied
for federal registration in the United States for various other Action names
and logos, as well as goracing.com, Muscle Machine, and other marks. Our
ability to prevent others from using trademarks or names similar to marks and
names that we use may be adversely impacted if our marks are regarded as
descriptive or weak. Our inability to obtain trademark protection for our
marks and names could have a material adverse effect on our business. We may not be able to obtain effective trademark, service mark, copyright, and
trade secret protection in every country in which we market our products. We
may find it necessary to take legal action in the future to enforce or protect
our intellectual property rights or to defend against claims of infringement
from others. Policing unauthorized use of our proprietary rights is difficult.
Litigation can be very expensive and can distract our managements time and
attention, which could adversely affect our business. In addition, we may not
be able to obtain a favorable outcome in any intellectual property litigation. As part of our confidentiality procedures, we generally enter into agreements
with our employees and consultants. These agreements may be ineffective in
preventing misappropriation of intellectual property and could be
unenforceable. Misappropriation of our intellectual property or the litigation
costs associated with our intellectual property could have a material adverse
effect on us. In addition, we may receive notices from third parties that
claim that aspects of our business infringe on their rights. While we are not
currently subject to any such claim, any future claim, with or without merit,
could result in significant litigation costs and diversion of resources,
including the attention of management, and could require us to enter into
royalty and license agreements. Product liability, product recalls, and other claims relating to the use of our
products could adversely affect our business. Because we sell our products to consumers, we face product liability risks
relating to the use of our products. We also must comply with a variety of
product safety and product testing regulations. If we fail to comply with
these regulations or if we face product liability claims, we may be subject to
damage awards or settlement costs that exceed our insurance coverage and we may
incur significant costs in complying with recall requirements. Even if a
product liability claim is without merit, the claim could harm our business. We have debt, and we may be unable to continue to meet debt covenants. We have incurred indebtedness in connection with our growth strategy. As of
September 30, 2004, we had long-term debt of $15.9 million (including a current
portion of $4.0 million). Our amended loan and security agreement include
financial covenants related to minimum tangible net worth and minimum fixed
charge coverage ratio. We are required to measure our compliance with
financial covenants each fiscal quarter. If we fail to meet any financial
covenants, our lender could call the loan and security agreement immediately.
There can be no assurance we will continue to meet these covenants or negotiate
a waiver in the event we fail to meet the covenants in the future. We expect to incur additional expenses in complying with corporate governance
and public disclosure requirements. Changing laws, regulations, and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC
regulations, and New York Stock Exchange rules, are creating uncertainty for
companies such as ours. These new or changed laws, regulations, and standards
are subject to varying interpretations in many cases due to their lack of
specificity and, as a result, their application in practice may evolve over
time as new guidance is provided by regulatory and governing bodies, which
could result in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and governance practices.
We are committed to maintaining high standards of corporate governance and
public disclosure. As a result, our efforts to comply with evolving laws,
regulations, and standards have resulted in, and are likely to continue to
result in, increased general and administrative expenses and a diversion of
management time and attention from revenue-generating activities to compliance
activities. In particular, our efforts to comply with Section 404 of the
Sarbanes-Oxley Act of 2002 and the related regulations regarding our required
assessment 21




---



##### 



of our internal control over financial reporting and our external auditors
audit of that assessment will require the commitment of significant financial
and managerial resources. We expect these efforts to require the continued
commitment of significant resources. In addition, it may become more difficult
and more expensive for us to obtain director and officer liability insurance.
Further, our board members, chief executive officer, and chief financial
officer could face an increased risk of personal liability in connection with
the performance of their duties. As a result, we may have difficulty
attracting and retaining qualified board members and executive officers, which
could harm our business. If our efforts to comply with new or changed laws,
regulations, and standards differ from the activities intended by regulatory or
governing bodies due to ambiguities related to practice, our reputation may be
harmed. The market price of our common stock has been, and in the future could be,
extremely volatile. The market price of our common stock has fluctuated dramatically. The trading
price of our common stock in the past has been, and in the future could be,
subject to wide fluctuations in response to a number of factors, including the
following:  
    
    quarterly variations in our operating results;
    
    actual or anticipated announcements of new products by our company or our competitors;
    
    changes in analysts estimates of our financial performance;
    
    general conditions in the markets in which we compete; and
    
    worldwide economic and financial conditions. The stock market also has experienced extreme price and volume fluctuations
that have affected the market prices for more rapidly expanding companies and
that often have been unrelated to the operating performance of these companies.
These broad market fluctuations and other factors may adversely affect the
market price of our common stock. Sales of additional shares of common stock could have a depressive effect on
the market price of our common stock. Almost all of our outstanding common stock is eligible for resale in the public
market without restriction or further registration unless held by an
affiliate of our company, as that term is defined under applicable securities
laws. A portion of the shares of common stock outstanding is restricted
shares, as that term is defined in Rule 144 under the securities laws, and may
be sold only in compliance with Rule 144, pursuant to registration under the
securities laws, or pursuant to an exemption from the registration
requirements. We have also registered for resale an aggregate of 662,820
shares of common stock issued or to be issued in connection with the
acquisition of Trevco Trading Corp. and Funline Merchandise Co. Inc., which may
be sold by the respective holder in the public market. Affiliates also are
subject to certain of the resale limitations of Rule 144. Generally, under
Rule 144, each person who beneficially owns restricted securities with respect
to which at least one year has elapsed since the later of the date the shares
were acquired from us or an affiliate of our company may, every three months,
sell in ordinary brokerage transactions or to market makers an amount of shares
equal to the greater of 1% of our then-outstanding common stock or the average
weekly trading volume for the four weeks prior to the proposed sale of the
shares. The majority of the shares held by our officers and directors
currently are available for sale under Rule 144. Sales of substantial amounts
of common stock by our shareholders, or even the potential for such sales, may
have a depressive effect on the market price of our common stock. It may be difficult for a third party to acquire us, even if the acquisition
would be in the best interests of shareholders. As an Arizona corporation, our articles of incorporation contain provisions
that may have the effect of making more difficult or delaying attempts by
others to obtain control of our company, even when those attempts may be in the 22




---



##### 



best interests of our shareholders. Our articles of incorporation also
authorize our board of directors, without shareholder approval, to issue one or
more series of preferred stock, which could have voting, liquidation, dividend,
conversion, or other rights that adversely affect or dilute the voting power of
the holders of common stock. 
 ITEM 2. PROPERTIES We lease a 65,000 square foot building in Tempe, Arizona as our corporate
headquarters. The initial term of the lease expires in October 2009, with a
ten-year renewal option. In addition, we use approximately 8,500 square feet
of another leased facility in Phoenix, Arizona as warehouse space. We lease a facility in the vicinity of Charlotte, North Carolina, containing
approximately 181,000 square feet for our operations in that area. We utilize
approximately 42,000 square feet of the facility for offices and approximately
139,000 square feet for warehouse space and distribution operations. The
initial term of the lease expires in June 2018, with four five-year renewal
options. We also rent mall space for retail stores to support the Charlotte
operation, seasonally, for periods of less than one year. We lease a facility in Atlanta, Georgia, containing approximately 92,000 square
feet, of which we utilize approximately 20,000 square feet for offices and
approximately 72,000 square feet for manufacturing and warehouse operations.
The lease on this facility expires in April 2008. We lease a 45,000 square foot facility in Baraboo, Wisconsin. We utilize
approximately 10,000 square feet of the facility for offices and approximately
35,000 square feet for warehouse space and distribution operations. The term
of this lease expires in December 2004. We lease a 38,750 square foot facility in Los Angeles, California. We utilize
approximately 9,000 square feet of the facility for offices and approximately
29,750 square feet for apparel assembly and warehouse operations. The term of
this lease expires in March 2005. We do not intend to renew the lease. We lease a 250,000 square foot facility in City of Industry, California. We
utilize approximately 14,000 square feet of the facility for offices and
approximately 236,000 square feet for die-cast warehouse operations. The terms
of the lease expires in October 2009. We own a 116,000 square foot facility in Aachen, Germany. We utilize
approximately 80,000 square feet of this facility for our European warehouse
and distribution operations and approximately 36,000 square feet for office
space. 
 ITEM 3. LEGAL PROCEEDINGS We are involved in various legal proceedings arising out of our operations in
the ordinary course of business. We do not believe that such proceedings, even
if determined adversely, will have a material adverse effect on our business,
financial condition, or results of operations. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 23




---



##### 



PART II 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock has been listed on the New York Stock Exchange under the
symbol ATN since February 20, 2002. From April 27, 1993, the date of our
initial public offering, until February 19, 2002, our common stock was quoted
on the Nasdaq National Market under the symbol ACTN. The following table
sets forth the high and low sale prices of the common stock for each calendar
quarter indicated as reported on the New York Stock Exchange or Nasdaq National
Market, as applicable. Common StockHigh
    
    Low2004:First Quarter
    
    $
    19.89
    
    
    $
    12.58Second Quarter
    
    
    18.13
    
    
    
    13.57Third Quarter
    
    
    15.49
    
    
    
    9.74Fourth Quarter (through December 10, 2004)
    
    
    11.20
    
    
    
    8.372003:First Quarter
    
    $
    21.60
    
    
    $
    14.65Second Quarter
    
    
    24.56
    
    
    
    16.50Third Quarter
    
    
    26.99
    
    
    
    18.15Fourth Quarter
    
    
    27.71
    
    
    
    16.742002:First Quarter
    
    $
    50.27
    
    
    $
    30.03Second Quarter
    
    
    51.99
    
    
    
    27.75Third Quarter
    
    
    34.30
    
    
    
    20.68Fourth Quarter
    
    
    26.71
    
    
    
    15.80
 On December 10, 2004, the closing sale price of our common stock on the New
York Stock Exchange was $9.58 per share. As of December 10, 2004, there were
approximately 465 holders of record of our common stock and approximately 6,500
beneficial owners of our common stock. Dividend Policy 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, 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$917
    
    $
    0.05
    
    
    June 9, 2004
    
    June 18, 2004
    
    July 12, 2004$919
    
    $
    0.05
    
    
    August 19, 2004
    
    September 17, 2004
    
    October 18, 2004
 24




---



##### 



ITEM 6. SELECTED FINANCIAL DATA The selected historical financial data presented below as of and for the five
years ended September 30, 2004, are derived from our consolidated financial
statements. The selected financial data should be read in conjunction with
Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations and the Consolidated Financial Statements and the Notes
thereto included elsewhere in this report. Fiscal Year Ended September 30,2004
    
    2003
    
    2002
    
    2001
    
    2000 (2)(in thousands, except per share amounts)Consolidated Statement of
Operations Data (1):Net sales
    
    $
    344,330
    
    
    $
    369,458
    
    
    $
    406,558
    
    
    $
    323,237
    
    
    $
    257,996Cost of sales
    
    
    247,959
    
    
    
    245,879
    
    
    
    250,810
    
    
    
    208,375
    
    
    
    209,102Gross profit
    
    
    96,371
    
    
    
    123,579
    
    
    
    155,748
    
    
    
    114,862
    
    
    
    48,894Selling, general and
administrative expenses
    
    
    90,713
    
    
    
    82,598
    
    
    
    76,870
    
    
    
    69,341
    
    
    
    107,833Amortization of goodwill and
trademark (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,097
    
    
    
    11,295Amortization of licenses and
other intangibles
    
    
    3,802
    
    
    
    3,416
    
    
    
    2,797
    
    
    
    2,060
    
    
    
    5,458Income (loss) from operations
    
    
    1,856
    
    
    
    37,565
    
    
    
    76,081
    
    
    
    39,364
    
    
    
    (75,692
    )Interest expense
    
    
    (1,832
    )
    
    
    (2,085
    )
    
    
    (3,029
    )
    
    
    (5,102
    )
    
    
    (6,291
    )Gain (loss) on extinguishment of
debt (5)
    
    
    (322
    )
    
    
    34
    
    
    
    (1,361
    )
    
    
    14,219
    
    
    
    Foreign exchange gains (6)
    
    
    1,545
    
    
    
    3,574
    
    
    
    1,500
    
    
    
    
    
    
    
    Earnings from joint venture
    
    
    1,370
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    Other income and expenses
    
    
    (1,011
    )
    
    
    (1,424
    )
    
    
    (638
    )
    
    
    (1,040
    )
    
    
    (696
    )Income (loss) before income taxes
    
    
    1,606
    
    
    
    37,726
    
    
    
    72,553
    
    
    
    47,441
    
    
    
    (82,679
    )Income taxes (5)
    
    
    1,066
    
    
    
    13,499
    
    
    
    27,606
    
    
    
    15,505
    
    
    
    (24,592
    )Net income (loss)
    
    $
    540
    
    
    $
    24,227
    
    
    $
    44,947
    
    
    $
    31,936
    
    
    $
    (58,087
    )Net income (loss) per common
share, assuming dilution (4)
    
    $
    0.03
    
    
    $
    1.33
    
    
    $
    2.41
    
    
    $
    1.90
    
    
    $
    (3.52
    )Weighted average number of
common shares, assuming dilution
(4)
    
    
    18,600
    
    
    
    18,259
    
    
    
    19,231
    
    
    
    16,849
    
    
    
    16,515Cash dividends declared, per
common share
    
    $
    0.20
    
    
    $
    0.16
    
    
    $
    0.03
    
    
    $
    
    
    
    $
    Book value per share
    
    $
    14.19
    
    
    $
    14.32
    
    
    $
    12.84
    
    
    $
    9.31
    
    
    $
    6.27Consolidated Balance
Sheet Data (1):Working capital
    
    $
    86,954
    
    
    $
    113,593
    
    
    $
    117,518
    
    
    $
    90,303
    
    
    $
    64,524Total assets
    
    
    354,283
    
    
    
    372,688
    
    
    
    337,916
    
    
    
    278,953
    
    
    
    255,917Total debt
    
    
    15,891
    
    
    
    34,992
    
    
    
    40,783
    
    
    
    57,420
    
    
    
    109,278Total shareholders equity
    
    
    260,627
    
    
    
    261,593
    
    
    
    229,388
    
    
    
    159,826
    
    
    
    102,718
  (1)
    
    This financial data includes the results of acquired operations,
including Funline Merchandise Co., Inc., acquired in September 2003;
Trevco, McArthur and Jeff Hamilton, acquired in 2002; and Goodsports
Holdings Pty Ltd. (Goodsports), closed in 2001. Results also include net
sales of Winners Circle product beginning as of the date of acquisition
of the Winners Circle trademark in 2001. Prior to acquisition of the
Winners Circle trademark, we recorded license income with respect to
Winners Circle products. 25




---



##### 



(2)
    
    Results in 2000 include charges of $17.5 million arising from the
decision to abandon our Internet strategy relating to goracing.com. The
goracing.com network at that time consisted of various
motorsports-related, e-commerce enabled websites that we developed,
operated, and maintained. The goracing.com charges include provision for
the write-off of goodwill, endorsements, sponsorship commitments, employee
severance and termination costs, and the withdrawal of the initial public
offering of goracing.com. In addition, as a result of the decision to
abandon our Internet strategy and in response to demand changes, we
evaluated our operations and concluded it was necessary to reorganize the
company and refocus on our core strengths. Consequently, in addition to
the goracing.com charges, 2000 includes charges of $47.3 million for
inventory write-downs because anticipated sponsorship and driver and
marketing programs did not materialize, a provision for vendor discounts
anticipated but not received due to lower than anticipated volumes, a
change in the estimated useful lives of tooling, write-downs of prepaid
royalties and sponsorship fees because we decided to concentrate future
production on core drivers and core programs, a write-down of goodwill
because the die-cast helmet product line was deemed worthless, and other
items. The total $64.8 million of restructuring and other special charges
are reflected as follows: $32.6 million in cost of sales, $20.3 in
selling, general, and administrative expenses, $6.4 million in
amortization of goodwill and trademark, $3.1 million in amortization of
licenses and other intangibles, and $2.4 million in other income
and expenses. (3)
    
    Amortization of goodwill and trademark ceased October 1, 2001, with the
adoption of SFAS No. 142, Goodwill and Other Intangible Assets. (4)
    
    The impacts of outstanding 43⁄4% convertible subordinated notes were
not included in the calculation of diluted EPS for 2004, 2003, 2001, and
2000, because to do so would have been antidilutive. The impact of
certain options and warrants for all years presented were not included in
the calculation of diluted EPS, because to do so would be antidilutive. (5)
    
    Amounts for 2002 and 2001 have been adjusted to reflect adoption of SFAS
No. 145 effective October 1, 2001. Prior to adoption, gains on
extinguishment of debt were reflected as extraordinary items. (6)
    
    Beginning in May 2002, euro exchange rate gain or loss on intercompany
advances to our German subsidiary is included in operations. Prior to May
2002, these advances, denominated in dollars, were deemed permanently
reinvested. 
 ITEM 7. 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:  
    
    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. 26




---



##### 




    
    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
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. 27




---



##### 



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
the products for shipment, of approximately $6 million in 2004, $6 million in
2003, and $5 million in 2002. 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. 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. 28




---



##### 



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. 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). 29




---



##### 



Results of Operations The following table sets forth, for the years indicated, the percentage of
total revenue represented by certain expense and revenue items. 2004
    
    2003
    
    2002Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    72.0
    
    
    
    66.5
    
    
    
    61.7Gross profit
    
    
    28.0
    
    
    
    33.5
    
    
    
    38.3Selling,
general, and administrative expenses
    
    
    26.3
    
    
    
    22.4
    
    
    
    18.9Amortization
of licenses and other intangibles
    
    
    1.1
    
    
    
    0.9
    
    
    
    0.7Income from operations
    
    
    0.6
    
    
    
    10.2
    
    
    
    18.7Interest expense
    
    
    (0.5
    )
    
    
    (0.6
    )
    
    
    (0.7
    )Loss on extinguishment of debt
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.3
    )Foreign exchange gains
    
    
    0.5
    
    
    
    1.0
    
    
    
    0.4Earnings from joint venture
    
    
    0.4
    
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    0.1
    
    
    
    0.2Other expense
    
    
    (0.4
    )
    
    
    (0.5
    )
    
    
    (0.4
    )Income before income taxes
    
    
    0.5
    
    
    
    10.2
    
    
    
    17.9Income taxes
    
    
    0.3
    
    
    
    3.6
    
    
    
    6.8Net income
    
    
    0.2
    %
    
    
    6.6
    %
    
    
    11.1
    %
 The following table sets forth for the years indicated, net sales by channel of
distribution and net sales from the operations of acquired entities. 2004
    
    2003
    
    2002Domestic Die-cast:Wholesale distribution and promotion
    
    $
    63,695
    
    
    $
    102,003
    
    
    $
    145,942Wholesale to mass-merchant retailers
    
    
    59,146
    
    
    
    22,140
    
    
    
    35,900Retail through collectors catalog club
    
    
    19,485
    
    
    
    24,406
    
    
    
    27,295Foreign
Die-cast - wholesale distribution and promotion
    
    
    36,903
    
    
    
    34,631
    
    
    
    29,433Total die-cast
    
    
    179,229
    
    
    
    183,180
    
    
    
    238,570Domestic Apparel and Memorabilia:Wholesale distribution and promotion
    
    
    68,818
    
    
    
    82,254
    
    
    
    65,032Wholesale to mass-merchant retailers
    
    
    43,519
    
    
    
    48,587
    
    
    
    42,523Total apparel and memorabilia
    
    
    112,337
    
    
    
    130,841
    
    
    
    107,555Domestic
Apparel and Memorabilia - Retail at Trackside
    
    
    49,928
    
    
    
    52,456
    
    
    
    57,264Royalties and Other
    
    
    2,836
    
    
    
    2,981
    
    
    
    3,169Net Sales
    
    $
    344,330
    
    
    $
    369,458
    
    
    $
    406,558Net Sales from Businesses Acquired in 2003
    
    $
    42,140
    
    
    $
    480
    
    
    $
    
 Year Ended September 30, 2004 Compared with Year Ended September 30, 2003 Net sales decreased to $344.3 million for 2004, compared to $369.5 million in
2003, a decline of $25.1 million, or 6.8%, from the 2003 fiscal year. Revenues
for the year included $42.1 million from Funline, which was acquired in 2003
and contributed $0.5 million in that year. Excluding the impact of the Funline
acquisition, revenues were down $66.8 million, or 18.1% from 2003. Domestic die-cast sales decreased $6.2 million, or 4.2%, from the prior year
while foreign die-cast sales increased $2.3 million, or 6.6%. The domestic
die-cast segment sales decrease of $6.2 million is comprised of a $38.3 million
decrease in our wholesale distribution and promotion revenues, a $4.9 million
decrease in our die-cast retail collectors catalog club revenues, and an
offsetting $37.0 million increase in domestic die-cast wholesale sales to
mass-merchant retailers. Domestic die-cast wholesale distribution and
promotion revenues and collectors catalog club revenues were down as a result
of problems in our wholesale distribution network and from a weak NASCAR 30




---



##### 



collector die-cast market. In 2004, approximately one-third of our
distributors experienced financial hardships of varying degrees, which impacted
both their ordering patterns as well as their ability to pay our invoices on a
timely basis. The NASCAR collector die-cast market in 2004 suffered from over
production of both the number of units in a given production run and the
varieties of product offerings. The increase in the variety of production runs
made our approval and production process difficult to manage, resulting in a
failure to ship product into the market on a timely basis thereby negatively
impacting sales. We expect comparable sales from our domestic die-cast
wholesale distribution and promotion revenues and collectors catalog club
revenues in 2005 as we continue to work to improve our die-cast distribution
model and focus our product offerings. Domestic die-cast wholesale sales to
mass-merchant retailers increased $37.0 million as a result of the $41.7
million impact of increased revenues from Funline, acquired in September 2003,
offset by the $4.7 million decrease in NASCAR die-cast sales to
mass-merchant
retailers. NASCAR die-cast sales to mass-merchant retailers have been trending
up year-over-year in the last two quarters of 2004. We expect double-digit
growth in Funline sales in 2005 and single digit growth in NASCAR die-cast
sales to mass-merchant retailers, based on merchant feedback. Domestic apparel and memorabilia segment sales, exclusive of trackside,
decreased $18.5 million, or 14.1%, to $112.3 million in 2004, compared to
$130.8 million in 2003, due to decreased demand. Trackside sales decreased 4.8% in 2004, to $49.9 million compared to $52.5
million in 2003. After considering the impact of the timing of the fall
Taladega Superspeedway race, which occurred in October 2002, September 2003,
and October 2004, trackside sales were relatively unchanged. The 5.5% decline in gross profit, to 28.0% of net sales in 2004 from 33.5% in
2003, was impacted by the changes in segment gross margins as follows: Gross
    
    Weighted% of Net
    
    Margin
    
    Gross MarginSales
    
    Decline
    
    DeclineDomestic die-cast
    
    
    43.8
    %
    
    
    (8.9
    )%
    
    
    (3.9
    )%Domestic apparel and memorabilia
    
    
    47.4
    
    
    
    (3.0
    )
    
    
    (1.4
    )Foreign die-cast
    
    
    10.7
    
    
    
    (2.6
    )
    
    
    (0.3
    )Corporate and other
    
    
    (1.9
    )
    
    
    
    
    
    
    0.1Consolidated Total
    
    
    100.0
    %
    
    
    
    
    
    
    (5.5
    )%
 The domestic die-cast decline in gross margin of 8.9% consisted of the
following: Impact of revenue mix between higher margin NASCAR die-cast sales and
lower margin Funline stylized die-cast (acquired in September 2003)
    
    
    0.9
    %Impact of NASCAR gross margin changes-Write-off of Pontiac NASCAR tooling due to the withdrawal of
Pontiac from NASCAR
    
    
    0.4Increased royalty rate due to NASCAR product mix
    
    
    1.5Increased royalty reserves related to guarantees and special
programs
    
    
    2.5Impact of fixed tooling amortization
    
    
    1.3Customer concessions
    
    
    0.7Product cost increases, offset by selling price increases, mix,
and other
    
    
    1.68.9
    %
 Domestic die-cast gross margins began improving in the third quarter, as a
result of price increases that went in to effect in the third quarter of 2004
and product cost reductions. However the improvement, which could be expected
to continue from these price increases, will be offset in early 2005, by
liquidation sales at lower than average margins. Domestic apparel and memorabilia margins declined 3.0% primarily as a result of
third and fourth quarter write-downs of Jeff Hamilton inventory to net
realizable value in 2004. The 2.6% decline in foreign die-cast
gross margins was principally a 31




---



##### 



result of higher 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 $90.7 million, or 26.3% of
net sales, in 2004, compared to $82.6 million, or 22.4% of net sales, in 2003.
After considering the $5.2 million increase attributable to the operations of
Funline, selling, general, and administrative expenses increased $2.9 million.
Selling, general, and administrative expenses in 2004, included the $0.9
million settlement of litigation with Dover International Speedway, $0.8
million settlement from New Hampshire International Speedway, and a $5.3
million provision for distributor and Jeff Hamilton customers receivables,
compared to 2003 which included a $0.8 million settlement on a mediation
proceeding and a $1.7 million provision for distributor receivables.
Advertising and promotion costs decreased between years by $1.0 million. Interest expense of $1.8 million in 2004, was $0.3 million lower than interest
expense for 2003 as a result of convertible subordinated note repurchases. Foreign currency gains were $1.5 million in 2004, versus a foreign currency
gain of $3.6 million in 2003. Changes in the euro-to-U.S. dollar exchange rate
resulted in translation gains of $1.7 million in 2004 and $3.7 million in 2003.
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 $0.1 million on forward exchange contracts. The effective tax rate of 66.4% for 2004 was higher than the 35.8% effective
tax rate in 2003, primarily due to the impact of nondeductible expenses on
lower pre-tax income and foreign subsidiary income comprising a larger portion
of total taxable income. Our foreign subsidiary is subject to higher tax rates
than our domestic operations. Year Ended September 30, 2003 Compared with Year Ended September 30, 2002 Net sales decreased 9.1% to $369.5 million for 2003, from $406.6 million in
2002. Domestic die-cast sales decreased $60.6 million, or 29.0%, from the
prior year while foreign die-cast sales increased $5.2 million, or 17.7%.
Domestic wholesale distribution and promotion die-cast revenues were down in
part due to the four-month delay in producing Monte Carlo and Pontiac products
arising from the retooling of those products, and in part due to reduced
special paint scheme product volumes resulting from the lack of high-impact
specials and the economic environment. Mass-merchant retail domestic die-cast
revenues were down because our largest customer ordered virtually no product
for delivery in the second half of 2003. The 17.7% increase in foreign
die-cast sales approximated the change in the average euro-to-U.S. dollar
exchange rate between 2003 and 2002. The increase in domestic apparel and
memorabilia segment sales, exclusive of trackside was $23.3 million, or 21.7%
from the prior year, and included a $22.5 million increase from businesses
acquired in 2002. Trackside sales decreased 8.4% to $52.5 million from
revenues of $57.3 million in the prior year. Trackside revenues were impacted
by adverse weather conditions and a weak economy. The 4.8% decline in gross profit, to 33.5% of sales in 2003 from 38.3% in 2002,
was impacted by the changes in segment gross margins as follows: Gross
    
    Weighted% of Net
    
    Margin
    
    Gross MarginSales
    
    Decline
    
    DeclineDomestic die-cast
    
    
    42.3
    %
    
    
    (6.8
    )%
    
    
    (2.9
    )%Domestic apparel and memorabilia
    
    
    49.7
    
    
    
    (4.0
    )
    
    
    (2.0
    )Foreign die-cast
    
    
    9.4
    
    
    
    (2.5
    )
    
    
    (0.2
    )Corporate and other
    
    
    (1.4
    )
    
    
    
    
    
    
    0.3Consolidated Total
    
    
    100.0
    %
    
    
    
    
    
    
    (4.8
    )%
 32




---



##### 



The 6.8% decline in domestic die-cast margin was attributable primarily to
die-cast product cost increases, including freight, of 4.3% and the impact of
largely fixed tooling costs on lower die-cast volumes of 2.3%. The 4.0%
decline in domestic apparel and memorabilia margins resulted principally from a
program to reduce apparel and other specialty inventories before the end of
fiscal 2003. Foreign die-cast margins were lower 2.5% as a result of higher
tooling depreciation. Selling, general, and administrative expenses increased $5.7 million to $82.6
million in 2003 compared to $76.9 million in 2002. Excluding the $5.8 million
increase attributable to the operations of businesses acquired in 2002,
selling, general, and administrative expenses decreased $0.1 million. That
increase was primarily the result of the fact that 2003 included a $0.8 million
settlement on a mediation proceeding and a $1.7 million provision for
distributor receivables compared to 2002 which included a $0.6 million vendor
settlement and $1.1 million more bonus expense than 2003. Interest expense of $2.1 million in 2003, was $0.9 million lower than interest
expense for 2002 as a result of convertible subordinated note repurchases. Foreign currency gains were $3.6 million in 2003, versus a foreign currency
gain of $1.5 million in 2002. Changes in the euro-to-U.S. dollar exchange rate
resulted in translation gains of $3.7 million in 2003 and $1.5 million in 2002.
These gains resulted from translation of German advances payable, which are
denominated in U.S. dollars. The effective tax rate of 35.8% for 2003 was lower than the 38.0% effective tax
rate in 2002, primarily because the 2003 income tax provision includes credits
of $1.4 million reflecting adjustments of prior tax rates and the release of
valuation allowances. Quarterly Results of Operations The following table sets forth certain unaudited quarterly results of
operations for each of the quarters in the two years ended September 30, 2004
(in thousands, except per share amounts). All quarterly information was
obtained from unaudited financial statements not otherwise contained in this
report. We believe that all necessary adjustments have been made to present
fairly the quarterly information when read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this report. The
operating results for any quarter are not necessarily indicative of the results
for any future period. 20041st Quarter
    
    2nd Quarter
    
    3rd Quarter
    
    4th QuarterNet sales
    
    $
    71,207
    
    
    $
    83,596
    
    
    $
    92,150
    
    
    $
    97,377Gross profit
    
    
    16,956
    
    
    
    24,162
    
    
    
    29,571
    
    
    
    25,682
    (a)Income (loss) from operations
    
    
    (3,891
    )
    
    
    2,842
    
    
    
    6,898
    
    
    
    (3,993
    )(a)Net income (loss)
    
    $
    (1,705
    )
    
    $
    1,288
    
    
    $
    3,833
    
    
    $
    (2,876
    )(a)Net income (loss) per common
share, assuming dilution
    
    $
    (0.09
    )
    
    $
    0.07
    
    
    $
    0.21
    
    
    $
    (0.16
    )(a)Weighted average number of
common shares, assuming
dilution
    
    
    18,281
    
    
    
    18,602
    
    
    
    18,606
    
    
    
    18,366
 20031st Quarter
    
    2nd Quarter
    
    3rd Quarter
    
    4th QuarterNet sales
    
    $
    85,229
    
    
    $
    90,889
    
    
    $
    87,497
    
    
    $
    105,843Gross profit
    
    
    29,952
    
    
    
    31,884
    
    
    
    30,939
    
    
    
    30,804Income from operations
    
    
    12,260
    
    
    
    11,417
    
    
    
    9,817
    
    
    
    4,071
    (b)Net income
    
    $
    7,966
    
    
    $
    7,254
    
    
    $
    6,311
    
    
    $
    2,696
    (b)Net income per common share,
assuming dilution
    
    $
    0.44
    
    
    $
    0.40
    
    
    $
    0.35
    
    
    $
    0.15
    (b)Weighted average number of
common shares, assuming
dilution
    
    
    19,003
    
    
    
    18,998
    
    
    
    18,291
    
    
    
    18,368
 33




---



##### 



(a) Results in the fourth quarter of 2004 include the impacts of a $4.0
million pre-tax expense for a reserve for distributor accounts receivable, a
$2.2 million pre-tax expense to write inventory and accounts receivable for the
Jeff Hamilton business down to estimated net realizable value, and a $0.8
million pre-tax expense for settlement of litigation with New Hampshire
International Speedway. (b) Results in the fourth quarter of 2003 include the impacts of a $0.8
million pre-tax charge related to the settlement of a mediation proceeding and
a $1.7 million pre-tax receivable allowance provision for one customer with
overdue invoices. Our revenue and operating results are subject to quarterly fluctuations as a
result of seasonality factors related to the commencement (February) and
completion (November) of the NASCAR race season. We believe that
quarter-to-quarter comparisons of our past financial results may not
necessarily be meaningful and should not be relied upon as an indication of
future performance. Liquidity and Capital Resources Working capital decreased $26.6 million to $87.0 million at September 30, 2004,
from $113.6 million at September 30, 2003. Cash decreased $36.9 million to
$12.6 million at September 30, 2004, from $49.5 million at September 30, 2003.
Cash decreased as a result of reductions in cash for net property and equipment
expenditures ($24.9 million), payments for acquisitions of businesses and
intangibles ($8.1 million), increases in inventory ($13.1 million), dividends
to common and minority interest shareholders ($5.3 million), redemption of
convertible subordinated notes ($30.1 million), increases in other current
assets, and decreases in other current liabilities. This decrease in cash was
offset by increases in cash for decreases in accounts receivable ($18.5
million) and long-term borrowings ($11.7 million). Days sales outstanding, calculated on quarterly sales, were 48.9 days as of
September 30, 2004, compared to 60.7 days as of September 30, 2003. Days sales
outstanding improved from September 30, 2003, although Funline, which was
acquired in September 2003, days sales outstanding was 56.8 days at September
30, 2004. Inventories at September 30, 2004, increased $13.7 million over amounts at
September 30, 2003. Of this increase, $7.1 million was attributable to Funline
due to inventory requirements for the mass-merchant retailers. 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 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. Domestic and foreign die-cast, including Funline product, backlog was $48
million and $44 million at September 30, 2004 and 2003. Apparel and
memorabilia backlog was approximately $17 million at both September 30, 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 and
building additions in Aachen, Germany, were $24.9 million during 2004, and
included $8.2 million applicable to foreign operations and $7.2 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 2005 are expected to total $25
million. 34




---



##### 



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. On June 30, 2004, we entered into an amended loan and security agreement with a
bank. 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). We received $11.7 million of cash upon issuance
of the term loans on June 30, 2004. 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 $11.6 million at September
30, 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 were in compliance with those covenants at September 30, 2004. As of September 30, 2004, the covenants were as follows: Financial Covenant
    
    Period
    
    Requirement
    
    ActualMinimum tangible net worth
    
    As of September 30, 2004
    
    > $105.2 million
    
    $113.7 millionMinimum
fixed charge coverage ratio
    
    April 1, 2004 to
    
    > 1.15
    
    >1.18September 30, 2004Limitation
on capital expenditures
    
    October 1, 2003 to
    
    < $35.0 million
    
    $24.9 millionSeptember 30, 2004
 At December 31, 2004, we will be required to meet a minimum fixed charge
coverage ratio for the nine months ended December 31, 2004, of 1.15. Based on
current projections, we expect to be in compliance with our covenants through
September 30, 2005, however, we expect our actual fixed charge coverage ratio
to be close to the requirement throughout that period. The revolving credit facility
bears interest at LIBOR plus 1.75% - 2.50% or prime
plus 0.00% - 0.25% (4.75% at September 30, 2004), and the term loans bear
interest at LIBOR plus 2.00% - 3.50% or prime plus 0.00% - 1.25% (Term Loan A
5.25% and Term Loan B 5.75% at September 30, 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. On August 2, 2004, we
redeemed $29.9 million of
43/4% convertible
subordinated notes at a price of 100.68% for cash of $30.1 million. We funded
the redemption with cash on hand, revolving credit facility borrowings, and the
term loans under the loan and security agreement. The subordinated notes were
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 and would have matured on April 1, 2005. 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, including the requirements of our new Funline subsidiary, 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, 2003, follows (in thousands, except per share data): 35




---



##### 



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$917
    
    $
    0.05
    
    
    June 9, 2004
    
    June 18, 2004
    
    July 12, 2004$919
    
    $
    0.05
    
    
    August 19, 2004
    
    September 17, 2004
    
    October 18, 2004
 Contractual Obligations and Commercial Commitments Aggregate future minimum payments due contractually under royalty agreement
guarantees, personal service agreements, long-term debt, noncancellable
operating leases, commercial letters of credit, and other unconditional
purchase obligations are as follows as of September 30, 2004 (in thousands): Royalty
    
    Personal
    
    
    
    
    
    
    
    
    
    
    
    
    
    UnconditionalAgreement
    
    Service
    
    Long-term
    
    Interest
    
    Lease
    
    PurchaseYear
    
    Guarantees
    
    Agreements
    
    Debt
    
    Payments
    
    Payments
    
    Obligations
    
    Total2005
    
    $
    19,145
    
    
    $
    1,514
    
    
    $
    4,009
    
    
    $
    260
    
    
    $
    5,681
    
    
    $
    12,600
    
    
    $
    43,2092006
    
    
    17,938
    
    
    
    843
    
    
    
    4,036
    
    
    
    238
    
    
    
    5,189
    
    
    
    
    
    
    
    28,2442007
    
    
    15,996
    
    
    
    379
    
    
    
    3,504
    
    
    
    213
    
    
    
    4,923
    
    
    
    
    
    
    
    25,0152008
    
    
    14,514
    
    
    
    135
    
    
    
    1,036
    
    
    
    188
    
    
    
    4,092
    
    
    
    
    
    
    
    19,9652009
    
    
    14,491
    
    
    
    135
    
    
    
    254
    
    
    
    163
    
    
    
    3,650
    
    
    
    
    
    
    
    18,693Thereafter
    
    
    39,695
    
    
    
    68
    
    
    
    3,052
    
    
    
    1,084
    
    
    
    10,004
    
    
    
    
    
    
    
    53,903Total
    
    $
    121,779
    
    
    $
    3,074
    
    
    $
    15,891
    
    
    $
    2,146
    
    
    $
    33,539
    
    
    $
    12,600
    
    
    $
    189,029
 In addition to the scheduled interest payments above, we will pay interest on
amounts outstanding under our loan and security agreement. Unconditional
purchase obligations at September 30, 2004, were approximately $1.0 million for
property and equipment and $11.6 million of outstanding letters of credit.
Term Loan B under the loan and security agreement is subject to annual
mandatory prepayments of 50% of excess cash flows as defined by the agreement.
Scheduled payments for this three-year loan are reflected above. Excluded from above is a commitment to make a payment in connection with a
license renewal totaling $5 million in 2006, and a commitment to make a payment
in connection with a license extension, at the licensors option, for $2
million, in 2007. Also excluded from above is our commitment to pay the former owners of Funline
the following under their earn-out provisions if the following targets are met: Year Ended
    
    Year EndedDecember 31, 2004
    
    December 31, 2005Target revenue
    
    $35.0 - $45.0 million
    
    $45.0 - $55.0 millionAdditional Consideration-
Cash
    
    $1.0 - $2.0 million
    
    $1.0 - $2.0 millionShares of common stock
    
    23,310 - 46,620 shares
    
    23,310 - 46,620 shares
 Based on current trends we expect Funline to have revenues during the earn-out
period ended December 31, 2004, in excess of $40.0 million. In certain sublease arrangements, we remain the primary obligor under the terms
of the original lease agreements. Commitments under these subleases expire as
follows (in thousands): 36




---



##### 



SubleaseYear
    
    Commitments2005
    
    $
    6032006
    
    
    4692007
    
    
    3422008
    
    
    2009
    
    
    Thereafter
    
    
    Total
    
    $
    1,414
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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
change our annual interest expense $0.1 million, if our variable rate debt
remains at September 30, 2004, levels. 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 affect our future earnings. A 7% change in the euro
exchange rate would change the net income from that operation in 2004 by $0.1
million. During part of the year 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 $16.3 million at September 30, 2004. In 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). We
realized $0.3 million of losses on contracts, which settled at maturity in
2004. 
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the financial statements, the notes thereto, and reports
thereon, commencing at page F-1 of this report, which financial statements,
notes, and report are incorporated herein by reference. 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 
 ITEM 9A. 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 September 30, 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 annual reports filed under the Securities Exchange Act within the time
periods specified by the Securities and Exchange Commissions rules and forms.
During the period covered by this report, there have not been any changes in
our internal controls over financial reporting that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting. 
 ITEM 9B. OTHER INFORMATION Not applicable. 37




---



##### 



PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item relating to directors of our company is
incorporated herein by reference to the definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934 for our 2005
Annual Meeting of Shareholders. The information required by this Item relating
to our executive officers is included in Item 1, Business  Executive
Officers. 
 ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2005 Annual Meeting of Shareholders. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS The information required by this Item is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2005 Annual Meeting of Shareholders. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2005 Annual Meeting of Shareholders. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item is incorporated herein by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Exchange Act for our 2005 Annual Meeting of Shareholders. 
 PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Financial Statement Schedules  (1)
    
    Financial Statements are listed in the Index to Consolidated
Financial Statements and Schedule on page F-1 of this Report.(2)
    
    The Financial Statement Schedule II  VALUATION AND
QUALIFYING ACCOUNTS is listed in the Index to Consolidated Financial
Statements and Schedule on page F-1 of this report. (b) Reports on Form 8-K We filed a current report on Form 8-K, dated July 1, 2004,
reporting that we issued a press release announcing our intention
to redeem the remaining $29.9 million of
43/4% convertible
subordinated notes due 2005 on August 2, 2004. We filed a current report on Form 8-K, dated July 1, 2004,
reporting the renewal and increase of our senior secured credit
facility with Banc One Capital Markets, Inc. We filed a current report on Form 8-K, dated July 28, 2004,
reporting that we issued a press release announcing our third
quarter ended June 30, 2004, results. We filed a current report on Form 8-K, dated August 2, 2004,
reporting that we redeemed the remaining $29.9 million of our
43/4% convertible subordinated notes at a price of 100.68
percent. 38




---



##### 



We filed a current report on Form 8-K, dated August 19, 2004,
reporting the appointment of Melodee Volosin as our Executive Vice
President and Chief Operating Officer effective August 19, 2004. (c) Exhibits ExhibitNumber
    
    Exhibit3.1
    
    First Amended and Restated Articles of Incorporation of Registrant, as amended (11)3.2
    
    Amended and Restated Bylaws of Registrant (1)4.1
    
    Form of Certificate of Common Stock (2)4.2
    
    Indenture dated as of March 24, 1998, between Action Performance
Companies, Inc. and First Union National Bank, as Trustee, including forms
of Notes (3)10.4.2
    
    1993 Stock Option Plan, as amended and restated through January 16, 1997
(5)10.8
    
    Form of Indemnification Agreement entered into with the Directors of the
Registrant (2)10.27
    
    Manufacturing Agreement between the Registrant and Early Light
International Co. Ltd. dated November 1, 2000 (4)10.52
    
    1998 Non-qualified Stock Option Plan(3)10.49
    
    Standard Form Industrial Lease dated April 8, 1997, between
Hewson/Breckner-Baseline, L.L.C. and Action Performance Companies, Inc.
(6)
 39




---



##### 



ExhibitNumber
    
    Exhibit10.50
    
    Lease Agreement dated July 9, 1997, by and between Performance Park
Partners, LLC and Sports Image, Inc. (6)10.52
    
    1998 Non-qualified Stock Option Plan (3)10.56
    
    1999 Employee Stock Purchase Plan (7)10.57
    
    Standard Form Industrial Lease (Single Tenant) dated June 28, 1999,
between H-B Tempe, L.L.C. and Action Performance Companies, Inc. (8)10.59
    
    Distribution Agreement dated September 13, 2000 by and between the
Registrant and QVC, Inc. (4)10.63
    
    Loan and Security Agreement dated September 29, 2000 by and among Action
Performance Companies, Inc., certain subsidiaries and affiliates, as
guarantors, and American National Bank and Trust Company of Chicago. (4)10.64
    
    Pledge Agreement dated October 2, 2000, by and between Racing
Collectables Club of America, Inc., and American National Bank and Trust
Company of Chicago. (4)10.65
    
    Pledge Agreement dated October 2, 2000 by and between Action Performance
Companies, Inc., and American National Bank and Trust Company of Chicago.
(4)10.66
    
    Pledge Agreement dated October 2, 2000 by and between goracing.com,
inc., and American National Bank and Trust Company of Chicago. (4)10.67
    
    Second Amendment to Loan and Security Agreement, dated January 31, 2001,
by and among Action Performance Companies, Inc., and certain subsidiaries
and affiliates, as guarantors, and Bank One, NA. (9)10.68
    
    First Amended and Restated 2000 Stock Option Plan (10)10.69
    
    Consent and Third Amendment to Loan and Security Agreement, dated
September 2002, by and among Action Performance Companies, Inc., and
certain subsidiaries and affiliates, as guarantors, and Bank One, NA. (11)10.70
    
    Fifth Amendment to Loan and Security Agreement, dated March 12, 2003, by
and among Action Performance Companies, Inc., and certain subsidiaries and
affiliates, as guarantors, and Bank One, NA. (12)10.71
    
    Sixth Amendment to Loan and Security Agreement, dated September 23,
2003, by and among Action Performance Companies, Inc., and certain
subsidiaries and affiliates, as guarantors, and Bank One, NA. (13)10.72
    
    Form of Non-Qualified Stock Option Agreement for Chris Leong, April
Leong, and Ken Leong. (14)10.73
    
    Amended and Restated Credit Agreement, dated June 30, 2004, by and among
Action Performance Companies, Inc. and certain subsidiaries and
affiliates, as guarantors, and Bank One, NA. (15)10.74
    
    Pledge and Security Agreement, dated June 30, 2004, by and among Action
Performance Companies, Inc. and certain subsidiaries and affiliates, as
guarantors, and Bank One, NA. (15)10.75
    
    Severance Agreement and General
Release, effective October 8, 2004,
between Action Performance Companies, Inc., and R. David Martin.10.76
    
    Employment Agreement, dated
December 10, 2004, between Action
Performance Companies, Inc. and Fred W. Wagenhals.21
    
    List of Subsidiaries
 40




---



##### 



ExhibitNumber
    
    Exhibit23.1
    
    Consent of PricewaterhouseCoopers LLP31.1
    
    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
amended.31.2
    
    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
amended.32.1
    
    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
2002.32.2
    
    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.
   (1)
    
    Incorporated by reference to the Registrants Form 10-QSB for the quarter
ended March 31, 1996, as filed with the Securities and Exchange Commission
on May 2, 1996.(2)
    
    Incorporated by reference to the Registrants Registration Statement on
Form SB-2 and amendments thereto (Registration No. 33-57414-LA).(3)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter
ended March 31, 1998, as filed with the Securities and Exchange Commission
on May 15, 1998.(4)
    
    Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 2000, as filed with the Securities and Exchange
Commission on December 29, 2000.(5)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter
ended March 31, 1997, as filed with the Securities and Exchange Commission
on May 15, 1997.(6)
    
    Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 1997, as filed with the Securities and Exchange
Commission on December 22, 1997.(7)
    
    Incorporated by reference to the Registrants Registration Statement on
Form S-8 (Registration No. 333-82879).(8)
    
    Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 1999, as filed with the Securities and Exchange
Commission on December 29, 1999.(9)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter
ended December 31, 2001, as filed with the Securities and Exchange
Commission on February 13, 2002.(10)
    
    Incorporated by reference to the Registrants Registration Statement on
Form S-8 (Registration No. 333-88114).(11)
    
    Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 2002, as filed with the Securities and Exchange
Commission on December 20, 2002.(12)
    
    Incorporated by reference to the Registrants Form 8-K dated March 12,
2003, as filed with the Securities and Exchange Commission on March 18,
2003.(13)
    
    Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 2003, as filed with the Securities and Exchange
Commission on December 16, 2003.(14)
    
    Incorporated by reference to the Registrants Registration Statement on
Form S-8 (Registration No. 333-114246).(15)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter
ended June 30, 2004, as filed with the Securities and Exchange Commission
on August 10, 2004. 41




---



##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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.Date: December 10, 2004
    
    /s/ Fred W. WagenhalsFred W. Wagenhals, Chairman of the Board,President, and Chief Executive Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated. Signature
    
    Capacity
    
    Date/s/ Fred W. Wagenhals
Fred W. Wagenhals
    
    Chairman of the Board, President, and Chief
Executive Officer (Principal Executive Officer)
    
    December 10, 2004/s/ David M. Riddiford
David M. Riddiford
    
    Chief Financial Officer, Secretary, Treasurer,
and Director (Principal Financial and
Accounting Officer)
    
    December 10, 2004/s/ Melodee L. Volosin
Melodee L. Volosin
    
    Chief Operating Officer, Executive Vice
President, and Director
    
    December 10, 2004/s/ Herbert M. Baum
Herbert M. Baum
    
    Director
    
    December 10, 2004/s/ Edward J. Bauman
Edward J. Bauman
    
    Director
    
    December 10, 2004/s/ Michael L. Gallagher
Michael L. Gallagher
    
    Director
    
    December 10, 2004/s/ Roy A. Herberger, Jr.
Roy A. Herberger, Jr.
    
    Director
    
    December 10, 2004/s/ Anne L. Mariucci
Anne L. Mariucci
    
    Director
    
    December 10, 2004/s/ Robert L. Matthews
Robert L. Matthews
    
    Director
    
    December 10, 2004/s/ Lowell L. Robertson
Lowell L. Robertson
    
    Director
    
    December 10, 2004
 42




---



##### 



ACTION PERFORMANCE COMPANIES, INC. 
 Index to Consolidated Financial Statements and Schedule
 PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of September 30, 2004 and 2003
    
    
    F-3Consolidated Statements of Operations and Comprehensive Income for the Years
Ended September 30, 2004, 2003 and 2002
    
    
    F-4Consolidated Statements of Shareholders Equity for the Years
Ended September 30, 2004, 2003 and 2002
    
    
    F-5Consolidated Statements of Cash Flows for the Years
Ended September 30, 2004, 2003 and 2002
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7Schedule II  Valuation and Qualifying Accounts
    
    
    F-24
 F-1




---



##### 



Report of Independent Registered Public Accounting Firm To: The Board of Directors and Shareholders of Action Performance Companies, Inc.: In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Action Performance Companies, Inc. and its subsidiaries at
September 30, 2004 and September 30, 2003, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 2004, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion. /s/ PricewaterhouseCoopers LLP Phoenix, Arizona
December 3, 2004 F-2




---



##### 



ACTION PERFORMANCE COMPANIES, INC. 
 CONSOLIDATED BALANCE SHEETS
September 30, 2004 and 2003
(in thousands, except per share data)
 2004
    
    2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    12,580
    
    
    $
    49,462Accounts receivable, net of allowance of $9,367 and $3,634
    
    
    51,769
    
    
    
    69,890Inventories
    
    
    56,947
    
    
    
    43,232Prepaid royalties
    
    
    2,834
    
    
    
    4,470Taxes receivable
    
    
    2,126
    
    
    
    Deferred income taxes
    
    
    8,766
    
    
    
    5,291Prepaid expenses and other
    
    
    5,920
    
    
    
    3,161Total current assets
    
    
    140,942
    
    
    
    175,506LONG-TERM ASSETS:Property and equipment, net
    
    
    64,878
    
    
    
    62,951Goodwill
    
    
    88,653
    
    
    
    87,448Licenses and other intangibles, net
    
    
    56,614
    
    
    
    44,426Other
    
    
    3,196
    
    
    
    2,357Total long-term assets
    
    
    213,341
    
    
    
    197,182$
    354,283
    
    
    $
    372,688LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    28,778
    
    
    $
    36,734Accrued royalties
    
    
    10,702
    
    
    
    9,692Accrued expenses
    
    
    8,757
    
    
    
    11,764Taxes payable
    
    
    1,742
    
    
    
    3,156Current portion of long-term debt
    
    
    4,009
    
    
    
    567Total current liabilities
    
    
    53,988
    
    
    
    61,913LONG-TERM LIABILITIES:Deferred income taxes
    
    
    24,979
    
    
    
    10,89043⁄4% convertible subordinated notes
    
    
    
    
    
    
    29,935Other long-term debt
    
    
    11,882
    
    
    
    4,490Other
    
    
    298
    
    
    
    926Total long-term liabilities
    
    
    37,159
    
    
    
    46,241MINORITY INTERESTS
    
    
    2,509
    
    
    
    2,941COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Preferred stock, no par value, 5,000 shares authorized,
no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 62,500 shares authorized;
18,560 and 18,464 shares issued
    
    
    186
    
    
    
    185Additional paid-in capital
    
    
    158,429
    
    
    
    157,301Treasury stock, at cost, 190 and 190 shares
    
    
    (3,999
    )
    
    
    (3,999
    )Accumulated other comprehensive loss
    
    
    (1,456
    )
    
    
    (2,488
    )Retained earnings
    
    
    107,467
    
    
    
    110,594Total shareholders equity
    
    
    260,627
    
    
    
    261,593$
    354,283
    
    
    $
    372,688
 The accompanying notes are an integral part of these consolidated financial statements. F-3




---



##### 



ACTION PERFORMANCE COMPANIES, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 Years Ended September 30, 2004, 2003 and 2002
(in thousands, except per share data) 2004
    
    2003
    
    2002Net sales
    
    $
    344,330
    
    
    $
    369,458
    
    
    $
    406,558Cost of sales
    
    
    247,959
    
    
    
    245,879
    
    
    
    250,810Gross profit
    
    
    96,371
    
    
    
    123,579
    
    
    
    155,748Operating expenses:Selling, general, and administrative
    
    
    90,713
    
    
    
    82,598
    
    
    
    76,870Amortization of licenses and other intangibles
    
    
    3,802
    
    
    
    3,416
    
    
    
    2,797Total operating expenses
    
    
    94,515
    
    
    
    86,014
    
    
    
    79,667Income from operations
    
    
    1,856
    
    
    
    37,565
    
    
    
    76,081Interest expense
    
    
    (1,832
    )
    
    
    (2,085
    )
    
    
    (3,029
    )Gain (loss) on extinguishment of debt
    
    
    (322
    )
    
    
    34
    
    
    
    (1,361
    )Foreign exchange gains
    
    
    1,545
    
    
    
    3,574
    
    
    
    1,500Earnings from joint venture
    
    
    1,370
    
    
    
    62
    
    
    
    Other income
    
    
    204
    
    
    
    485
    
    
    
    773Other expense
    
    
    (1,215
    )
    
    
    (1,909
    )
    
    
    (1,411
    )Income before income taxes
    
    
    1,606
    
    
    
    37,726
    
    
    
    72,553Income taxes
    
    
    1,066
    
    
    
    13,499
    
    
    
    27,606Net income
    
    
    540
    
    
    
    24,227
    
    
    
    44,947Currency translation
    
    
    1,032
    
    
    
    2,118
    
    
    
    1,019Comprehensive income
    
    $
    1,572
    
    
    $
    26,345
    
    
    $
    45,966EARNINGS PER COMMON SHARE:Basic
    
    $
    0.03
    
    
    $
    1.36
    
    
    $
    2.56Diluted
    
    $
    0.03
    
    
    $
    1.33
    
    
    $
    2.41
 The accompanying notes are an integral part of these consolidated financial statements. F-4




---



##### 



ACTION PERFORMANCE COMPANIES, INC. 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 
 AccumulatedOtherCommon Stock
    
    AdditionalPaid-in
    
    Treasury
    
    ComprehensiveIncome
    
    RetainedShares
    
    Amount
    
    Capital
    
    Stock
    
    (Loss)
    
    Earnings
    
    TotalBALANCE, OCTOBER 1, 2001
    
    
    17,313
    
    
    $
    173
    
    
    $
    121,669
    
    
    $
    (1,221
    )
    
    $
    (5,625
    )
    
    $
    44,830
    
    
    $
    159,826Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (532
    )
    
    
    (532
    )Common stock purchases, 83 shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,038
    )
    
    
    
    
    
    
    
    
    
    
    (2,038
    )Treasury stock issuances for note
repurchases, 145 shares
    
    
    
    
    
    
    
    
    
    
    5,638
    
    
    
    1,284
    
    
    
    
    
    
    
    
    
    
    
    6,922Common stock issuances for note
repurchases
    
    
    95
    
    
    
    2
    
    
    
    4,514
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,516Stock option exercises
    
    
    437
    
    
    
    4
    
    
    
    6,465
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,469Stock option tax benefits
    
    
    
    
    
    
    
    
    
    
    2,864
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,864Warrant issuances for services and
licenses
    
    
    
    
    
    
    
    
    
    
    2,903
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,903Shares issued for business acquisitions
    
    
    84
    
    
    
    
    
    
    
    2,343
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,343Other
    
    
    19
    
    
    
    
    
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    149Currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,019
    
    
    
    
    
    
    
    1,019Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,947
    
    
    
    44,947BALANCE, SEPTEMBER 30, 2002
    
    
    17,948
    
    
    
    179
    
    
    
    146,545
    
    
    
    (1,975
    )
    
    
    (4,606
    )
    
    
    89,245
    
    
    
    229,388Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,878
    )
    
    
    (2,878
    )Common stock purchases, 110 shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,024
    )
    
    
    
    
    
    
    
    
    
    
    (2,024
    )Stock option exercises
    
    
    140
    
    
    
    2
    
    
    
    819
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    821Stock option tax benefits
    
    
    
    
    
    
    
    
    
    
    623
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    623Shares issued for business acquisitions
    
    
    373
    
    
    
    4
    
    
    
    9,264
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,268Other
    
    
    3
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,118
    
    
    
    
    
    
    
    2,118Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,227
    
    
    
    24,227BALANCE, SEPTEMBER 30, 2003
    
    
    18,464
    
    
    
    185
    
    
    
    157,301
    
    
    
    (3,999
    )
    
    
    (2,488
    )
    
    
    110,594
    
    
    
    261,593Cash dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,667
    )
    
    
    (3,667
    )Stock option exercises
    
    
    52
    
    
    
    1
    
    
    
    195
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    196Stock option tax benefits
    
    
    
    
    
    
    
    
    
    
    142
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142Warrant issuances for services and
licenses
    
    
    
    
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110Warrant exercises
    
    
    10
    
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69Shares issued for business acquisitions
    
    
    28
    
    
    
    
    
    
    
    547
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    547Other
    
    
    6
    
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65Currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,032
    
    
    
    
    
    
    
    1,032Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    540
    
    
    
    540BALANCE, SEPTEMBER 30, 2004
    
    
    18,560
    
    
    $
    186
    
    
    $
    158,429
    
    
    $
    (3,999
    )
    
    $
    (1,456
    )
    
    $
    107,467
    
    
    $
    260,627
 The accompanying notes are an integral part of these consolidated financial statements. F-5




---



##### 



ACTION PERFORMANCE COMPANIES, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended September 30, 2004, 2003 and 2002
(in thousands) 2004
    
    2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    540
    
    
    $
    24,227
    
    
    $
    44,947Adjustments to reconcile net income to net cash
provided by operating activities-Deferred income taxes
    
    
    (885
    )
    
    
    3,354
    
    
    
    (133
    )Depreciation and amortization
    
    
    30,184
    
    
    
    26,153
    
    
    
    23,722(Gain) loss on extinguishment of debt
    
    
    322
    
    
    
    (34
    )
    
    
    1,361Stock option tax benefits
    
    
    142
    
    
    
    623
    
    
    
    2,864Undistributed earnings from joint venture
    
    
    (1,370
    )
    
    
    (62
    )
    
    
    Other
    
    
    1,149
    
    
    
    982
    
    
    
    1,976Change in assets and liabilities, net of businesses
acquired and disposed:Accounts receivable, net of allowance
    
    
    18,456
    
    
    
    (1,865
    )
    
    
    (18,518
    )Inventories
    
    
    (13,077
    )
    
    
    (363
    )
    
    
    (4,522
    )Prepaid royalties
    
    
    3,706
    
    
    
    15
    
    
    
    3,285Other assets
    
    
    (2,785
    )
    
    
    2,890
    
    
    
    (2,116
    )Accounts payable and accrued expenses
    
    
    (9,469
    )
    
    
    (6,117
    )
    
    
    5,869Accrued royalties
    
    
    (1,167
    )
    
    
    (4,241
    )
    
    
    (1,655
    )Taxes payable and receivable, net
    
    
    (3,660
    )
    
    
    (1,851
    )
    
    
    (3,366
    )Other liabilities
    
    
    (2,273
    )
    
    
    (4,285
    )
    
    
    (989
    )Net cash provided by operating activities
    
    
    19,813
    
    
    
    39,426
    
    
    
    52,725CASH FLOWS FROM INVESTING ACTIVITIES:Property and equipment purchases
    
    
    (24,940
    )
    
    
    (33,366
    )
    
    
    (25,800
    )Property and equipment sales proceeds
    
    
    84
    
    
    
    245
    
    
    
    261Acquisitions of businesses and intangibles,
net of costs
    
    
    (8,142
    )
    
    
    (15,733
    )
    
    
    (19,006
    )Other
    
    
    615
    
    
    
    
    
    
    
    (238
    )Net cash used in investing activities
    
    
    (32,383
    )
    
    
    (48,854
    )
    
    
    (44,783
    )CASH FLOWS FROM FINANCING ACTIVITIES:Long-term debt borrowings
    
    
    11,700
    
    
    
    3,001
    
    
    
    Long-term debt repayments
    
    
    (31,303
    )
    
    
    (9,429
    )
    
    
    (6,397
    )Stock option and other exercise proceeds
    
    
    330
    
    
    
    871
    
    
    
    6,618Common stock purchases for treasury
    
    
    
    
    
    
    (2,024
    )
    
    
    (1,975
    )Dividends
paid - common shareholders
    
    
    (3,663
    )
    
    
    (2,497
    )
    
    
    Dividends
paid - minority interest shareholders
    
    
    (1,609
    )
    
    
    (1,256
    )
    
    
    (1,353
    )Net cash used in financing activities
    
    
    (24,545
    )
    
    
    (11,334
    )
    
    
    (3,107
    )Effect of exchange rate changes on cash and cash
equivalents
    
    
    233
    
    
    
    639
    
    
    
    236Net change in cash and cash equivalents
    
    
    (36,882
    )
    
    
    (20,123
    )
    
    
    5,071Cash and cash equivalents, beginning of year
    
    
    49,462
    
    
    
    69,585
    
    
    
    64,514Cash and cash equivalents, end of year
    
    $
    12,580
    
    
    $
    49,462
    
    
    $
    69,585
 The accompanying notes are an integral part of these consolidated financial statements. F-6




---



##### 



ACTION PERFORMANCE COMPANIES, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 THE COMPANY Operations Action Performance Companies, Inc., an Arizona corporation, and its U.S. and
German subsidiaries (Action) designs and sells licensed motorsports collectible
and consumer products. Our products include die-cast scaled replicas of
motorsports vehicles, apparel (including tee shirts, hats, and jackets),
seasonal gifts, leather jackets, terry products, golf gifts, and memorabilia.
In the United States, we are a licensee of, among others, the National
Association for Stock Car Auto Racing (NASCAR), Indy Racing League (IRL), World
of Outlaws, and National Hot Rod Association (NHRA). In Germany, we
merchandise Formula One and high-end auto manufacturer die-cast replica
vehicles. Our products are marketed in the United States, Germany and worldwide through:  
    
    Distributor networks which target specialty retailers;
    
    Mobile trackside stores which target motorsports event attendees;
    
    Mass-merchant retailers;
    
    A members only collectors catalog club, managed by QVC;
    
    Television programming on QVC;
    
    Internet sites including goracing.com, an Internet site maintained by QVC; and
    
    Other distribution channels. We work closely with drivers, teams, owners, track operators, and sponsors, to
design and merchandise products. We outsource production of the die-cast and
most of the apparel and memorabilia. We retain ownership and control over
designs and tooling, however, and maintain close working relationships with
outsourced manufacturers to help assure quality product. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Action
Performance Companies, Inc. and its wholly owned and majority owned
subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. Our fiscal year ends September 30. Certain
reclassifications have been made in prior period financial statements to
conform to the current presentation. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of Estimates Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses, and disclosure of contingent assets and liabilities. Estimates
are used for, but not limited to, the accounting for doubtful accounts,
inventory values, goodwill and other intangible values, depreciation,
amortization, prepaid royalty allowances, taxes, and contingencies. Actual
results could differ from those estimates. F-7




---



##### 



Revenue Recognition 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 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. 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
the products for shipment, of approximately $6 million in 2004, $6 million in
2003, and $5 million in 2002. 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. Inventory Inventories are stated at cost (first-in, first-out method or average cost) or
estimated net realizable value if lower. The cost of purchased inventory
includes the cost of the purchased product and freight in. Cost of sales also
includes freight out. 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. F-8




---



##### 



Personal Services Amounts due under personal service agreements for driver appearance fees and
similar matters, are expensed to selling, general, and administrative
expenses over the
term during which the services are provided. Cash and Cash Equivalents Cash and cash equivalents includes cash and all highly liquid investments with
original maturities of three months or less. Property and Equipment Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which range up to 25 years. Tooling consists of molds and dies used by third
parties to manufacture our die-cast scaled replicas. Tooling costs capitalized
consist of amounts paid to the third parties, which manufacture the tools.
Depreciation of tooling and other production assets is included in cost of
sales. All other depreciation is included in selling, general, and
administrative expenses. Maintenance and repairs are charged to expense as
incurred. The costs of renewals and betterments that materially extend the
useful lives of assets or increase their productivity are capitalized. Long-Lived Assets We periodically evaluate long-lived assets used in operations for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be fully recoverable. Determination of recoverability is based on the
sum of the expected long-term undiscounted cash flows compared to the carrying
amount of the long-lived assets being evaluated. Goodwill and Other Intangibles Goodwill represents the cost in excess of the fair value of net assets acquired
in business combinations. Licenses and other intangibles, which have
definitive lives, are amortized using the straight-line method over their
contractual lives or their estimated useful life if shorter. Goodwill and
intangibles with indefinite lives are subject to an impairment test, based on
fair value, at least annually. We evaluate goodwill and other intangibles for
impairment annually, and when impairment indicators arise, in accordance with
SFAS 142. 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 completed impairment evaluations of goodwill and of other intangibles,
which include licenses and trademarks and other intangibles, in accordance with
SFAS 142. The reporting units for SFAS 142 are domestic die-cast, domestic
apparel and memorabilia, foreign die-cast, and corporate and other, which are
also our reporting segments. Goodwill and trademarks, which have an indefinite
life, have been allocated to those reporting units as indicated below in
Segment Information. We have made no adjustments to income (loss) to date in
connection with the evaluations. Currency Translation Financial information relating to foreign operations is reported in accordance
with SFAS No. 52, Foreign Currency Translation. The financial statements of
non-U.S. subsidiaries are measured using the local currency as the functional
currency. Assets and liabilities of these non-U.S. subsidiaries are translated
at exchange rates in effect as of each balance sheet date, and related revenues
and expenses are translated at average exchange rates in effect during the
period. The resulting currency translation adjustments are recorded directly
to shareholders equity as a component of other comprehensive income (loss). F-9




---



##### 



Stock-Based Compensation 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. For SFAS No. 123, Accounting for Stock-Based Compensation
(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: 2004
    
    2003
    
    2002Volatility
    
    
    65.2
    %
    
    
    54.1
    %
    
    
    57.2
    %Risk-free interest rate
    
    
    2.7
    %
    
    
    2.1
    %
    
    
    2.6
    %Dividend rate
    
    
    1.0
    %
    
    
    0.7
    %
    
    
    0.7
    %Expected life of options
    
    3 years
    
    3 years
    
    3 years
 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 income and per share amounts
would have been the following pro forma amounts (in thousands, except per share
data): 2004
    
    2003
    
    2002Net income, as reported
    
    $
    540
    
    
    $
    24,227
    
    
    $
    44,947Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of related tax
effects
    
    
    (3,817
    )
    
    
    (3,667
    )
    
    
    (3,125
    )Pro forma net income (loss)
    
    $
    (3,277
    )
    
    $
    20,560
    
    
    $
    41,822Basic Earnings (Loss) Per Share:As Reported
    
    $
    0.03
    
    
    $
    1.36
    
    
    $
    2.56Pro Forma
    
    $
    (0.18
    )
    
    $
    1.15
    
    
    $
    2.38Diluted Earnings (Loss) Per Share:As Reported
    
    $
    0.03
    
    
    $
    1.33
    
    
    $
    2.41Pro Forma
    
    $
    (0.18
    )
    
    $
    1.13
    
    
    $
    2.24
 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). We adopted FIN 46-R on January 1, 2004.
Adoption of FIN 46-R had no effect on our financial position, results of
operations, or cash flows. We have interests in an unconsolidated partnership,
which remain unconsolidated under FIN No. 46, due to the exception in paragraph
4(h) in FIN 46-R. 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. F-10




---



##### 



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 LLC,
included in other long-term assets, was $0.9 million at September 30, 2004, and
$0.1 million at September 30, 2003, and earnings on the investment in the LLC,
included in other income, were $1.4 million for 2004, and $0.1 million for
2003. ACQUISITIONS AND DISPOSITIONS In September 2003, we acquired Funline Merchandise Co.; Inc. (Funline), a
distributor of non-NASCAR die-cast vehicles. The purchase price of $24.9
million consisted of $15.5 million in cash, including payment of $3.8 million
of existing debt, $9.3 million in common stock, and $0.1 million in accrued
transaction costs. The final allocation of the purchase price was as follows
(in thousands): Accounts receivable, net
    
    $
    6,191Inventories
    
    
    9,225Prepaid royalties
    
    
    423Prepaid expenses and other
    
    
    64Property and equipment
    
    
    69Trademark
    
    
    28,829Non-compete and other intangibles
    
    
    1,695Accounts payable
    
    
    (5,735
    )Deferred taxes payable
    
    
    (11,468
    )Taxes payable
    
    
    (640
    )Accrued royalties
    
    
    (857
    )Accrued expenses
    
    
    (2,918
    )Purchase price
    
    $
    24,878
 Under the terms of the agreement, if Funline achieves certain revenue targets
we pay additional consideration as follows for the periods indicated: September 26, 2003 to
    
    Year Ended
    
    Year EndedDecember 31, 2003
    
    December 31, 2004
    
    December 31, 2005Target revenue
    
    $12.0 - $17.0 million
    
    $35.0 - $45.0 million
    
    $45.0 - $55.0 millionAdditional Consideration-Cash
    
    $1.0 - $2.0 million
    
    $1.0 - $2.0 million
    
    $1.0 - $2.0 millionShares of common stock
    
    23,310 - 46,620 shares
    
    23,310 - 46,620 shares
    
    23,310 - 46,620 shares
 The additional consideration for each of the periods will be added to the
Funline purchase price if and when the financial targets are achieved. Net
assets were assigned to the domestic die-cast segment. 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 for the
period ended December 31, 2003. As a result, we issued 28 thousand shares of
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. In 2004, we
made an election for federal income tax purposes to treat the acquisition as a
stock purchase, which resulted in a revision of the preliminary purchase price
allocation to establish deferred tax liabilities of $11.5 million and paid $0.7
million as additional purchase price under a dividend distribution agreement.
The additional consideration for the earn-out and the election increased the
amount recorded for the Funline trademarks. F-11




---



##### 



In September 2002, we acquired a producer of premium leather jackets and other
apparel, which operates as Jeff Hamilton Collection, Inc. A portion of the
product is decorated with team logos under licenses with many of the major
sports leagues. The initial purchase price of $4.5 million in cash, including
payment of certain existing liabilities, and $1.0 million in common stock was
allocated $1.0 million to tangible net assets, primarily inventory, $4.3
million to trademark and $0.2 million to other intangible assets consisting of
backlog, licenses, and non-contractual customer relationships. Under the terms
of the agreement, we pay additional consideration if Jeff Hamilton achieves net
income before income tax targets in 2003 and 2004. These targets were not met.
Net assets were assigned to the domestic apparel and memorabilia segment. In July 2002, we acquired terry and golf product businesses, which operates as
McArthur Towel and Sports, Inc. McArthur distributes terry and golf products
to specialty retailers and institutions. A portion of the product is decorated
with team logos under licenses with many of the major sports leagues and
college teams. The purchase price of $4.6 million in cash was allocated $2.3
million to tangible net assets, primarily inventory, $1.9 million to goodwill
(which is expected to be deductible for tax purposes), and $0.4 million to
other intangible assets, consisting of backlog, patent, licenses, and
non-contractual customer relationships. Net assets were assigned to the
domestic apparel and memorabilia segment. In June 2002, we acquired Trevco Trading Corp. Trevco markets gifts and
ornaments, which are produced overseas, to mass-merchant retailers. The
initial cash purchase price of $5.5 million was allocated $0.5 million to
tangible net assets, $2.3 million to goodwill (which is expected to be
deductible for tax purposes) and $2.7 million to other intangible assets,
consisting of backlog, non-contractual customer relationships, and a five-year
non-compete agreement. The intangible assets are being amortized over lives
ranging from three months to five years. Under the terms of the merger
agreement, additional consideration was payable if Trevco achieved revenue and
operating income targets for the five months ended September 30, 2002. As of
September 30, 2002, Trevco achieved its revenue and operating targets and an
additional $1.0 million in cash and $1.3 million in stock were accrued to
goodwill as additional purchase price. Under the terms of the merger
agreement, we may issue a second round of additional consideration, either 50
thousand or 75 thousand shares of common stock, if Trevco achieves revenue and
operating income targets in 2004. No additional consideration was owed under
these provisions. Trevcos sales fall primarily in our fourth quarter. Net
assets were assigned to the domestic apparel and memorabilia segment. Pro forma financial information has not been presented as the acquisitions in
each of the years 2003 and 2002, both individually and in the aggregate, are
not material to our financial position or results of operations. 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-merchant 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 net
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): F-12




---



##### 



Inter-
    
    Depreciation
    
    OperatingExternal
    
    segment
    
    and
    
    Income
    
    Net CapitalRevenues
    
    Revenues
    
    Amortization
    
    (Loss)
    
    Expenditures2004:Domestic die-cast
    
    $
    142,326
    
    
    $
    8,374
    
    
    $
    13,820
    
    
    $
    14,499
    
    
    $
    14,667Domestic apparel and memorabilia
    
    
    162,265
    
    
    
    822
    
    
    
    2,903
    
    
    
    9,908
    
    
    
    930Foreign die-cast
    
    
    36,903
    
    
    
    
    
    
    
    8,893
    
    
    
    5,086
    
    
    
    8,222Corporate and other
    
    
    2,836
    
    
    
    1,479
    
    
    
    4,568
    
    
    
    (25,970
    )
    
    
    1,037Eliminations
    
    
    
    
    
    
    (10,675
    )
    
    
    
    
    
    
    (1,667
    )
    
    
    Total per consolidated
financial statements
    
    $
    344,330
    
    
    $
    
    
    
    $
    30,184
    
    
    $
    1,856
    
    
    $
    24,8562003 (d):Domestic die-cast
    
    $
    148,549
    
    
    $
    7,645
    
    
    $
    11,034
    
    
    $
    36,534
    
    
    $
    16,608Domestic apparel and memorabilia
    
    
    183,297
    
    
    
    391
    
    
    
    3,189
    
    
    
    24,382
    
    
    
    3,556Foreign die-cast
    
    
    34,631
    
    
    
    
    
    
    
    6,505
    
    
    
    5,885
    
    
    
    9,025Corporate and other
    
    
    2,981
    
    
    
    2,018
    
    
    
    5,425
    
    
    
    (29,171
    )
    
    
    3,932Eliminations
    
    
    
    
    
    
    (10,054
    )
    
    
    
    
    
    
    (65
    )
    
    
    Total per consolidated
financial statements
    
    $
    369,458
    
    
    $
    
    
    
    $
    26,153
    
    
    $
    37,565
    
    
    $
    33,1212002 (d):Domestic die-cast
    
    $
    209,137
    
    
    $
    11,582
    
    
    $
    10,536
    
    
    $
    70,590
    
    
    $
    7,704Domestic apparel and memorabilia
    
    
    164,819
    
    
    
    7
    
    
    
    2,769
    
    
    
    26,911
    
    
    
    3,724Foreign die-cast
    
    
    29,433
    
    
    
    
    
    
    
    4,494
    
    
    
    5,515
    
    
    
    9,696Corporate and other
    
    
    3,169
    
    
    
    1,553
    
    
    
    5,923
    
    
    
    (26,726
    )
    
    
    4,415Eliminations
    
    
    
    
    
    
    (13,142
    )
    
    
    
    
    
    
    (209
    )
    
    
    Total per consolidated
financial statements
    
    $
    406,558
    
    
    $
    
    
    
    $
    23,722
    
    
    $
    76,081
    
    
    $
    25,539
 Identifiable Assets
    
    Goodwill and TrademarksSept. 30,
    
    Sept. 30,
    
    Sept. 30,
    
    Sept. 30,2004
    
    2003
    
    2004
    
    2003Domestic die-cast (a)
    
    $
    114,157
    
    
    $
    98,847
    
    
    $
    45,661
    
    
    $
    33,953Domestic apparel and
memorabilia (b)
    
    
    125,319
    
    
    
    131,845
    
    
    
    61,840
    
    
    
    62,840Foreign die-cast
    
    
    61,292
    
    
    
    58,619
    
    
    
    19,438
    
    
    
    18,232Corporate and other (c)
    
    
    63,680
    
    
    
    91,317
    
    
    
    
    
    
    
    Eliminations
    
    
    (10,165
    )
    
    
    (7,940
    )
    
    
    
    
    
    
    Total per consolidated
financial statements
    
    $
    354,283
    
    
    $
    372,688
    
    
    $
    126,939
    
    
    $
    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 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. In 2004, we
made an election for federal income tax purposes to treat the acquisition
as a stock purchase, which resulted in a revision of the preliminary
Funline purchase price allocation to establish deferred tax liabilities of
$11.5 million. Also during 2004, we accrued $1.7 million as additional
consideration payable under the earn-out provisions of the Funline
acquisition agreement and $0.7 million as additional purchase price under
a dividend distribution agreement. The additional consideration and
preliminary purchase price allocation revisions were allocated to the
Funline trademarks.(b)
    
    During fiscal 2004, the Jeff Hamilton trademark was decreased by $1.0
million when an accrual for expected contingent consideration was
reversed. F-13




---



##### 



(c)
    
    Corporate and other identifiable assets includes $8.5 million in cash and
cash equivalents at September 30, 2004, and $45.4 million in cash and cash
equivalents at September 30, 2003.(d)
    
    Certain prior period amounts have been reclassified to conform to the
current year presentation. INVENTORIES Inventories by our reporting segments consist of the following at September 30
(in thousands): 2004
    
    2003Domestic die-cast:NASCAR related
    
    $
    7,239
    
    
    $
    5,031Funline
    
    
    15,635
    
    
    
    8,496Total domestic die-cast
    
    
    22,874
    
    
    
    13,527Domestic apparel and memorabiliaNASCAR related
    
    
    21,698
    
    
    
    19,240Other
    
    
    8,109
    
    
    
    6,668Total domestic apparel and memorabilia
    
    
    29,807
    
    
    
    25,908Foreign die-cast
    
    
    4,266
    
    
    
    3,797Total inventory
    
    $
    56,947
    
    
    $
    43,232
 Apparel blank stock and other raw materials were $3.7 million and $5.2 million
at September 30, 2004 and 2003. We depend upon third parties to manufacture all die-cast product and most
apparel and memorabilia. Most significantly, one manufacturer produces over
55% of die-cast product. Any difficulty experienced by this manufacturer in
producing and delivering the die-cast collectible product could have an adverse
effect on our results of operations. PROPERTY AND EQUIPMENT Property and equipment consists of the following at September 30 (in
thousands): 2004
    
    2003
    
    Estimated Useful LifeLand
    
    $
    755
    
    
    $
    708Building and leasehold improvements
    
    
    19,271
    
    
    
    17,530
    
    
    2-25 yearsTooling
    
    
    155,819
    
    
    
    128,867
    
    
    1-3 yearsEquipment, software and other
    
    
    29,730
    
    
    
    27,537
    
    
    3-5 yearsTrackside trailers and vehicles
    
    
    11,164
    
    
    
    11,019
    
    
    5 years216,739
    
    
    
    185,661Accumulated depreciation
    
    
    (151,861
    )
    
    
    (122,710
    )$
    64,878
    
    
    $
    62,951
 Cost of sales includes tooling depreciation totaling $21.2 million, $17.2
million and $14.8 million in 2004, 2003 and 2002. F-14




---



##### 



GOODWILL AND OTHER INTANGIBLES  The estimated aggregate intangibles amortization expense expected as of
September 30, 2004, follows (in thousands): Year2005
    
    $
    3,5132006
    
    
    4,0372007
    
    
    3,6392008
    
    
    2,1082009
    
    
    1,699Thereafter
    
    
    3,332Total
    
    $
    18,328
  Goodwill and other intangibles consists of the following at September 30 (in
thousands): Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageAmortization
    
    
    
    
    
    Amortization2004
    
    Period
    
    2003
    
    PeriodIntangibles with Indefinite Lives:Carrying amount-Goodwill
    
    $
    105,965
    
    
    NA
    
    $
    104,580
    
    
    NATrademarks
    
    
    38,306
    
    
    NA
    
    
    27,597
    
    
    NA144,271
    
    
    
    
    
    
    
    132,177Accumulated amortization
    
    
    (17,332
    )
    
    
    
    
    
    
    (17,152
    )126,939
    
    
    
    
    
    
    
    115,025Intangibles with Definite Lives:Carrying
amount-Licenses
    
    
    28,699
    
    
    8.4 years
    
    
    23,590
    
    
    9.2 yearsCustomer relationships
    
    
    1,964
    
    
    5.0 years
    
    
    2,359
    
    
    4.5 yearsNon-compete agreement
    
    
    1,635
    
    
    3.4 years
    
    
    1,635
    
    
    3.4 yearsPatent
    
    
    68
    
    
    4.0 years
    
    
    68
    
    
    4.0 years32,366
    
    
    8.0 years
    
    
    27,652
    
    
    8.4 yearsAccumulated amortization
    
    
    (14,038
    )
    
    
    
    
    
    
    (10,803
    )18,328
    
    
    
    
    
    
    
    16,849$
    145,267
    
    
    
    
    
    
    $
    131,874
 There were no increases to goodwill as a result of acquisitions in 2004 and
2003. DEBT AND FINANCING Other long-term debt consists of the following at September 30 (in thousands): 2004
    
    2003Term Loan A due June 30, 2008, variable rate
    
    $
    1,644
    
    
    $
    Term Loan B due June 30, 2007, variable rate
    
    
    9,444
    
    
    
    Notes payable, secured by property and equipment, 6.0% to 8.4%
    
    
    4,803
    
    
    
    5,057Less current portion
    
    
    (4,009
    )
    
    
    (567
    )$
    11,882
    
    
    $
    4,490
 F-15




---



##### 



On June 30, 2004, we entered into an amended loan and security agreement with a
bank. The amended agreement increased available borrowings from $35.0 million
to $75.0 million. The agreement is comprised 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). We received $11.7 million of cash upon issuance
of the term loans on June 30, 2004. 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. 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 were in compliance with those covenants at September 30,
2004. As of September 30, 2004, the covenants were as follows: Financial Covenant
    
    Period
    
    Requirement
    
    ActualMinimum tangible net worth
    
    As of September 30, 2004
    
    >$105.2 million
    
    $113.7 millionMinimum
fixed charge coverage ratio
    
    April 1, 2004 to
    
    >1.15
    
    >1.18September 30, 2004Limitation
on capital expenditures
    
    October 1, 2003 to
    
    <$35.0 million
    
    $24.9 millionSeptember 30, 2004
 The revolving credit facility
bears interest at LIBOR plus 1.75% - 2.50% or
prime plus 0.00% - 0.25% (4.75% at September 30, 2004), and the term loans bear
interest at LIBOR plus 2.00% - 3.50% or prime plus 0.00% - 1.25% (Term Loan A
5.25% and Term Loan B 5.75% at September 30, 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. On August 2, 2004, we
redeemed $29.9 million of
43/4% convertible
subordinated notes at a price of 100.68% for cash of $30.1 million. We funded
the redemption with cash on hand, revolving credit facility borrowings, and the
term loans under the loan and security agreement. The subordinated notes were
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 and would have matured on April 1, 2005. The aggregate future maturities of long-term debt at September 30, 2004,
follows (in thousands): Year2005
    
    $
    4,0092006
    
    
    4,0362007
    
    
    3,5042008
    
    
    1,0362009
    
    
    254Thereafter
    
    
    3,052Total
    
    $
    15,891
 Term Loan B under the loan and security agreement is subject to annual
mandatory prepayments of 50% of excess cash flows as defined by the agreement.
Only scheduled payments for this three-year loan are reflected above. F-16




---



##### 



CREDIT RISK AND FINANCIAL INSTRUMENTS Sales to our top five customers accounted for 27.6%, 22.5%, and 24.8% of sales
in 2004, 2003, and 2002, respectively. Sales to our largest customer, Wal-Mart
Stores, Inc., were approximately 17.4% of revenue in 2004. Accounts receivable
from Wal-Mart at September 30, 2004, totaled $14.1 million. Sales to our
second largest customer, Kmart Corporation, and its divisions were
approximately 3.5% of revenue in 2004. Accounts receivable from Kmart at
September 30, 2004, totaled $2.3 million. Sales to our 15 wholesale
distributors were approximately 15.5% of revenue in 2004. Accounts receivable
from our 15 wholesale distributors at September 30, 2004, totaled $9.5 million,
net of allowances. Cash equivalents consist of $7.7 million of investments in overnight reverse
repurchase agreements at September 30, 2004. Repurchase agreements are
collateralized at 102% of securities provided as collateral by the counterparty
bank. The bank provides securities with a market value at least equal to the
funds held by the bank under the underlying repurchase agreement. During part of the year 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 $16.3 million at September 30, 2004. 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). We realized $0.3 million of losses
on contracts, which settled at maturity in 2004. SHAREHOLDERS EQUITY As of September 30, 2004, options on 231,769 shares of common stock were
available for grant to key employees, consultants, independent contractors, and
non-employee directors under the 1998 Non-Qualified Stock Option Plan and the
2000 Stock Option Plan, as approved by shareholders. The stock option plans
allow awards in the form of incentive stock options, non-statutory stock, stock
appreciation rights, and shares of common stock. In October 2001, the board of
directors amended the 2000 Stock Option Plan and increased the number of shares
issuable under the plan from 7% of issued common shares not to exceed 2 million
shares, to 13% of issued common shares not to exceed 3 million shares. The
shareholders approved this amendment. The board also increased the number of
shares reserved for issuance under the 2000 Stock Option Plan, from 2.0 million
shares to 3.0 million shares. At September 30, 2004, the shares reserved for
issuance under the expired 1993 Stock Option Plan, the 1998 Non-Qualified Stock
Option Plan and the 2000 Stock Option Plan totaled 2.4 million shares. In
addition, there are options on 80,000 shares of common stock outstanding
outside these plans. F-17




---



##### 



Stock option plan activity and data follows: 2004
    
    2003
    
    2002Weighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedNumber
    
    Average
    
    Number
    
    Average
    
    Number
    
    Averageof
    
    Exercise
    
    of
    
    Exercise
    
    of
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at beginning of year
    
    
    2,222,673
    
    
    $
    20.86
    
    
    
    1,780,716
    
    
    $
    20.58
    
    
    
    1,764,029
    
    
    $
    13.50Granted
    
    
    395,000
    
    
    
    14.83
    
    
    
    744,500
    
    
    
    18.83
    
    
    
    507,000
    
    
    
    39.18Exercised
    
    
    (52,336
    )
    
    
    3.72
    
    
    
    (129,986
    )
    
    
    5.78
    
    
    
    (437,641
    )
    
    
    14.76Canceled
    
    
    (276,667
    )
    
    
    24.40
    
    
    
    (172,557
    )
    
    
    20.62
    
    
    
    (52,672
    )
    
    
    10.87Outstanding at end of year
    
    
    2,288,670
    
    
    $
    19.78
    
    
    
    2,222,673
    
    
    $
    20.86
    
    
    
    1,780,716
    
    
    $
    20.58Outstanding exercisable at end
of year
    
    
    1,527,315
    
    
    $
    18.99
    
    
    
    1,004,808
    
    
    $
    19.28
    
    
    
    626,355
    
    
    $
    18.18Options available for grant at
end of year
    
    
    231,769
    
    
    
    
    
    
    
    337,556
    
    
    
    
    
    
    
    913,189Weighted average fair value of
options granted in the year
    
    
    
    
    
    $
    6.38
    
    
    
    
    
    
    $
    6.81
    
    
    
    
    
    
    $
    15.23
 Options outstanding and exercisable by price range as of September 30, 2004,
are as follows: Options Outstanding
    
    Options ExercisableWeightedAverage
    
    Weighted
    
    
    
    
    
    WeightedRemaining
    
    Average
    
    
    
    
    
    AverageRange of
    
    Options
    
    Contractual
    
    Exercise
    
    Options
    
    ExerciseExercise Prices
    
    Outstanding
    
    Life
    
    Price
    
    Exercisable
    
    Price$  2.38
    
    
    
    $
    8.77
    
    
    
    438,941
    
    
    
    6.3
    
    
    $
    5.17
    
    
    
    438,941
    
    
    $
    5.178.78
    
    
    
    
    17.54
    
    
    
    418,393
    
    
    
    7.7
    
    
    
    13.62
    
    
    
    186,726
    
    
    
    12.1117.55
    
    
    
    
    26.30
    
    
    
    814,503
    
    
    
    7.9
    
    
    
    18.75
    
    
    
    476,493
    
    
    
    19.4326.31
    
    
    
    
    35.07
    
    
    
    201,500
    
    
    
    5.2
    
    
    
    26.97
    
    
    
    136,497
    
    
    
    26.9535.08
    
    
    
    
    43.84
    
    
    
    415,333
    
    
    
    7.2
    
    
    
    39.97
    
    
    
    288,658
    
    
    
    39.982.38
    
    
    
    
    43.84
    
    
    
    2,288,670
    
    
    
    7.2
    
    
    $
    19.78
    
    
    
    1,527,315
    
    
    $
    18.99
 In 2004, we issued options and warrants to purchase a total of 35 thousand
shares of common stock in connection with license agreements, at an average
exercise price of $14.74 per share. The warrants had a fair market value of
$0.1 million as estimated by the Black-Scholes option pricing method (average
assumed volatility 45.70%, risk-free rate 2.17%, annual rate of dividends
1.00%, and term of 1.6 years). Issuance resulted in increases in additional
paid-in-capital and intangible assets. In 2002, we issued warrants to purchase a total of 200 thousand shares of
common stock in connection with license agreements, at an average exercise
price of $28.06 per share. The warrants had a fair market value of $2.2
million as estimated by the Black-Scholes option pricing method (average
assumed volatility 48.51%, risk-free rate 3.99% and term of 5.0 years).
Issuance resulted in increases in additional paid-in-capital and intangible
assets. A total of 1.8 million shares of our common stock are reserved for sale to
employees under the Action Performance Companies, Inc. 1999 Employee Stock
Purchase Plan. The plan allows eligible employees to purchase shares of common
stock at the lesser of 85% of the fair value of such shares at the beginning or
end of each semi-annual offering period. Purchases are limited to 15% of an
employees eligible compensation, subject to a maximum limitation. Share
purchases occur semi-annually and have been less than 25 thousand shares in
2004, 2003 and 2002. In October 2002, under a one-year program approved by the Board of Directors,
110 thousand shares of our common stock were purchased at a price of $18.39 per
share. At this time we do not have approval by the Board of Directors to
purchase our common stock in the open market or in privately negotiated
transactions. F-18




---



##### 



EMPLOYEE BENEFITS Our defined contribution plan qualifies as a cash or deferred profit sharing
plan under Sections 401(a) and 401(k) of the Internal Revenue Code and is
available to substantially all domestic employees. Participating employees may
defer all or a portion of their pre-tax compensation, subject to certain
limitations. Effective October 1, 2003, the plan provides for employer
matching contributions, which fully match each dollar contributed by an
employee, up to a maximum of 3% of the employees defined compensation and 50%
of each dollar contributed by an employee between 3% and 5%, of the employees
defined compensation. In 2003 and 2002, the plan had provided for an employer
matching contribution of 50% of each dollar contributed by the employee, up to
a maximum of 2% of the employees defined compensation. The plan also provides
for an annual employer profit sharing contribution in such amounts as the Board
of Directors may determine. In 2004, 2003 and 2002, employer-matching
contributions expensed totaled $604 thousand, $188 thousand, and $158 thousand. EARNINGS PER COMMON SHARE Reconciliations of the numerators and denominators in the EPS computations for
net income follow (in thousands): 2004
    
    2003
    
    2002NUMERATOR:Basic  net income
    
    $
    540
    
    
    $
    24,227
    
    
    $
    44,947Effect of dilutive 43⁄4% convertible subordinated
notes, tax affected interest
    
    
    
    
    
    
    
    
    
    
    1,497Diluted  adjusted net income before assumed conversions
    
    $
    540
    
    
    $
    24,227
    
    
    $
    46,444DENOMINATOR:Basic  weighted average shares
    
    
    18,328
    
    
    
    17,856
    
    
    
    17,565Effect of dilutive stock options and warrants
    
    
    272
    
    
    
    403
    
    
    
    721Effect of dilutive 43⁄4% convertible subordinated notes
    
    
    
    
    
    
    
    
    
    
    945Diluted  adjusted weighted average shares and assumed
conversion of 43⁄4% convertible subordinated notes
    
    
    18,600
    
    
    
    18,259
    
    
    
    19,231
 The impact of certain options and warrants outstanding for the purchase of 1.8
million, 1.3 million, and 0.5 million shares of common stock at average prices
of $25.66, $30.45, and $39.90 per share, were not included in the calculation
of diluted EPS for 2004, 2003, and 2002, because to do so would be
antidilutive. The options and warrants had exercise prices greater than the
average market price of the common stock in 2004, 2003, and 2002, 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 2004 and 2003, because to do so also would have been antidilutive. INCOME TAXES We provide for income taxes under SFAS No. 109, Accounting for Income Taxes
(SFAS 109). SFAS 109 requires the use of an asset and liability approach in
accounting for income taxes. Deferred tax assets and liabilities are recorded
based on the differences between the financial statement and tax bases of
assets and liabilities and the tax rates in effect when these differences are
expected to reverse. A reconciliation of the federal income tax rate to the Companys effective rate
follows: 2004
    
    2003
    
    2002Statutory federal rate
    
    
    34
    %
    
    
    35
    %
    
    
    35
    %State taxes, net of federal benefit
    
    
    (2
    )
    
    
    2
    
    
    
    2Foreign incremental rate
    
    
    28
    
    
    
    2
    
    
    
    1Valuation allowances and other
    
    
    6
    
    
    
    (3
    )
    
    
    66
    %
    
    
    36
    %
    
    
    38
    %
 F-19




---



##### 



Income taxes, consists of the following (in thousands): 2004
    
    2003
    
    2002Current:Federal
    
    $
    139
    
    
    $
    8,050
    
    
    $
    24,440State
    
    
    (6
    )
    
    
    265
    
    
    
    2,371Foreign
    
    
    1,818
    
    
    
    1,830
    
    
    
    9281,951
    
    
    
    10,145
    
    
    
    27,739Deferred:Federal
    
    
    (1,044
    )
    
    
    1,842
    
    
    
    (1,196
    )State
    
    
    (48
    )
    
    
    256
    
    
    
    14Foreign
    
    
    207
    
    
    
    1,256
    
    
    
    1,049(885
    )
    
    
    3,354
    
    
    
    (133
    )Income taxes
    
    $
    1,066
    
    
    $
    13,499
    
    
    $
    27,606
 The components of deferred taxes at September 30 follow (in thousands): 2004
    
    2003Deferred Tax Assets:Domestic-Inventory cost capitalization
    
    $
    1,190
    
    
    $
    1,043Reserves and accruals
    
    
    10,953
    
    
    
    6,815Deferred compensation
    
    
    349
    
    
    
    314Intangible asset capitalization
    
    
    1,795
    
    
    
    704Capital loss carryforwards
    
    
    745
    
    
    
    745State net operating losses
    
    
    1,425
    
    
    
    1,172Unrealized loss on investments
    
    
    27
    
    
    
    21Valuation allowance
    
    
    (2,225
    )
    
    
    (1,972
    )Foreign-Net operating losses
    
    
    913
    
    
    
    1,451Valuation allowance
    
    
    (422
    )
    
    
    (1,401
    )Net deferred tax assets
    
    
    14,750
    
    
    
    8,892Deferred Tax Liabilities:Domestic-Accelerated tax depreciation
    
    
    (2,087
    )
    
    
    (755
    )Accelerated tax amortization
    
    
    (20,990
    )
    
    
    (6,540
    )Reserves and accruals
    
    
    (1,810
    )
    
    
    (1,824
    )Foreign-Accelerated tax depreciation
    
    
    (1,166
    )
    
    
    (1,250
    )Accelerated tax amortization
    
    
    (4,580
    )
    
    
    (4,046
    )Reserves and accruals
    
    
    (23
    )
    
    
    (76
    )Unrealized foreign currency gain
    
    
    (307
    )
    
    
    Net deferred tax liabilities
    
    
    (30,963
    )
    
    
    (14,491
    )Net deferred tax liabilities
    
    $
    (16,213
    )
    
    $
    (5,599
    )
 F-20




---



##### 



SFAS 109 requires the reduction of deferred tax assets by a valuation allowance
if, based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax asset may not be realized. Valuation
allowances as of September 30, 2004, include $0.4 million to reserve foreign
tax assets for net operating losses generated by German subsidiaries, $1.4
million to fully reserve tax assets for state net operating losses expected to
expire before realized and $0.8 million to fully reserve capital loss
carryforwards. During 2004, we reduced valuation allowances by $1.0 million
because 2004 and 2003 taxable income was sufficient to realize foreign net
operating loss tax assets. Valuation allowances as of September 30, 2003,
include $1.4 million to reserve foreign tax assets for net operating losses
generated by German subsidiaries, $1.2 million to fully reserve tax assets for
state net operating losses expected to expire before realized and $0.8 million
to fully reserve capital loss carryforwards. During 2002, we reduced valuation
allowances by $0.4 million because 2002 taxable income was sufficient to
realize state and foreign net operating loss tax assets. Valuation allowances
as of September 30, 2002, include $0.8 million to fully reserve a foreign tax
asset for net operating losses generated by a German subsidiary, $1.2 million
to fully reserve tax assets for state net operating losses expected to expire
before realized and $0.8 million to fully reserve capital loss carryforwards.
Those capital loss carryforwards of $2.0 million expire $1.0 million in 2005
and $1.0 million in 2006. Prior to May 2002, undistributed earnings were deemed permanently reinvested.
Beginning in May 2002, U.S. federal income taxes have been provided on
undistributed earnings of German subsidiaries. The 2003 income tax provision includes credits of $1.4 million reflecting
adjustments of prior tax rates and the release of valuation allowances. Our U.S. income tax returns for 1998 through 2001 have been examined by the
Internal Revenue Service. Certain adjustments, principally related to timing
differences as to when expenses are deductible, have been recorded in these
financial statements. SUPPLEMENTAL CASH FLOW INFORMATION The supplemental cash flow disclosures and non-cash transactions follow (in
thousands): 2004
    
    2003
    
    2002Supplemental disclosures:Interest paid
    
    $
    2,252
    
    
    $
    2,199
    
    
    $
    2,705Income taxes paid
    
    
    5,070
    
    
    
    11,420
    
    
    
    27,815Non-cash transactions:Change in fixed asset purchases accrued
    
    
    3,253
    
    
    
    
    
    
    
    Common stock issued in acquisitions
    
    
    547
    
    
    
    9,268
    
    
    
    2,343Warrants issued for licenses
    
    
    110
    
    
    
    
    
    
    
    2,903Shares issued to repurchase debt
    
    
    
    
    
    
    
    
    
    
    10,153Change in accrued dividends
    
    
    (5
    )
    
    
    (381
    )
    
    
    533
 COMMITMENTS AND CONTINGENCIES Aggregate future minimum guaranteed royalty payments and personal service
agreement payments are as follows as of September 30, 2004 (in thousands): PersonalYear
    
    Royalty
    
    Service2005
    
    $
    19,145
    
    
    $
    1,5142006
    
    
    17,938
    
    
    
    8432007
    
    
    15,996
    
    
    
    3792008
    
    
    14,514
    
    
    
    1352009
    
    
    14,491
    
    
    
    135Thereafter
    
    
    39,695
    
    
    
    68Total
    
    $
    121,779
    
    
    $
    3,074
 F-21




---



##### 



Royalty expense under licenses, including guaranteed minimums, were $58.5
million, $58.4 million and $69.7 million for 2004, 2003 and 2002. Excluded from above is a commitment to make a payment in connection with a
license renewal totaling $5.0 million in 2006 and a commitment to make a
payment in connection with a license extension, at the licensors option, for
$2.0 million, in 2007. Our license agreements and distributor agreements generally contain provisions
under which we indemnify and hold harmless licensors and distributors of our
products from losses connected with the design, manufacture, or promotion of
products. We carry no reserves for such claims and have not experienced any
losses related to the design, manufacture, or promotion of our products in the
past three years. We are generally indemnified under our manufacturing
agreements for such losses connected with the manufacture of products. We also
maintain general liability and product liability insurance to cover such losses
and have had no related claims activity under those insurance contracts in the
last three years. Aggregate future payments and receipts under noncancellable operating leases
and subleases are as follows as of September 30, 2004 (in thousands): Lease
    
    SubleaseYear
    
    Payments
    
    Receipts2005
    
    $
    5,681
    
    
    $
    6032006
    
    
    5,189
    
    
    
    4692007
    
    
    4,923
    
    
    
    3422008
    
    
    4,092
    
    
    
    2009
    
    
    3,650
    
    
    
    2010-2018
    
    
    10,004
    
    
    
    Total
    
    $
    33,539
    
    
    $
    1,414
 The companys noncancellable operating leases consist primarily of building
leases. Principal among these is the lease of our Arizona corporate
headquarters, which expires in 2009, with a ten-year renewal option, and the
lease of our North Carolina facility that expires in 2018 with four five-year
renewal options. Minimum rent is expensed on a straight-line basis over the
term of the lease. Any escalation of rent payments relating to increases in
construction or acquisition cost of the leased property are included in minimum
rent, and payments which depend on an existing index or rate are included in
minimum rent based on the index or rate existing at the inception of the lease. Rent expense recognized for noncancellable operating leases, net of sublease
income, totaled $3.9 million, $4.1 million, and $2.1 million for 2004, 2003 and
2002. Commitments at September 30, 2004, were approximately $1.0 million for property
and equipment and $11.6 million of outstanding letters of credit. We entered into a contractual agreement providing severance benefits to our
chairman in the event of a potential change of ownership or termination of
employment. Commitments under this arrangement totaled approximately $1.6
million at September 30, 2004. 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 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. F-22




---



##### 



RELATED PARTY TRANSACTIONS In September 2002, we sold a building to an independent third party, which had
been originally purchased from our chairman in 1999 for $2.1 million. This
sale resulted in a $0.4 million loss. SUBSEQUENT EVENTS In October 2004, we settled a lawsuit with New Hampshire Speedway, Inc. (NHS),
filed in May 2004 against us in the U.S. District Court for the District of New
Hampshire for $0.8 million. Selling, general, and administrative expense for
2004 includes an accrual for the settlement of $0.8 million. 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. F-23




---



##### 



Schedule II ACTION PERFORMANCE COMPANIES, INC. VALUATION AND QUALIFYING ACCOUNTS Years Ended September 30, 2004, 2003 and 2002
(in thousands) Additions-
    
    (Charged to)Balance at
    
    Charged to
    
    or creditedbeginning
    
    costs and
    
    from other
    
    Deductions
    
    Balance atDescription
    
    of year
    
    expenses
    
    accounts
    
    (A)
    
    end of yearAllowance for
doubtful accounts:2004
    
    $
    3,634
    
    
    $
    6,768
    
    
    $
    2,440
    (B)
    
    $
    (3,475
    )
    
    $
    9,3672003
    
    
    2,127
    
    
    
    3,121
    
    
    
    (1,009
    )(C)
    
    
    (605
    )
    
    
    3,6342002
    
    
    2,141
    
    
    
    1,589
    
    
    
    (548
    )(D)
    
    
    (1,055
    )
    
    
    2,127Other Assets 
Allowance for
doubtful accounts,
long term:2004
    
    $
    1,926
    
    
    $
    
    
    
    $
    (1,926
    )(E)
    
    $
    
    
    
    $
    2003
    
    
    1,030
    
    
    
    
    
    
    
    896
    (F)
    
    
    
    
    
    
    1,9262002
    
    
    
    
    
    
    
    
    
    
    1,030
    (F)
    
    
    
    
    
    
    1,030
  (A)
    
    Amounts indicated as deductions are for amounts charged against
these reserves in the ordinary course of business.(B)
    
    Amounts indicated as charged to other accounts represent recoveries
of $0.5 million and a reclassification of $1.9 million from allowance
for doubtful accounts, long term (Other Assets).(C)
    
    Amounts indicated as charged to other accounts represent a
reclassification of ($0.9) million to allowance for doubtful accounts,
long term (Other Assets), and ($0.1) million to other liabilities.(D)
    
    Amounts indicated as charged to other accounts represent recoveries
of $0.4 million, a reclassification of $(1.0) million to allowance for
doubtful accounts, long term (Other Assets), and $0.1 million acquired
in the acquisition of Jeff Hamilton Collection, Inc.(E)
    
    Amounts indicated as charged to other accounts represent
reclassifications of the allowance for doubtful accounts, long term
(Other Assets) to allowance for doubtful accounts.(F)
    
    Amounts indicated as credited from other accounts represent
reclassifications of the allowance for doubtful accounts to allowance
for doubtful accounts, long-term (Other Assets). F-24




---



##### 



EXHIBIT INDEX ExhibitNumber
    
    Exhibit3.1
    
    First Amended and Restated Articles of Incorporation of Registrant, as amended (11)3.2
    
    Amended and Restated Bylaws of Registrant (1)4.1
    
    Form of Certificate of Common Stock (2)4.2
    
    Indenture dated as of March 24, 1998, between Action Performance
Companies, Inc. and First Union National Bank, as Trustee, including forms
of Notes (3)10.4.2
    
    1993 Stock Option Plan, as amended and restated through January 16, 1997
(5)10.8
    
    Form of Indemnification Agreement entered into with the Directors of the
Registrant (2)10.27
    
    Manufacturing Agreement between the Registrant and Early Light
International Co. Ltd. dated November 1, 2000 (4)10.52
    
    1998 Non-qualified Stock Option Plan(3)10.49
    
    Standard Form Industrial Lease dated April 8, 1997, between
Hewson/Breckner-Baseline, L.L.C. and Action Performance Companies, Inc.
(6)10.50
    
    Lease Agreement dated July 9, 1997, by and between Performance Park
Partners, LLC and Sports Image, Inc. (6)10.52
    
    1998 Non-qualified Stock Option Plan (3)10.56
    
    1999 Employee Stock Purchase Plan (7)10.57
    
    Standard Form Industrial Lease (Single Tenant) dated June 28, 1999,
between H-B Tempe, L.L.C. and Action Performance Companies, Inc. (8)10.59
    
    Distribution Agreement dated September 13, 2000 by and between the
Registrant and QVC, Inc. (4)10.63
    
    Loan and Security Agreement dated September 29, 2000 by and among Action
Performance Companies, Inc., certain subsidiaries and affiliates, as
guarantors, and American National Bank and Trust Company of Chicago. (4)10.64
    
    Pledge Agreement dated October 2, 2000, by and between Racing
Collectables Club of America, Inc., and American National Bank and Trust
Company of Chicago. (4)10.65
    
    Pledge Agreement dated October 2, 2000 by and between Action Performance
Companies, Inc., and American National Bank and Trust Company of Chicago.
(4)10.66
    
    Pledge Agreement dated October 2, 2000 by and between goracing.com,
inc., and American National Bank and Trust Company of Chicago. (4)10.67
    
    Second Amendment to Loan and Security Agreement, dated January 31, 2001,
by and among Action Performance Companies, Inc., and certain subsidiaries
and affiliates, as guarantors, and Bank One, NA. (9)10.68
    
    First Amended and Restated 2000 Stock Option Plan (10)10.69
    
    Consent and Third Amendment to Loan and Security Agreement, dated
September 2002, by and among Action Performance Companies, Inc., and
certain subsidiaries and affiliates, as guarantors, and Bank One, NA. (11)10.70
    
    Fifth Amendment to Loan and Security Agreement, dated March 12, 2003, by
and among Action Performance Companies, Inc., and certain subsidiaries and
affiliates, as guarantors, and Bank One, NA. (12)10.71
    
    Sixth Amendment to Loan and Security Agreement, dated September 23,
2003, by and among Action Performance Companies, Inc., and certain
subsidiaries and affiliates, as guarantors, and Bank One, NA. (13)10.72
    
    Form of Non-Qualified Stock Option Agreement for Chris Leong, April
Leong, and Ken Leong. (14)10.73
    
    Amended and Restated Credit Agreement, dated June 30, 2004, by and among
Action Performance Companies, Inc. and certain subsidiaries and
affiliates, as guarantors, and Bank One, NA. (15)10.74
    
    Pledge and Security Agreement, dated June 30, 2004, by and among Action
Performance Companies, Inc. and certain subsidiaries and affiliates, as
guarantors, and Bank One, NA. (15)10.75
    
    Severance Agreement and General Release, dated October 8, 2004, by and
among Action Performance Companies, Inc., and R. David Martin.10.76
    
    Employment Agreement, dated December 10, 2004, by and among Action
Performance Companies, Inc. and Fred W. Wagenhals.21
    
    List of Subsidiaries




---



##### 



ExhibitNumber
    
    Exhibit23.1
    
    Consent of PricewaterhouseCoopers LLP31.1
    
    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
amended.31.2
    
    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
amended.32.1
    
    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
2002.32.2
    
    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.
   (1)
    
    Incorporated by reference to the Registrants Form 10-QSB for the quarter
ended March 31, 1996, as filed with the Securities and Exchange Commission
on May 2, 1996.(2)
    
    Incorporated by reference to the Registrants Registration Statement on
Form SB-2 and amendments thereto (Registration No. 33-57414-LA).(3)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter
ended March 31, 1998, as filed with the Securities and Exchange Commission
on May 15, 1998.(4)
    
    Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 2000, as filed with the Securities and Exchange
Commission on December 29, 2000.(5)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter
ended March 31, 1997, as filed with the Securities and Exchange Commission
on May 15, 1997.(6)
    
    Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 1997, as filed with the Securities and Exchange
Commission on December 22, 1997.(7)
    
    Incorporated by reference to the Registrants Registration Statement on
Form S-8 (Registration No. 333-82879).(8)
    
    Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 1999, as filed with the Securities and Exchange
Commission on December 29, 1999.(9)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter
ended December 31, 2001, as filed with the Securities and Exchange
Commission on February 13, 2002.(10)
    
    Incorporated by reference to the Registrants Registration Statement on
Form S-8 (Registration No. 333-88114).(11)
    
    Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 2002, as filed with the Securities and Exchange
Commission on December 20, 2002.(12)
    
    Incorporated by reference to the Registrants Form 8-K dated March 12,
2003, as filed with the Securities and Exchange Commission on March 18,
2003.(13)
    
    Incorporated by reference to the Registrants Form 10-K for the year
ended September 30, 2003, as filed with the Securities and Exchange
Commission on December 16, 2003.(14)
    
    Incorporated by reference to the Registrants Registration Statement on
Form S-8 (Registration No. 333-114246).(15)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter
ended June 30, 2004, as filed with the Securities and Exchange Commission on
August 10, 2004.