SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2004

Commission file number 0-21630

ACTION PERFORMANCE COMPANIES, INC.

1480 South Hohokam Drive
Tempe, AZ 85281

(602) 337-3700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [  ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Table of Contents

PART I- FINANCIAL INFORMATION

ITEM 1. Financial Statements

2

ACTION PERFORMANCE COMPANIES, INC.

The accompanying notes are an integral part of these consolidated financial statements.

3

The accompanying notes are an integral part of these consolidated financial statements.

4

ACTION PERFORMANCE COMPANIES, INC.

The accompanying notes are an integral part of these consolidated financial statements.

5

ACTION PERFORMANCE COMPANIES, INC.

INTERIM FINANCIAL REPORTING

The accompanying interim condensed consolidated financial statements for Action Performance Companies, Inc. and subsidiaries have been prepared without audit by independent auditors pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, all normal and recurring adjustments necessary for a fair statement of financial position and results of operations for the interim periods included herein have been made. Certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted from these statements pursuant to such rules and regulations. Accordingly, these financial statements should be read in conjunction with our Form 10-K for the fiscal year ended September 30, 2003. The results of operations for the interim periods are not necessarily indicative of the operating results that may be expected for the fiscal year ending September 30, 2004.

Certain prior period amounts have been reclassified to conform to the current year presentation.

SHAREHOLDERS’ EQUITY

We account for stock-based compensation plans under APB No. 25, Accounting for Stock Issued to Employees and related interpretations, under which no compensation expense has been recognized, as all options have been granted with an exercise price equal to or exceeding the fair value of the common stock on the date of grant. Options generally vest ratably over three years. Options granted to independent directors generally vest immediately upon grant.

Had compensation costs been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), utilizing the assumptions detailed below and amortizing the resulting fair value of stock options granted over the respective vesting period of the options, the net income (loss) and per share amounts would have been the following pro forma amounts for the periods ended March 31 (in thousands, except per share data):

For SFAS 123, we estimated the fair value of each option grant as of the date of grant using the Black-Scholes option pricing method with the following assumptions for the periods ended March 31:

6

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). In December 2003, FASB issued a revised interpretation of FIN 46 (FIN 46-R), which supercedes FIN 46 and clarifies and expands current accounting guidance for variable interest entities (VIEs). Adoption of FIN 46 and FIN 46-R had no effect on our financial position, results of operations, or cash flows. We have interests in unconsolidated partnerships, which remain unconsolidated under FIN No. 46.

SEGMENT INFORMATION

Reportable segments are based on divisions operating geographically, domestic and abroad, and specializing in either die-cast or apparel and memorabilia. The domestic die-cast operations are based in the Phoenix, Arizona and Los Angeles, California areas. The domestic apparel and memorabilia operation is based in Charlotte, North Carolina with a mass-market retail distribution center in Atlanta, Georgia and warehouse and distribution facilities in Charlotte, North Carolina, Baraboo, Wisconsin and Los Angeles, California. Trackside operations are included in the domestic apparel and memorabilia segment. The foreign die-cast operation is based in Aachen, Germany.

We evaluate performance and allocate resources based on segment operating income (loss). The accounting policies of the reportable segments are the same as those used in the consolidated financial statements. Domestic licensing costs and certain management costs are not allocated to the domestic operating segments and are included in corporate and other. Intangible licenses are included in corporate and other assets. Each domestic segment is allocated royalty expense based on the incremental royalty due on that segment’s sales. Domestic royalty guarantees advanced and unearned are allocated as an expense of the domestic segments. Financial information for the reportable segments follows (in thousands):

7

(a)		Domestic die-cast identifiable assets include the Winner’s Circle trademark, purchased from Hasbro in May 2001. As additional consideration for the trademark purchase, we pay 1.5% or 3% of certain Winner’s Circle product sales to Hasbro, quarterly, through May 2006. The additional consideration is added to the cost of the trademark quarterly. During fiscal 2004, $1.7 million was accrued as additional consideration payable under the earn-out provisions of the Funline acquisition agreement. The amount recorded for the Funline trademarks, included in the domestic die-cast segment, was increased by the amount of the additional consideration. In addition, during the first quarter of fiscal 2004, a revision of the preliminary purchase price allocation for the initial consideration for Funline resulted in a $3.6 million reduction in the amount allocated to the Funline trademarks.
(b)		During the second quarter of fiscal 2004, the Jeff Hamilton trademark was decreased by $1.0 million when an accrual for expected contingent consideration was reversed.
(c)		Corporate and other identifiable assets includes $30.3 million in cash and cash equivalents at March 31, 2004, and $45.4 million in cash and cash equivalents at September 30, 2003.

8

EARNINGS PER COMMON SHARE (EPS)

Reconciliations of the numerators and denominators in the EPS computations for net income (loss) for the periods ended March 31 follows (in thousands):

The impact of options and warrants outstanding for the purchase of 2.0 million and 1.4 million shares of common stock, at an average price of $25.93 and $28.79, were not included in the calculation of diluted EPS for the three months ended March 31, 2004 and 2003, because to do so would be antidilutive. The impact of options and warrants outstanding for the purchase of 1.4 million and 1.3 million shares of common stock, at an average price of $29.31 and $30.09 were not included in the calculation of diluted EPS for the six months ended March 31, 2004 and 2003, because to do so would be antidilutive. The options and warrants had exercise prices greater than the average market price of the common stock for the three and six months ended March 31, 2004 and 2003, but could potentially dilute EPS in the future. The impacts of outstanding 4³/4% convertible subordinated notes were not included in the calculation of diluted EPS for the three and six months ended March 31, 2004 because to do so also would be antidilutive. The notes could potentially dilute EPS in the future.

COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, we are subject to certain lawsuits and asserted and unasserted claims. We believe that the resolution of any such matters will not have a material adverse effect on financial position, results of operations, or cash flows.

On April 26, 2004, we filed a complaint for declaratory judgment in the state of North Carolina, county of Cabarrus against New Hampshire Speedway, Inc. (NHS) to settle a dispute regarding trackside payments between the parties, and requesting that the court rule as a matter of law that NHS be precluded from asserting any claims against us. Subsequently, on May 5, 2004, Action was served with a lawsuit filed by NHS in the U.S. District Court for the District of New Hampshire claiming we underpaid certain trackside expenses. We intend to seek a stay or dismissal on the New Hampshire action and resolve whatever dispute may still exist in the North Carolina case. We do not believe that the resolution of this matter will have a material adverse effect on our consolidated financial position or results of operations.

In December 2003, we settled a lawsuit, with Dover International Speedway, filed in October 2003 against us in the U.S. District Court for the District of Delaware for $0.9 million.

9

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are the leading designer and marketer of licensed motorsports products related to NASCAR, including die-cast scaled replicas of motorsports vehicles, apparel, and memorabilia. We currently have exclusive license agreements with many of the most recognized names in NASCAR. We also design and sell products relating to other motorsports, including racing sanctioned by the NHRA, Formula One, the IRL, IROC, and the World of Outlaws. In Germany, we merchandise Formula One and high-end auto manufacturer die-cast replica vehicles. We work closely with drivers, team owners, track operators, and sponsors to design and merchandise our products. Third parties manufacture all of the replica motorsports vehicles and most apparel and memorabilia, generally utilizing our designs, tools, and dies. We retain ownership and control over designs and tooling and have close working relationships with our third-party manufacturers to help assure product quality.

We have structured our operations to enable us to service higher levels of sales with limited increases in operating expenses and capital investments. The principal elements of this operating structure include the following:

•		Our exclusive licenses allow us to exert a high degree of control over product pricing.
•		Manufacturing costs are largely fixed due to outsourcing under fixed-price contracts.
•		Royalties are paid generally as a percentage of sales.
•		Due to our agreements with distributors and QVC, incremental volume does not proportionately increase our operating expenses.
•		Research and development is limited to basic design and engineering.
•		Capital expenditures are principally limited to tooling for die-cast.
•		Functions, such as manufacturing and others outside of our core skills, are generally outsourced.

Revenue

We derive revenue primarily from the sale of our licensed motorsports products. The popularity and performance of drivers and teams under license, the popularity of motorsports in general and NASCAR in particular, the general demand for licensed sports merchandise, and our ability to design, produce, and distribute our products in a timely manner influence the level of our net sales.