SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2004

Commission file number 0-21630

ACTION PERFORMANCE COMPANIES, INC.

1480 South Hohokam Drive

(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 o

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

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

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ACTION PERFORMANCE COMPANIES, INC.
Unaudited Condensed Consolidated Balance Sheets
June 30, 2004 and September 30, 2003
(in thousands, except per share data)

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

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ACTION PERFORMANCE COMPANIES, INC.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
Three and Nine Months Ended June 30, 2004 and 2003
(in thousands, except per share data)

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

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ACTION PERFORMANCE COMPANIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2004 and 2003
(in thousands)

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

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ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004

INTERIM FINANCIAL REPORTING

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

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

SHAREHOLDERS’ EQUITY

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

Had compensation costs been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), utilizing the assumptions detailed below and amortizing the resulting fair value of stock options granted over the respective vesting period of the options, the net income and per share amounts would have been the following pro forma amounts for the periods ended June 30 (in thousands, except per share data):

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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 June 30:

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 an unconsolidated partnership, 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 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):

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(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.

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In 2004, we made an election for federal income tax purposes, which resulted in a revision of the Funline preliminary purchase price allocation to establish deferred tax liabilities of $11.0 million. Also during 2004, we accrued $1.7 million as additional consideration payable under the earn-out provisions of the Funline acquisition agreement and reduced liabilities established in the preliminary purchase price allocation by $3.6 million. The additional consideration and preliminary purchase price allocation revisions were 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 $49.1 million in cash and cash equivalents at June 30, 2004, and $45.4 million in cash and cash equivalents at September 30, 2003.

EARNINGS PER COMMON SHARE (EPS)

Reconciliations of the numerators and denominators in the EPS computations for net income for the periods ended June 30 follows (in thousands):

The impact of options and warrants outstanding for the purchase of 2.0 million and 1.2 million shares of common stock, at an average price of $25.83 and $30.36, were not included in the calculation of diluted EPS for the three months ended June 30, 2004 and 2003, because to do so would be antidilutive. The impact of options and warrants outstanding for the purchase of 1.9 million and 1.2 million shares of common stock, at an average price of $25.97 and $30.16 were not included in the calculation of diluted EPS for the nine months ended June 30, 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 nine months ended June 30, 2004 and 2003, but could potentially dilute EPS in the future. The impacts of outstanding 4¾% convertible subordinated notes were not included in the calculation of diluted EPS for the three and nine months ended June 30, 2004 because to do so also would be antidilutive. The notes could potentially dilute EPS in the future.

OFF-BALANCE SHEET ARRANGEMENTS

We are not currently a party to any off-balance sheet arrangements and do not anticipate being a party to any off-balance sheet arrangements in the future.

JOINT VENTURE

We have an investment in a joint venture, Action-McFarlane LLC. The joint venture distributes action figurines based on NASCAR driver likenesses. All of the figurines are manufactured by third parties. Our investment in the LLC, included in other long-term assets, was $0.5 million at June 30, 2004, and earnings on the investment in the LLC, included in other income, were $0.2 million for the three months ended June 30, 2004, and $1.0 million for the nine months ended June 30, 2004.

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DEBT AND FINANCING

On June 30, 2004, we entered into an amended loan and security agreement with our 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 June 30, 2004.

The revolving credit facility bears interest at LIBOR plus 1.75%-2.50% or prime plus 0.00% - 0.25%, and the term loans bear interest at LIBOR plus 2.00% - 3.50% or prime plus 0.00% - 1.25%, 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.

As of June 30, 2004, 4¾% convertible subordinated notes with a face value of $29.9 million remained outstanding. On August 2, 2004, we redeemed the notes at a price of 100.68%. The notes were classified as current maturities of long-term debt at June 30, 2004. 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 the 4¾% convertible subordinated notes, term loans under the loan and security agreement and other long-term debt at June 30, 2004, follow (in thousands):