Action Performance Companies 10-Q 2002 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2002

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.)

4707 E. Baseline Road
Phoenix, AZ 85042
(602) 337-3700

(Address, including zip code, and telephone number, including area code, of principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yesþ  No___

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

CLASS	OUTSTANDING AT APRIL 30, 2002
Common Stock, $0.01 Par Value	17,795,783 Shares

TABLE OF CONTENTS

Unaudited Condensed Consolidated Balance Sheets
Unaudited Condensed Consolidated Statements of Operations
Unaudited Condensed Consolidated Statements of Cash Flows
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II — OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 2. Changes in Securities and Use of Proceeds
	ITEM 3. Defaults Upon Senior Securities
	ITEM 4. Submissions of Matters to a Vote of Security Holders
	ITEM 5. Other Information
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

2

ACTION PERFORMANCE COMPANIES, INC.

Unaudited Condensed Consolidated Balance Sheets

March 31, 2002 and September 30, 2001
(in thousands, except per share data)

			March 31,			September 30,
			2002			2001
ASSETS
Current Assets:
	Cash and cash equivalents		$	67,084		$	64,514
	Accounts receivable, net			42,206			40,725
	Inventories			25,385			25,120
	Prepaid royalties			11,040			10,222
	Deferred tax asset			2,624			2,672
	Prepaid expenses and other assets			1,880			1,392
		Total Current Assets		150,219			144,645
Property and Equipment, net				41,296			40,356
Goodwill				76,319			76,937
Licenses and Trademark				12,073			12,785
Other Assets				5,113			4,230
			$	285,020		$	278,953
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
	Accounts payable		$	13,631		$	18,371
	Accrued royalties			16,102			16,792
	Accrued expenses and other			10,420			18,755
	Current portion of long-term debt			314			424
		Total Current Liabilities		40,467			54,342
Long-Term Liabilities:
	4 3/4% convertible subordinated notes			48,933			54,933
	Other long-term debt			1,563			2,063
	Other			4,552			4,710
		Total Long-Term Liabilities		55,048			61,706
Commitments and Contingencies
Minority Interests				2,888			3,079
Shareholders’ Equity:
	Common stock, $.01 par value, 25,000 shares authorized,
	17,684 and 17,313 shares issued			177			173
	Additional paid-in capital			130,001			121,669
	Treasury stock, at cost, 145 and 143 shares			(1,284	)		(1,221	)
	Accumulated other comprehensive loss			(6,498	)		(5,625	)
	Retained earnings			64,221			44,830
		Total Shareholders’ Equity		186,617			159,826
			$	285,020		$	278,953

The accompanying notes are an integral part of these consolidated balance sheets.

3

ACTION PERFORMANCE COMPANIES, INC.

Unaudited Condensed Consolidated Statements of Operations

Three and Six Months Ended March 31, 2002 and 2001
(in thousands, except per share data)

			Three Months Ended						Six Months Ended
			2002			2001			2002			2001
Net sales			$	100,185		$	71,074		$	184,321		$	121,962
Cost of sales				61,328			47,087			113,613			79,893
Gross profit				38,857			23,987			70,708			42,069
Operating expenses:
	Selling, general and administrative			18,929			16,632			36,101			31,499
	Amortization of goodwill			—			960			—			1,945
	Amortization of intangibles			581			525			1,087			1,293
		Total operating expenses		19,510			18,117			37,188			34,737
Income from operations				19,347			5,870			33,520			7,332
Interest expense				(861	)		(1,541	)		(1,706	)		(2,986	)
Minority interests and other, net				(245	)		1			(371	)		(139	)
Income before income taxes and
	extraordinary gain (loss)			18,241			4,330			31,443			4,207
Income taxes				7,078			1,734			12,200			1,684
Income before extraordinary gain (loss)				11,163			2,596			19,243			2,523
Extraordinary gain (loss), net				(2	)		6,087			148			6,087
Net income				11,161			8,683			19,391			8,610
	Other comprehensive loss			(1,229	)		(2,314	)		(873	)		(815	)
	Comprehensive income		$	9,932		$	6,369		$	18,518		$	7,795
EARNINGS PER COMMON SHARE:
Basic-
	Income before extraordinary gain		$	0.64		$	0.16		$	1.11		$	0.16
	Extraordinary gain, net of tax			—			0.38			0.01			0.37
	Net income		$	0.64		$	0.54		$	1.12		$	0.53
Diluted-
	Income before extraordinary gain		$	0.60		$	0.16		$	1.05		$	0.16
	Extraordinary gain, net of tax			—			0.37			0.01			0.37
	Net income		$	0.60		$	0.53		$	1.06		$	0.53

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

4

ACTION PERFORMANCE COMPANIES, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

Six Months Ended March 31, 2002 and 2001
(in thousands)

					Six Months Ended March 31,
					2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income				$	19,391		$	8,610
	Adjustments to reconcile net income to cash from operations-
		Deferred income taxes				1			5,907
		Depreciation and amortization				11,589			13,659
		Stock option tax benefits				3,180			—
		Extraordinary gain on extinguishment of debt				(235	)		(9,663	)
		Other				(348	)		750
	Changes in assets and liabilities, net-
		Accounts receivable, net				(1,638	)		(9,603	)
		Accounts payable				(4,571	)		(546	)
		Income tax payable and receivable				(5,078	)		17,819
		Inventories				(394	)		5,700
		Prepaid royalties and accrued royalties				(1,507	)		(1,850	)
		Other				(4,321	)		(4,776	)
			Net cash from operating activities			16,069			26,007
CASH FLOWS FROM INVESTING ACTIVITIES:
		Capital expenditures, net				(12,009	)		(7,792	)
		Disposition of Fantasy Sports, net of costs				—			3,847
		Other				(237	)		—
				Net cash used in investing activities		(12,246	)		(3,945	)
CASH FLOWS FROM FINANCING ACTIVITIES:
		Long-term debt repayments				(6,227	)		(7,841	)
		Common stock purchases for treasury				—			(1,375	)
		Stock option exercise proceeds				5,154			—
		Other				—			18
			Net cash used in financing activities			(1,073	)		(9,198	)
Effect of exchange rates on cash and cash equivalents						(180	)		(63	)
Net change in cash and cash equivalents						2,570			12,801
Cash and cash equivalents, beginning of period						64,514			22,758
Cash and cash equivalents, end of period					$	67,084		$	35,559
Supplemental Disclosures:
		Interest paid			$	1,433		$	2,923
		Income taxes paid (refunded), net				14,035			(19,600	)

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

5

ACTION PERFORMANCE COMPANIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2002

INTERIM FINANCIAL REPORTING

The accompanying condensed consolidated financial statements for Action Performance Companies, Inc. and subsidiaries have been prepared without audit by independent public accountants pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, all normal 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, 2001. 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, 2002.

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

RECENT ACCOUNTING PRONOUNCEMENTS

We adopted SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), effective October 1, 2001. This standard establishes new guidelines for determining the accounting value of goodwill and other intangibles and eliminates the amortization requirement for goodwill and intangibles with an indefinite life. Goodwill and intangibles with indefinite lives will be subject to an impairment test, based on fair value, at least annually.

We have completed evaluations of goodwill and of other intangibles, which include licenses and the Winner’s Circle trademark, in accordance with SFAS 142. The reporting units for SFAS 142 are domestic die-cast, domestic apparel, foreign die-cast and corporate and other, which are also our reporting segments. Goodwill and the trademark, which has 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, and we do not anticipate making any adjustments.

As of October 1, 2001, goodwill and trademark amortization ceased, in accordance with SFAS 142. The trademark was acquired in May 2001. For the three and six months ended March 31, 2001, goodwill amortization was $960 thousand and $1.9 million or $754 thousand and $1.5 million, net of tax. Excluding the impact of goodwill amortization, net of tax, income before extraordinary gain and net income for the three and six months ended March 31, 2001,would have been the following (in thousands, except per share data):

			Three		Six
			Months		Months
			Ended		Ended
Income before extraordinary gain (loss)			$	3,350	$	4,043
Net income			$	9,437	$	10,130
Earnings Per Common Share:
	Basic-
		Income before extraordinary gain	$	0.21	$	0.25
		Net income	$	0.59	$	0.62
	Diluted-
		Income before extraordinary gain	$	0.21	$	0.25
		Net income	$	0.58	$	0.62

6

SEGMENT INFORMATION

Reportable segments are based on divisions operating geographically, domestic and abroad, and specializing in either die-cast or apparel and other souvenirs. The domestic die-cast operation is based in Phoenix. The domestic apparel and souvenir operation is based in Charlotte, with a screen-printing facility in Atlanta. The foreign die-cast operation is based in Germany. The foreign apparel and souvenir operation (Goodsports) was based in England. Goodsports was closed effective September 30, 2001.

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 and information systems 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 an expense of corporate and other. Financial information for the reportable segments follows (in thousands):

			Three Months Ended March 31,
					Inter-			Depreciation		Operating
			External		segment			and		Income
			Revenues		Revenues			Amortization		(Loss)
								(a)		(a)
2002:
	Domestic die-cast		$	53,428	$	3,621		$	2,658	$	17,423
	Domestic apparel			38,741		—			513		8,256
	Foreign die-cast			7,351		—			1,118		1,561
	Corporate and other			665		—			1,438		(7,248	)
	Eliminations			—		(3,621	)		—		(645	)
		Total per consolidated financial statements	$	100,185	$	—		$	5,727	$	19,347
2001:
	Domestic die-cast		$	24,196	$	1,709		$	3,734	$	3,579
	Domestic apparel			33,413		—			1,336		5,822
	Foreign die-cast			8,102		122			970		2,019
	Foreign apparel			3,777		190			57		(138	)
	Corporate and other			1,586		—			1,346		(5,412	)
	Eliminations			—		(2,021	)		—		—
		Total per consolidated financial statements	$	71,074	$	—		$	7,443	$	5,870

7

			Six Months Ended March 31,
					Inter-			Depreciation		Operating
			External		segment			and		Income
			Revenues		Revenues			Amortization		(Loss)
								(a)		(a)
2002:
	Domestic die-cast		$	101,087	$	6,192		$	5,578	$	33,595
	Domestic apparel			66,767		—			1,006		10,328
	Foreign die-cast			14,813		—			2,130		3,118
	Corporate and other			1,654		—			2,875		(13,181	)
	Eliminations			—		(6,192	)		—		(340	)
		Total per consolidated financial statements	$	184,321	$	—		$	11,589	$	33,520
2001:
	Domestic die-cast		$	46,834	$	2,642		$	6,187	$	8,624
	Domestic apparel			51,735		—			2,530		6,075
	Foreign die-cast			14,495		122			1,825		3,331
	Foreign apparel			5,482		190			118		(775	)
	Corporate and other			3,416		—			2,999		(9,923	)
	Eliminations			—		(2,954	)		—		—
		Total per consolidated financial statements	$	121,962	$	—		$	13,659	$	7,332

		Identifiable Assets						Goodwill and Trademark
		March 31,			Sept. 30,			March 31,		Sept. 30,
		2002			2001			2002		2001
Domestic die-cast (b)		$	50,083		$	52,526		$	13,032	$	12,656
Domestic apparel			94,012			92,136			51,079		51,079
Foreign die-cast			40,281			40,599			13,659		14,277
Corporate and other (c)			102,551			95,869			—		—
Eliminations			(1,907	)		(2,177	)		—		—
	Total per consolidated financial statements	$	285,020		$	278,953		$	77,770	$	78,012

(a)	Goodwill ceased amortizing October 1, 2001, with the adoption of SFAS 142. Depreciation and amortization and operating income (loss), included goodwill amortization totaling $960 thousand ($170 thousand for domestic die-cast, $621 thousand for domestic apparel and $169 thousand for foreign die-cast) for the three months ended March 31, 2001 and totaling $1.9 million ($296 thousand for domestic die-cast, $1.3 million for domestic apparel and $327 thousand for foreign die-cast) for the six months ended March 31, 2001.
(b)	Domestic die-cast identifiable assets include the Winner’s Circle trademark, purchased from Hasbro in May 2001. As additional consideration we pay 3% of the related product sales to Hasbro, quarterly through May 2006. The additional consideration is added to the cost of the trademark quarterly.
(c)	Corporate and other identifiable assets includes $63.1 million in cash at March 31, 2002, and $60.9 million in cash at September 30, 2001.

8

EARNINGS PER COMMON SHARE (EPS)

Reconciliations of the numerators and denominators in the EPS computations for income before extraordinary gain for the periods ended March 31 follow in thousands:

	Three Months Ended				Six Months Ended
	2002		2001		2002		2001
NUMERATOR:
Basic – income (loss) before extraordinary gain	$	11,163	$	2,596	$	19,243	$	2,523
Effect of dilutive convertible subordinated notes		405		—		852		—
Diluted – adjusted income (loss) before extraordinary gain and assumed conversions	$	11,568	$	2,596	$	20,095	$	2,523
DENOMINATOR:
Basic – weighted average shares		17,434		16,043		17,338		16,141
Effect of dilutive stock options and warrants		799		162		771		97
Effect of dilutive convertible subordinated notes		1,028		—		1,082		—
Diluted – adjusted weighted average shares and assumed conversions		19,261		16,205		19,191		16,238

The impact of options and warrants outstanding for the purchases of 493 thousand shares of common stock, at an average price of $39.76 were not included in the calculation of diluted EPS for the six months ended March 31, 2002, because to do so would be antidilutive. The options and warrants had an exercise price greater than the average market price of the common stock for the six months ended March 31, 2002, but could potentially dilute EPS in the future.

GAIN ON EXTINGUISHMENT OF DEBT

During the three and six months ended March 31, 2002, we repurchased 4 3/4% convertible subordinated notes with a face value of $1.0 million and $6.0 million, at a loss of $2 thousand and a gain of $148 thousand, net of tax. During April 2002, we extinguished additional notes with a face value of $10.0 million, at a loss of $1.0 million, net of tax, using 145 thousand shares from treasury and 95 thousand newly issued shares.

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 or results of operations.

In certain sublease arrangements, we remain the primary obligor under the terms of the original lease agreements. One of our sublessees became in arrears on lease payments during the quarter ended March 31, 2002, and subsequent to March 31, 2002, we have paid lease payments on behalf of the sublessee. The subleases with this party include a building lease, which expires October 2009, and equipment leases, which expire between September and October 2002. The building currently has annual lease payments of $960 thousand. The future minimum lease payments, including payments to acquire the equipment, and the payments we have made but have not been reimbursed for on the equipment leases, total $1.6 million. While we continue to pursue our options with respect to recovery of amounts due from the sublessee, we have established a reserve at March 31, 2002, for $1.1 million for our current estimate of the potential loss on these leases

9

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

Overview

We design and market licensed motorsports products, including collectible die-cast scaled replicas of motorsports vehicles, apparel and souvenirs. The die-cast vehicles are principally replicas of cars driven in NASCAR, Formula One and NHRA races. Third parties manufacture all of the motorsports vehicles and most of the apparel and souvenirs, generally utilizing our designs, tools and dies. We screen-print and embroider a portion of the apparel in an Atlanta facility. Formula One vehicles are designed and marketed by subsidiaries in Germany.

The popularity and performance of drivers and teams under license, the popularity of motorsports, particularly NASCAR, and the general demand for licensed sports merchandise impacts revenue positively and negatively.

We strive to structure our operations such that:

• We maintain price point control over product in the marketplace.

• Manufacturing costs are fixed due to outsourcing under fixed-price contracts.

• Royalties are generally variable with sales.

• Research and development is basic design and engineering.

• Capital expenditures are principally tooling for die-cast.

• Due to agreements with distributors and QVC, incremental volume does not proportionately increase distribution costs.

• Functions outside of core skills are generally outsourced.

Cost of sales consists primarily of the cost of products procured from third-party manufacturers, freight charges, royalty payments to licensors and depreciation of tooling and dies. Significant factors affecting cost of sales as a percentage of sales include the following:

• Product mix,

• The effect of amortizing the fixed cost components of cost of sales, primarily depreciation of tooling and dies, over varying levels of net sales,

• The type of freight charges, and

• Additional charges related to lower than minimum order quantities, cancellation of specific purchase orders, etc.

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 of motorsports products.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operation are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles (GAAP) 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 product returns, bad debts, inventories, fixed assets, intangible assets, income taxes, royalties, contingencies and litigation. We base our estimates on historical experience and on 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.

10

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

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, 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.

We write down our inventory for estimated obsolescence or unmarketable inventory 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 by management, additional inventory write-downs may be required.

License agreements generally require payments of royalties to drivers, sponsors, teams and other parties on a calendar year basis. Royalties payable are recognized as costs of sales when the related sale is recognized. Guarantees advanced under license agreements are carried as prepaid royalties until earned by the third party. We evaluate prepaid royalties regularly and expense prepaids to cost of sales to the extent projected to be unrecoverable through sales.

We evaluate goodwill for impairment at least annually, in accordance with FAS 142. If the carrying amount of an intangible asset exceeds its fair value, we would recognize an impairment loss. 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. 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.

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 then assess the likelihood that our deferred tax assets will be recovered from future taxable income. If we were to believe that the recovery were not more likely than not, 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 were made.

Results of Operations

The following table sets forth the percentage of total revenue represented by certain expense and revenue items for the periods ended March 31:

	Three Months Ended						Six Months Ended
	2002			2001			2002			2001
Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		61.2			66.3			61.7			65.5
Gross profit		38.8			33.7			38.3			34.5
Selling, general and administrative expenses		18.9			23.4			19.6			25.8
Amortization of goodwill		—			1.3			—			1.6
Amortization of licenses		0.6			0.7			0.6			1.1
Income from operations		19.3			8.3			18.1			6.0
Interest Expense		(0.9	)		(2.2	)		(0.9	)		(2.4	)
Minority Interest and other, net		(0.2	)		—			(0.2	)		(0.1	)
Income before income taxes and extraordinary gain		18.2			6.1			17.0			3.5
Income taxes		7.1			2.4			6.6			1.4
Income before extraordinary gain		11.1			3.7			10.4			2.1

11

Three Months Ended March 31, 2002 Compared with Three Months Ended March 31, 2001

Sales increased 41.0% to $100.2 million for the three months ended March 31, 2002, from $71.1 million in the prior year period. Sales increased in both die-cast and apparel distribution channels. Die-cast segment sales increased 88.2% to $60.8 million from $32.3 million in the prior-year quarter. Sales of Winner’s Circle brand die-cast, acquired in May 2001, contributed $5.7 million of the $28.5 million increase in die-cast sales. Apparel segment sales, exclusive of trackside, rose 18.3% to $26.8 million from $22.7 million in the year-ago quarter, reflecting increased demand from both wholesale and mass-retail channels. Trackside sales decreased 17.9% to $11.9 million from $14.5 million due primarily to the date of Easter weekend, which caused the revenues from the Texas Winston Cup race to fall into the third fiscal quarter this year, versus the second fiscal quarter of last year.

Gross profit improved to 38.8 % of sales in the second quarter of fiscal 2002 from 33.7% in the fiscal 2001 period. Domestic die-cast margins improved as the depreciation of tooling and dies has slightly fallen since last year although sales have more than doubled. Our annual investment in tooling has decreased because we focused our product line on fewer drivers. In addition, segments are generally benefiting from improved selling prices while costs per unit have generally remained stable or fallen due to improved cost controls and increased volume. Effective September 30, 2001, we also closed the Goodsports foreign apparel operation, which had a lower margin than the corporate average.

Selling, general and administrative expenses were $18.9 million, or 18.9% of sales, in the quarter ended March 31, 2002, compared to $16.6 million, or 23.4% of sales in the prior year quarter, reflecting strong expense controls and the leverage we obtain from increased revenues.

Goodwill amortization ceased effective October 1, 2001, with the adoption of FAS 142. Goodwill amortization in the prior fiscal second quarter was $960 thousand, or 1.3% of sales.

Interest expense of $861 thousand for the three months ended March 31, 2002, was $680 thousand lower than interest expense for the comparable period in the prior year as a result of the convertible subordinated note repurchases and other long-term debt reductions since last fiscal second quarter.

The effective tax rate of 38.8% in the three months ended March 31, 2002, reflects current expectations for the effective tax rate for fiscal 2002.

Six Months Ended March 31, 2002 Compared with Six Months Ended March 31, 2001

Sales increased 51.1% to $184.3 million for the six months ended March 31, 2002, from $122.0 million in the prior year period. Sales increased in both die-cast and apparel distribution channels. Die-cast sales increased 89.0% to $115.9 million from $61.3 million in the prior year period. Apparel segment sales, exclusive of trackside, rose 27.6% to $46.8 million from $36.7 million in the prior year period, reflecting increased demand from both wholesale and mass retail channels. Trackside sales decreased 2.9% to $19.9 million from $20.5 million, due primarily to the date of Easter weekend, which caused the revenues from the Texas Winston Cup race to fall into the third fiscal quarter this year, versus the second fiscal quarter of last year.

Gross profit improved to 38.3% of sales in the first six months of fiscal 2002 from 34.5% in the comparable fiscal 2001 period. Domestic die-cast margins improved as the depreciation of tooling and dies has slightly fallen since last year although sales have more than doubled. Our annual investment in tooling has decreased because we focused our product line on fewer drivers. In addition, segments are generally benefiting from improved selling prices while costs per unit have generally remained stable or fallen due to improved cost controls and increased volume. Effective September 30, 2001, we also closed the Goodsports foreign apparel operation, which had a lower margin than the corporate average.

Selling, general and administrative expenses were $36.1 million, or 19.6% of sales in the first six months of fiscal 2002, compared to $31.5 million, or 25.8% of sales in the comparable fiscal 2001 period, reflecting strong expense controls and the leverage we obtain from increased revenues.

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Goodwill amortization ceased effective October 1, 2001, with the adoption of FAS 142. Goodwill amortization in the fiscal 2001 period was $1.9 million, or 1.6% of sales.

Interest expense of $1.7 million for the six months ended March 31, 2002, was $1.3 million lower than interest expense for the comparable period in the prior year as a result of the convertible subordinated note repurchases and other long-term debt reduction since the six months ended March 31, 2001.

The effective tax rate of 38.8% in the six months ended March 31, 2002, reflects current expectations for the effective tax rate for fiscal 2002.

Liquidity and Capital Resources

Working capital improved $19.5 million to $109.8 million at March 31, 2002, from $90.3 million at September 30, 2001. Cash increased $2.6 million to $67.1 million at March 31, 2002, from $64.5 million at September 31, 2001. Operating cash flows ($16.1 million) were reduced by payment of semi-annual interest on the 43/4% convertible subordinated notes ($1.3 million) and U.S. tax payments ($14.0 million).

Days sales outstanding, calculated on quarterly sales, improved 7.7% from the second fiscal quarter of 2001 to the second fiscal quarter of 2002, as a result of improved receivables management. Inventory turns, calculated on quarterly cost of sales, improved 34.7% over the second fiscal quarter of 2001, with the implementation of a build-to-order approach in die-cast operations and better inventory management. Our backlog at March 31, 2002, was approximately $115 million compared to $120 million at September 30, 2001.

As of April 30, 2002, 4 3/4% convertible subordinated notes with a face value of $38.9 million remained outstanding. The market price of our common stock has exceeded the $48.20 initial conversion price. We may redeem the notes, upon 30 days notice, in whole or in part, at the redemption prices in the indenture, currently 102% of face value. We are evaluating whether to redeem the notes, which currently trade at approximately 111% of face value.

During the six months ended March 31, 2002, we repurchased 43/4% convertible subordinated notes with a face value of $6.0 million, at a gain of $148 thousand, net of tax. During April 2002, we extinguished additional notes with a face value of $10.0 million, at a loss of $1.0 million, net of tax, using 145 thousand shares from treasury and 95 thousand newly issued shares.

Capital expenditures for the six months ended March 31, 2002, totaled $12.0 million, related principally to ongoing investments in tooling, and included $4.2 million applicable to foreign operations. Capital expenditures for fiscal year 2002 are not expected to exceed $25 million.

As amended January 2002, the loan and security agreement with Bank One (the Agreement), provides for borrowings of up to $20.0 million, subject to the limitation of a calculated borrowing base. The Agreement consists of a $20.0 million revolving line of credit, which includes up to $15.0 million of letters of credit. Prior to the amendment, the Agreement had included a revolving line of credit of up to $30.0 million. The $10.0 million reduction in available line of credit reduces commitment fees payable. We have never borrowed under the Agreement (originally dated September 2000). We believe that the line of credit reduction was warranted by this fact and current cash flow and cash positions. We believe that the Agreement will be adequate to cover letter of credit and other liquidity needs for the next 12 months after considering our current cash position and anticipated cash flows from operations.

The line of credit bears interest at Bank One’s base rate, or LIBOR plus 2.5%. A commitment fee of 0.5% of the average unused line of credit and 1.5%-2.5% of the average letters of credit is payable annually on the loan. The Agreement maturity date was extended from December 2002 to March 2003. Outstanding letters of credit totaled $4.3 million at March 31, 2002. The Agreement is secured principally by inventory, receivables, and equipment and no longer prohibits the payment of dividends

Under the Agreement, as amended, we are required to meet certain financial tests principally related to debt coverage, tangible net worth and funded indebtedness to EBIDA. We were in compliance with those covenants at March 31, 2002.

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Cautionary Statement Regarding Forward-Looking Statements

This report contains forward-looking statements, including statements regarding business strategies, business, and the industry in which we operate. These forward-looking statements are based primarily on our expectations and are subject to a number of risks and uncertainties, some of which are beyond our control. Actual results could differ materially from the forward-looking statements as a result of numerous factors, including those set forth in our Form 10-K for the year ended September 30, 2001, as filed with the Securities and Exchange Commission.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There has been no significant change in our exposure to market risk since year-end. The risk is limited to interest rate risk associated with credit instruments and foreign currency exchange rate risk associated with operations in Germany. We have never used derivative financial instruments to manage or reduce market risk.

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PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

In November 2001, Speedway Systems LLC and Charlotte Motor Speedway, LLC, Atlanta Motor Speedway, Inc., Bristol Motor Speedway, Inc., Texas Motor Speedway, Inc. and Sears Point Raceway, LLC (“Speedway”) brought an action in the Superior Court for Cabarrus County, North Carolina against Action Performance Companies, Inc. and Action Sports Image, LLC (“Action”), alleging breach of contract, fraud and unfair competition. In December 2001, Action timely removed the action to the United States District Court for the Middle District of North Carolina and, shortly thereafter, Action moved to dismiss the complaint. The Complaint alleged that Action did not provide accurate commission payments to Speedway for souvenirs and memorabilia sold at various racetracks. Action contended that there was no merit to these allegations. In February 2002, as a part of a new marketing agreement with Speedway, the pending lawsuit was dismissed.

ITEM 2. Changes in Securities and Use of Proceeds

During April 2002, we issued 240 thousand shares of common stock to repurchase 4 3/4% convertible subordinated notes with a face value of $10.0 million from existing noteholders. We issued these shares without registration under the Securities Act in reliance upon the exemption provided by Section 3(a)(9) of the Securities Act as an exchange by the issuer with its existing security holders where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.

ITEM 3. Defaults Upon Senior Securities

Not applicable

ITEM 4. Submissions of Matters to a Vote of Security Holders

The annual meeting of shareholders was held on March 4, 2002. The following nominees were elected to the board of directors to serve as directors until their successors are elected and qualified: Fred W. Wagenhals, R. David Martin, Melodee L. Volosin, John S. Bickford, Sr., Edward J. Bauman, Herbert M. Baum, Lowell L. Robertson, Robert L. Matthews. The shareholders also ratified the appointment of Arthur Andersen LLP as independent public accountants of our company for 2002, by the following vote: 15,892,930 for, 530,541 against, and 13,191 abstaining. The shareholders also approved an annual incentive plan for 2002, by the following vote: 11,830,524 for, 324,736 against, and 27,154 abstaining. The shareholders also approved an amendment to the 2000 Stock Option Plan by the following vote: 6,137,459 for, 6,007,536 against, and 37,419 abstaining.

ITEM 5. Other Information

On February 20, 2002, we transferred our stock listing from Nasdaq (ACTN) to the New York Stock Exchange. We now trade on the New York Stock Exchange under the ticker symbol ATN.

On May 28, 2002, the shareholders will vote at a special meeting of the shareholders to increase the number of shares of our authorized common stock from 25.0 million to 62.5 million shares. The proposed increase in the number of authorized shares will allow the board of directors to consider a stock split in the form of a stock dividend.

ITEM 6. Exhibits and Reports on Form 8-K

(a)	Exhibits – Not applicable
(b)	Reports on Form 8-K

On March 18, 2002, we filed a current report on Form 8-K relating reporting that we dismissed Arthur Andersen LLP as our independent public accountants and, effective March 22, 2002, engaged the accounting firm of PricewaterhouseCoopers LLP as our new independent public accountants.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ACTION PERFORMANCE COMPANIES, INC.

Signature	Capacity	Date
/s/ Fred W. WagenhalsFred W. Wagenhals	Chairman of the Board, President, and Chief Executive Officer (Principal Executive Officer)	May 7, 2002
/s/ R. David MartinR. David Martin	Chief Financial Officer, Secretary and Treasurer (Principal Financial and Accounting Officer)	May 7, 2002

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