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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For fiscal year ended September 30, 2001

Commission file number 0-21630

ACTION PERFORMANCE COMPANIES, INC.

4707 E. Baseline Road
Phoenix, Arizona 85042
(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: None

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, par value $.01 per share

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     No 

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.   

The aggregate market value of Common Stock held by nonaffiliates of the registrant (15,258,595 shares) based on the closing price of the registrant’s Common Stock as reported on the Nasdaq National Market on December 12, 2001, was $534,050,825. 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 12, 2001, there were outstanding 17,343,112 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 2002 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

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ACTION PERFORMANCE COMPANIES, INC.

ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED SEPTEMBER 30, 2001

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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 2002 and thereafter; our strategy to focus on our core products and licenses; our product and distribution channel development strategies; the success of particular product or marketing programs; revenue generated as a result of licensing arrangements; and liquidity and anticipated cash needs and availability. 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, “Special Considerations.”

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PART I

ITEM 1. BUSINESS

Introduction

We are the worldwide leader in the design and sale of licensed motorsports collectible and consumer products. Our products include die-cast scaled replicas of motorsports vehicles, apparel (including t-shirts, hats, and jackets), and souvenirs. We market our products through U.S. and German subsidiaries under an extensive portfolio of license arrangements with various drivers, team owners, sponsors, sanctioning bodies, and others, including the following:

	•		NASCAR (National Association for Stock Car Auto Racing) Winston Cup Drivers: Tony Stewart, Dale Earnhardt, Sr., Dale Earnhardt, Jr., Jeff Gordon, Dale Jarrett, Bobby Labonte, Bill Elliott, Rusty Wallace, Ricky Rudd, Kevin Harvick and Sterling Marlin;
	•		NASCAR Team Owners: Robert Yates Racing, Richard Childress Racing Enterprises, Joe Gibbs Racing, Evernham Motorsports, Chip Ganassi racing, and Dale Earnhardt, Inc.;
	•		NHRA (National Hot Rod Association) champions John Force and Kenny Bernstein;
	•		Formula One Teams; and
	•		Sanctioning Bodies: NASCAR, NHRA, IRL (Indy Racing League), and World of Outlaws.

Third parties manufacture all of our motorsports collectibles and most of our apparel and souvenirs, generally utilizing our designs, tools, and dies. We screen print and embroider a portion of the licensed motorsports apparel that we sell.

Our products are marketed in the United States, Germany and worldwide through the following:

	•		Distributor networks which target specialty retailers,
	•		Mobile trackside souvenir stores which target motorsports event attendees,
	•		Mass-market retailers,
	•		A members-only collectors’ catalog club (Racing Collectables Club of America, the “Club”), managed by QVC,
	•		Television programming on QVC,
	•		Internet sites including, goracing.com, an Internet site maintained by QVC, and
	•		Other distribution channels.

Historically, our business concentrated on designing and marketing die-cast collectibles featuring NASCAR Winston Cup drivers and vehicles. Since 1995, we have expanded our lines of die-cast collectibles to include replicas of motorsports vehicles from Formula One, NHRA drag racing, World of Outlaws sprint car racing, and motorcycle racing. Through a series of acquisitions and licensing arrangements between fiscal 1997 and fiscal 1999, we expanded our product offerings to include apparel (hats, t-shirts and jackets) and other memorabilia. During that time period, the motorsports industry experienced a period of rapid growth and we expanded our distribution channels to reach the expanded fan base.

We continue to pursue a strategy designed to enhance our leadership position in the motorsports collectible and consumer products industry. Key aspects of this strategy include (a) focusing on licensing the top drivers and teams, (b) focusing on large promotion programs that allow us to market more products under our key existing licensing arrangements, (c) developing promotional programs for corporate sponsors, and (d) strengthening and developing our existing distribution channels.

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Our company was incorporated in Arizona in 1992. Principal executive offices are located at 4707 East Baseline Road, Phoenix, Arizona 85042, and our telephone number is (602) 337-3700. All references to our business operations in this report include the operations of Action Performance Companies, Inc. and our subsidiaries and operating divisions.

Our Business

Industry Overview

Motorsports racing consists of several distinct segments, each with its own organizing bodies and events. The largest segment in the United States, in terms of attendance and media exposure, is stock car racing, which is dominated by NASCAR. The other principal segments include the following:

	•		drag racing, with NHRA the most prominent organizing body;
	•		open wheel racing and the IRL;
	•		dirt track racing, which includes the World of Outlaws and USAC;
	•		sports car racing, which includes the United States Road Racing Championship and the American Le Mans Series;
	•		motorcycle racing, which includes the American Motorcycle Association; and
	•		Formula One.

Millions of racing fans attend racing events in North America or tune in to televised racing events each year. In 2001, public interest in NASCAR is up significantly over 2000 as indicated by television ratings. A significant portion of the increase this year is due to a new six-year, $2.4 billion broadcast contract signed by NASCAR. Under the contract, FOX broadcasts the first half of the season and NBC and TNT broadcasts the second half. The 20 races on NBC and TNT in the second half of the 2001 Winston Cup season drew audiences 34 percent larger than for those races last year. Fox Sports and cable channel FX saw ratings go up 29 percent for 19 races. Ratings increased across the country for NBC and TNT, going up 74 percent in the Southwest, 66 percent in the Pacific region, and 47 percent in the Northeast. Each rating point represents a little more than one million television households. Internationally, Formula One events are broadcast worldwide to approximately 130 countries.

Since 1996, new speedways have been opened in the Los Angeles, Dallas/Ft. Worth, Las Vegas, 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. The geographical expansion of new speedways has expanded the awareness of NASCAR racing.

Strategy

We plan to continue to grow revenues and increase profitability by pursuing a strategy that is designed to continue our leadership position in the motorsports collectible and consumer products industry, leverage the growing popularity of motorsports (particularly NASCAR) and take advantage of our exclusive license arrangements with the most popular figures in these sports. This strategy includes focusing on core licensed motorsports products, further developing existing licensing arrangements, continuing to develop promotional programs, strengthening existing distribution channels, expanding into new distribution channels, exploiting the growth and popularity of motorsports internationally, and continuing to develop and bring new products to market. Specific initiatives include growing the Winner’s Circle brand of collectibles within the mass-retail market, launching new products, such as replica die-cast boats and engines, through existing distribution channels, developing programs for the increasingly popular NHRA and Sprint car series and working with major corporate clients on major national or international promotional programs.

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Products

Die-Cast Replica Vehicles

We design and market replicas of motorsports-related vehicles that are constructed using die-cast bodies and chassis with free-spinning wheels and tires. We design our collectible die-cast replicas as high-quality collectible items. We market our die-cast products under approximately 250 active licenses with racecar drivers, team owners, and sponsors as well as under license agreements with NASCAR, IRL, Ford Motor Company, several divisions of General Motors Corp., and others. The die-cast products that we offer relate to NASCAR Winston Cup, “Busch,” and “Craftsman Truck” racing series; Formula One; NHRA drag racing; GT and other sports car racing; USAC racing; and “World of Outlaws” sprint car racing. We also produce die-cast replicas of certain factory production cars.

Our die-cast replicas typically range in price at retail from approximately $10.00 to $99.00 per item, depending on size, type of vehicle, and level of detail. A 1:24th scale replica of an actual racing vehicle typically retails for $59.99 to $69.99. We offer our die-cast collectibles primarily through our wholesale distributor network to specialty retailers, the Club, direct response television through our relationship with QVC, our trackside stores, and corporate promotional programs. We offer Winner’s Circle products principally through mass retail.

We enhance the collectible value and appeal of our products through various measures. These measures include (a) designing die-cast collectibles that include features that are not offered by our competitors; (b) limiting the quantities of each collectible item that we produce and sell; (c) 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; (d) offering certain items only through the Club; and (e) designing packaging concepts to improve the display of each collectible item.

We market a line of die-cast replica racing vehicles to mass retailers under the “Winner’s Circle” brand name. These die-cast products are completely distinct from our other products and do not compete directly with our limited-edition motorsports die-cast collectible products.

Apparel and Other Consumer Products

We market various licensed motorsports apparel, souvenirs, and other consumer products, including t-shirts, jackets, hats, coffee mugs, pins, key chains, knives, coolers, and tote bags. Each of the motorsports consumer products generally features the name, likeness, and car number of a popular racecar driver.

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 sizes ranging from infant to youth to men and women’s adult sizes.

We design our motorsports consumer products primarily for distribution through retail outlets, trackside stores, direct response television through our relationship with QVC, and promotional programs with corporate sponsors of racing teams and racing events.

Chase-Branded Apparel

We own an 80% interest in Chase Racewear, L.L.C., a motorsports-related apparel brand and licensing company. Chase licenses apparel and clothing accessories that bear “Chase” brand marks, including “Chase Authentics,” “Competitor’s View,” and a stylized “C”, which is generally embroidered on the shirt cuff or pocket. NASCAR drivers including Jeff Gordon, Rusty Wallace, Dale Jarrett, Terry Labonte, Bobby Labonte, and others, have agreed, subject to certain exceptions, to ensure that licensed apparel products bearing their names, likenesses, or signatures will also bear “Chase” brand marks. These drivers also have agreed to endorse Chase-branded apparel as the exclusive trackside apparel of top NASCAR drivers. All apparel the Company sells utilizes Chase brand . In addition, Chase Racewear, L.L.C. licenses the brand to others, including VF Knitwear.

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Sales and Distribution

We market our die-cast replicas worldwide to approximately 10,000 specialty retailers through our wholesale distributor network, the Club, direct response television through our relationship with QVC, trackside stores, mass retail and corporate promotional programs. We market our apparel and other consumer products through certain distributors primarily through an in-house sales force and independent representatives to approximately 10,000 specialty retailers and to major discount and department stores, retail automotive product outlets, and convenience stores; direct trackside sales to race fans; and promotional programs with corporate sponsors.

Die-cast Distribution

We currently market our die-cast collectibles on a wholesale basis through 18 distributors operating in the United States and 45 distributors operating in 45 countries throughout the world. The distributors solicit orders for our die-cast products from approximately 5,000 specialty retailers throughout the United States and approximately 5,000 specialty retailers in other countries throughout the world. The retailers include stores specializing in motorsports collectibles and apparel and stores specializing in other sports collectible items, and a limited number of hobby shops. 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, including promotion of our collectibles on “home shopping” television programs (such as QVC Network’s “For Race Fans Only” program) and advertising during popular television programs of interest to motorsports enthusiasts. We market our Winner’s Circle die-cast through mass retail merchants.

Apparel and Other Consumer Products Distribution

Our in-house sales force and independent representatives market certain motorsports consumer products on a wholesale basis to major discount and department stores, such as Wal-Mart and K-Mart, to automotive retail stores, and to convenience stores. We also utilize our distributor network as well as an in-house sales force and independent representatives to market our motorsports apparel, souvenirs, and other consumer products on a wholesale basis to the same specialty retailers that sell our die-cast collectibles.

Club

We market certain of our die-cast collectibles exclusively through the Club. Members of the Club pay a lifetime membership fee that entitles them to receive a membership kit, a monthly magazine, catalogs, and other special sales materials highlighting our collectibles and other products. Membership in the Club was approximately 230 thousand members as of September 30, 2001. Approximately 120 thousand members are active, having made a purchase in the last twelve months.

Under a ten-year outsourcing and exclusive supply agreement with QVC, Inc., QVC assumed responsibilities for the day-to-day marketing and distribution operations of the Club in fiscal 2001. We are QVC’s exclusive supplier for motorsports memorabilia offered by the Club, and QVC is the exclusive distributor for Club products, including distribution over the Internet.

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 the Club’s members. We produce and consign our inventory with QVC, which sells and retains 20% to 40% of the revenue generated based upon quantity of products shipped and whether products are sold through direct response television. QVC retains all membership fees paid and has the exclusive opportunity to sell club products over interactive television and its web site after the initial sales window reserved for club members has expired.

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Trackside Sales

We currently operate 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 Winston Cup race (39 events in fiscal 2001) 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 apparel, souvenirs, and die-cast collectibles 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 each store.

Internet

In April 2001, we entered into an agreement with QVC to re-establish our online interactive merchandising presence. QVC assumed day-to-day responsibility for operating and promoting our goracing.com Internet site as an online motorsports retail store that will market our die-cast and apparel racing merchandise. QVC also assumed all costs associated with redesigning, restructuring and operating goracing.com, including processing online purchases. In October, we relaunched the website, with initial offerings of die-cast products. We plan to add apparel and other consumer products to the offerings in fiscal 2002.

Special Promotion Programs

We develop and implement extensive promotional programs, generally with popular drivers, that feature special, one-time themes or events intended to reinforce awareness of the identity of corporate sponsors, and other licensors of intellectual property and which will increase the market for the Company’s products. We market a broad variety of specially designed die-cast vehicles and other collectibles, apparel, and souvenirs based on these programs.

Building on the success of the Looney Tunes program (one of the largest in our history which exceeded $20 million in die-cast sales primarily in the fourth quarter of fiscal 2001) as well as other successful promotions including Coca Cola, Harley Davidson, Home Depot and others, we have scheduled several significant promotions in 2002. Some of these feature Elvis Presley, James Dean, the 20th anniversary of the release of Steven Spielberg’s ET and the rock band KISS.

Design and Production

Die-cast Scaled Replica Vehicles

We design each die-cast collectible that we market. Many of our die-cast collectibles 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 collectibles to ensure 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 collectibles with pad printing instead of stickers or decals.

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.

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A substantial portion of our die-cast collectibles is manufactured under an exclusive agreement with one third-party manufacturer in China. The term of the agreement currently extends through October 31, 2005 and automatically renews for five successive one-year terms 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 a significant portion of the tooling that the third-party manufacturer uses to produce die-cast collectibles for our company, and we have partial control over the production of our die-cast collectibles under the manufacturing agreement. We invested $15.1 million in fiscal 2001 tooling for our proprietary lines of die-cast collectibles. We believe the breadth and quality of the tooling program provides us with a competitive advantage in the motorsports collectible market.

We believe that our primary overseas manufacturer of die-cast collectibles is dedicated to high quality and productivity as well as support for new product development. There are significant risks inherent in relying on a single manufacturer for a substantial portion of our die-cast products. See Item 1, “Special Considerations – We depend on third-party manufacturers and shippers.”

We obtain the approximately 20% of the die-cast sold from other manufacturers in China. We currently do not have a formal, long-term arrangement with any of these manufacturers.

Apparel and Other Consumer Products

We currently obtain substantially all of our licensed motorsports apparel, souvenirs, and other consumer products on a purchase order basis from approximately 200 third-party manufacturers and suppliers located primarily in the United States. We also screen print and embroider a portion of the licensed motorsports apparel that we sell. The apparel and souvenir 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 souvenir products from those of our competitors. We engage in a bidding process for certain items, such as embroidered hats or t-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 that have licenses for those items with the drivers and other licensors.

We work closely with the third-party apparel and souvenir manufacturers in order to ensure that the 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 consumer 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.

Licenses

We focus on developing long-term relationships with and we engage in comprehensive efforts to license the most popular drivers, team owners, and other personalities in each top racing category, their sponsors, various sanctioning bodies, and others in the motorsports industry. We develop opportunities to market innovative collectible and consumer 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.

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Significant Driver License and Endorsement Agreements; Significant Team Owner Licenses

We have long-term license agreements with NASCAR Winston Cup Points champions Jeff Gordon, Dale Jarrett, Bobby Labonte, Bill Elliott, and Rusty Wallace and eleven-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. These agreements, as well as many of our other significant 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 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 Robert Yates Racing, Inc.; Richard Childress Racing Enterprises, Inc.; Redline Sports Marketing, Inc. (the licensing entity for the Joe Gibbs race team); Evernham Motorsports, LLC; Chip Ganassi Racing and Dale Earnhardt, 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 Winston Cup 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.

The following table sets forth certain information with respect to the license or personal service agreements with the drivers and team owners described above:

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Additional Product Licenses

We maintain other licenses with various other drivers, car owners, sponsors, and manufacturers. Other popular drivers under license with our company include NASCAR Winston Cup driver Terry Labonte; Jerry Nadeau; IRL Driver Al Unser, Jr.; NHRA drag racers Kenny Bernstein and Larry Dixon; and NHRA Pro Stock motorcycle driver Matt Hines. We also have licenses with Formula One teams and with other popular team owners, car sponsors, NASCAR, World of Outlaws, Ford Motor Company, several divisions of General Motors Corp. and DaimlerChrysler.

Other License Arrangements

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 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 licensing 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 licensing arrangement expires on 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. The license agreement with NASCAR will automatically renew for two additional five-year terms unless it has been terminated in accordance with its terms.

We have a license agreement with the Indianapolis Motor Speedway Corporation, the owner and operator of the Indianapolis Motor Speedway and the host of the Indianapolis 500, Brickyard 400 and U.S. Grand Prix, that gives us the non-exclusive right to use the IRL teams, drivers, and drivers’ likeness on our die-cast replicas and other motorsports products and apparel. The license agreement extends through 2003. Under the agreement, we must pay IMS a royalty based on a percentage of our net sales of licensed product, subject to guaranteed minimum royalty payments by us.

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Acquisitions

Mass Market Products and the “Winner’s Circle” Brands

We design, manufacture, and market licensed die-cast racecar toy replicas for the mass retail market through our “Winner’s Circle” brand of products. In May 2001, we acquired “Winner’s Circle” brand name and related die-cast inventory and tooling from Hasbro Inc. We use our licenses with approximately 15 drivers to produce die-cast replicas of their racecars, including both standard and special paint schemes. The items produced under this brand name principally include miniature toy die-cast replicas of motorsports vehicles. We believe that our entry into the mass retail die-cast market furthers our strategy to establish our presence in all licensed die-cast racecar replica marketing channels and expands our line of licensed motorsports merchandise for mass retail customers to include both die-cast products and apparel. Prior to our acquisition of the “Winner’s Circle” brand, we licensed to Hasbro the rights to produce specific motorsports-related products for sale to the mass market. The mass market die-cast products manufactured and marketed under the “Winner’s Circle” brand are distinct form our current products and do not compete directly with our limited edition motorsports die-cast collectible products.

Die-Cast Scaled Replica Bass Fishing Boats

In September 2001, we acquired an 80% interest in a development stage business that manufactures and distributes collectible die-cast models of popular high-performance bass fishing boats. The die-cast replicas are distributed under our Castaway brand through most of the same channels as our other die-cast collectibles including QVC cable television and QVC online. Our Castaway line of collectibles will be replicas of bass boats designed and manufactured by Forest Wood’s Ranger Boats and Tracker Marine, including Tracker Marine’s Pro Craft and Nitro brands. We plan to produce product lines featuring a NASCAR Winston Cup driver series and a bass professional angler signature series. Our NASCAR Winston Cup series will include bass boats utilizing the paint schemes of certain top drivers, including Dale Earnhardt, Dale Earnhardt Jr., Jeff Gordon, Kevin Harvick, Dale Jarrett, Bobby Labonte, Steve Park, Tony Stewart, Rusty Wallace, and Michael Waltrip. Our Castaway Bass Professional Angler Signature Series includes bass boats used and endorsed by Hank Parker and other top professional bass anglers. We believe that the crossover of demographics of motorsports and competitive bass fishing will provide an opportunity for the Castaway product line to appeal to a large audience.

Competition

Our motorsports die-cast collectibles compete with die-cast and other motorsports collectibles and, to a certain extent, die-cast replicas of motorsports vehicles that are sold through mass retail channels. Our motorsports apparel and souvenirs 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. Emerging companies also may increase their participation in these 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.

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Intellectual Property

Our business depends upon valuable trademarks and other rights that we license from third parties. Our performance and ability to compete also depend to a significant degree on the value of our various tradenames and marks, as well as our proprietary technology and other rights. We are seeking protection of our significant service marks and trademarks in the United States, including various “Action” names and logos, “goracing.com,” and other names and logos.

Insurance

We maintain a total of $26 million in liability insurance to cover the sale of our die-cast and other related products. In addition, we maintain a separate policy to cover our tooling located at our third-party manufacturer in China. The current coverage limit is $15 million for damage to our property as well as an additional $15 million for business interruption insurance from resulting damage to the property. We believe that our current insurance coverage and program is adequate for our exposures.

Employees

As of December 12, 2001, we had approximately 500 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.

Fred W. Wagenhals has served as our Chairman of the Board, President, and Chief Executive Officer since November 1993 and served as Chairman of the Board and Chief Executive Officer from May 1992 until September 1993 and as President from July 1993 until September 1993.

R. David Martin has served as our Chief Financial Officer since August 2000 and as a director since December 2000. Previously, Mr. Martin joined Deloitte & Touche in June 1968 and served as a partner of that firm from August 1978 until May 2000.

Melodee L. Volosin has served 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. Ms. Volosin served as the Director of our Wholesale Division from May 1992 to September 1997. Ms. Volosin’s duties include managing all of our wholesale distribution of die-cast collectibles and other products, including advertising programs and budgeting.

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John S. Bickford, Sr. has served as our Vice President — Strategic Alliances since July 1997 and as a director of our company since January 1997. Mr. Bickford also served as a consultant to our company from January 1997 to June 1997. From 1976 to present, Mr. Bickford has served as President of MPD Racing Products, Inc., which manufactures racecar parts for distribution through speed shops and high-performance engine shops. Mr. Bickford served as President of Bickford Motorsports, Inc., which provided consulting and special project coordination services to racecar drivers, car owners, and other businesses, from 1990 until 1997. Mr. Bickford also published Racing for Kids magazine during 1996 and 1997. Mr. Bickford served as General Manager of Jeff Gordon, Inc. from 1990 to 1995. Mr. Bickford currently serves as a director of Equipoise Balancing, Inc., a privately held company.

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Special Considerations

The following factors, in addition to those discussed elsewhere in this report, should be carefully considered in evaluating our company and our business.

A variety of factors could adversely affect our operating results.

A wide variety of factors could adversely impact our operating results. These factors include the following:

	•		our ability to identify popular motorsports personalities, teams, and other licensors and to enter into and maintain mutually satisfactory licensing arrangements with them;
	•		the racing success of the key motorsports personalities, teams, and other licensors with whom we have license arrangements;
	•		our ability to identify trends in the motorsports collectibles and consumer markets and to create and introduce on a timely basis products and services that take advantage of those trends and that compete effectively on the basis of price and consumer tastes and preferences;
	•		our ability to design and arrange for the timely production and delivery of our products;
	•		our ability to identify, develop, and implement special merchandising and marketing programs on a timely basis;
	•		the level and timing of orders placed by customers;
	•		our ability to expand our distribution channels and to effectively manage the growth of our operations;
	•		seasonality; and
	•		competition and competitive pressures on prices.

Many of the factors described above are beyond our control.

Our business depends on our relationships and license arrangements with key licensors.

We market our products under licensing arrangements with racecar drivers, team owners, sponsors, automobile and truck manufacturers, NASCAR, NHRA, IRL, and other entities. The licensing arrangements vary in scope and duration, but generally authorize us to sell specified licensed products for short periods of time. Some license agreements require us to pay minimum royalties or other fixed amounts regardless of the level of sales of products licensed under that agreement or the profitability of those sales. The success of licensing arrangements depends on many factors, including the following:

	•		the continued popularity of motorsports in general,
	•		the reasonableness of license fees in relationship to revenue generated by sales of licensed products,
	•		the continued popularity of the licensors,
	•		the continued performance, public image, and health of the individual drivers.

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.

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In addition, our ability to enforce our rights under licensing 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 a significant change in our management team. The termination, cancellation, or inability to renew or enforce material licensing arrangements, or the inability to develop and enter into or enforce new licensing arrangements, would have a material adverse effect on our business.

We depend on the popularity of the motorsports industry in general and NASCAR racing in particular.

The growth rate of the motorsports industry and its appeal to consumers has a significant effect on the sales of motorsports merchandise and corporation sponsorship. Motorsports competes for television viewership, attendance, merchandise sales, and sponsorship funding with other sports, entertainment, and recreational events. The competition in the sports, entertainment, and recreation industries is intense.

Sales of die-cast replicas and other licensed merchandise related to NASCAR racing represented approximately 70.0% of our revenue in fiscal 2001. Although we have expanded our product lines to include vehicles from other segments of motorsports, we expect that products related to NASCAR racing will continue to account for a significant percentage of our revenue for the foreseeable future. As a result, the popularity of NASCAR-sanctioned racing is important to the success of our business.

Any decrease in the growth of the motorsports industry may have a material adverse effect on our business, and any continued growth decline of the motorsports industry, and NASCAR racing in particular, would continue to have a material adverse effect on our business.

We depend on third-party manufacturers and shippers.

We depend upon third parties to manufacture all of our motorsports collectibles and most of our consumer products. In particular, we rely on one manufacturer, which operates a single facility in China, to produce most of our die-cast products. Although we own most of the tools, dies, and molds used in the manufacturing processes of our collectible products and own the tooling and dies used to manufacture certain of our consumer products, we have limited control over the manufacturing processes themselves. As a result, any 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.

We obtain die-cast products from our primary manufacturer in China under an agreement that extends through October 31, 2006, and that automatically renews for successive one-year terms unless terminated by either party giving written notice to the other at least 90 days prior to the end of the then-current term. We do not have long-term contracts with any other of our third-party manufacturers.

Because we own most of the tools and dies used in the manufacturing process, we believe that we would be able to secure other third-party manufacturers to produce our products in the event that either party terminates that agreement. Our operations would be adversely affected, however, by the following:

	•		the loss of our relationship with certain of our current suppliers, including particularly our primary manufacturer of die-cast products;
	•		the disruption or termination of the operations of one or more of our current suppliers; 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.

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Significant damage to the facilities of our third-party manufacturers, particularly the facilities used by our die-cast product manufacturers in China, also could result in the loss of or damage to a material portion of our key tools, dies, and molds in addition to production delays while new facilities were being arranged and replacement tools, dies, and molds were being produced. We do not maintain an inventory of sufficient size to provide protection for any significant period against an interruption of supply, particularly if we are required to obtain alternative sources of supply.

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, and other costs increase. Although to date we have been able to increase the prices at which we sell our products in order to cover the increased prices that we pay for such products, we may not be able to continue to pass along such price increases to our customers in the future.

We also depend upon a number of third-party shippers, such as the U.S. Postal Service, United Parcel Service, and Federal Express, to deliver goods to our customers and us. Strikes or other service interruptions affecting our shippers would have a material adverse effect on our ability to deliver merchandise on a timely basis.

Our success depends on our ability to respond to rapid market changes.

The markets for our products and services are subject to rapidly changing customer tastes, a high level of competition, seasonality, and a constant need to create and market new products and services, especially related to our core licensors. Demand for motorsports collectible and consumer products depends upon a wide variety of factors, including the following:

	•		the popularity of drivers, teams, and other licensors,
	•		the popularity of current product and service concepts or themes,
	•		cultural and demographic trends,
	•		marketing and advertising expenditures, and
	•		general economic conditions.

Because these factors can change rapidly, customer demand also can shift quickly. We frequently are able to successfully market new products or services 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 in order 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 or services to market, we may not always be able to accurately forecast required inventory levels 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 or services.

The market for our products and services are competitive.

The motorsports collectible and consumer products market is competitive. We compete with major domestic and international companies. Some of these competitors have greater market recognition and substantially greater financial, technical, marketing, distribution, and other resources than we possess.

Our motorsports die-cast collectibles compete with die-cast and other motorsports collectibles and, to a certain extent, die-cast replicas of motorsports vehicles that are sold through mass retail channels. Our motorsports apparel and souvenirs compete with similar products sold or licensed by drivers, owners, sponsors, and other licensors with which we currently do not have licenses as well as with sports apparel licensors and manufacturers in general. Other companies also may increase their participation in these motorsports markets. Our promotional programs must compete for advertising dollars against other specialty advertising programs and media, such as television, radio, newspapers, magazines, and billboards.

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.

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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. We also are increasing our efforts to develop large corporate promotional programs. These programs typically result in significant levels of revenue and income, which may increase quarter-to-quarter variations in our operating results. 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, borrowing amounts, 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. As a result, it is difficult to predict our future revenue and operating results. Any shortfall in revenue or fluctuations in operating results may have a material 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.

We face a variety of risks associated with acquisitions and dispositions.

We completed a number of acquisitions in prior years. Although our short-term strategy does not anticipate any acquisitions, we may wish to acquire complementary businesses, products, services, or technologies in the future. We may not be able to identify suitable acquisition candidates, make acquisitions on commercially acceptable terms, or have adequate capital to do so.

We conduct due diligence reviews of each acquired business and we obtain representations and warranties for each. Unforeseen liabilities and operating difficulties can arise. Contractual or other remedies may not be sufficient to compensate us in the event unforeseen liabilities and operating difficulties arise. In addition, our ability to enforce our rights or remedies in connection with acquisitions of businesses outside the United States may be limited by the interpretation and enforcement of those agreements under the laws of countries other than the United States.

We periodically engage in discussions with various motorsports-related and other businesses regarding potential acquisition and disposition of businesses. In connection with these discussions, we and other parties exchange confidential operational and financial information, conduct due diligence inquiries, and consider the structure, terms, and conditions of the potential transactions. In certain cases, the third party agrees not to discuss a potential transaction with any other party for a specific period of time and agrees to take other actions designed to enhance the possibility of the transaction. Discussions frequently take place over a longer period of time and often involve difficult business integration and other issues, including in some cases retention of management personnel and related matters. As a result of these and other factors, a number of potential transactions that from time to time appear likely to occur may not result in binding legal agreements and may not be consummated.

We face risks associated with our international operations, international trade, exchange, and financing.

We obtain most of our products from overseas manufacturers, particularly one third-party manufacturer of die-cast collectibles and other replicas in China. During fiscal 2001, we derived approximately 45% of total revenue and 80% of our die-cast revenue from products that were manufactured by this third-party manufacturer. Because most of our products are manufactured overseas, we face risks in addition to the risks generally created by obtaining our products from third parties. We maintain business operations in Germany and we market motorsports collectible 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. These risks include the following:

	•		management of a multi-national organization,
	•		compliance with local laws and regulatory requirements, as well as changes in such laws and requirements,
	•		restrictions on the repatriation of funds,
	•		employment and severance issues,
	•		overlap of tax issues,

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	•		the business and financial condition of the third-party manufacturers,
	•		political and economic conditions abroad, and
	•		the possibility of
			– expropriation or nationalization of assets,
			– supply disruptions,
			– currency controls,
			– exchange rate fluctuations, and
			– changes in tax laws, tariffs, and freight rates.

Protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export compliance laws, or other trade policies, could adversely affect our ability to purchase our products from foreign suppliers or the price at which we can obtain those products. In November 1999, the United States and China signed an agreement that will lift trade barriers between the two countries and that advances China’s efforts to join the World Trade Organization. Special interest groups have raised objections to these efforts and we cannot be certain whether or to what extent trade relations with China will continue to improve. Any developments that adversely affect trade relations between the United States and China in the future could impact our ability to obtain die-cast collectible products from our manufacturers.

All of our purchases from our foreign manufacturers are denominated in U.S. dollars or in Hong Kong dollars, which are pegged to the U.S. dollar. As a result, the foreign manufacturers bear any risks associated with exchange rate fluctuations subsequent to the date we place orders with those manufacturers. An extended period of financial pressure on overseas markets or a devaluation of the Chinese currency that results in a financial setback to our overseas manufacturers, however, could have an adverse impact on our operations. Purchases of die-cast products from the China-based manufacturers generally require us to provide an international letter of credit in an amount equal to the purchase order. Although we currently have in place financing arrangements in an amount that we consider adequate for anticipated purchase levels, the inability to fund any letter of credit required by a supplier would have an adverse impact on our operations.

Substantially all of our sales are denominated in either U.S. dollars or Euros. As a result, international customers for our products bear any risks associated with exchange rate fluctuations subsequent to the date the order is placed. We may, however, experience losses as a result of exchange rate fluctuations between the dollar and the Euro. In the future, we may seek to limit such exposure by entering into forward foreign exchange contracts or engaging in similar hedging strategies. 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.

We depend on management and other key personnel.

Our development and operations to date have been, and our proposed operations will be, substantially dependent upon the efforts and abilities of our senior management, particularly Fred W. Wagenhals, our Chairman of the Board, President, and Chief Executive Officer. The loss of services of one or more of our key employees, particularly Mr. Wagenhals, could 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 do not maintain such insurance on any of our other officers.

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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 critical to our success. Our failure to adequately protect our intellectual property could materially and adversely affect our business, operating results, and financial position. Our intellectual property rights primarily consist of our 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. 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. 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 make our products and services available. 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. 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 technology 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 aspects of our business infringe 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 our management, and could require us to enter into royalty and licensing agreements.

The market price of our common stock and notes may 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 or services 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 many rapidly expanding companies and that often have been unrelated to the operating performance of such companies. These broad market fluctuations and other factors may adversely affect the market price of our common stock.

The trading price of our subordinated notes will depend on the factors described above as well as on other factors, such as prevailing interest rates, perceptions of our creditworthiness, the market price of our common stock into which the subordinated notes are convertible, and the market for similar securities. As a result, the market price of our subordinated notes may trade at a discount from their principal amount based on such factors.

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We face risks associated with our exclusive relationship with QVC and the outsourcing of our Club operations.

We outsource the distribution of Club products through QVC under a ten-year exclusive agreement expiring in 2011. Although we will remain responsible for acquisition of licenses, product selection, development, and manufacturing, we face risks associated with our agreement with QVC, including the following:

	•		potential damage to our reputation as a result of reduced levels of customer service; and
	•		reduced sales generated from Club products.

Holders of our subordinated notes and holders of our common stock will be subject to additional risks associated with those notes.

Our subordinated notes are general unsecured obligations, subordinated in right of payment to all of our existing and future senior indebtedness. As a result of this subordination, in the event of any insolvency, liquidation or reorganization of our company or upon acceleration of the subordinated notes due to an event of default (as defined in the indenture governing the notes), the assets of our company will be available to pay obligations on the notes only after the administrative expenses of any bankruptcy proceeding and all senior indebtedness, if any, have been paid in full. As a result, there may not be sufficient assets remaining to pay amounts due on the notes and any of our other subordinated indebtedness then outstanding. The indenture does not prohibit or limit the ability of our company and our subsidiaries to incur additional indebtedness, including senior indebtedness. The incurrence of such indebtedness could adversely affect our ability to pay our obligations under the notes. In addition, the notes are not guaranteed by any of our subsidiaries. As a result, the notes effectively rank junior to all creditors of our subsidiaries.

Upon the occurrence of certain adverse events, each holder of subordinated notes may require us to repurchase all or a portion of the notes. If such an event were to occur, we may not have sufficient financial resources or may not be able to arrange financing to pay the repurchase price for all subordinated notes tendered by holders thereof. Our ability to repurchase the notes in such event may be limited by law, the indenture, and the terms of other agreements relating to borrowings that constitute senior indebtedness, as such indebtedness or agreements may be entered into, replaced, supplemented, or amended from time to time. We may be required to refinance senior indebtedness in order to make any such repurchase payments. If we are prohibited from repurchasing the subordinated notes, such failure would constitute an event of default under the indenture, which may constitute a further default under certain of our existing agreements relating to borrowings and the terms of other indebtedness that we may enter into from time to time. In such circumstances, the subordination provisions in the indenture would prohibit payments to the holders of the subordinated notes. Furthermore, we may not have the financial ability to repurchase the subordinated notes in the event that maturity of senior indebtedness is accelerated as a result of a default under the applicable loan or similar agreement. The repurchase of subordinated notes under the circumstances described above, or our inability to repurchase subordinated notes as required, could have a material adverse affect on our financial condition and operating results.

Rights to acquire shares will result in dilution to other holders of our common stock.

As of December 12, 2001, options to acquire a total of 1.6 million shares of our common stock were outstanding under our stock option plans. In addition, warrants to purchase 200 thousand shares of our common stock at prices ranging from $6.88 to $20.35 were outstanding at December 12, 2001. We also offer our employees the opportunity to buy our common stock at a discount under our employee stock purchase plan. At December 12, 2001, holders of our subordinated notes have the right to convert their notes into an aggregate of 1,139,689 shares of common stock at a conversion price of $48.20 per share. Holders of stock options, holders of warrants, employees who participate in the purchase plan, and holders of subordinated notes will have the opportunity to profit from an increase in the market price of our common stock, with resulting dilution in the interests of other holders of common stock. The existence of such stock options, notes, and our purchase plan could adversely affect the terms on which we can obtain additional financing, and the option holders, note holders, and purchase plan participants can be expected to buy shares at a time when we, in all likelihood, would be able to obtain additional capital by offering shares of common stock on terms more favorable to us than those provided by such options, notes, and the purchase plan.

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Sales of additional shares of common stock could have a depressive effect on the market price of our common stock.

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. A majority of the 17,343,112 shares of common stock outstanding as of December 12, 2001, currently are 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 are “restricted securities,” 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 there from. We have registered an aggregate of approximately 472,300 shares of such “restricted securities” for resale pursuant to effective registration statements. 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 such shares. The majority of the shares held by our officers and directors currently are available for sale under Rule 144.

It may be difficult for a third party to acquire us, even if the acquisition would be in the best interests of shareholders.

Our articles of incorporation, bylaws, and Arizona law 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 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. In addition, many of our license agreements are subject to termination in the event of a change in control of our company.

Our operating results could differ materially from the forward-looking statements included in this report.

Some of the statements and information contained in this report concerning future, proposed, and anticipated activities of our company, anticipated trends with respect to our revenue, operating results, capital resources, and liquidity or with respect to the markets in which we compete or the motorsports industry in general, and other statements contained in this report regarding matters that are not historical facts are forward-looking statements, as that term is defined in the securities laws. Forward-looking statements, by their very nature, include risks and uncertainties, many of which are beyond our control. Accordingly, actual results may differ, perhaps materially, from those expressed in or implied by such forward-looking statements. Factors that could cause actual results to differ materially include those discussed elsewhere under this Item 1, “Special Considerations.”

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ITEM 2. PROPERTIES

We lease a 140,000 square foot building in Phoenix, Arizona. We use approximately 31,000 square feet of this facility for our corporate headquarters. We have subleased substantially all of the remaining space. The initial term of the lease expires in August 2007, with two five-year renewal options.

We also lease a facility in the vicinity of Charlotte, North Carolina, approximately 121,000 square foot, for our operations in that area. We utilize approximately 42,000 square feet of the new facility for offices and approximately 79,000 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 currently lease two facilities in Atlanta, Georgia. One facility consists of approximately 77,400 square feet, of which we utilize approximately 14,000 square feet for offices and approximately 63,400 square feet for manufacturing and warehouse operations. The lease on this facility expires in January 2002. The second facility consists of approximately 21,900 square feet, of which we utilize approximately 19,400 square feet for warehouse and distribution operations and approximately 2,500 square feet for offices. The lease on this facility expires in February 2002.

We own a facility in Aachen, Germany, which is approximately 53,000 square feet. We utilize approximately 40,000 square feet of this facility for our European warehouse and distribution operations and approximately 13,000 square feet for office space. We have 38,000 square feet of warehouse space under construction with completion scheduled for May 2002 and 13,000 square feet of office space under construction with completion scheduled March 2003.

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ITEM 3. LEGAL PROCEEDINGS

On November 30, 1999, a class action lawsuit was filed against our company in the United States District Court for the District of Arizona, case No. CIV’99 2106 PHXROS. Fred W. Wagenhals our Chairman of the Board, President, and Chief Executive Officer, and Tod J. Wagenhals and Christopher S. Besing, former directors and officers of our company, also were named as defendants. The lawsuit alleged that our company and the other defendants violated the Securities Exchange Act of 1934 by (a) making allegedly false statements about the state of our business and the shipment of certain products to a customer or (b) participating in a fraudulent scheme that was intended to inflate the price of our common stock. The alleged class of plaintiffs consisted of all persons who purchased our publicly traded securities between July 27, 1999 and December 16, 1999. The lawsuit was dismissed in September 2001.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has been quoted on the Nasdaq National Market under the symbol “ACTN” since April 27, 1993. The following table sets forth the high and low sales prices of our common stock on the Nasdaq National Market during the calendar quarters indicated.

As of December 12, 2001, there were 358 holders of record of our common stock. On December 12, 2001, the closing sales price of our common stock on the Nasdaq National Market was $35.00 per share.

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ITEM 6. SELECTED FINANCIAL DATA

The selected historical financial data presented below as of and for the five years ended September 30, 2001 are derived from our consolidated financial statements, which have been audited by Arthur Andersen LLP, independent public accountants. 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.

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(4)		Fiscal 2000 results include the results of operations of Fantasy Sports Enterprises, Inc., beginning as of date of acquisition. Also includes $64.8 million of restructuring and other charges.
(5)		Fiscal 2001 results include the results of operations of Winner’s Circle beginning in May 2001.
(6)		Includes settlement costs and related legal and other expenses of $5.4 million in 1997, $1.0 million in 1998, and $3.6 million in 1999.
(7)		Adjusted to reflect adoption of EITF 00-10, Accounting for Shipping and Handling Fees and Costs, in the quarter ended September 30, 2001.

ITEM 7. 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 replicas of cars driven by individual drivers and are principally NASCAR, Formula One and NHRA replicas. 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. Formula One vehicles and apparel 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 impact 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 and cancellation of specific purchase orders.

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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.

Results of Operations

The following table sets forth, for the fiscal years indicated, the percentage of total revenue represented by certain expense and revenue items.

The above percentages have been adjusted to reflect adoption of EITF 00-10, Accounting for Shipping and Handling Fees and Costs, in the quarter ended September 30, 2001.

Special Charges

In fiscal 2000, we recorded charges of $17.5 million arising from the decision to abandon our Internet strategy, relating to goracing.com. The 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. The charges are reflected in the fiscal 2000 financial statements as follows (in millions):

We completely utilized the accruals for the above cash charges of $5.8 million with cash payments of $0.7 million in fiscal 2001 and $5.1 million in fiscal 2000.

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In addition to the goracing.com charges, the fiscal 2000 financial statements include charges of $47.3 million for restructuring and other costs. Anticipated sponsorships, and driver and marketing programs did not materialize as anticipated, contributing to $13.3 million in inventory write-downs. Vendor discounts totaling $3.0 million were anticipated but not received due to lower than anticipated volumes. A change in the estimated useful lives of tooling equipment and identification of obsolete items caused tooling write-downs and amortization totaling $8.5 million. We decided to concentrate future production on core drivers and core programs contributing to write downs of prepaid royalties and sponsorship fees of $7.8 million. Revised estimates of the collectibility of certain customer account balances indicated $6.1 million of additional receivable reserve requirements. We determined the goodwill related to the die-cast helmet product line was worthless resulting in a $1.9 million impairment. These charges are reflected in the fiscal 2000 financial statements as follows (in millions):

Fiscal Year Ended September 30, 2001 Compared with Fiscal Year Ended September 30, 2000

Sales increased 25.3% to $323.4 million for 2001 from $258.1 million in the prior year. Domestic die-cast sales increased 12.9%. Domestic apparel sales increased 35.8% and foreign sales increased 35.2%. In the second fiscal quarter, in connection with the start of the NASCAR racing season, consumer demand increased significantly. Due to the shorter production lead-time, sales in domestic apparel operations strengthened after the first quarter. However, because of the 90-120 day lead-time required to produce and ship die-cast replicas, product was not available for shipment to customers until late in the third quarter. As a result, domestic die-cast sales growth was lower than apparel sales growth.

Gross profit improved to $115.0 million in fiscal 2001 from $49.0 million in the fiscal 2000. The prior year period included $32.6 million of special charges. The gross profit percentage improved to 35.6% of sales from 31.6% of sales, after considering the effect of special charges. The increase in gross profit as a percentage of sales resulted from reduced freight, product and production costs and the leverage attained from higher die-cast production quantities with relatively fixed tooling and die depreciation costs.

Selling, general and administrative expenses decreased to $69.5 million in 2001 from $107.9 million in the prior year. The prior year included $20.3 million of special charges. Selling, general and administrative, excluding the special charges, represented 21.5% of sales in 2001 and 34.0% of sales in 2000. The decrease as a percentage of sales resulted primarily from costs eliminated as a result of the outsourcing agreement with QVC and cost reductions realized from management and restructuring changes made in the third and fourth quarters of fiscal 2000. We also benefited from the full year effect of headcount reductions in fiscal 2000.

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Amortization of goodwill and other intangibles decreased to $6.2 million for 2001 from $16.8 million in the prior year. The prior year period included $9.5 million of special charges. The $1.1 million decrease, net of the special charge, is related to the elimination of goodwill and related amortization from the sale of Fantasy Sports and the reductions in amortization expense as a result of the impairment write-offs of goodwill and other intangibles recorded in the third and fourth quarters of fiscal 2000.

Interest expense and other, net for 2001 was $0.8 million lower than the prior year. The reduction is primarily the result of the $1.2 million reduction in interest expense as a result of the convertible subordinated note repurchases discussed further in Liquidity and Capital Resources and other long-term debt and liabilities reductions since last year.

The effective tax rate of 30.7% in 2001 compares to an effective rate of 29.7% in 2000.

Fiscal Year Ended September 30, 2000 Compared with Fiscal Year Ended September 30, 1999

We incurred a loss of $58.1 million for fiscal 2000 compared with net income of $28.4 million for the fiscal 1999. The fiscal year 2000 loss included $64.8 million of restructuring and other charges as discussed in Special Charges above.

Net sales decreased to $258.1 million in fiscal 2000, a decline of 25.8% from the $347.8 million reported for fiscal 1999. The decrease reflected a general decline in sports licensed merchandise sales, a decline in the number of promotional programs, and a decline in sales for certain licensed products that had enjoyed materially increased sales in the previous year.

Cost of sales for fiscal 2000 was $209.1 million or 81.0% of sales compared with $216.2 million for fiscal 1999 or 62.1% of sales. Before special charges, cost of sales was $176.5 million or 68.4% of sales. This percentage was greater than the percentage for 1999 because of increased freight costs as a percentage of cost of sales, increased manufacturing costs due to change orders, and lower order quantities and sales of product at discounted prices.

Selling, general, and administrative expenses were $107.9 million or 41.8% of sales for fiscal 2000 compared with $71.6 million for fiscal 1999 or 20.6% of sales. Excluding special charges, such expenses were $87.6 million for fiscal 2000 or 34.0% of sales. The increase before special charges of $16.0 million for fiscal 2000 was principally due to the costs of operating goracing.com prior to abandoning our Internet strategy, the costs of operating Fantasy Sports, which was acquired in fiscal 2000, and an increase in sponsorships and additional professional fees. The percentage increase was also due to the reduction in sales volume without a corresponding reduction in such costs.

Amortization of goodwill and other intangibles was $16.8 million for fiscal 2000 compared with $6.8 million for fiscal 1999. Excluding the special charge for the write-off of the goracing.com and Simpson Products, Inc. intangible, amortization was $7.3 million for fiscal 2000.

Interest expense and other, net for 2000 reflects reduced minority interests of $1.6 million resulting from lower income from our 80% owned German subsidiary.

We recorded an income tax benefit of $24.6 million for fiscal 2000, representing 29.7% of the pre-tax, loss compared with a tax provision of $18.5 million for fiscal 1999, representing 39.5% of the pre-tax income. The percentage income tax benefit for fiscal 2000 was less than the percentage tax provision for fiscal 1999 principally because of the special charges for the write-off of intangibles that did not have a tax basis and because no benefit was recorded for state and federal tax jurisdictions.

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Quarterly Results of Operations

The following table sets forth certain unaudited quarterly results of operations for each of the quarters in the three fiscal years ended September 30, 2001 (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.

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(3)		Includes $15.2 million of goracing.com related charges and other charges of $15.0 million of asset write-downs and impairments.
(4)		Includes $32.2 million of special, principally non-cash charges related to restructuring, costs associated with a reorganization, and a decision to refocus on our core drivers and core programs.
(5)		Our cost of sales was $60.3 million during the fourth quarter of fiscal 2000, or 107.1% of sales, compared with $56.5 million during the fourth quarter of fiscal 1999, or 61.7% of sales. Before special charges, fourth quarter cost of sales was $40.1 million, or 71.3% of sales. The increase in the percentage of sales during the fourth quarter of fiscal 2000 related to increased freight costs and sales of product at discounted prices.
(6)		Loss from operations reflects the factors described in footnote (5) above as well as increases in selling, general, and administrative expenses. Selling, general, and administrative expenses were $34.9 million during the fourth quarter of fiscal 2000, or 62.6% of sales, compared with $22.7 million during fiscal 1999, or 25.1% of sales. Excluding special charges during fiscal 2000, such expenses were $24.8 million, or 44.4% of sales. The percentage increase was in part due to the reduction in sales without a corresponding reduction in such costs.
(7)		Revenues have been restated in all periods for adoption of EITF 00-10, Accounting for Shipping and Handling Fees and Costs, in the quarter ended September 30, 2001.

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.

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) generally are characterized by higher sales of motorsports products.

Liquidity and Capital Resources

Our working capital position increased to $90.3 million at September 30, 2001, from $64.5 million at September 30, 2000. Cash increased as a result of increased profitability, proceeds from the sale Fantasy Sports ($3.8 million), receipt of an income tax refund ($17.8 million), proceeds upon exercise of stock options ($3.0 million) and other operating activities, including net inventory reductions since September 30, 2000. The increases in cash were offset by reductions in cash for repurchases of convertible subordinated notes ($11.1 million) and other debt ($6.0 million), treasury stock purchases ($1.5 million), Winner’s Circle acquisition ($1.3 million), expenditures for equipment ($16.6 million) and other operating activities, including volume related increases in accounts receivable ($19.3 million).

Days sales outstanding, calculated on quarterly sales, improved 7.7% over fiscal 2000 as a result of improved receivables management. Inventory turns, calculated on quarterly cost of sales, improved 46.1% over fiscal 2000, with the implementation of a build-to-order approach in die-cast operations and better inventory management. Our backlog at September 30, 2001, was approximately $120 million, with fulfillment scheduled primarily over the following two fiscal quarters.

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As of September 30, 2001, $54.9 million of 4 3/4% convertible subordinated notes were outstanding. The subordinated notes are convertible, at the option of the holders, into shares of common stock at the initial conversion price of $48.20 per share, subject to adjustments in certain events. Interest on the notes is payable semi-annually on April 1 and October 1 of each year. The notes mature on April 1, 2005. The notes are general unsecured obligations of our company, subordinated in right of payment to all existing and future senior indebtedness, as defined in the notes. The indenture governing the notes does not limit or prohibit our company or our subsidiaries from incurring additional debt, including senior indebtedness. We have the option to redeem the notes in whole or in part at any time on or after April 1, 2001, at redemption prices set forth in the indenture governing the notes. Upon the occurrence of a “change in control” or a “termination of trading,” as defined in the indenture, the holders of the subordinated notes will have the right to require us to repurchase all or any part of such holders’ notes at 100% of their principal amount, plus accrued and unpaid interest.

In July 2001, the Board of Directors approved a one-year program in which we may purchase up to one million shares of our common stock in the open market or in privately negotiated transactions. No shares have been purchased under the program.

During fiscal 2001, we repurchased Notes with a face value of $45.1 million at pretax gains of $13.4 million. The notes were repurchased using $11.1 million in cash and 829 thousand shares of common stock, previously, reacquired as treasury stock, with a market value of $19.5 million. The difference between the treasury shares’ $6.9 million cost and $19.5 million market value increased additional paid-in capital.

During fiscal 2001, we also paid $4.0 million in cash to settle a long-term obligation, extending through 2007, and valued at $4.8 million. The resulting $0.8 million pre-tax gain is included in extraordinary gain. The settlement also eliminated future contingent royalty payments for trademark usage through 2007.

In September 2000, the Company entered into a Loan and Security Agreement (the Agreement) with a subsidiary of Bank One (Bank One), providing for borrowings up to $30.0 million, subject to the limitation of a calculated borrowing base, and including up to $15.0 million of stand by letters of credit. The line of credit bears interest at the Bank One corporate base plus 0.5% or LIBOR plus 2.5%. The agreement provides for commitment fee of 0.5% of the average unused line of credit and 1.75% to 2.5% of the average unused letters of credit payable annually and expires December 2002. The Agreement is secured principally by inventory, receivables and equipment. The Agreement contains covenants, which require the Company to meet certain financial tests principally related to tangible net worth and EBITDA, and restricts the payment of dividends. The calculated borrowing base generally totals less than $30.0 million at current accounts receivable levels. At September 30, 2001, letters of credit totaled $5.8 million and the available line of credit totaled $22.2 million. We believe that the revised borrowing base will be adequate to cover our letter of credit and other liquidity needs for the next 12 months after considering anticipated cash flow from operations.

We anticipate that our capital expenditures in fiscal 2001 will principally relate to expenditures for tooling and a building addition in Germany. Our capital expenditures are not anticipated to exceed $21 million.

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 our foreign operations. We do not currently use and we have not historically used derivative financial instruments to manage or reduce market risk.

At September 30, 2001, we had $54.9 million outstanding under our convertible subordinated notes at an interest rate of 4.75%, and approximately $2.5 million of debt outstanding at various rates and terms, principally under promissory notes and capital leases. Interest rates on these credit instruments are fixed and comparable to current market rates.

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The functional currency for our foreign operation is the Euro. As such, changes in exchange rates between the Euro and the U.S. dollar could adversely affect our future earnings. Given the level of income we currently derive from our foreign operations, we consider this exposure to be minimal. A 10% change in exchange rates would not have a significant impact on our future earnings.

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.

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 2002 Annual Meeting of Shareholders. The information required by this Item relating to our executive officers is included in Item 1, “Our 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 2002 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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 2002 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 2002 Annual Meeting of Shareholders.

PART IV

ITEM 14. 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 - Not applicable.

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(c)

Exhibits