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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended June 30, 2002

Commission file number 0-21630

ACTION PERFORMANCE COMPANIES, INC.

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

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

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

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

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PART I- FINANCIAL INFORMATION

ITEM 1. Financial Statements

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ACTION PERFORMANCE COMPANIES, INC.
Unaudited Condensed Consolidated Balance Sheets
June 30, 2002 and September 30, 2001
(in thousands, except per share data)

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

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ACTION PERFORMANCE COMPANIES, INC.
Unaudited Condensed Consolidated Statements of Operations
Three and Nine Months Ended June 30, 2002 and 2001
(in thousands, except per share data)

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

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ACTION PERFORMANCE COMPANIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2002 and 2001
(in thousands)

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

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ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002

INTERIM FINANCIAL REPORTING

The accompanying condensed consolidated financial statements for Action Performance Companies, Inc. and subsidiaries have been prepared without audit by independent public accountants pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, all normal recurring adjustments necessary for a fair statement of financial position and results of operations for the interim periods included herein have been made. Certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted from these statements pursuant to such rules and regulations. Accordingly, these financial statements should be read in conjunction with our Form 10-K for the fiscal year ended September 30, 2001. The results of operations for the interim periods are not necessarily indicative of the operating results that may be expected for the fiscal year ending September 30, 2002.

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

We have completed evaluations of goodwill and of other intangibles, which include licenses and the Winner’s Circle trademark, in accordance with SFAS 142. The reporting units for SFAS 142 are domestic die-cast, domestic apparel, foreign die-cast and corporate and other, which are also our reporting segments. Goodwill and the trademark, which has an indefinite life, have been allocated to those reporting units as indicated below in “Segment Information.” We have made no adjustments to income (loss) to date in connection with the evaluations, and we do not anticipate making any adjustments.

As of October 1, 2001, goodwill and trademark amortization ceased, in accordance with SFAS 142. The trademark was acquired in May 2001. For the three and nine months ended June 30, 2001, goodwill amortization was $1.0 million and $3.0 million or $0.6 million and $2.1 million, net of tax. Excluding the impact of goodwill amortization, net of tax, income before extraordinary items and net income for the three and nine months ended June 30, 2001,would have been the following (in thousands, except per share data):

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SFAS No. 145, Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002 (SFAS 145), changes the classification of all gains and losses from extinguishment of debt, which under FASB Statement No. 4 were required to be classified as an extraordinary item, net of related income tax effect. Under SFAS No. 145, gains and losses from extinguishment of debt will now be classified as a component of operations. We intend to adopt SFAS No. 145 effective October 1, 2002. We will reclassify debt extinguishments in all periods presented as a component of income before tax and adjust income taxes accordingly. There will be no net impact on net income previously reported.

SEGMENT INFORMATION

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

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

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EARNINGS PER COMMON SHARE (EPS)

Reconciliations of the numerators and denominators in the EPS computations for income before extraordinary items for the periods ended June 30 follow in thousands:

The impact of options and warrants outstanding for the purchases of 482 thousand shares of common stock, at an average price of $39.90 were not included in the calculation of diluted EPS for the nine months ended June 30, 2002, because to do so would be antidilutive. The options and warrants had an exercise price greater than the average market price of the common stock for the nine months ended June 30, 2002, but could potentially dilute EPS in the future.

GAIN ON EXTINGUISHMENT OF DEBT

During the three months ended June 30, 2002, we repurchased 4¾% convertible subordinated notes with a face value of $10.0 million, at a loss of $1.0 million, net of tax, using 145 thousand shares from treasury and 95 thousand newly issued shares at an average price of $47.60. During the nine months ended June 30, 2002, we repurchased 4¾% convertible subordinated notes with a face value of $16.0 million, at a loss of $854 thousand, using 5.7 million in cash and 145 thousand shares from treasury and 95 thousand newly issued shares at an average price of $47.60.

ACQUISITIONS

In June 2002, we acquired Trevco Trading Corp (Trevco). Trevco markets gifts and ornaments, which are produced overseas, to mass retailers. The initial cash purchase price of $5.5 million was allocated $0.6 million to tangible net assets, $1.8 million to goodwill and $3.1 million to other intangible assets, consisting of backlog, non-contractual customer relationships and a 5-year non-compete agreement. The intangible assets are being amortized over lives ranging from 3 months to 5 years. Under the terms of the merger agreement we will pay additional consideration of $1.0 million in cash and 51,046 shares of common stock, payable if Trevco achieves revenue and operating income targets for the 5 months ended September 30, 2002. Under the terms of the merger agreement, we may issue a second round of additional consideration, either 50,000 or 75,000 shares of common stock, if Trevco achieves revenue and operating income targets for the year ended September 30, 2004. The additional consideration will be added to the purchase price if and when the financial targets are achieved. Trevco’s annual net sales, which fall primarily in our fourth fiscal quarter, are expected to total approximately $9 million. The domestic apparel segment includes Trevco’s net sales since the date of acquisition of $1.0 million for the three and nine months ended June 30, 2002.

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In July 2002, we acquired terry and golf product businesses, which will operate as McArthur Towel and Sports, Inc. McArthur distributes terry and golf products to specialty retailers and institutions. A portion of the product is decorated with team logos under licenses with many of the major sports leagues and college teams. The purchase price of $4.6 million in cash will be allocated to tangible net assets, primarily inventory, and intangible assets, consisting of backlog, patent, licenses and non-contractual customer relationships and goodwill. McArthur will be included in the domestic apparel reporting unit. The businesses had annual sales of approximately $14 million in the last year.

Effective May 2001, we acquired Hasbro’s “Winner’s Circle ™” brand name and related die-cast inventory and tooling (Winner’s Circle). As additional consideration, we pay 3% of related product sales to Hasbro, quarterly, for the next five years. The additional consideration added to the price of the trademark for the nine months ended June 30, 2002 was $0.6 million.

COMMITMENTS AND CONTINGENCIES

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

In certain sublease arrangements, we remain the primary obligor under the terms of the original lease agreements. One of our sublessees is in arrears on lease payments and we have paid certain lease payments on behalf of the sublessee. The subleases with this party include a building lease, which expires October 2009, and equipment leases, which expire October 2002. The building lease has annual lease payments of $1.0 million. The sublessee is currently paying a portion of the building rent. The future minimum lease payments, including payments to acquire the equipment, and the payments we have made but have not been reimbursed for on the equipment leases, total $1.6 million. While we continue to pursue our options with respect to recovery of amounts due from the sublessee, we have reserved $1.4 million for our current estimate of the potential loss under these lease agreements.

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

Overview

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

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

	•		We have the ability to exert a high degree of control over product pricing.
	•		Manufacturing costs are largely fixed as a percentage of sales due to outsourcing under fixed-price contracts.
	•		Royalties are paid generally as a percentage of sales.
	•		Due to our agreements with distributors and QVC, incremental volume does not proportionately increase our operating expenses.
	•		Research and development is limited to basic design and engineering.