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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2003

Commission file number 0-21630

ACTION PERFORMANCE COMPANIES, INC.

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

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

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

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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
March 31, 2003 and September 30, 2002
(in thousands, except per share data)

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

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ACTION PERFORMANCE COMPANIES, INC.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income
Three and Six Months Ended March 31, 2003 and 2002
(in thousands, except per share data)

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

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ACTION PERFORMANCE COMPANIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months Ended March 31, 2003 and 2002
(in thousands)

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

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ACTION PERFORMANCE COMPANIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003

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, 2002. 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, 2003.

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

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS No. 145, “Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections as of April 2002” 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 are now classified as a component of operations. We adopted SFAS No. 145 effective October 1, 2002. We have classified gains and losses from extinguishment of debt in all periods presented as a component of other income and adjusted income taxes accordingly. There was no net impact on net income previously reported.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The interpretation requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee and expands the disclosures required. Initial recognition and measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, consequently, the adoption of FIN No. 45 had no effect on our financial position, results of operations or cash flows. We believe our current accounting policies are consistent with the interpretation.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities – an Interpretation of ARB No. 51.” FIN No. 46 clarifies the consolidation requirements of variable interest entities. We have adopted the interpretation. We have no interests in unconsolidated variable interest entities and, consequently, adoption of FIN No. 46 had no effect on our financial position, results of operations or cash flows.

SEGMENT INFORMATION

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

We evaluate performance and allocate resources based on segment operating income (loss). The accounting policies of the reportable segments are the same as those used in the consolidated financial statements. Domestic licensing costs and certain other management and shared 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

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royalty guarantees advanced and unearned are allocated as an expense of the domestic segments. Financial information for the reportable segments follows (in thousands):

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EARNINGS PER COMMON SHARE (EPS)

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

The impact of options and warrants outstanding at March 31, 2003, for the purchase of 1.3 million shares of common stock, at an average price of $30.09 were not included in the calculation of diluted EPS for the six months ended March 31, 2003, because to do so would be antidilutive. The options and warrants had exercise prices greater than the average market price of the common stock for the six months ended March 31, 2003, but could potentially dilute EPS in the future.

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SHAREHOLDERS’ EQUITY

We account for stock-based compensation plans under APB No. 25, Accounting for Stock Issued to Employees and related interpretations, under which no compensation expense has been recognized, as all options have been granted with an exercise price equal to or exceeding the fair value of the common stock on the date of grant. For SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), we estimated the fair value of each option grant as of the date of grant using the Black-Scholes option pricing method with the following assumptions for the periods ended March 31:

Options granted to employees generally vest ratably over three years. Options granted to independent directors generally vest immediately upon grant. Had compensation costs been determined consistent with SFAS 123, utilizing the assumptions detailed above and amortizing the resulting fair value of stock options granted over the respective vesting period of the options, the net income and per share amounts would have been the following pro forma amounts for the periods ended March 31 (in thousands, except per share data):

In July 2002, the Board of Directors approved a one-year program under which we may purchase up to 1.0 million shares of our common stock in the open market or in privately negotiated transactions. In October 2002, under this program, we purchased 110 thousand shares at a price of $18.39 per share.

GAIN ON EXTINGUISHMENT OF DEBT

During the three and six months ended March 31, 2002, we repurchased 4³/₄% convertible subordinated notes with a face value of $1.0 million and $6.0 million, for cash of $1.0 million and 4.7 million, respectively. We did not repurchase 4³/₄% convertible subordinated notes during the three and six months ended March 31, 2003. On May 1, 2003, we repurchased 4³/₄% convertible subordinated notes with a face value of $5.0 million with $4.9 million cash.

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ALLIANCES

In November 2002, we entered into a 50/50 joint venture with TMP International, Inc, the producer of McFarlane Toys, to produce and market a new series of action figures based on NASCAR drivers. The joint venture, called Action-McFarlane LLC, is currently expected to begin production in late 2003.

COMMITMENTS AND CONTINGENCIES

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

One of our sublessees fell in arrears on lease payments during 2002. The subleases with this party include a building lease, which expires October 2009, and equipment and furniture leases, which expired October 2002. The building lease has annual lease payments of $1.0 million. We acquired the equipment and furniture under the subleases in October 2002. In fiscal 2002, we reserved $3.0 million, representing our then current estimate of the total potential loss under the building sublease agreements. In March 2003, we decided to move our corporate headquarters to this building from our current corporate headquarters, which is also a leased building. We currently estimate that the $0.9 million reserve remaining at March 31, 2003, will be adequate to cover lease payments on the current corporate headquarters building after we move, until sublet. We plan to move in late summer.

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

Overview

We are the leading designer and marketer of licensed motorsports products related to NASCAR, including die-cast scaled replicas of motorsports vehicles, apparel, and memorabilia. We currently have exclusive license agreements with many of the most recognized names in NASCAR. We also design and sell products relating to other motorsports, including racing sanctioned by the NHRA, Formula One, the IRL, 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.
	•		Capital expenditures are principally limited to tooling for die-cast.
	•		Functions, such as manufacturing and others outside of our core skills, are generally outsourced.

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Revenue

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

We distribute our products through a broad range of channels, including a network of wholesale distributors, leading mass-market retailers, mobile trackside stores, QVC, and our collectors’ club catalog. We recognize revenue when persuasive evidence of an arrangement exists, title passes to the customer, the fee is fixed or determinable, and collection is probable. Most distributor sales are recognized when product is shipped to a distributor because title to the product passes to the distributor at shipment. Sales to mass-market retailers are recognized when title to product passes to the retailer, either at time of shipment to the retailer or receipt by the retailer. Under terms of our consignment agreement with QVC, collectors’ club catalog sales are recognized when QVC ships product to the consumer. We recognize trackside sales when the consumer purchases product at the point of sale. A portion of the product sold through television programming is consignment product, for which sales are recognized when QVC ships the product to the consumer. Internet and other sales are generally recognized when delivered to the consumer.

Cost of Sales

Cost of sales consists primarily of the cost of products procured from third-party manufacturers, royalty payments to licensors, depreciation of tooling and dies, and freight charges. Substantial portions of our die-cast products are manufactured under an exclusive agreement with Early Light, a third-party manufacturer in China. We obtain substantially all of our apparel and memorabilia products from several third-party manufacturers and suppliers.

Due to the variable nature of most of the components of our cost of sales, our gross margin generally does not fluctuate significantly. However, certain factors do affect our gross margin, including the following:

	•		product mix,
	•		our ability to control product pricing without discounting,
	•		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.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses consist primarily of employee compensation, advertising and promotion, rent and other facility costs, and depreciation and amortization. The majority of these costs are fixed and, as a result, incremental sales volume generally results in a decline in selling, general, and administrative expenses as a percentage of net sales.

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) are historically characterized by higher sales.

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Application of Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. During preparation of these financial statements, we are required to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to bad debts, inventories, fixed assets, goodwill and other intangible assets, income taxes, royalties, contingencies, and litigation. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The following critical accounting policies require us to make significant judgments and estimates used in the preparation of our financial statements.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We determine the adequacy of this allowance by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. If the financial condition of our customers were to deteriorate, additional allowances may be required. Our accounts receivable are written off once the account is deemed to be uncollectible. This typically occurs once we have exhausted all efforts to collect the account, which includes collection attempts by company employees and outside collection agencies.

Inventory Reserves

We write-down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions prove to be less favorable than those projected by management, additional inventory write-downs may be required.

Royalties

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

Goodwill and Other Intangibles

We evaluate goodwill and other intangibles for impairment at least annually, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. For goodwill, we first compare the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds the fair value of a reporting unit, additional tests would be used to measure the amount of impairment loss, if any. We use a present value technique to measure reporting unit fair value. If the carrying amount of any other intangible asset exceeds its fair value, we would recognize an impairment loss for the difference between fair value and the carrying amount. We have not recognized any impairment losses to date. If events occur and circumstances change, causing the fair value of a reporting unit to fall below its carrying amount, impairment losses may be recognized in the future.

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Deferred Tax Assets

We estimate our actual current tax obligations together with the temporary differences that have resulted from the differing treatment of items dictated by generally accepted accounting principles versus U.S. and German tax laws. These temporary differences result in deferred tax assets and liabilities. On an on-going basis, we assess the likelihood that our deferred tax assets will be recovered from future taxable income. If we were to believe the recovery was less than likely, we would establish a valuation allowance against the deferred tax asset and charge the amount as an income tax expense in the period in which such a determination was made.

Stock-Based Compensation

We account for employee stock-based compensation in accordance with Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees and related interpretations (APB No. 25). Common stock options issued under our plans generally do not result in compensation expense because the exercise price of the stock options equals the market price of the underlying stock on the date of grant.

Results of Operations

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

Three Months Ended March 31, 2003, Compared with Three Months Ended March 31, 2002

Net sales decreased 9.1% to $91.1 million for the three months ended March 31, 2003, from $100.2 million in the prior year quarter. Domestic die-cast sales decreased $18.8 million, or 35.1%, from the prior year quarter while foreign die-cast sales increased $0.8 million or 10.9%. The decline in wholesale and collectors club die-cast revenue was due to the previously reported Monte Carlo and Pontiac re-tooling issue. The re-tooling is now complete. Other products and distribution channels showed strength and partially offset the decline in die-cast revenues. Domestic apparel and memorabilia segment sales, exclusive of trackside, increased $6.5 million, or 24.1%, from the prior year quarter. This increase includes $1.7 million from mass retail, $4.1 million from 2002 acquisitions, and an increase of $0.7 million in wholesale apparel sales. Trackside sales increased 17.4% to $14.0 million from $11.9 million in the prior year quarter due to the timing of the Texas race.

Gross profit declined to 35.2% of sales in the three months ended March 31, 2003, from 38.8% in the comparable fiscal 2002 quarter. Gross margins were impacted by lower domestic die-cast margins and lower margins from our German subsidiary. Domestic die-cast margins suffered as a result of die-cast product cost increases and the lack of premium selling prices due to fewer special programs. German die-cast margins were lower as a result of higher tooling costs. These declines in gross margin were partially offset by the impact of higher margin apparel sales being a larger component of total sales this year than last year.

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Selling, general, and administrative expenses were $19.8 million, or 21.7% of sales, in the three months ended March 31, 2003, compared to the $18.9 million, or 18.9% of sales in the prior year quarter. Selling, general, and administrative expenses increased only $0.9 million, despite incremental selling, general, and administrative expenses arising from companies acquired in fiscal 2002 totaling $1.7 million. We obtained selling, general, and administrative expense reductions by continued strong cost controls.

Amortization of licenses and intangibles for the three months ended March 31, 2003, includes $0.3 million in incremental expenses arising from companies acquired in fiscal 2002.

Interest expense of $0.6 million for the three months ended March 31, 2003, was $0.3 million lower than interest expense for the prior year quarter as a result of convertible subordinated note repurchases.

Other income included $0.9 million of foreign currency translation gains in the three months ended March 31, 2003. The gains resulted from the impact the 4.0% improvement in the euro-to-U.S. dollar exchange rate had on German advances payable, which are denominated in U.S. dollars.

The effective tax rate of 37.0% in the three months ended March 31, 2003, reflected current expectations for the effective tax rate for fiscal 2003 and was slightly lower than the 38.8% effective tax rate in the prior year quarter.

Six Months Ended March 31, 2003 Compared with Six Months Ended March 31, 2002

Net sales decreased 4.1% to $176.9 million for the six months ended March 31, 2003, from $184.3 million in the prior year period. Domestic die-cast sales decreased $26.0 million, or 25.7%, from the prior year period while foreign die-cast sales increased $2.5 million, or 16.8%. The decline in wholesale and collectors club die-cast revenue was due to the previously reported Monte Carlo and Pontiac re-tooling issue. The re-tooling is now complete. The decrease in wholesale and collectors club die-cast sales was offset by a $5.9 million increase in mass retail die-cast sales. Other products and distribution channels showed strength and partially offset the decline in die-cast revenues. Domestic apparel and memorabilia segment sales, exclusive of trackside, increased $15.6 million, or 33.4%, from the prior year period. This increase included $6.8 million from mass retail, $11.0 million from 2002 acquisitions, and a decrease of $2.2 million in wholesale apparel sales. Trackside sales increased 2.5% to $20.4 million from revenues of $19.9 million in the prior year. The increase in trackside revenues due to the timing of the Texas race was offset by lower year-over-year trackside sales in the six-month period.

Gross profit declined to 35.4% of sales in the six months ended March 31, 2003 from 38.4% in the comparable fiscal 2002 period. Gross margins were impacted by lower domestic die-cast margins and lower margins from our German subsidiary. Domestic die-cast margins suffered as a result of die-cast product cost increases and the lack of premium selling prices due to fewer special programs. German die-cast margins were lower as a result of higher tooling costs. These declines in gross margin were partially offset by the impact of higher margin apparel sales being a larger component of total sales this year than last year.

Selling, general, and administrative expenses were $37.2 million, or 21.0% of sales, in the six months ended March 31, 2003, compared to the $36.1 million, or 19.6% of sales in the prior year period. Selling, general, and administrative expenses increased only $1.1 million, despite incremental selling, general, and administrative expenses arising from companies acquired in fiscal 2002 totaling $3.5 million. We obtained selling, general, and administrative expense reductions by continued strong cost controls.

Amortization of licenses and intangibles for the six months ended March 31, 2003, includes $0.6 million in incremental expenses arising from companies acquired in fiscal 2002.

Interest expense of $1.2 million for the six months ended March 31, 2003, was $0.5 million lower than interest expense for the prior year period as a result of convertible subordinated note repurchases.

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Other income included $2.3 million of foreign currency translation gains in the six months ended March 31, 2003. The gains resulted from the impact the 11.1% improvement in the euro-to-U.S. dollar exchange rate had on German advances payable, which are denominated in U.S. dollars.

The effective tax rate of 37.4% in the six months ended March 31, 2003, reflected current expectations for the effective tax rate for fiscal 2003 and was slightly lower than the 38.8% effective tax rate in the prior year period.

Liquidity and Capital Resources

Working capital improved $5.5 million to $123.0 million at March 31, 2003, from $117.5 million at September 30, 2002. Cash decreased $4.8 million to $64.8 million at March 31, 2003, from $69.6 million at September 30, 2002. Cash decreased due to net property and equipment expenditures ($20.3 million), common stock purchases for treasury ($2.0 million), dividends to common shareholders ($1.1 million), and other activities. The decreases in cash were offset by increases in cash for collection of receivables ($10.6 million), a 3-year, 5.2% mortgage on the building expansion in Germany ($3.0 million), and other activities.

Days sales outstanding, calculated on quarterly sales, decreased to 50.6 days as of March 31, 2003, compared to 51.0 days as of September 30, 2002, and 37.9 days as of March 31, 2002. The increase in days sales outstanding from March 31, 2002, reflected increased mass-retail revenues, which have a longer days sales outstanding.

Days in inventory, calculated on quarterly cost of sales, increased to 55.3 days as of March 31, 2003, compared to 44.7 days as of September 30, 2002, and 37.3 days as of March 31, 2002, due to inventory requirements of subsidiaries acquired since December 31, 2001, and growing mass-retail apparel sales. Backlog was approximately $86 million at March 31, 2003, and $90 million at September 30, 2002.

As of March 31, 2003, 4 3/4% convertible subordinated notes with a face value of $38.9 million were outstanding. On May 1, 2003, $5.0 million of these notes were repurchased with $4.9 million cash. 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 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, 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.

Net capital expenditures related principally to ongoing investments in tooling, investments made to upgrade our IT systems in Charlotte, North Carolina, the installation of a point-of-sales system in trackside trailers and building additions in Charlotte, North Carolina and Aachen, Germany. Capital expenditures totaled $20.3 million for the six months ended March 31, 2003, and included $3.7 million applicable to foreign operations. Net capital expenditures for 2003 are expected to approximate $30 million.

On March 12, 2003, we entered into an amendment to the loan and security agreement with Bank One that increased the revolving credit facility, modified certain covenants, and extended the term of the agreement through March 31, 2005. The amended agreement provides for a revolving credit facility of $35 million. The agreement provides for borrowings of up to $20 million and is available to support letters of credit, to the extent not utilized for borrowings. Prior to the amendment, the revolving credit facility was $20 million. Outstanding letters of credit totaled $11.1 million at March 31, 2003.

The line of credit bears interest at Bank One’s base rate or LIBOR plus 2.5%. We pay a commitment fee of 0.5% of the average unused credit facility and a fee of 1.0% of the average undrawn letters of credit.

Under the agreement, as amended, we are required to meet certain financial tests principally related to ratios of debt coverage, total liabilities to tangible net worth, and funded indebtedness to EBIDA (earnings before interest,

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depreciation, and amortization). We were in compliance with those covenants at March 31, 2003. We have never borrowed under the agreement, originally dated September 2000.

In July 2002, the Board of Directors approved a one-year program under which we may purchase up to 1.0 million shares of our common stock in the open market or in privately negotiated transactions. In October 2002, under this program, we purchased 110,000 shares at a price of $18.39 per share.

In September 2002, we initiated an ongoing quarterly dividend policy with an initial dividend of $.03 per share. On December 2, 2002, we declared a cash dividend payable on our common stock of $0.03 per share, which was accrued at December 31, 2002, and paid on January 13, 2003, to shareholders of record as of December 23, 2002. On March 5, 2003, we declared a cash dividend payable on our common stock of $0.03 per share, which was accrued at March 31, 2003, and paid on April 14, 2003, to shareholders of record as of March 21, 2003.

Cautionary Statement Regarding Forward-Looking Statements

This report contains forward-looking statements, including statements regarding business strategies, business, and the industry in which we operate. These forward-looking statements are based primarily on our expectations and are subject to a number of risks and uncertainties, some of which are beyond our control. Actual results could differ materially from the forward-looking statements as a result of numerous factors, including those set forth in our Form 10-K for the year ended September 30, 2002, as filed with the Securities and Exchange Commission.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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 exposure to be minimal. However, at March 31, 2003, we had $20.8 million in intercompany advances to our German subsidiary denominated in dollars for which the euro exchange rate gain or loss is charged to results of operations. We are considering using derivative financial instruments to manage or reduce foreign currency risk.

ITEM 4.  CONTROLS AND PROCEDURES

Based on their evaluation, as of a date within 90 days prior to the date of the filing of this report, of the effectiveness of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer have each concluded that our disclosure controls and procedures are effective and sufficient to ensure that we record, process, summarize, and report information required to be disclosed by us in our quarterly reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms.

Subsequent to the date of their evaluation, there have not been any significant changes in our internal controls or in other factors that could significantly affect these controls, including any corrective action with regard to significant deficiencies and material weaknesses.

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PART II - OTHER INFORMATION

ITEM 1.  Legal Proceedings

Not applicable

ITEM 2.  Changes in Securities and Use of Proceeds

Not applicable

ITEM 3.  Defaults Upon Senior Securities

Not applicable

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

The annual meeting of shareholders was held on March 5, 2003. The following nominees were elected to the board of directors to serve as directors until their successors are elected and qualified: Fred W. Wagenhals, R. David Martin, Melodee L. Volosin, John S. Bickford, Sr., Edward J. Bauman, Herbert M. Baum, Lowell L. Robertson, Robert L. Matthews, Roy A. Herberger, Jr. The shareholders also ratified the appointment of PricewaterhouseCoopers LLP as independent public accountants of our company for fiscal 2003, by the following vote: 16,307,416 for, 65,194 against, and 3,200 abstaining.

ITEM 5.  Other Information

Not applicable

ITEM 6.  Exhibits and Reports on Form 8-K

(a)

Exhibits