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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2005

Commission file number 0-21630

ACTION PERFORMANCE COMPANIES, INC.

(Exact Name of Registrant as Specified in Its Charter)

1480 South Hohokam Drive
Tempe, AZ 85281

(Address, including zip code, of principal executive offices)

(602) 337-3700

(Registrant’s telephone number, including area code)

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 þ No o

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

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


CLASS Common Stock, $0.01 Par Value		OUTSTANDING AT JULY 31, 2005 18,573,805 Shares

TABLE OF CONTENTS


PART I- FINANCIAL INFORMATION
	ITEM 1. Financial Statements
	ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
	ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
	ITEM 4. Controls and Procedures
PART II — OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
	ITEM 3. Defaults Upon Senior Securities
	ITEM 4. Submissions of Matters to a Vote of Security Holders
	ITEM 5. Other Information
	ITEM 6. Exhibits
SIGNATURES
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Exhibit 99.1

PART I- FINANCIAL INFORMATION

ITEM 1. Financial Statements

ACTION PERFORMANCE COMPANIES, INC.

Unaudited Condensed Consolidated Balance Sheets
June 30, 2005 and September 30, 2004
(in thousands, except per share data)


	June 30,			September 30,
	2005			2004
ASSETS
Current Assets:
Cash and cash equivalents	$	6,336		$	12,580
Accounts receivable, net		31,263			47,050
Inventories		46,457			48,514
Prepaid royalties		5,608			2,774
Taxes receivable		1,132			306
Deferred income taxes		9,700			7,006
Prepaid expenses and other		4,140			5,740
Assets to be disposed		13,493			16,971

Total current assets		118,129			140,941

Long-Term Assets:
Property and equipment, net		57,275			64,691
Goodwill		86,180			86,764
Licenses and other intangibles, net		40,931			52,302
Other		2,092			3,196
Assets to be disposed		95			6,389

Total long-term assets		186,573			213,342

	$	304,702		$	354,283

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	15,597		$	28,044
Accrued royalties		10,388			10,002
Accrued expenses		6,270			8,453
Taxes payable		2,312			1,742
Current portion of long-term debt		373			4,009
Liabilities related to assets to be disposed		1,954			1,729

Total current liabilities		36,894			53,979

Long-Term Liabilities:
Long-term debt		3,908			11,882
Deferred income taxes		22,313			24,979
Other		241			298

Total long-term liabilities		26,462			37,159

Commitments and Contingencies
Minority Interests		2,466			2,518
Shareholders’ Equity:
Common stock, $.01 par value, 62,500 shares authorized, 18,764 and 18,560 shares issued		188			186
Additional paid-in capital		160,010			158,429
Treasury stock, at cost, 190 and 190 shares		(3,999	)		(3,999	)
Accumulated other comprehensive loss		(2,409	)		(1,456	)
Retained earnings		85,090			107,467

Total shareholders’ equity		238,880			260,627

	$	304,702		$	354,283

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

ACTION PERFORMANCE COMPANIES, INC.

Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
Three and Nine Months Ended June 30, 2005 and 2004
(in thousands, except per share data)


	Three Months Ended						Nine Months Ended
	2005			2004			2005			2004
Net sales	$	72,693		$	88,334		$	216,050		$	232,662
Cost of sales		50,583			58,827			155,999			164,135

Gross profit		22,110			29,507			60,051			68,527

Operating expenses:
Selling, general, and administrative		21,037			20,307			62,489			57,346
Amortization of licenses and other intangibles		892			937			2,640			2,715
Impairment losses on trademarks and licenses		12,674			—			12,674			—

Total operating expenses		34,603			21,244			77,803			60,061


Operating income (loss)		(12,493	)		8,263			(17,752	)		8,466


Interest expense		(303	)		(468	)		(1,000	)		(1,370	)
Foreign exchange gains (losses)		(1,122	)		(196	)		(214	)		957
Earnings (losses) from joint venture		(59	)		204			343			966
Other income		25			47			106			159
Other expense		(540	)		(280	)		(1,309	)		(1,060	)

Total other expense		(1,999	)		(693	)		(2,074	)		(348	)


Income (loss) from continuing operations before income taxes		(14,492	)		7,570			(19,826	)		8,118
Income taxes		(5,014	)		2,869			(6,012	)		3,042


Income (loss) from continuing operations		(9,478	)		4,701			(13,814	)		5,076
Loss from discontinued operations, net of income taxes		(5,522	)		(868	)		(7,639	)		(1,660	)


Net income (loss)		(15,000	)		3,833			(21,453	)		3,416

Other comprehensive income (loss)		(1,784	)		(196	)		(953	)		618


Comprehensive income (loss)	$	(16,784	)	$	3,637		$	(22,406	)	$	4,034


Earnings (loss) per common share:
Basic -
Income (loss) from continuing operations	$	(0.51	)	$	0.26		$	(0.75	)	$	0.28
Loss from discontinued operations		(0.30	)		(0.05	)		(0.41	)		(0.09	)

Net income (loss)	$	(0.81	)	$	0.21		$	(1.16	)	$	0.19

Diluted -
Income (loss) from continuing operations	$	(0.51	)	$	0.26		$	(0.75	)	$	0.27
Loss from discontinued operations		(0.30	)		(0.05	)		(0.41	)		(0.09	)

Net income (loss)	$	(0.81	)	$	0.21		$	(1.16	)	$	0.18


Cash dividends declared, per common share	$	—		$	0.05		$	0.05		$	0.15

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

ACTION PERFORMANCE COMPANIES, INC.

Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended June 30, 2005 and 2004
(in thousands)


	Nine Months Ended June 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(21,453	)	$	3,416
Adjustments to reconcile net income (loss) to cash provided by operating activities-
Discontinued operations and related impairment charges		10,552			(3,810	)
Depreciation and amortization		24,612			21,473
Impairment losses on trademark and licenses		12,674			—
Provision for doubtful accounts		2,741			991
Deferred taxes		(6,400	)		690
Other		921			170
Changes in assets and liabilities, net of businesses acquired and disposed-
Accounts receivable		12,967			15,172
Accounts payable and accrued expenses		(10,624	)		(3,264	)
Taxes payable and receivable, net		(199	)		(394	)
Inventories		1,927			(12,173	)
Prepaid royalties and accrued royalties		(2,421	)		1,524
Other		2,487			(4,433	)

Net cash provided by operating activities		27,784			19,362


CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net		(18,787	)		(20,208	)
Acquisition of businesses and intangibles, net of costs		(2,103	)		(2,890	)
Other		675			265

Net cash used in investing activities		(20,215	)		(22,833	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line-of-credit		—			11,700
Long-term debt repayments		(11,636	)		(478	)
Dividends paid — common shareholders		(1,842	)		(2,746	)
Dividends paid — minority interest shareholders		(1,115	)		(1,414	)
Stock option and other exercise proceeds		918			270

Net cash provided by (used in) financing activities		(13,675	)		7,332

Effect of exchange rates on cash and cash equivalents		(138	)		178

Net change in cash and cash equivalents		(6,244	)		4,039
Cash and cash equivalents, beginning of period		12,580			49,462

Cash and cash equivalents, end of period	$	6,336		$	53,501


Supplemental Disclosures:
Interest paid	$	772		$	1,632
Income taxes paid (refunded), net		(1,153	)		4,571

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

ACTION PERFORMANCE COMPANIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005

INTERIM FINANCIAL REPORTING

The accompanying interim condensed consolidated financial statements for Action Performance Companies, Inc. and subsidiaries have been prepared by management without audit by an independent registered public accounting firm pursuant to the rules and regulations of the Securities and Exchange Commission. In our opinion, all normal and recurring adjustments necessary for a fair statement of financial position and results of operations for the interim periods included herein have been made. Certain information and note disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted from these statements pursuant to such rules and regulations. Accordingly, these financial statements should be read in conjunction with our Form 10-K for the fiscal year ended September 30, 2004. 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, 2005.

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

DISCONTINUED OPERATIONS

During the quarter we decided to divest of our McArthur business. McArthur distributes terry and golf products primarily to specialty retailers and institutions. A portion of the product is licensed and bears the logos of professional sports teams. McArthur has historically operated as a stand-alone subsidiary in Baraboo, Wisconsin, and there has been little, if any, mutual benefit between our products and customers and McArthur’s. In addition, we have determined that for McArthur to produce an acceptable level of cash flow, the stand-alone operations would have to be consolidated with our Charlotte location. Given the risk of disruption to the business, the potential loss of key personnel in such a move, and that the Charlotte facility was in the middle of the “dealer direct” project, we determined that the sale of McArthur represented the best alternative. We are currently in negotiations to sell the McArthur business and based on the current status of these negotiations, anticipate completing the sale in the fourth quarter of fiscal 2005. In connection with our decision and the anticipated sale, we recorded an after-tax loss of $1.7 million in the third quarter to write-down related assets to the lower of the carrying value or fair value less costs to sell. This charge is reflected as a component of discontinued operations. We expect that any future cash expenditures associated with the sale of the McArthur business will be immaterial.

During the quarter we decided to discontinue our Hamilton apparel business and Castaway collectible business. Hamilton produced licensed premium leather jackets and other apparel decorated with professional sports team logos, which were marketed primarily to specialty fashion and other “upstairs retail” channels. Castaway marketed die-cast boats. Each of these businesses had declining sales for the prior three quarters. We have determined that each business was outside of our core NASCAR licensed products business, and that the additional investment necessary to bring those businesses to an acceptable level of sales would likely not be recovered. In connection with these decisions, we recorded in the third fiscal quarter an after-tax charge of $3.8 million, primarily related to the write-down of the businesses’ remaining inventory and the Hamilton trademark. These charges are reflected as a component of discontinued operations. We expect that most of the inventory relating to these businesses will be sold by the end of the fourth quarter of fiscal 2005 and that any future cash expenditures associated with the businesses will be immaterial.

McArthur and Hamilton were components of our domestic apparel and memorabilia segment. Castaway was a component of our domestic die-cast segment.

All periods presented have been restated to present the operating results of these components of our business as discontinued operations.

The following table presents selected operating data for these components for the three and nine months ended June 30, 2005 and 2004 (in thousands):


	McArthur			Hamilton			Castaway			Total
Three Months Ended June 30, 2005:
Net sales	$	3,642		$	(11	)	$	14		$	3,645
Loss on disposal		(2,861	)		—			—			(2,861	)
Loss before income taxes		(2,597	)		(5,713	)		(373	)		(8,683	)
Loss from discontinued operations, net of tax		(1,652	)		(3,633	)		(237	)		(5,522	)

Three Months Ended June 30, 2004:
Net sales	$	3,172		$	587		$	58		$	3,817
Income (loss) before income taxes		300			(1,534	)		(101	)		(1,335	)
Income (loss) from discontinued operations, net of tax		195			(997	)		(66	)		(868	)

Nine Months Ended June 30, 2005:
Net sales	$	9,521		$	2,010		$	137		$	11,668
Loss on disposal		(2,861	)		—			—			(2,861	)
Loss before income taxes		(2,701	)		(8,744	)		(566	)		(12,011	)
Loss from discontinued operations, net of tax		(1,718	)		(5,561	)		(360	)		(7,639	)

Nine Months Ended June 30, 2004:
Net sales	$	9,068		$	4,560		$	664		$	14,292
Income (loss) before income taxes		339			(2,730	)		(163	)		(2,554	)
Income (loss) from discontinued operations, net of tax		221			(1,775	)		(106	)		(1,660	)

The assets and liabilities of these components, included in our consolidated balance sheet at June 30, 2005 and September 30, 2004, in assets to be disposed and liabilities related to assets to be disposed were as follows (in thousands):


	June 30, 2005
	McArthur		Hamilton		Castaway		Total
Accounts receivable, net	$	1,725	$	483	$	197	$	2,405
Inventories		3,228		479		181		3,888
Taxes receivable		983		3,183		206		4,372
Deferred income taxes		494		2,065		—		2,559
Other		180		81		8		269
Property and equipment, net		78		—		—		78
Licenses and other intangibles, net		17		—		—		17

Assets to be disposed	$	6,705	$	6,291	$	592	$	13,588

Accounts payable	$	1,112	$	5	$	2	$	1,119
Accrued royalties		123		442		2		567
Accrued expenses		171		5		92		268

Liabilities related to assets to be disposed	$	1,406	$	452	$	96	$	1,954


	September 30, 2004
	McArthur			Hamilton		Castaway			Total
Accounts receivable, net	$	2,076		$	2,462	$	180		$	4,718
Inventories		3,596			4,514		323			8,433
Taxes receivable (payable)		(236	)		1,930		127			1,821
Deferred income taxes		154			1,605		—			1,759
Other		189			42		9			240
Property and equipment, net		123			65		—			188
Goodwill		1,889			—		—			1,889
Licenses and other intangibles, net		30			4,282		—			4,312

Assets to be disposed	$	7,821		$	14,900	$	639		$	23,360

Accounts payable	$	481		$	247	$	6		$	734
Accrued royalties		195			498		6			699
Accrued expenses		142			71		92			305
Other		—			—		(9	)		(9	)

Liabilities related to assets to be disposed	$	818		$	816	$	95		$	1,729

IMPAIRMENT CHARGES

During the quarter ended June 30, 2005, we wrote-down our Funline trademarks by $10.0 million and two licenses by $2.7 million. These charges are included in the impairment losses on trademarks and licenses in the consolidated statement of operations as a component of operating expenses.

Funline’s strategy is to identify various vehicle and motor enthusiast trends, and create die-cast scale products that exploit those trends. Funline’s long-term sales growth rate is dependent on the successful identification of those trends, and the ability to secure the rights to create products to capture those trends. Since our September 2002 acquisition of Funline and through the 2004 fiscal year, Funline sales had exhibited strong growth characteristics, but in 2005, sales suffered when one of the new licensed concepts failed to gain consumer appeal. We determined that Funline’s strategy would produce a future revenue stream with more volatility than those of our other businesses. Accordingly, during our annual impairment testing in accordance with SFAS 142, we used a higher discount rate in determining the fair value of the trademarks in order to account for the higher volatility of the projected revenue streams. As in prior periods, we determine fair value using a variant of the income approach known as the relief from royalty method. Based on this impairment testing, we determined the carrying amount of the trademarks exceeded fair value by $10.0 million and recorded this amount as an impairment charge, which is included in the domestic die-cast segment. The new carrying value of the trademarks is $23.9 million.

During the quarter we also tested two of our long-term licenses – our Revell license and our license with an NHRA team — for recoverability. Sales of products under each license had fallen from historic levels. We determined during the quarter that sales were unlikely to increase sufficiently to recover the licenses carrying value. The Revell licenses supported a secondary domestic die-cast brand, which is out of favor. Revenue under the NHRA team license has suffered as a result of changes in NHRA sponsorship. The undiscounted net cash flows from projected use of the licenses were less than the carrying value of the licenses. In accordance with SFAS 144, we wrote-down the licenses to their fair value. We determined fair value using a traditional present value technique. The impairment charges as a result of the testing were $2.7 million, and are included in the corporate and other segment.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) revises FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123) and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. We will adopt SFAS 123(R) effective October 1, 2005. We have selected the modified prospective method of adoption, under which unvested awards as of October 1, 2005 will be charged to expense over the remaining vesting period of the awards. We are currently evaluating the impact of SFAS 123(R) on our financial position and results of operations.

The American Jobs Creation Act of 2004 (the Act) creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad. Beginning in May 2002, U.S. federal income taxes have been provided on undistributed earnings of our German subsidiaries. Accordingly, the Act has no impact on our financial statements.

STOCK-BASED COMPENSATION

We currently 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. Pursuant to SFAS 123, we estimated the fair value of each option grant as of the date of grant using the Black-Scholes option pricing method using the following assumptions for the periods ended June 30:


	Three Months Ended						Nine Months Ended
	2005			2004			2005			2004
Volatility		62.6	%		65.1	%		61.1	%		65.2	%
Risk-free interest rate		4.0	%		3.2	%		3.5	%		2.7	%
Dividend rate		0.5	%		1.0	%		0.7	%		1.0	%
Expected life of options	3 years			3 years			3 years			3 years

Options granted to employees generally vest ratably over three years or after one and a half 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 (loss) and per share amounts would have been the following pro forma amounts for the periods ended June 30 (in thousands, except per share data):


	Three Months Ended						Nine Months Ended
	2005			2004			2005			2004
Net income (loss), as reported	$	(15,000	)	$	3,833		$	(21,453	)	$	3,416
Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(490	)		(1,015	)		(1,962	)		(3,043	)

Pro forma net income (loss)	$	(15,490	)	$	2,818		$	(23,415	)	$	373

Basic earnings (loss) per share:
As reported	$	(0.81	)	$	0.21		$	(1.16	)	$	0.19
Pro forma	$	(0.84	)	$	0.15		$	(1.27	)	$	0.02
Diluted earnings (loss) per share:
As reported	$	(0.81	)	$	0.21		$	(1.16	)	$	0.18
Pro forma	$	(0.84	)	$	0.15		$	(1.27	)	$	0.02

In the nine months ended June 30, 2005, we issued options to purchase 457 thousand shares of common stock, at an average exercise price of $11.26.

DEBT AND FINANCING

In May 2005, we refinanced the $9.3 million outstanding balance of the term loans with the revolving credit facility and amended the agreement to consist of only the $63.3 million revolving credit facility. The $9.3 million balance was subsequently repaid in full later in the quarter, leaving no amounts outstanding on the revolving credit facility at June 30, 2005. Under the amended agreement, we are required to meet a minimum fixed charge coverage ratio of 1.35 to 1.0 for the nine months ended September 30, 2005, and 1.0 to 1.0 for each quarter thereafter. Based on current projections, we expect to be in compliance with our covenants through June 30, 2006, however, we expect our actual fixed charge coverage ratio to be close to the requirement throughout that period and we are close to the

minimum tangible net worth that we must maintain. We were in compliance with those covenants at June 30, 2005. If we do not maintain compliance with these covenants, our business or profitability deteriorates or we incur unexpected expenses or asset impairments, it could have a material adverse effect on our liquidity and financial resources, including an inability to utilize our revolving credit facility and an acceleration of the indebtedness outstanding thereunder. If we are unable to utilize our revolving credit facility, we may be required to refinance all or part of our existing debt, sell assets, borrow more money, or obtain other additional financing.

SEGMENT INFORMATION

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

We evaluate performance and allocate resources based on segment operating income (loss). The accounting policies of the reportable segments are the same as those used in the consolidated financial statements. Domestic licensing costs and certain management costs are not allocated to the domestic operating segments and are included in corporate and other. Intangible licenses are included in corporate and other assets. Each domestic segment is allocated royalty expense based on the incremental royalty due on that segment’s sales. Domestic royalty guarantees advanced and unearned are allocated as an expense of the domestic segments. All periods in the tables below have been restated to reflect only continuing operations. Financial information for the reportable segments follows (in thousands):


	Three Months Ended June 30,
			Inter-			Depreciation			Operating
	External		segment			and			Income
	Revenues		Revenues			Amortization			(Loss)
2005:
Domestic die-cast	$	27,735	$	879		$	14,179		$	(8,252	)(c)
Domestic apparel and memorabilia		34,880		285			721			4,693
Foreign die-cast		9,430		—			2,390			1,733
Corporate and other		648		476			3,975	(d)		(11,333	) (d)
Eliminations		—		(1,640	)		—			666

Total per consolidated financial statements	$	72,693	$	—		$	21,265		$	(12,493	)


2004:
Domestic die-cast	$	40,741	$	2,869		$	3,185		$	7,604
Domestic apparel and memorabilia		38,145		59			610			6,139
Foreign die-cast		8,698		—			2,222			1,117
Corporate and other		750		236			1,129			(6,399	)
Eliminations		—		(3,164	)		—			(198	)

Total per consolidated financial statements	$	88,334	$	—		$	7,146		$	8,263


	Nine Months Ended June 30,
			Inter-			Depreciation			Operating
	External		segment			and			Income
	Revenues		Revenues			Amortization			(Loss)
2005:
Domestic die-cast	$	85,001	$	2,801		$	21,695		$	(8,982	)(c)
Domestic apparel and memorabilia		99,113		773			2,129			10,868
Foreign die-cast		29,530		—			6,798			4,851
Corporate and other		2,406		1,315			6,664	(d)		(25,216	) (d)
Eliminations		—		(4,889	)		—			727

Total per consolidated financial statements	$	216,050	$	—		$	37,286		$	(17,752	)

2004:
Domestic die-cast	$	103,607	$	5,925		$	9,733		$	14,235
Domestic apparel and memorabilia		99,599		536			2,002			9,932
Foreign die-cast		27,135		—			6,264			3,819
Corporate and other		2,321		1,024			3,474			(18,881	)
Eliminations		—		(7,485	)		—			(639	)

Total per consolidated financial statements	$	232,662	$	—		$	21,473		$	8,466


	Identifiable Assets						Goodwill and Trademarks
	June 30,			Sept. 30,			June 30,		Sept. 30,
	2005			2004			2005		2004
Domestic die-cast (a)	$	92,217		$	113,645		$	39,404	$	45,660
Domestic apparel and memorabilia		99,711			106,092			55,669		55,669
Foreign die-cast		59,401			61,292			18,854		19,438
Corporate and other (b)		48,044			60,059			—		—
Assets to be disposed		13,588			23,360			—		—
Eliminations		(8,259	)		(10,165	)		—		—

Total per consolidated financial statements	$	304,702		$	354,283		$	113,927	$	120,767


(a)		Domestic die-cast identifiable assets include the Winner’s Circle trademark, purchased from Hasbro in May 2001. As additional consideration for the trademark purchase, we pay 1.5% or 3% of certain Winner’s Circle product net sales to Hasbro, quarterly, through May 2006. The additional consideration is added to the cost of the trademark quarterly. Domestic die-cast identifiable assets also include Funline trademarks. During the first quarter of fiscal 2005, $2.1 million was accrued as additional consideration payable under the earn-out provisions of the Funline acquisition agreement. The amount recorded for the Funline trademarks was increased by the amount of the additional consideration.

(b)		Corporate and other identifiable assets includes $1.7 million in cash at June 30, 2005, and $8.5 million in cash at September 30, 2004.

(c)		Domestic die-cast during the quarter ended June 30, 2005, includes an impairment loss on the Funline trademarks of $10.0 million.

(d)		Corporate and other during the quarter ended June 30, 2005, includes $2.7 million of impairment losses on two licenses. Corporate and other also includes incremental Sarbanes-Oxley implementation costs of $0.6 million in the three months ended June 30, 2005, and $0.9 million in the nine months ended June 30, 2005.

EARNINGS PER COMMON SHARE (EPS)

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


	Three Months Ended					Nine Months Ended
	2005			2004		2005			2004
NUMERATOR:
Basic and diluted – income (loss) from continuing operations	$	(9,478	)	$	4,701	$	(13,814	)	$	5,076


DENOMINATOR:
Basic – weighted average shares		18,574			18,336		18,516			18,315
Effect of dilutive stock options and warrants		—			270		—			304

Diluted – adjusted weighted average shares		18,574			18,606		18,516			18,619

The impact of certain options and warrants outstanding for the purchases of 1.9 million and 2.0 million shares of common stock, at an average price of $22.59 and $25.83, were not included in the calculation of diluted EPS for the three months ended June 30, 2005 and 2004, because to do so would be antidilutive. The impact of certain options and warrants outstanding for the purchases of 1.9 million and 1.9 million shares of common stock, at an average price of $22.59 and $25.97 were not included in the calculation of diluted EPS for the nine months ended June 30, 2005 and 2004, because to do so would be antidilutive. Although the options and warrants had exercise prices greater than the average market price of the common stock for the three or nine months ended June 30, 2005 and 2004, they could potentially dilute EPS in the future. The impact of our outstanding 4³/4% convertible subordinated notes were not included in the calculation of diluted EPS for the three and nine months ended June 30, 2004 because to do so also would be antidilutive.

OFF-BALANCE SHEET ARRANGEMENTS

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

JOINT VENTURE

We have an investment in a joint venture, Action-McFarlane LLC. The joint venture distributes action figurines based on NASCAR driver likenesses. All of the figurines are manufactured by third parties. Our investment in the joint venture, which is included in other long-term assets, was $0.3 million at June 30, 2005, and $0.6 million at September 30, 2004, and earnings (losses) on our investment in the joint venture were $(0.1) million and $0.2 million for the three months ended June 30, 2005 and 2004, and were $0.3 million and $1.0 million for the nine months ended June 30, 2005 and 2004.

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 our financial position, results of operations, or cash flows.

In October 2004, we settled a lawsuit with New Hampshire Speedway, Inc., filed in May 2004 against us in the United States District Court for the District of New Hampshire for $0.8 million. The $0.8 million was accrued as of September 30, 2004 and paid in October 2004.

complaint alleges that we made false and misleading statements concerning our financial results and business during the period from July 23, 2003 to October 22, 2003, resulting in violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks unspecified monetary damages and equitable relief. We dispute the claims and intend to defend the lawsuit vigorously.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Current Events

On August 1, 2005, we announced that Herb Baum will join us in the role of Executive Chairman. Mr. Baum has been an independent Director since 2001, and the Former Chairman, President, and Chief Executive Officer of the Dial Corporation, which develops and markets a diversified line of consumer products under various major brand names. Mr. Baum’s previous experience includes President and Chief Operating Officer of Hasbro Inc., a multi-billion dollar designer and manufacturer of toys, games, and interactive software, Chairman and Chief Executive Officer of Quaker State Corporation, and President of Campbell Soup Company-North and South America. Mr. Baum serves on the boards of directors of America West Holdings Corporation, Meredith Corporation, Playtex Products, Inc., and Pepsi Americas, Inc., all public companies.

We have announced our plans to improve our financial performance. These plans include the following:

	•		Improving the way our die-cast product is marketed and distributed;

	•		Controlling expenditures; and

	•		Expanding our traditional retail channels.

Significant actions we have taken to date to improve the way our die-cast products are marketed and distributed include:

•

Eliminated over 60% of our NASCAR die-cast SKUs. As a result of focusing our product line on the most popular and profitable SKUs, we believe that we will realize the following benefits.

	o		Reduced future capital expenditures to support the business.

	o		Better utilization of those future capital expenditures.

	o		A simplified and more efficient approval and production process.

We recognized approximately $0.5 million in the nine months ended June 30, 2005 of additional depreciation on tooling for those SKUs that were either discontinued outright or will be eliminated in various stages during the remainder of the year. We expect to recognize approximately $0.3 million of additional depreciation expense in the fourth quarter of fiscal 2005 associated with this tooling.

	•		Reorganized the departments that handle the product design, approval, and production process of die-cast.

	•		Announced our plan to restructure our wholesale NASCAR die-cast distribution model from a distributor-based model to a direct-to-retail model. We announced that our existing Charlotte, North Carolina operations, which currently manages wholesale apparel operations, would also handle fulfillment for wholesale NASCAR die-cast and apparel effective October 1, 2005. We will also add a call center at that facility for order processing and customer service. We believe the benefits of bringing in-house our distribution are as follows:

	o		A significantly lower cost profile for the business. These lower costs should allow us to invest in both retail level marketing and sales efforts to improve the longer-term volume potential of the business, as well as improve the profitability of the business.

	o		Allow us to communicate and deal directly with the retailer of our products to improve our speed to market, as well as recognize consumer trends, preferences, and buying habits sooner.

	o		We have restricted credit to seven of our fifteen distributors and recorded a $2.5 million allowance for doubtful accounts in the first quarter of 2005 to reserve for estimated uncollectible receivables

as a result of changing distribution models.

Actions taken to control expenditures include:

	•		Reduced the workforce at our Tempe headquarters by approximately 20%. In addition, we anticipate selling our 12.5% fractional ownership in a corporate aircraft in August of 2005, from which we will receive proceeds of approximately $0.8 million.

	•		Decided not to declare a dividend in the quarter ended June 30, 2005. The evaluation of paying dividends will be made on a quarter-by-quarter basis, although at the current time we do not anticipate paying a dividend for the foreseeable future.

	•		Established a policy for capital expenditures to limit future annual spending to a level below annual depreciation.

	•		Initiated plans to close the Los Angeles location of Funline and consolidate its administrative functions in Phoenix and Atlanta. We expect this consolidation to take place by January 2006 and be complete during that quarter. Annual savings are expected to approximate $2.5 to $3.0 million.

	•		Initiated plans to open a sourcing office in mainland China to reduce the cost of production.

Plans and actions to expand our traditional retail channels include:

	•		Consolidating procurement, marketing, sales, and distribution functions of our Winner’s Circle die-cast and Funline brands to better leverage the combined size of these two businesses. Recruiting for individuals with sales and/or marketing expertise to help realize the potential of these two businesses. During the third quarter of 2005, we announced the hiring of Mike Smith as our new Vice President of Mass Sales. Mr. Smith has 30 years of experience in selling to Mass customers with such companies as Fisher Price, Champion Sportswear, and Rauch Industries.

	•		Consolidating our mass apparel and novelty logistics and distribution function in our facility in Atlanta, Georgia. Such consolidation is currently underway and is expected to be substantially complete by the end of the fourth quarter.

We are also evaluating the profitability of, and synergies among, our various product lines, and may determine to dispose of one or more of them, or to acquire other complimentary businesses, as we move forward with our business plan. Plans and actions taken in this regard include:

	•		We are in negotiations to sell our McArthur towel subsidiary and believe that such sale will occur in the fourth quarter of 2005. McArthur has historically operated as a stand-alone subsidiary in Baraboo, Wisconsin, and there has been little, if any, mutual benefit between our products and customers and McArthur’s. In addition, we have determined that for McArthur to produce an acceptable level of cash flow, the stand-alone operations would have to be consolidated with our Charlotte location. Given the risk of disruption to the business, the potential loss of key personnel in such a move, and that the Charlotte facility was in the middle of the “dealer direct” project, we determined that the sale of McArthur represented the best alternative.

	•		We have decided to discontinue two businesses: Hamilton and Castaway. Each of these businesses have had declining sales for the prior three quarters, and we have determined that each business was outside of our core NASCAR licensed products business, and that the additional investment necessary to bring those businesses to an acceptable level of sales would likely not be recovered.

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, IROC, 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 with the goal of achieving higher levels of sales with limited increases in operating expenses and capital investments. The principal elements of this operating structure include the following:

	•		NASCAR die-cast unit manufacturing costs are largely fixed due to outsourcing under fixed-price contracts.

	•		Royalties are paid generally as a percentage of sales, although often subject to guaranteed minimums.

	•		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.

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 have historically distributed our products through a broad range of channels, including a network of wholesale distributors, leading mass-merchant 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 amount 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 distributors at shipment. Sales to mass-merchant 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 title passes to QVC, which occurs 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 title passes to QVC, which occurs when QVC ships the product to the consumer. Internet and other sales are generally recognized when delivered to the consumer.

Net sales include sales net of estimated sales returns, discounts, advertising, and other allowances. Advertising allowances are amounts paid primarily to mass-merchant retailers in connection with promoting and selling our product. These amounts are recorded as a reduction from sales when revenue is recognized.

Cost of Sales

Cost of sales includes product cost, shipping and freight forwarding costs paid to third parties, depreciation of tooling and dies, royalties to third party licensors, product testing and sample expense, and fees paid to QVC for shipping and handling. We incur costs to screen print or embroider certain inventory, which are also included in cost of sales, although most of our product is procured in its finished state. 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 on a purchase order basis from several third-party manufacturers and suppliers.

Most of the components of our cost of sales are variable in nature. However, certain factors do affect our gross margin, including the following:

	•		product mix;

	•		our ability to price our product appropriately;

	•		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;

	•		additional charges related to lower than minimum order quantities and cancellation of specific purchase orders; and

	•		the impact of minimum royalty guarantees.

Gross Margin

Our gross margins may not be comparable to those of other entities, since some entities include all handling and warehousing costs in cost of sales and others exclude a portion of such costs from gross margin, including them instead in line items such as selling, general, and administrative expenses.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses include salaries and benefits, use and occupancy expenses, creative services costs, advertising and promotion costs, sponsorship costs, and other general and administrative expenses. Included are the salaries, benefits and other costs of our procurement, receiving, and warehouse personnel. Selling, general, and administrative expenses include internal handling costs, incurred to store, move, and prepare our products for shipment. 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 and incremental volume decreases have the opposite effect.

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.

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 against the allowance 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

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 are less favorable than those projected, additional inventory write-downs may be required.

Royalties

Our license agreements generally require payments of royalties to drivers, sponsors, teams, and other parties. Contracts generally provide for royalties to be calculated as a specified percentage of sales. Some contracts, however, provide for guaranteed minimum royalty payments. Royalties payable calculated using the contract percentage rates are recognized as cost of sales when the related sales are recognized. To the extent we project that royalties payable under a contract, calculated using the contract percentage rate, will be lower than guaranteed minimums during the guarantee period, we recognize additional cost of sales over the guarantee period, generally a calendar year. Guarantees advanced under the 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 prepaid royalties 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 annually, and when impairment indicators arise, in accordance with SFAS 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. 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.

Deferred Tax Assets

We estimate our actual current tax exposure together with the temporary differences that have resulted from the differing treatment of items dictated by generally accepted accounting principles versus U.S. and German tax laws. These temporary differences result in deferred tax assets and liabilities. On an on-going basis, we assess the likelihood that our deferred tax assets will be recovered from future taxable income or loss carrybacks. 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 currently 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). Under 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. When we adopt SFAS 123(R), effective October 1, 2005, we will record compensation expense for these options and the charge to earnings might be significant (See Stock Based Compensation Note).

Results of Operations

Discussions of results of operations below focus on results from continuing operations unless otherwise stated.

The following table sets forth the percentage of net sales represented by certain expense and revenue items for the periods ended June 30:


	Three Months Ended						Nine Months Ended
	2005			2004			2005			2004
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		69.6			66.6			72.2			70.5

Gross profit		30.4			33.4			27.8			29.5
Selling, general, and administrative expenses		28.9			23.0			28.9			24.7
Amortization of licenses and other intangibles		1.2			1.1			1.2			1.2
Impairment losses on trademark and licenses		17.5			—			5.9			—

Operating income (loss)		(17.2	)		9.3			(8.2	)		3.6
Interest expense		(0.4	)		(0.5	)		(0.5	)		(0.6	)
Foreign exchange gains (losses)		(1.5	)		(0.2	)		(0.1	)		0.4
Earnings (losses) from joint venture		(0.1	)		0.2			0.2			0.4
Other income		—			—			—			0.1
Other expense		(0.7	)		(0.2	)		(0.6	)		(0.4	)

Income (loss) from continuing operations before income taxes		(19.9	)		8.6			(9.2	)		3.5
Income taxes		(6.9	)		3.3			(2.8	)		1.3

Income (loss) from continuing operations		(13.0	)		5.3			(6.4	)		2.2
Loss from discontinued operations, net of income taxes		(7.6	)		(1.0	)		(3.5	)		(0.7	)

Net income (loss)		(20.6	)%		4.3	%		(9.9	)%		1.5	%

The following table sets forth net sales by channel of distribution for the periods ended June 30 (in thousands):


	Three Months Ended				Nine Months Ended
	2005		2004		2005		2004
Domestic Die-cast:
Wholesale distribution and promotion	$	19,234	$	25,651	$	43,264	$	48,973
Wholesale to mass-merchant retailers		4,492		9,389		29,859		40,884
Retail through collector’s catalog club		4,009		5,701		11,878		13,750

Total domestic die-cast		27,735		40,741		85,001		103,607
Foreign Die-cast — wholesale distribution and promotion		9,430		8,698		29,530		27,135

Total die-cast		37,165		49,439		114,531		130,742


Domestic Apparel and Memorabilia:
Wholesale distribution and promotion		9,278		14,705		32,769		39,520
Wholesale to mass-merchant retailers		6,887		6,745		28,646		26,462

Total apparel and memorabilia		16,165		21,450		61,415		65,982
Retail at Trackside		18,715		16,695		37,698		33,617
Royalties and Other		648		750		2,406		2,321

Net Sales	$	72,693	$	88,334	$	216,050	$	232,662

Three Months Ended June 30, 2005, Compared with Three Months Ended June 30, 2004

Net sales decreased $15.6 million, or 17.7%, to $72.7 million for the three months ended June 30, 2005, compared to $88.3 million in the prior year quarter.

Domestic die-cast sales decreased $13.0 million, or 31.9%, from the prior year quarter while foreign die-cast sales increased $0.7 million, or 8.4%. The domestic die-cast segment sales decrease of $13.0 million is comprised of a $6.4 million decrease in our wholesale distribution and promotion revenues and a $4.9 million decrease in domestic die-cast wholesale sales to mass-merchant retailers. We expect domestic die-cast wholesale distribution and promotion revenues in 2005 to fall below 2004 levels as we continue to work to improve our die-cast distribution model and reduce the number of die-cast SKUs. Domestic die-cast wholesale sales to mass-merchant retailers consisted of $3.7 million of Funline sales and $0.8 million of NASCAR sales in the third quarter of 2005, compared to $6.5 million of Funline sales and $2.9 million of NASCAR sales in the third quarter of 2004. We do not expect sales to mass-merchant retailers for the remainder of 2005 to increase over 2004. The 8.4% increase in foreign die-cast sales from the prior year third quarter, was partly the result of the 4.6% change in the euro-to-U.S. dollar exchange rate between the periods.

Domestic apparel and memorabilia segment sales, exclusive of trackside, decreased $5.3 million, or 24.6%, to $16.2 million in the quarter ended June 30, 2005, compared to $21.5 million in the quarter ended June 30, 2004.

Trackside sales increased $2.0 million, or 12.1% in the quarter ended June 30, 2005. This increase was due to 13 events occurring in the quarter ended June 30, 2005, compared to 11 events in the quarter ended June 30, 2004. After adjusting for the number of races, sales were down in the quarter as a result of a venue change in this year’s quarter versus the prior year period. At similar venues during the quarter sales were comparable. Meaningful comparisons of year-to-year trackside sales for a given quarter are difficult to make due to differences in the current year’s race schedule and race venues to those in the prior year. We consider the comparison of trackside sales for the nine months ended June 30, 2005 more meaningful, as many of the quarter-to-quarter differences between the current year and prior year are normalized.

The 3.0% decline in gross profit, to 30.4% of net sales in the third quarter of 2005, from 33.4% in the third quarter of 2004, was impacted by changes in segment gross margins as follows:


							Weighted
				Gross			Gross
	% of			Margin			Margin
	Net			Increase			Increase
	Sales			(Decrease)			(Decrease)
Domestic die-cast		39.9	%		(9.0	)%		(3.6	)%
Domestic apparel and memorabilia		49.7			1.3			0.7
Foreign die-cast		13.0			3.7			0.5
Corporate and other		(2.6	)					(0.6	)

Consolidated Total		100.0	%					(3.0	)%

The domestic die-cast gross margin decline of 9.0% was comprised of the 3.4% weighted impact of NASCAR die-cast margin declines and the 5.6% weighted impact of Funline die-cast margin declines. Domestic die-cast margins declined due to the impact of lower sales on relatively fixed tooling depreciation. Results included write-downs of inventory of one Funline product line to net realizable value in the third quarter of 2005 and lower margins on other Funline product lines. In addition, the impact of lower sales on relatively fixed tooling depreciation has depressed margins. Funline margins are expected to remain low as they sell inventory built in anticipation of higher sales volumes. The 3.7% increase in foreign die-cast gross margins was principally a result of lower product costs as a percentage of revenue.

Selling, general, and administrative expenses were $21.0 million, or 28.9% of net sales, in the three months ended June 30, 2005, compared to $20.3 million, or 23.0% of net sales, in the three months ended June 30, 2004. The

increase was $0.7 million, or 3.6%, from the prior year quarter. Selling, general, and administrative expenses in the quarter ended June 30, 2005, included $0.9 million incremental trackside related costs, $0.6 million incremental Sarbanes-Oxley implementation costs, $0.2 million more depreciation of a fractional interest in a corporate aircraft, and $0.2 million additional use and occupancy costs. Offsetting those increases were $1.0 million lower bad debt expense for distributor receivables and a $0.2 million decrease in commissions as result of lower Funline sales. Trackside related costs increased as a result of increased sales volume, higher fuel costs, and increased track fees as a percentage of sales. We expect to sell the fractional interest in the corporate aircraft in August of 2005 for $0.8 million. Savings from headcount reductions made in the second quarter were offset by costs associated with preparing for our implementation of our dealer direct model. We anticipate incurring approximately $0.4 million in the fourth quarter of fiscal 2005 in incremental Sarbanes-Oxley implementation costs.

Interest expense of $0.3 million in the three months ended June 30, 2005, was $0.2 million lower than interest expense in the comparable prior year period, as a result of convertible subordinated note repurchases.

Foreign currency losses were $1.1 million and $0.2 million for the three months ended June 30, 2005 and 2004. Changes in the euro-to-U.S. dollar exchange rate resulted in translation losses of $1.1 million and $0.4 million for the three months ended June 30, 2005 and 2004. These losses resulted from translation of German advances payable, which are denominated in U.S. dollars. In the three months ended June 30, 2004, these translation losses were offset by a gain of $0.2 million on a forward exchange contract.

The effective tax rate of 34.6% for the three months ended June 30, 2005 was lower than the 37.9% effective tax rate for the three months ended June 30, 2004. During the quarter we changed our estimate of the annual effective rate on loss from continuing operations to 30.3%. The 30.3% estimated 2005 effective rate is lower than the 2004 effective rate of 66.4% primarily as a result of the change in mix of foreign and domestic pre-tax income (loss) as well as the impact of nondeductible expenses on lower projected pre-tax income (loss). Our German subsidiary is subject to higher tax rates than our domestic subsidiaries.

Nine Months Ended June 30, 2005, Compared with Nine Months Ended June 30, 2004

Net sales decreased $16.6 million, or 7.1%, to $216.1 million for the nine months ended June 30, 2005, compared to $232.7 million in the prior year period.

Domestic die-cast sales decreased $18.6 million, or 18.0%, from the prior year period while foreign die-cast sales increased $2.4 million, or 8.8%. The domestic die-cast segment sales decrease of $18.6 million is comprised of a $5.7 million decrease in our wholesale distribution and promotion revenues, a $1.9 million decrease in our die-cast retail collectors’ catalog club revenues, and a $11.0 million decrease in domestic die-cast wholesale sales to mass-merchant retailers. We expect domestic die-cast wholesale distribution and promotion revenues in 2005 to fall below 2004 levels as we continue to work to improve our die-cast distribution model and reduce the number of die-cast SKUs. Domestic die-cast wholesale sales to mass-merchant retailers consisted of $23.0 million of Funline sales and $6.8 million of NASCAR sales in the nine months ended June 30, 2005, compared to $30.1 million of Funline sales and $10.8 million of NASCAR die-cast sales in the nine months ended June 30, 2004. We do not expect sales to mass-merchant retailers for the remainder of 2005 to increase over 2004. The 8.8% increase in foreign die-cast sales from the prior year period was partly the result of the 5.8% change in the euro-to-U.S. dollar exchange rate between the periods.

Domestic apparel and memorabilia segment sales, exclusive of trackside, decreased $4.6 million, or 6.9%, to $61.4 million in the nine months ended June 30, 2005, compared to $66.0 million in the nine months ended June 30, 2004.

Trackside sales increased $2.4 million, or 7.2%, after considering the impact of the timing of the fall Talladega Superspeedway race ($1.7 million of 2005 sales), which occurred in October 2004 and September 2003. On a like number of races basis, and comparing Phoenix race results to the results from last year’s Rockingham race (the second Phoenix race in the Nextel cup series replaced the Rockingham race) sales increased approximately 4.2%. Meaningful comparisons of year-to-year trackside sales are difficult to make due to differences in the current year’s race schedule and race venues to those in the prior year.

The 1.7% decline in gross profit, to 27.8% of net sales in the nine months ended June 30, 2005, from 29.5% in the nine months ended June 30, 2004, was impacted by changes in segment gross margins as follows:


							Weighted
				Gross			Gross
	% of			Margin			Margin
	Net			Increase			Increase
	Sales			(Decrease)			(Decrease)
Domestic die-cast		41.1	%		(6.8	)%		(2.8	)%
Domestic apparel and memorabilia		47.7			0.3			0.2
Foreign die-cast		13.7			2.1			0.3
Corporate and other		(2.5	)					0.6

Consolidated Total		100.0	%					(1.7	)%

The domestic die-cast gross margin decline of 6.8% was primarily the result of lower gross margins on Funline product sales. Results included write-downs of certain Funline product lines to net realizable value in the first nine months of 2005 and lower margins on other Funline product lines. In addition the impact of lower sales on relatively fixed tooling depreciation has depressed margins. Funline margins are expected to remain low as they sell inventory built in anticipation of higher sales volumes. The 2.1% increase in foreign die-cast gross margins was principally a result of lower product costs as a percentage of revenue.

Selling, general, and administrative expenses were $62.5 million, or 28.9% of net sales, in the nine months ended June 30, 2005, compared to $57.3 million, or 24.7% of net sales, in the nine months ended June 30, 2004. The increase was $5.2 million, or 9.0%, from the prior year period. Selling, general, and administrative expenses in the nine months ended June 30, 2005, included a $1.8 million increase in bad debt expense for distributor receivables, $0.8 million incremental trackside related costs, a $0.4 million severance expense for our former Chief Financial Officer, $0.9 million incremental Sarbanes-Oxley implementation costs, $0.7 million more depreciation of a fractional interest in a corporate aircraft, $0.6 million additional salaries and $0.9 million additional use, and occupancy costs. Those increases were offset by $0.4 million lower personal service agreement costs and a $0.5 million decrease in commissions as result of lower Funline sales. Trackside related costs increased as a result of increased sales volume, higher fuel costs, and increased track fees as a percentage of sales. We expect to sell the fractional interest in the corporate aircraft in August of 2005 for $0.8 million. Savings from headcount reductions made in the second quarter were offset by severance costs and additional costs associated with preparing for our implementation of our dealer direct model. We anticipate incurring approximately $0.4 million in the fourth quarter in incremental Sarbanes-Oxley implementation costs.

Interest expense of $1.0 million in the nine months ended June 30, 2005, was $0.4 million lower than interest expense in the comparable prior year period, as a result of convertible subordinated note repurchases.

Foreign currency losses were $0.2 million for the nine months ended June 30, 2005, versus a foreign currency gain of $1.0 million for the nine months ended June 30, 2004. Changes in the euro-to-U.S. dollar exchange rate resulted in translation gains and losses that resulted from German advances payable, which are denominated in U.S. dollars. In the nine months ended June 30, 2004, these translation gains were offset by a loss of $0.1 million on a forward exchange contract.

The effective tax rate of 30.3% for the nine months ended June 30, 2005, was lower than the 37.5% effective tax rate for the nine months ended June 30, 2004. The 30.3% estimated 2005 effective rate is lower than the 2004 effective rate of 66.4% primarily as a result of the change in mix of foreign and domestic pre-tax income (loss) as well as the impact of nondeductible expenses on lower projected pre-tax income (loss). Our German subsidiary is subject to higher tax rates than our domestic subsidiaries.

Liquidity and Capital Resources

Working capital, exclusive of assets to be disposed and related liabilities decreased $2.0 million to $69.7 million at June 30, 2005, from $71.7 million at September 30, 2004. Cash decreased $6.2 million to $6.3 million at

June 30, 2005, from $12.6 million at September 30, 2004. Cash decreased as a result of cash used for net property and equipment expenditures ($18.8 million), payments for acquisitions of businesses and intangibles ($2.1 million), dividends to common and minority interest shareholders ($3.0 million) and repayments of long-term debt ($11.6 million). This decrease in cash was offset by increases in cash provided from operations ($27.8 million).

Days sales outstanding, calculated on quarterly sales, was 39.1 days as of June 30, 2005, compared to 46.0 days as of September 30, 2004, and 46.4 days as of June 30, 2004. The decrease from September 30, 2004, reflects the smaller portion of revenues coming from mass-retail channels, which have longer dating terms.

Inventories at June 30, 2005, decreased $2.1 million from September 30, 2004. Of this decrease, $2.0 million was attributable to a reduction of Funline inventory levels as management continues to reduce inventory built in anticipation of sales, which have not materialized.

Except for Funline and collectors’ catalog club die-cast, we generally produce domestic and foreign die-cast based upon orders received from customers. The timing of receiving orders is directly related to the timing of the completion of product program approvals and is not necessarily indicative of product demand or future sales. We produce Funline die-cast for inventory based on customer-projected orders. We receive Funline customer orders weekly, which are fulfilled in the following week. We report as backlog orders received from customers, which for Funline, is limited to the weekly orders.

Apparel and memorabilia product, except Trevco product, is generally ordered from stock inventory. Trevco products are seasonal in nature and orders are received in our second and third fiscal quarters and shipped in our third and fourth fiscal quarters.

Domestic and foreign die-cast backlog, including Funline product, was $55.7 million and $55.6 million at June 30, 2005 and 2004. Apparel and memorabilia backlog was approximately $29.2 million and $29.3 million at June 30, 2005 and 2004. Backlog on any date in a given year is not necessarily indicative of future sales.

Capital expenditures related principally to ongoing investments in tooling were $18.8 million for the nine months ended June 30, 2005, and included $6.8 million applicable to foreign operations and $4.7 million for Funline capital expenditures. Capital expenditures for 2005 are expected to total approximately $21 million.

During the first quarter of 2005, the results of Funline’s operations were sufficient to meet earn-out targets established in the Funline acquisition agreement. As a result, we issued 40 thousand shares of our common stock with a value of $0.4 million at December 31, 2004 and paid $1.7 million as additional consideration in the second quarter. The additional consideration increased the amount recorded for the Funline trademarks at December 31, 2004.

On June 30, 2004, we entered into an amended loan and security agreement. The amended agreement increased available borrowings from $35.0 million to $75.0 million. The agreement consisted of a $63.3 million, four-year revolving credit facility, which is subject to a borrowing base calculation, a four-year term loan of $1.7 million and a three-year term loan of $10.0 million. In May 2005, we refinanced the $9.3 million outstanding balance of the term loans with the revolving credit facility and amended the agreement to consist of only the $63.3 million revolving credit facility. The $9.3 million balance was subsequently repaid in full later in the quarter, leaving no amounts outstanding on the revolving credit facility at June 30, 2005. The agreement provides for issuance of up to $30.0 million of letters of credit, to the extent not utilized for borrowings. Outstanding letters of credit totaled $12.0 million at June 30, 2005.

Repayment of borrowings under this facility is secured by a first lien on substantially all of our assets. We are required to meet certain financial tests related to minimum tangible net worth and minimum fixed charge coverage ratio.

Under the amended agreement, we will be required to meet a minimum fixed charge coverage ratio of 1.35 to 1.0 for the nine months ended September 30, 2005, and 1.0 to 1.0 for each quarter thereafter. Based on current projections, we expect to be in compliance with our covenants through June 30, 2006, however, we expect our actual fixed charge coverage ratio to be close to the requirement throughout that period and we are close to the minimum tangible net worth that we must maintain. We were in compliance with those covenants at June 30, 2005.

As of June 30, 2005, results of the other covenant calculations were as follows:


Financial Covenant	Period	Requirement	Actual
Minimum tangible net worth	As of June 30, 2005	> $105.2 million	$110.6 million
Minimum fixed charge coverage ratio	January 1, 2005 – June 30, 2005	> 0.81	0.93
Limitation on capital expenditures	October 1, 2004 to September 30, 2005	< $35.0 million	$18.8 million

As amended, until September 30, 2005, our credit facility bears interest at LIBOR plus 2.50% or prime plus 0.25% (6.25% at June 30, 2005). After September 30, 2005, the revolving credit facility bears interest at LIBOR plus 2.00% — 2.75% or prime plus 0.25% — 0.50% depending on our fixed coverage ratio, as defined. Interest on the term loans, prior to refinancing, was approximately 1% higher. We pay a commitment fee of 0.375% of the average unused revolving credit facility and a fee of 1.0% of the average undrawn letters of credit.

Based on our current forecast and historical results, we believe that we have adequate credit availability and cash flow from operations to fund our operating needs through June 30, 2006. As discussed above, however, we expect our fixed charge coverage ratio to be close to the minimum requirement during the next year and we are close to the minimum tangible net worth that we must maintain. If we do not maintain compliance with these covenants, our business or profitability deteriorates or we incur unexpected expenses or asset impairments, it could have a material adverse effect on our liquidity and financial resources, including an inability to utilize our revolving credit facility and an acceleration of the indebtedness outstanding thereunder. If we are unable to utilize our revolving credit facility, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or obtain other additional financing. We cannot guarantee that we would be able to do so on terms acceptable to us, if at all.

In September 2002, we initiated a quarterly dividend policy with an initial dividend of $0.03 per share. A summary of dividends paid on common stock after September 30, 2004, follows (in thousands, except per share data):


Amount	Rate Per Share		Declaration Date	Record Date	Paid
$919	$	0.05	August 19, 2004	September 17, 2004	October 18, 2004
$924	$	0.05	November 12, 2004	December 17, 2004	January 5, 2005

Under our amended loan and security agreement, we are required to obtain written consent prior to declaring dividends on our common stock. We have not declared a dividend since November 12, 2004. The evaluation of paying dividends will be made on a quarter-by-quarter basis, although at the current time we do not anticipate paying a dividend for the foreseeable future.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. The words “believe,” “expect,” “anticipate,” “forecast”, “plan” and “project” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. All such statements are within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may include, but are not limited to, projections of sales, capital expenditures, backlog, and other expenses; plans for future operations; financing needs or plans and liquidity; the impact of changes in interest rates; the magnitude and timing of benefits relating to our restructuring; the impact of changes in currency exchange rates; plans and estimates relating to the acquisition or disposition of product lines, including the McArthur, Hamilton and Castaway businesses; plans relating to our products; our plans and intentions with respect to off-balance sheet arrangements; the expected outcome of legal proceedings against us; the sufficiency of our capital resources to support our operating strategy; and the impact of new accounting principles, as well as assumptions relating to the foregoing.

Actual events and results may differ materially from those expressed in forward-looking statements due to a number of factors. Risks identified in Exhibit 99.1 to this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended September 30, 2004, including those under the caption “Business – Risk Factors” describe factors, among others, that could contribute to or cause such differences. These factors may also affect our business generally and as a result, the price of our stock may fluctuate dramatically.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Since September 30, 2004, we have repaid all our variable interest rate debt. There have been no other significant changes in our exposure to market risk since year-end. Our exposure to market risk is limited to interest rate risk associated with our credit instruments and foreign currency exchange rate risk associated with operations in Germany. As of June 30, 2005, our debt is comprised of fixed interest rate debt. The functional currency for our foreign operations is the euro. As such, changes in exchange rates between the euro and the U.S. dollar could affect our future earnings. A 5.8% change in the euro exchange rate would have changed the net income from that operation in the twelve months ended June 30, 2005, by $0.1 million.

During 2004 we used a derivative as part of our risk management strategy related to a portion of our exposure to currency fluctuations on intercompany advances to our German subsidiary, denominated in dollars, for which the euro exchange rate gain or loss is included in operations. These advances totaled $16.2 million at June 30, 2005. In the nine months ended June 30, 2005, a 1% change in the euro exchange rate would have resulted in a $0.1 million change in net income. We had entered into foreign currency forward contracts designed to partially offset the effect changes in the euro exchange rate have on earnings related to these advances. These forward contracts did not qualify for hedge accounting and were recorded on the balance sheet at fair value. Changes in fair value were recorded each period in foreign exchange gains (losses).

ITEM 4. Controls and Procedures

We have evaluated, with the participation of our principal executive and financial officers, the effectiveness of our disclosure controls and procedures as of June 30, 2005. Based on this evaluation, our principal executive and financial officers, have each concluded that our disclosure controls and procedures are effective to ensure that we record, process, summarize, and report information required to be disclosed by us in our reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission’s rules and forms. During the quarterly period covered by this report, there have not been any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

In October 2004, we settled a lawsuit with New Hampshire Speedway, Inc, filed in May 2004 against us in the United States District Court for the District of New Hampshire for $0.8 million. The $0.8 million was accrued as of September 30, 2004 and paid in October 2004.

During December 2004, we were served with a class action securities lawsuit entitled “The Cornelia Crowell, GST Trust v. Action Performance Companies, Inc., et al.”, which was filed in the United States District Court of New Mexico. The complaint names as defendants our Company and certain of our current and former officers. The complaint alleges that we made false and misleading statements concerning our financial results and business during the period from July 23, 2003 to October 22, 2003, resulting in violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934. The complaint seeks unspecified monetary damages and equitable relief. We dispute the claims and intend to defend the lawsuit vigorously.

ITEM 2. Unregistered Sales of Equity 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

Not applicable

ITEM 5. Other Information

Not applicable

ITEM 6. Exhibits

	10.1		Change of Control Agreement/Severance Agreement between David M. Riddiford and Action Performance Companies, Inc. (1)

	10.2		Change of Control Agreement/Severance Agreement between Melodee L. Volosin and Action Performance Companies, Inc. (1)

	10.3		First Amendment to Employment Agreement between Fred W. Wagenhals and Action Performance Companies, Inc. (1)

	31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

	31.2		Rule 13a-14(a)/Rule 15d-14(a) Certification of Chief Financial Officer

	32.1		Section 1350 Certification of Chief Executive Officer

	32.2		Section 1350 Certification of Chief Financial Officer

	99.1		Private Securities Litigation Reform Act of 1995 Safe Harbor Compliance Statement for Forward-Looking Statements


(1)		Incorporated by reference to the Registrant’s Form 8-K dated June 2, 2005, as filed with the Securities and Exchange Commission on June 6, 2005.

SIGNATURES

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

ACTION PERFORMANCE COMPANIES, INC.


Signature	Capacity	Date

/s/ Fred W. Wagenhals Fred W. Wagenhals	Chairman of the Board, President, and Chief Executive Officer (Duly Authorized Officer)	August 9, 2005

/s/ David M. Riddiford David M. Riddiford	Chief Financial Officer, Secretary, and Treasurer (Principal Financial and Accounting Officer)	August 9, 2005

(State of Incorporation)

(I.R.S. Employer Identification No.)

ACTION PERFORMANCE COMPANIES INC 10-Q