10-Q 1 k86809e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2004 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission File Number: 2-98277C SPORTS RESORTS INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) MICHIGAN 38-3262264 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 951 AIKEN ROAD, OWOSSO, MICHIGAN 48867 (Address of principal executive offices) (Zip code) (989) 725-8354 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value 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 [ ] No [X] Number of shares of the registrant's Common Stock, $0.01 par value, outstanding as of August 2, 2004: 48,399,771 ================================================================================ PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The financial statements required under Item 1 of Part I are set forth in Appendix A to this Report on Form 10-Q and are herein incorporated by reference. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING STATEMENTS Some of the statements in this report are forward-looking statements. These forward-looking statements include statements relating to our performance. In addition, we may make forward-looking statements in future filings with the Securities and Exchange Commission and in written material, press releases and oral statements issued by us or on our behalf. Forward-looking statements include statements regarding the intent, belief or current expectations of us or our officers, including statements preceded by, "should," "believe," "may," "will," "expect," "anticipate," "estimate," "continue," "predict," "propose," or similar expressions. It is important to note that our actual results could differ materially from those anticipated in our forward-looking statements depending on various "risk factors." Such risk factors include: concentration of stock ownership, relationships with race sanctioning bodies, competition for leisure dollars, reliance on key personnel, potential liabilities for personal injuries, need for additional financing, limited trading market for our stock, dependence on the North American new truck industry, variability of raw material and labor costs, failure to manage mergers, acquisitions, dispositions and diversification into other lines of business, the need to effectively manage a large sports and entertainment development project and other factors discussed under the caption "Risk Factors." All forward-looking statements in this report are based on information available to us on the date of this report. We do not undertake to update any forward-looking statements that may be made by us or on our behalf in this report or otherwise. In addition please note that the matters discussed under the caption "Risk Factors" constitute cautionary statements identifying important factors with respect to the forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements. CRITICAL ACCOUNTING POLICIES A summary of our critical accounting policies is incorporated by reference beginning on page 10 of our 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2004. There have been no material changes in the accounting policies followed by us during fiscal 2004. BACKGROUND We are a Michigan corporation and a holding company with three active wholly owned subsidiaries. We have no independent operations of our own, however, we provide various administrative functions for our operating subsidiaries. 2 RUGGED LINER, INC. ("RL") manufactures and sells pickup truck bedliners and tailgate covers through a distributor network. Truck bedliners are plastic inserts that are placed in the rear beds of pickup trucks to protect the paint and structural integrity of the bed. RL manufactures approximately 90 different bedliners. BRAINERD INTERNATIONAL RACEWAY & RESORT, INC. ("BIR") operates a motor sports facility located approximately nine miles northwest of Brainerd, Minnesota. Substantially all of BIR's revenues are obtained from motor sports racing events at the racetrack. BIR schedules racing and other events held at the racetrack during weekends in May through October of each year. RACEWAY 66, INC. ("Raceway 66") is a combined convenience store and gas station adjacent to our BIR facility. DEVELOPMENT OF SPORTS AND ENTERTAINMENT COMPLEX. During 2001, we proposed the development of a new sports and entertainment complex (the "Complex") to be located on approximately 340 acres northeast of I-75 and Mount Morris Road in Mount Morris Township, Genesse County, Michigan. This project is in the development stage. We have received zoning and site plan approval for development of the site by the Mount Morris Township Planning Board. The Complex could eventually include a coliseum, domed stadium, hotel, theme restaurant, and a combined gas station, convenience and souvenir store, along with 130 acres of parking. To date, we have not been able to obtain the necessary funding for this project and are currently evaluating our options. If we cannot obtain sufficient capital to develop the Complex we will need to consider an alternative plan. LIQUIDITY AND CAPITAL RESOURCES Our consolidated current assets increased from $5,101,000 at December 31, 2003 to $11,253,000 at June 30, 2004. This increase is primarily related to the reclassification from long term to current, the majority of the balance owed on a related party note-receivable and increases in trade accounts receivable and other current assets of $448,000 and $724,000, respectively. Our consolidated current liabilities increased from $1,960,000 at December 31, 2003 to $3,194,000 at June 30, 2004. This increase primarily relates to increases in accounts payable and accrued expenses of $517,000 and $711,000, respectively. Cash increased by approximately $2,210,000 from $482,000 at December 31, 2003 to $2,692,000 at June 30,2004 primarily due to the receipt of Federal income tax refunds of $1,570,000. Additionally, the Company received proceeds of $414,000 upon the disposal of an unused warehouse building. Accounts receivable - trade increased by approximately $448,000 from $821,000 as of December 31, 2003 to $1,269,000 at June 30, 2004, due to increased seasonal sales activity associated with the second quarter of the fiscal year, as compared to the fourth quarter. Note receivable - related party is comprised of a note, which is secured by a subordinated mortgage and personal guarantee from the majority shareholder. The note requires monthly principal and interest payments through February 2005, at which time the unpaid balance is due. The current portion of the note increased by $4,351,000, from $161,000 at December 31, 2003 to $4,512,000 at June 30, 2004 primarily due to the reclassification of amounts from long-term. The note is being paid in accordance with terms. Federal income taxes receivable of $1,570,000 at December 31, 2003 relates to net operating losses available for carryback. During 2003, we completed a cost segregation study during which we reclassified certain assets originally classified as real property into other more appropriate asset 3 categories, which allowed for shorter more accelerated methods of depreciation as allowed by the Internal Revenue Service. As a result of the cost segregation study, we were able to accelerate our deductions for depreciation and increase the carryback of net operating losses during the completion of our 2002 consolidated Federal income tax return. During the second quarter of 2004 we received a refund of $1,570,000 from the amendment of certain prior year returns. Inventory levels remained consistent and were $1,535,000 at December 31, 2003 as compared to $1,525,000 at June 30, 2004. Other assets-current increased $724,000 from $532,000 at December 31, 2003 to $1,256,000 primarily due to prepaid sanction fees associated with events to be held at BIR in the third quarter of 2004. Net property, plant and equipment decreased by approximately $918,000 from $11,673,000 at December 31, 2003 to $10,755,000 at June 30, 2004 due to fixed asset additions of $178,000 offset by depreciation for the period of $866,000 and the disposal of an unused warehouse building with a carrying value of $230,000. Tooling comprised the majority of additions during the period. LIABILITIES AND EQUITY Accounts payable increased by approximately $517,000 from $1,136,000 at December 31, 2003 to $1,653,000 at June 30, 2004 due to higher levels of activity associated with the second quarter as compared to the fourth quarter of the fiscal year. Accrued expenses increased by $711,000 from $567,000 at December 31, 2003 to $1,278,000 at June 30, 2004, primarily due to advanced ticket sales of $888,000 at BIR, offset by the payment of other accrued amounts. During the first six months of 2002, we paid certain expenses on behalf of affiliated entities controlled by Donald J. Williamson, our majority shareholder. These expenses were predominately for the use of a common payroll processing service as well as a pro rata share of general insurance coverage. Additionally, we had advanced $1,036,000 on behalf of Mr. Williamson for construction costs related to a convenience store and gas station built adjacent to our BIR facility in Brainerd, Minnesota. Construction of the convenience store was completed in the second quarter of 2002. Effective September 1, 2002, Mr. Williamson transferred the facility to us, at which time the construction advances were offset based on net book value which was determined using historic cost data accumulated during the construction of the facility. Additionally, in June of 2003, we received $711,000 from affiliated entities toward amounts previously advanced. The total amount outstanding at June 30, 2004 and December 31, 2003 was $396,000, which is to be reimbursed to us by the affiliated entities. In accordance with the Sarbanes-Oxley Act of 2002, we discontinued making any additional advances to or on behalf of affiliated entities effective June 30, 2002. OUTSTANDING LOANS AND CONTRACTUAL COMMITMENTS We entered into a term loan in August 1999 in the amount of $403,000. This loan was secured by a permanent grandstand addition and required annual principal payments of $100,675, plus 9% interest, through August 2003 at which time this loan was paid in full. We have a term loan, which is secured by property that requires quarterly interest payments at 2% above the prime rate, subject to a minimum rate of 8% and a single principal payment of $50,000 in 2004. In 1995, we leased $2,689,000 of equipment under a lease agreement that included an option to purchase the equipment for $1.00 upon expiration of the lease term. The payment amounts under the lease represented principal payments, with interest at rates between 8.0% and 8.5%. In 1996, we 4 leased additional equipment in the amount of $3,744,000 structured in the same manner. In May of 2003, these capital leases were paid in full. In 2002 we entered into term loans in the amount of $595,237. These loans are secured by transportation equipment and require monthly payments including interest at rates approximating 8.0% through November 2007. In February 2003, we entered into a note payable with a bank in the amount of $500,000. This note was secured by a mortgage on BIR's facilities and required monthly payments of interest at 7.5%. In October 2003, we extended this note with monthly principal and interest payments at 2 -1/2% above prime through October 2008. We lease our Owosso, Michigan facility from an affiliated entity controlled by Donald J. and Patsy L. Williamson, our majority shareholders. We are also responsible for all taxes, insurance and maintenance expenses related to the facility. Summarized below are our obligations and commitments to make future payments under debt obligations and lease agreements as of June 30, 2004:

We believe that we will be able to satisfy our ongoing cash requirements for operating activities in the next twelve months and thereafter with available cash, cash flows from operations and the collection of advances and notes receivable outstanding from our majority shareholder and related entities. Borrowing arrangements or additional public capital will be necessary to fund the proposed sports and entertainment complex, which we have been unable to obtain to date. RESULTS OF OPERATIONS

5 Our revenues were $5,720,000 in the three months ended June 30, 2004 compared to $5,772,000 in the same period of 2003. Revenues attributable to RL were $4,898,000 and $5,030,000 for the quarters ended June 30, 2004 and 2003, respectively. The 3% decrease in RL's sales is attributable to a slight softening in customer demand. BIR's revenues were $822,000 and $742,000 for the quarters ended June 30, 2004 and 2003, respectively. The increase in BIR's revenue from 2003 to 2004 is primarily due to higher prices charged on fuel sales at our Raceway 66 convenience store operation because of higher fuel costs. Revenues were $10,442,000 and $10,211,000 for the six month periods ending June 30, 2004 and 2003, respectively. Revenues for RL were $9,512,000 and $9,326,000 for the six month periods ending June 30, 2004 and 2003, respectively. The slight increase in RL's revenues overall from 2003 to 2004 is primarily due to a reduction in sales incentives offered to new customers. BIR's revenues were $930,000 and $885,000 for the same periods for the same reason as described above. Cost of sales were $4,838,000 and $4,784,000 for the quarters ended June 30, 2004 and 2003 respectively or 85% and 83% of revenue. Cost of sales attributable to RL were $3,670,000 and $3,773,000 for the quarters ended June 30, 2004 and 2003 respectively or 75% of revenue for both periods. RL's cost of sales remained consistent primarily due to consistent prices in plastic resin, the material used to manufacture bedliners. Gross profit for RL was 25% of sales for the second quarters of 2004 and 2003. Cost of sales attributable to BIR were $1,168,000 and $1,011,000 for the quarters ended June 30, 2004 and 2003, respectively. The increase in BIR's cost of sales from 2003 to 2004 is primarily due to higher costs for fuel sold at our Raceway 66 convenience store operation. Cost of sales for the six month periods ended June 30, 2004 and 2003 were $8,775,000 and $8,384,000, respectively for the same reasons as described above. Cost of sales attributable to RL were $7,162,000 and $6,978,000 for the six month periods ended June 30, 2004 and 2003, respectively or 75% of revenues for both periods. Cost of sales attributable to BIR for the six month periods ended June 30, 2004 and 2003 were $1,613,000 and $1,406,000, respectively. Selling, general and administrative expenses remained consistent and were $1,135,000 and $1,184,000 for the quarters ended June 30, 2004 and 2003, respectively, or 20% and 21% respectively, as a percentage of revenues. Selling, general and administrative expenses attributed to RL were $865,000 and $927,000 for the quarters ended June 30, 2004 and 2003, respectively. Selling, general and administrative expenses for BIR were $270,000 and $257,000 for the three month periods ended June 30, 2004 and 2003 respectively. Selling, general and administrative expenses were $2,297,000 and $2,197,000 for the six month periods ended June 30, 2004 and 2003, respectively or 22% of revenues for both periods. Selling, general and administrative expenses attributed to RL were $1,851,000 and $1,739,000 for the six month periods ended June 30, 2004 and 2003, respectively. Selling, general and administrative expenses for BIR were $446,000 and $458,000 for the six month periods ended June 30, 2004 and 2003, respectively. Land development costs were $57,000 and $65,000 for the quarters ended June 30, 2004 and 2003, respectively and $170,000 and $200,000 for the six month periods ended June 30, 2004 and 2003, respectively. Land development costs are comprised principally of professional fees and non-refundable deposits to extend various agreements to purchase land in Mount Morris Township, Michigan in connection with our proposed sports and entertainment complex. The extended agreements are for periods of four to six months. Since financing for development of the project was not in place at June 30, 2004 these amounts have been expensed. 6 Net gain on disposal of assets was $185,000 for the quarter ended June 30, 2004 and is related to the sale of an unused warehouse facility. We recorded a net gain of $70,000 in the same period of 2003, principally related to the sale of unused land at our BIR facility. Net gain on disposal of assets was $198,000 and $98,000 for the six month periods ended June 30, 2004 and 2003, respectively, principally for the same reasons described above. Interest expense in the second quarter of 2004 decreased by $11,000 from the second quarter of 2003 due to the reduction of outstanding debt. Interest expense in the six month period ending June 30, 2004 decreased by $21,000 from the same period in 2003 for the same reason. Interest income was $94,000 and $97,000 for the quarters ended June 30, 2004 and 2003, respectively, and $188,000 and $195,000 for the six month periods ended June 30, 2004 and 2003, respectively. RISK FACTORS GENERAL OWNERSHIP OF OUR COMMON STOCK IS CONCENTRATED IN ONE SHAREHOLDER, WHO IS ABLE TO EXERCISE CONTROL AND MAKE DECISIONS THAT MAY NOT BE IN THE BEST INTEREST OF ALL OF OUR SHAREHOLDERS Donald J. Williamson, our majority shareholder and his wife, Patsy Williamson, own approximately 96% of our issued and outstanding shares of common stock. Accordingly, Donald and Patsy Williamson are able to control the election of directors and all other matters which are subject to a vote of shareholders. This concentration of ownership may have the effect of delaying or preventing a change of control of Sports Resorts International, Inc. even if this change of control would benefit all shareholders. OUR FUTURE SUCCESS WILL BE DEPENDENT ON THE SKILL OF OUR KEY PERSONNEL Our success depends upon the availability and performance of our officers and senior management and other key personnel. We rely heavily upon the expertise of a relatively small core of executives. We do not have employment agreements with any of our key personnel. The loss of the services of one or more of our key executives could have a material adverse effect on our operations. OUR COMMON STOCK HAS A LIMITED TRADING MARKET, WHICH MAY MAKE IT DIFFICULT TO SELL OR OBTAIN AN ADEQUATE PRICE FOR YOUR SHARES There is a limited public market for our common stock and there is no assurance that an active trading market will develop or be sustained. Because of this lack of liquidity, our stock price may be highly volatile. FLUCTUATIONS IN INTEREST RATES COULD INCREASE OUR BORROWING COSTS AND ADVERSELY AFFECT OUR FINANCIAL RESULTS In the event we borrow money in the future, we may be exposed to changes in interest rates. Our credit facilities are usually based on the prime rate of interest and may not necessarily be the lowest rate of interest. If the interest rates charged by our lenders increase, there could be an adverse effect on our financial results. 7 TRUCK ACCESSORIES SEGMENT OUR PROFITABILITY IS DEPENDENT ON CONTROL OF OUR COSTS, IN THE EVENT WE ARE UNABLE TO CONTROL OUR COSTS, OUR FINANCIAL RESULTS COULD BE ADVERSELY AFFECTED In order to manufacture our truck accessories we require plastic resin as a raw material. The cost of plastic resin is directly dependent upon fluctuations in natural gas feedstock prices. We do not have any long-term supply contracts and do not use any hedging techniques to manage the costs of plastic resin. In the event raw material prices increase, we may be unable to pass the increased costs on to our customers which could adversely affect our results of operations. In addition, we attempt to control our labor costs. In the event that the cost of labor increases and we are unable to pass such increased labor costs to our customers, our results of operations could be adversely affected. OUR TRUCK ACCESSORIES BUSINESS FACES STRONG COMPETITION WHICH COULD AFFECT OUR SALES AND PROFIT MARGINS We compete for sales of bedliners and other truck accessories against a number of companies. Many of these companies are larger, have greater market recognition and substantially greater financial, technical, marketing, distribution and other resources than we have. Additionally, new and alternative product offerings are increasingly available. While product quality is an important factor, price and features are also very important to our customers. We attempt to manufacture high quality full-featured products, which are cost competitive. We have faced and will continue to face additional competition from new entrants and alternative products into our markets. We cannot be certain that we will be able to compete successfully with existing or new competitors or products. THE EFFECTS OF INFLATION COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS IF OUR COSTS INCREASE FASTER THAN WE CAN PASS THEM ON TO OUR CUSTOMERS The relatively moderate rate of inflation experienced during the last decade has not had a significant impact on our results of operations. However, there can be no assurance that a moderate rate of inflation will continue. In the event the rate of inflation increases more dramatically in the future, our costs may increase faster than we can pass them on to our customers which would have an adverse effect on our financial results. OUR TRUCK ACCESSORY BUSINESS IS TIED TO THE NORTH AMERICAN VEHICLE INDUSTRY, WHICH IS HIGHLY CYCLICAL AND DEPENDENT ON CONSUMER SPENDING AND GENERAL ECONOMIC CONDITIONS IN NORTH AMERICA Sales of our truck accessories including bedliners is tied to the North American vehicle industry. The truck industry is highly cyclical and dependent on consumer spending and general economic conditions in North America. We primarily sell our truck accessories in the United States and as result we are solely dependent on the health and vitality of the U. S. economy for our success. There can be no assurance that production of pickup trucks will not decline in the future or that we will be able to fully utilize our manufacturing capacity. Economic factors adversely affecting truck sales and production and consumer spending could adversely impact our sales and operating results. 8 SPORTS AND ENTERTAINMENT SEGMENT WE NEED TO MAINTAIN AND ENHANCE OUR WORKING RELATIONSHIP WITH THE NHRA In order to be successful, our raceway operation needs to maintain a good relationship with the primary sanctioning body of our racing events, The National Hot Rod Association ("NHRA"). While we believe that we have a good relationship with the NHRA, and the current term of our sanctioning agreement has been extended to December 31, 2005, it is likely that the loss of the national race with the NHRA would adversely affect the results of our operations. OUR RACEWAY OPERATIONS FACE COMPETITION FOR TICKET SALES AND MARKETING AND ADVERTISING DOLLARS We compete for marketing, advertising and ticket sales with other sports and with other entertainment and recreational activities. In the event fan interest in racing declines, it is likely that our results of operations would be adversely affected. We compete with well-established raceway operations some of which have greater market recognition and substantially greater financial, technical, marketing, distribution and other resources than we have. Our ability to compete successfully depends on a number of factors, which are primarily outside our control including our ability to develop and maintain effective marketing programs, the number and location of our competitors and general market and economic conditions. WE MAY INCUR LIABILITY FOR PERSONAL INJURIES Racing events can be dangerous to participants and to spectators. We maintain insurance policies that provide coverage within limits that in our judgement are sufficient to protect us from material financial loss due to liability for personal injuries sustained by or death of, spectators in the ordinary course of our business. Our insurance may not be adequate or available at all times and in all circumstances. In the event damages for injuries sustained by our spectators exceed our liability coverage or our insurance company denies coverage, our financial condition, results of operations and cash flows could be adversely affected to the extent claims and associated expenses exceed our insurance recoveries. WE WILL NEED ADDITIONAL FINANCING WHICH MAY OR MAY NOT BE AVAILABLE OR WHICH MAY DILUTE THE OWNERSHIP INTEREST OF CURRENT SHAREHOLDERS We have previously announced plans to develop a large sports and entertainment complex in Mount Morris Township, Michigan. To date, we have been unable to obtain the necessary funding for this project and are currently evaluating our options. If we cannot obtain sufficient capital to develop the complex we will need to consider an alternative plan. OUR RACEWAY OPERATIONS ARE SEASONAL AND THEREFORE ADVERSE WEATHER CAN AFFECT OUR RESULTS OF OPERATIONS Our raceway operations primarily operate on the weekends from May through October. In the event that adverse weather conditions curtail attendance at any of our races, it could have a material adverse affect on our results of operations. 9 OUR FAILURE TO PROPERLY MANAGE MERGERS, ACQUISITIONS, DISPOSITIONS AND DIVERSIFICATION INTO OTHER LINES OF BUSINESS COULD ADVERSELY AFFECT OUR BUSINESS Recently, we announced that we have decided to expand the sports and entertainment aspects of our business. In the future we may expand or contract our operations through mergers, acquisitions, dispositions and diversification. These activities expose us to a number of special risks, including diversion of management's attention, failure to retain key personnel or customers of an acquired business, difficulties transitioning operations to accommodate new businesses or activities and limited experience in managing a large sports and entertainment enterprise. There can be no assurance that we will be able to effectively manage these special risks. NEW ACCOUNTING STANDARDS In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 provides guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE are to be included in an entity's Consolidated Financial Statements. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics include the direct or indirect ability to make decisions about an entity's activities through voting rights or similar rights, the obligation to absorb the expected losses of an entity if they occur, and the right to receive the expected residual returns of the entity if they occur. In December 2003, the FASB reissued Fin 46 ("FIN 46 (R)") with certain modifications and clarifications. Application of this guidance was effective for interests in certain VIE's commonly referred to as special-purpose entities ("SPEs") as of December 31, 2003. Application for all other types of entities is required for periods ending after March 15, 2004, unless previously applied. The provisions of FIN 46 (R) have not had an impact on our financial position or results of operations. SEGMENT REPORTING For a discussion of our business segments, see Note 12 to the condensed financial statements included in Appendix A. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See the discussion under "Market Risk Disclosure" in Item 2 above. ITEM 4. CONTROLS AND PROCEDURES Disclosures Controls and Procedures The Company maintains controls and procedures designed to ensure that it is able to collect the information that is required to be disclosed in the reports it files with the SEC, and to process, summarize and disclose this information within the time period specified in the rules of the SEC. The Company's Chief Executive and Chief Financial Officers are responsible for establishing, maintaining and enhancing these procedures. They are also responsible, as required by the rules established by the SEC, for the evaluation of the effectiveness of these procedures. 10 Based on their evaluation of the Company's disclosure controls and procedures which took place as of the end of the period covered by this report, the Chief Executive Officer and the Chief Financial Officer believe that these procedures are effective to ensure that the Company is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time period. Internal Controls The Company maintains a system of internal controls designed to provide reasonable assurance that transactions are executed in accordance with management's general or specific authorization; transactions are recorded as necessary to (1) permit preparation of financial statements in conformity with generally accepted accounting principles, and (2) maintain accountability for assets. Access to assets is permitted only in accordance with management's general or specific authorization. Since the date of the most recent evaluation of the Company's internal controls by the Chief Executive and Chief Financial Officers, there have been no significant changes in such controls or in other factors that could have significantly affected those controls, including any corrective actions with regard to significant deficiencies and material weaknesses. 11 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (b) Reports on Form 8-K We filed the following reports on Form 8-K during the period covered by this report: Form 8-K Filing Date Description ----------- ----------- May 5, 2004 Press release dated May 3, 2004 announcing that the Company met with officials from the State of Michigan's Office of Racing Commissioner. May 10, 2004 Press release dated May 7, 2004 announcing the appointment of Salvatore P. Semola to the Board of Directors. May 17, 2004 Press release dated May 14, 2004 announcing the Company's results for the quarter ending March 31, 2004. 12 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. SPORTS RESORTS INTERNATIONAL, INC. Dated: August 12, 2004 By: /s/ Gregory T. Strzynski -------------------------------------- Gregory T. Strzynski Chief Financial Officer (Duly Authorized Officer and Principal Accounting and Financial Officer of the Registrant) 13 APPENDIX A A-1 SPORTS RESORTS INTERNATIONAL, INC. CONDENSED BALANCE SHEETS

A-2 SPORTS RESORTS INTERNATIONAL, INC. CONDENSED BALANCE SHEETS

A-3 SPORTS RESORTS INTERNATIONAL, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

Continued A-4 SPORTS RESORTS INTERNATIONAL, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

Concluded A-5 SPORTS RESORTS INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

Continued A-6 SPORTS RESORTS INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

Concluded A-7 SPORTS RESORTS INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Note 1 BASIS OF PRESENTATION The Company is a Michigan corporation and a holding company with three active wholly owned subsidiaries, Rugged Liner, Inc. ("RL") (formerly The Colonel's Truck Accessories, Inc.), Brainerd International Raceway & Resort, Inc., ("BIR") (formerly the Colonel's Brainerd International Raceway, Inc.) and Raceway 66, Inc. ("Raceway 66"). The Colonel's, Inc. ("The Colonel's") is an inactive subsidiary, having sold all of its assets except for certain land in December 1998. The Company's subsidiaries operate in two segments, truck accessories and sports and entertainment. These financial statements should be read in conjunction with the audited financial statements and notes to consolidated financial statements included in the Company's 2003 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 25, 2004. A summary of critical accounting policies is presented beginning on page 10 of the Company's most recent Form 10-K. There have been no material changes in the accounting policies followed by the Company during fiscal year 2004. The financial information included herein is unaudited; however such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented. Interim results of operations are not necessarily indicative of the results expected for the full year. Reclassifications - Certain amounts from prior periods have been reclassified to conform to the current presentation. NEW ACCOUNTING PRONOUNCEMENTS In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 provides guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE are to be included in an entity's Consolidated Financial Statements. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Those characteristics include the direct or indirect ability to make decisions about an entity's activities through voting rights or similar rights, the obligation to absorb the expected losses of an entity if they occur, and the right to receive the expected residual returns of the entity if they occur. In December 2003, the FASB reissued Fin 46 ("FIN46 (R)") with certain modifications and clarifications. Application of this guidance was effective for interests in certain VIE's commonly referred to as special-purpose entities ("SPEs") as of December 31, 2003. Application for all other types of entities is required for periods ending after March 15, 2004, A-8 unless previously applied. The provisions of FIN 46 (R) have not had an impact on the Company's financial position or results of operations. Note 2 RELATED PARTY TRANSACTIONS Note Receivable During the first quarter of 1999, a note receivable from South Saginaw LLC, a company owned by Donald J. Williamson, the Company's majority shareholder, of $5,200,000 was established. The note requires monthly payments of $43,496, including interest at 8.0%, through February 2005, at which time the unpaid balance is due. The note is being paid in accordance with terms and is secured by a subordinated mortgage and personal guarantee. Net Advances to Related Parties From 1999 through the first six months of 2002, the Company paid certain expenses on behalf of affiliated entities controlled by Donald J. Williamson. These expenses were predominately for the use of a common payroll processing service as well as a pro rata share of general insurance coverage. Additionally, the Company had advanced $1,036,000 on behalf of Mr. Williamson for construction costs related to a convenience store and gas station being built adjacent to BIR's facility in Brainerd, Minnesota. Construction of the convenience store was completed in the second quarter of 2002. Effective September 1, 2002, Mr. Williamson transferred the facility to the Company, at which time the advances were offset based on net book value which was determined using historic cost data accumulated during the construction of the facility. Additionally, in June of 2003, the Company received $711,000 from affiliated entities toward amounts previously advanced. The total amount outstanding at June 30, 2004 and December 31, 2003 was $396,000, which is to be reimbursed to the Company by the affiliated entities. These advances to related parties are recorded as a reduction to shareholders' equity. In accordance with the Sarbanes-Oxley Act of 2002, the Company discontinued making any additional advances to or on behalf of affiliated entities effective June 30, 2002. Note 3 INVENTORIES Inventories are summarized as follows:

A-9 Note 4 OTHER ASSETS, CURRENT Other assets, current is summarized as follows:

Note 5 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized by major classification as follows:

The Company sold an unused warehouse building with a carrying value of approximately $230,000 and recognized a gain of $184,000 in the second quarter of 2004. During the first six months of 2004 and 2003, the Company made non-refundable deposits and extended various agreements to purchase land in Mount Morris Township, Michigan in connection with a proposed plan to develop a sports and entertainment complex. The extended agreements are for additional periods of four to six months. Since financing for development of the project was not in place at June 30, 2004, these deposits have been expensed and included in land development costs. Subsequent to June 30, 2004 the Company purchased approximately 38 acres of land in Mount Morris Township which had been under agreement to purchase for $750,000. A-10 Note 6 OTHER ASSETS, LONG-TERM Other assets, long-term is summarized as follows:

Note 7 LONG TERM DEBT Long-term obligations consist of the following:

A-11 Note 8 ACCRUED EXPENSES Accrued expenses consist of the following:

Note 9 INCOME TAXES The Company provides for deferred income taxes under the asset and liability method, whereby deferred income taxes result from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. A valuation allowance is established to reduce deferred income tax assets to the amount expected to be realized. On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 (the "Act") was enacted which extends the carryback period for net operating losses from two years to five years. Based on this new legislation, the Company carried back net operating losses for which there was a valuation allowance. In addition, the Company realized the tax benefit of certain deferred taxes for which there was a valuation allowance. In 2003 the Company performed a cost segregation study. A cost segregation study reclassifies assets originally classified as real property into other more appropriate asset categories which allow for shorter, more accelerated methods of depreciation as allowed by the Internal Revenue Service. Accordingly, the Company was able to accelerate its depreciation deduction for Federal income tax reporting purposes and increase the carry back allowed under the Act in connection with the completion of its 2002 consolidated Federal income tax return. As a result, the valuation reserve on deferred tax assets was reduced by $1,098,800 during year ending December 31, 2003. In connection with the passage of this legislation and the performance of the cost segregation study, the Company amended certain of its prior year returns. The Company received a refund of $1,570,234 in the second quarter of 2004 from its amended returns. Note 10 EARNINGS (LOSS) PER SHARE Basic earnings (loss) per share is based upon the weighted average number of shares outstanding. Diluted earnings per share assumes the exercise of common stock options when dilutive. A-12 Note 11 STOCK OPTIONS The Company has stock-based employee compensation plans, which are described more fully in Note 13 in the Company's 2003 Annual Report. The Company accounts for stock-based compensation consistent with SFAS No. 123, "Accounting for Stock-Based Compensation", and, as permitted by this standard, will continue to apply the recognition and measurement principles of Accounting Principles Board Opinion No. 25 to its stock-based compensation awards. Since stock options are granted at prices equal to fair market value, no compensation expense is recognized in connection with stock options granted to employees. The following illustrates the effect on net income (loss) and earnings (loss) per share if the Company applied the fair value recognition provisions of SFAS 123:

No options were granted during the periods presented. A-13 Note 12 SEGMENTS OF BUSINESS The Company's reportable segments are strategic business units that offer different products and services. The business units have been divided into two reportable segments: the manufacturing and sale of bedliners and other truck accessories ("Truck Accessories"), and operation of a multi-purpose motor sports facility in Brainerd, Minnesota ("Raceway"). Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision making group, in deciding how to allocate resources and assessing performance. The Company's chief operating decision-maker is its Chief Executive Officer. The Company evaluates performance based on stand-alone product segment operating income. Intersegment sales and transfers, interest income and expenses are not significant. Financial information segregated by reportable product segment is as follows:

A-14 Exhibit Index

SPORTS RESORTS INTERNATIONAL INC 10-Q