10-Q 1 k97316e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2005 ================================================================================ 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, 2005 [ ] 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 identification no.) incorporation or organization) 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 July 5, 2005: 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 11 of our 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2005. There have been no material changes in the accounting policies followed by us during fiscal 2005. 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. SALE OF MOTOR SPORTS FACILITY. In November 2004, we announced our intent to sell our multi-purpose motor sports facility located near Brainerd, Minnesota in an effort to concentrate on our manufacturing operations located in Michigan. There were no new developments regarding a potential sale of the facility during the quarter ended June 30, 2005. The facility which hosts various spectator events such as drag and road races for cars and motorcycles includes a one-quarter mile drag strip and three-mile race course and consists of approximately 530 acres of land. The facility also includes Raceway 66, a combined convenience store and gas station adjacent to the property. We expect to continue to operate the facility during 2005 until we locate a qualified purchaser. 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. Potential alternatives for the project include sale of the land we own and a release of the options we hold to purchase additional land. If we cannot obtain sufficient capital to develop the complex we will need to consider an alternative plan. WILLIAMSON PROPOSAL. On March 15, 2005 the Company received notification via a press release from Donald J. Williamson, the Company's majority shareholder, concerning his plans to have the Company execute a variety of corporate transactions including a joint venture with an Indian tribe to establish a casino, the spin-off of the Company's BIR subsidiary to shareholders and other corporate transactions. The Company has not had any further communication from Mr. Williamson regarding these proposals and has not taken any action to execute such transactions. LIQUIDITY AND CAPITAL RESOURCES Our consolidated current assets increased from $8,211,000 at December 31, 2004 to $9,714,000 at June 30, 2005. This increase is primarily related to increases in cash and other assets-current of $1,933,000 and $1,091,000 respectively, offset by a decrease in note receivable-related party of $1,671,000. Our consolidated current liabilities increased from $1,560,000 at December 31, 2004 to $3,082,000 at June 30, 2005. This increase primarily relates to increases in accounts payable and accrued expenses of $697,000 and $828,000, respectively. Cash increased $1,933,000, from $673,000 at December 31, 2004 to $2,606,000 at June 30, 2005 primarily due to $1,671,000 received from our majority shareholder towards the balance owed on an outstanding note receivable-related party and cash generated in operating activities of $346,000. Accounts receivable - trade increased by approximately $277,000 from $833,000 as of December 31, 2004 to $1,110,000 at June 30, 2005, due to increased sales activity associated with the second quarter of the fiscal year, as compared to the fourth quarter. 3 Note receivable - related party is comprised of a note, which is secured by a subordinated mortgage and personal guarantee from our majority shareholder. The note required monthly principal and interest payments through February 2005, at which time the unpaid balance was due. The related party failed to pay the remaining balance on the due date in February 2005, however, the related party has continued to make the same principal and interest payments through May 2005 and made a partial principal payment of $1,600,000 towards the remaining balance in June of 2005. The Company has sent a default letter demanding payment and is pursuing collection of this obligation. During the quarter ended June 30, 2005, the Company obtained an independent appraisal of the collateral which indicates a value of approximately $4,860,000. The Company is evaluating its options with regards to the collateral. The Company believes that it has adequate collateral to secure the remaining obligation. Inventories decreased by approximately $127,000 from $1,600,000 at December 31, 2004 to $1,473,000 at June 30, 2005 due to better inventory management. Other assets - current increased $1,091,000 from $675,000 at December 21, 2004 to $1,766,000 primarily due to prepaid sanction fees associated with an event to be held at BIR in the third quarter of 2005. Net property, plant and equipment decreased by approximately $870,000 from $10,024,000 at December 31, 2004 to $9,154,000 at June 30, 2005 primarily due to depreciation for the period of $837,000. LIABILITIES AND EQUITY Accounts payable increased by approximately $697,000 from $953,000 at December 31, 2004 to $1,650,000 at June 30, 2005 primarily due to activities associated with the seasonal operation of BIR which is from May through October each year. Accrued expenses increased by $828,000 from $388,000 at December 31, 2004 to $1,216,000 at June 30, 2005, primarily due to advanced ticket sales of $884,000 at BIR, offset by the payment of other accrued amounts. OUTSTANDING LOANS AND CONTRACTUAL COMMITMENTS 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% 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 2.5% above prime (effective rate of 8.5% at June 30, 2005) through October 2008. We lease our Owosso, Michigan facility from an affiliated entity controlled by Donald J. and Patsy L. Williamson, our majority shareholders at a monthly rental charge of $50,000 per month. We are also responsible for all taxes, insurance and maintenance expenses related to the facility. In the second quarter of 2005 we extended the terms of our original lease agreement to May of 2020. 4 Summarized below are our obligations and commitments to make future payments under debt obligations and lease agreements as of June 30, 2005:

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

Our revenues were $3,997,000 in the three months ended June 30, 2005 compared to $5,720,000 in the same period of 2004. Revenues attributable to RL were $3,676,000 and $4,898,000 for the quarters ended June 30, 2005 and 2004, respectively. The decrease in RL's sales from 2004 to 2005 is due to a softening in demand for its bedliner products. BIR's revenues were $321,000 and $822,000 for the quarters ended June 30, 2005 and 2004, respectively. The $501,000 decrease in BIR's revenues from 2004 to 2005 is due to a number of decisions made to improve BIR's overall profitability. In 2005, we eliminated our American Motorcyclist Association ("AMA") and Thunder at the Lakes events, which had revenues of $200,000 and $40,000, respectively in the second quarter of 2004. Additionally, Raceway 66, a combined gas station and convenience store has not been opened in 2005 and accounted for $229,000 of BIR's revenues in the second quarter of 2004. Revenues were $7,283,000 and $10,442,000 for the six months periods ending June 30, 2005 and 2004, respectively. Revenues for RL were $6,942,000 and $9,512,000 for the six month periods ended June 30, 2005 and 2004, respectively with the decrease due to the same factors noted above. BIR revenues were $341,000 and $930,000 for the same periods with the decrease due to the same reasons as described above. 5 Cost of sales were $3,378,000 and $4,838,000 for the quarters ended June 30, 2005 and 2004 respectively or 85% as a percentage of revenue for both periods. Cost of sales attributable to RL were $2,917,000 and $3,670,000 for the quarters ended June 30, 2005 and 2004 respectively or 79% and 75% as a percentage of revenue. RL's cost of sales increased as a percentage of sales from 2004 to 2005 due to less favorable material costs as well as the reduction in sales described above, reducing the absorption of fixed manufacturing and overhead costs. Gross profit for RL was 21% of sales for the second quarter of 2005 and 25% of sales for the second quarter of 2004. Cost of sales attributable to BIR were $461,000 and $1,168,000 for the quarters ended June 30, 2005 and 2004, respectively. The decrease in BIR's cost of sales from 2004 to 2005 is primarily due to not operating Raceway 66 during the second quarter of 2005 and the elimination of events as described above, which accounted for approximately $342,000 and $236,000, respectively, of the total reduction in BIR's cost of sales of $704,000. The remaining decrease is primarily due to reductions in maintenance costs of the track facility. Cost of sales for the six month periods ended June 30, 2005 and 2004 were $6,425,000 and $8,775,000, respectively for the same reasons as described above. Cost of sales attributable to RL were $5,726,000 and $7,162,000 for the same periods or 82% and 75% as a percentage of revenues, respectively. Cost of sales attributable to BIR for the six month periods ended June 30, 2005 and 2004 were $699,000 and $1,613,000, respectively. Selling, general and administrative expenses were $810,000 and $1,135,000 for the quarters ended June 30, 2005 and 2004, respectively, or 20% as a percentage of revenues for both periods. Selling, general and administrative expenses attributed to RL were $686,000 and $865,000 for the quarters ended June 30, 2005 and 2004, respectively or 19% and 18% respectively, as percentage of revenues. RL's selling, general and administrative expenses decreased due to a reduction in sales levels. Selling, general and administrative expenses for BIR were $124,000 and $270,000 for the three month periods ended June 30, 2005 and 2004 respectively and decreased primarily due to a reduction in administrative staff. Selling, general and administrative expenses were $1,755,000 and $2,297,000 for the six month periods ended June 30, 2005 and 2004, respectively, or 24% and 22% as a percentage of revenues for the same reasons as described above. Selling, general and administrative expenses attributed to RL were $1,538,000 and $1,851,000 for the six months ended June 30, 2005 and 2004, respectively. Selling, general and administrative expenses for BIR were $217,000 and $446,000 for the same periods. There were no land development costs incurred for the quarter ending June 30, 2005. Land development costs were $57,000 for the quarter ending June 30, 2004, and $40,000 and $170,000 for the six month periods ended June 30, 2005 and 2004, 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. Since financing for development of the project was not in place at June 30, 2005 these amounts have been expensed. There was no significant net gain on disposal of assets for the quarter ended June 30, 2005, which totaled $8,000. 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. Net gain on disposal of assets was $14,000 and $198,000 for the six month periods ended June 30, 2005 and 2004, respectively, principally for the same reasons described above. 6 Interest expense in the second quarter of 2005 decreased by $4,000 from the second quarter of 2004, from $16,000 to $12,000 due to the reduction of outstanding debt. Interest expense in the six month period ending June 30, 2005 decreased by $5,000 from the same period in 2004, from $33,000 to $27,000 for the same reason. Interest income was $69,000 and $94,000 for the quarters ended June 30, 2005 and 2004, respectively, and $161,000 and $188,000 for the six month periods ended June 30, 2005 and 2004, respectively. Changes in interest income are attributable to excess cash available for investment purposes at prevailing rates and interest earned on notes receivable-related party. 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 L. 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 of the 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 a 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. 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. 8 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. 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. 9 NEW ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)). It requires that the costs of employee share-based payments be measured at fair value on the awards grant date using an option-pricing model and recognized in the financial statements over the requisite service period. SFAS 123(R) supersedes Opinion 25, "Accounting for Stock Issued to Employees" and its related interpretations, and eliminates the alternative to use Opinion 25's intrinsic value method of accounting, which we are currently using. SFAS 123(R) allows for two alternative transition methods. We are currently determining which transition method we will adopt and are evaluating the impact SFAS 123(R) will have on our financial position, results of operations, EPS and cash flows when it is adopted. On March 29, 2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107, "Share Based Payments". This SAB expresses the views of the SEC staff regarding the relationship between SFAS No. 123(R), "Share-Based Payment" and certain SEC rules and regulations. In particular, the SAB provides guidance related to valuation methods, the classification of compensation expense, non-GAAP financial measures, the accounting for income tax effects of share-based payment arrangements, disclosures in Management's Discussion and Analysis subsequent to adoption of SFAS No. 123(R), and interpretations of other share-based payment arrangements. We will adopt SAB No. 107 in conjunction with the adoption of SFAS No. 123(R) in the first quarter of 2006. We do not expect the adoption of this SAB to have a material effect on our consolidated financial statements. In November 2004, the FASB issued SFAS No. 151, "Inventory Cost," an amendment of ARB No. 43, Chapter 4, which is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The amendments made by SFAS 151 will improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. We do not believe that the adoption of SFAS 151 will have a significant effect on our financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS No. 154"). SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections, and is effective for fiscal years beginning after December 15, 2005. Early adoption is permitted. SFAS No. 154 is not expected to have a material impact on our consolidated financial statements. 10 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. 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 and the Chief Financial Officers believe that, not withstanding the material weaknesses discussed below, 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 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. In February 2005, management was notified that Grant Thornton LLP had identified three material weaknesses in the Company's internal controls under the standards established by the Public Company Accounting Oversight Board. A material weakness is a control deficiency, or a combination of control deficiencies that results in a more than remote likelihood that a material misstatement will not be prevented or detected. Grant Thornton identified the following as material weaknesses: - lack of documentation of policies and controls; - concentration of duties among few accounting staff members; - inadequate security within software applications. The Company is developing a plan of action to remediate the cited material weaknesses. 11 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On July 19, 2005, the Company received a copy of a lawsuit filed in Genesee County circuit court (Case No. 05-081885-cz) captioned Richard R. Mansour v. Sports Resorts International, Inc. et al. The complaint seeks damages in excess of $25,000 and alleges various claims. The Company is evaluating the lawsuit and believes at this time that it is without merit. ITEM 6. EXHIBITS (a) Exhibits 10.1 Amendment to lease agreement between 620 Platt Road LLC and Rugged Liner, Inc. dated May 16, 2005 (Filed herewith) 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 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 8, 2005 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 2004 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 29, 2005. A summary of critical accounting policies is presented beginning on page 11 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 2005. 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 December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS 123(R)). It requires that the costs of employee share-based payments be measured at fair value on the awards grant date using an option-pricing model and recognized in the financial statements over the requisite service period. SFAS 123(R) supersedes Opinion 25, "Accounting for Stock Issued to Employees" and its related interpretations, and eliminates the alternative to use Opinion 25's intrinsic value method of accounting, which the Company is currently using. SFAS 123(R) allows for two alternative transition methods. The Company is currently determining which transition method it will adopt and is evaluating the impact SFAS 123(R) will have on its financial position, results of operations, EPS and cash flows when it is adopted. On March 29, 2005, the SEC issued Staff Accounting Bulletin ("SAB") No. 107, "Share Based Payments". This SAB expresses the views of the SEC staff regarding the relationship between SFAS No. 123(R), "Share-Based Payment" and certain SEC rules and regulations. In particular, the SAB provides guidance related to valuation methods, the classification of compensation expense, non-GAAP financial measures, the accounting for income tax effects of share-based payment arrangements, disclosures in Management's Discussion and Analysis A-8 subsequent to adoption of SFAS No. 123(R), and interpretations of other share-based payment arrangements. The Company will adopt SAB No. 107 in conjunction with its adoption of SFAS No. 123(R) in the first quarter of 2006. The Company does not expect the adoption of this SAB to have a material effect on its consolidated financial statements. In November 2004, the FASB issued SFAS No. 151, "Inventory Cost," an amendment of ARB No. 43, Chapter 4, which is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The amendments made by SFAS 151 will improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The Company does not believe that the adoption of SFAS 151 will have a significant effect on its financial statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS No. 154"). SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections, and is effective for fiscal years beginning after December 15, 2005. Early adoption is permitted. SFAS No. 154 is not expected to have a material impact on the Company's consolidated financial statements. 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 Chief Executive Officer and majority shareholder, of $5,200,000 was established. The note required monthly payments of $43,496, including interest at 8.0%, through February 2005, at which time the unpaid balance was due. The related party has failed to pay the remaining balance due on the due date in February 2005. The Company has sent a default letter demanding payment and is pursuing collection of this obligation. The note is secured by a subordinated mortgage and personal guarantee. The related party has continued to make interest and principal payments through May 31, 2005. In June of 2005 the related party made a partial principal payment of $1,600,000 towards the remaining balance. The Company has obtained an independent appraisal of the collateral which indicates a value of approximately $4,860,000. The Company is evaluating its options with regards to the collateral. The Company believes that it has adequate collateral to secure the remaining obligation. A-9 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, 2005 and December 31, 2004 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, or any modifications to existing credit arrangements to or on behalf of affiliated entities. Note 3 INVENTORIES Inventories are summarized as follows:

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

A-10 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. Note 6 OTHER ASSETS, LONG-TERM Other assets, long-term is summarized as follows:

The Company has incurred professional fees and made non-refundable deposits to purchase land in Mount Morris Township, Michigan in connection with a proposed plan to develop a sports and entertainment complex, during the six month periods ending June 30, 2005 and 2004. Since financing for development of the project is not in place, these amounts have been expensed. A-11 Note 7 LONG TERM DEBT Long-term obligations consist of the following:

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. At December 31, 2004, the Company has net operating loss carryforwards for federal income tax purposes of $2,808,226, the last of which expire in 2024 if not utilized. A-12 Note 10 LOSS PER SHARE Basic 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. Note 11 STOCK OPTIONS The Company has stock-based employee compensation plans, which are described more fully in Note 12 in the Company's 2004 Annual Report. The Company applies 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 proforma effect on net income (loss) and earnings (loss) per share if the Company applied the fair value recognition provisions of SFAS 123, is not presented since there were no unvested stock option awards during the periods presented. 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-13 Exhibit Index

SPORTS RESORTS INTERNATIONAL INC 10-Q