================================================================================ 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 September 30, 2002 [ ] 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 incorporation or organization) (I.R.S. employer 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 ------- ------ Number of shares of the registrant's Common Stock, $0.01 par value, outstanding as of November 1, 2002: 48,362,953 ================================================================================ 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 presented beginning on page 10 of our 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2002. There have been no material changes in our accounting policies during fiscal 2002 except for those changes described in "Cumulative Effect of Accounting Change for Goodwill" below. BACKGROUND/NAME CHANGES 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 In order to reflect the increasing prominence of the sports and leisure segment of our business, effective March 8, 2001 we began doing business under the assumed name of Sports Resorts International, Inc. On March 12, 2001, we changed our ticker symbol on the Nasdaq SmallCap Market from "COLO" to "SPRI". We received written consent from a majority of our shareholders and legally changed our name on April 16, 2001. We received approval from our Board of Directors and implemented name changes for two of our operating subsidiaries. We changed the name of our subsidiary, The Colonel's Truck Accessories, Inc., which operates in the truck accessories segment, to Rugged Liner, Inc. ("RL"). The name of our subsidiary, The Colonel's Brainerd International Raceway, Inc., which operates in the sports and entertainment segment, became Brainerd International Raceway & Resort, Inc. ("BIR"). All references to our subsidiaries in this document reflect the name changes as described above. 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 six 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. Ownership of Raceway 66 was transferred to us by Donald J. Williamson, our majority shareholder and affiliated entities in September of 2002. 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. Final approval is subject to review 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. 2 FOR 1 STOCK SPLIT. On July 9, 2001, our Board of Directors declared a 2 for 1 stock split payable to shareholders of record on August 9, 2001. In order to effectuate the stock split, the Company obtained the consent of the majority shareholders to amend the Company's articles of incorporation to increase the number of authorized shares of common stock from 35,000,000 to 70,000,000. The stock split was paid on September 6, 2001. All share and per share data in the condensed financial statements in Appendix A has been restated to reflect the split. LIQUIDITY AND CAPITAL RESOURCES Our consolidated current assets decreased from $4,908,000 at December 31, 2001 to $4,563,000 at September 30, 2002. This decrease is primarily related to a $331,000 increase in cash and a $226,000 increase in inventory, offset by reduction in Federal income taxes receivable of $914,000. Our consolidated current liabilities increased from $3,851,000 at December 31, 2001 to $3,970,000 at September 30, 2002. This increase primarily relates to a $638,000 increase in accounts payable offset by a decrease in the current portion of long-term debt of $466,000 and a decrease in accrued expenses of $235,000. 3 Cash increased by $331,000 from the year end 2001 to September 30, 2002 primarily due to $1,794,000 received in Federal income tax refunds as well as cash generated in other operating activities of $2,603,000, offset by capital expenditures of $2,952,000 and debt repayments of $982,000. Accounts receivable--trade increased by approximately $154,000 from $875,000 as of December 31, 2001 to $1,029,000 at September 30, 2002, due to increased sales activity. On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 was enacted which extended the carryback period for net operating losses from two years to five years. Based on this new legislation, we carried back net operating losses for which there was a valuation allowance. We received $1,794,000 in Federal income tax refunds in the third quarter of 2002. The tax benefit of the carryback and change in the valuation allowance was recorded in the first quarter of fiscal 2002 as SFAS No. 109, "Accounting for Income Taxes", requires the impact of new tax legislation to be recorded in the period in which the legislation is enacted. The balance of $914,000 at December 31, 2001 represents the amount due per our Federal income tax return as filed. Inventories increased by approximately $226,000 from $1,150,000 at December 31, 2001 to $1,376,000 at September 30, 2002 primarily due to increased production of bedliners to service higher sales volumes. Note receivable - related party at September 30, 2002 is comprised of a note, which is secured by a subordinated mortgage and personal guarantee from the majority shareholder and requires monthly principal and interest payments. The note is being paid in accordance with terms. Other assets -- current decreased $150,000, from $600,000 at December 31, 2001 to $450,000 at September 30, 2002. Net property, plant and equipment increased by approximately $1,400,000 from $9,798,000 at December 31, 2001 to $11,198,000 at September 30, 2002 due to fixed asset additions of $2,952,000 offset by depreciation for the period of $1,525,000. A convenience store and gas station adjacent to our BIR facility, equipment, molds, tooling and land improvements comprised additions during the period. LIABILITIES AND EQUITY Accounts payable increased by approximately $638,000 from $1,269,000 at December 31, 2001 to $1,907,000 at September 30, 2002 due to amounts owed for various capital improvements in progress at BIR as well as amounts owed in connection with an event held by BIR in the third quarter 2002. Accrued expenses decreased by $235,000 from $1,311, 000 at December 31, 2001 to $1,076,000 at September 30, 2002, primarily due to payments to settle outstanding legal claims that were provided for. During 2001 and the first six months of 2002, we paid certain expenses on behalf of affiliated entities controlled by Donald J. Williamson, our Chief Executive Officer and majority shareholder. These expenses are 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 4 which time the construction advances were offset. The total amount outstanding at September 30, 2002 and December 31, 2001 was $1,099,000 and $1,496,000 respectively, which is to be reimbursed to us by the affiliated entities. OUTSTANDING LOANS We entered into a term loan in August 1999 in the amount of $403,000. This loan is secured by a permanent grandstand addition and requires annual principal payments of $100,675, plus 9% interest, through 2003. We also have a term loan of $100,000, which is secured by property. The loan 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 per year through 2004. In 1995, we leased $2,689,000 of equipment under a lease agreement that includes an option to purchase the equipment for $1.00 upon expiration of the lease term. In 1996, we leased additional equipment in the amount of $3,744,000 structured in the same manner. The payment amounts under the lease represent principal payments, with interest at rates between 7.5 and 8.75 percent through October 2003. We believe that we will be able to satisfy our ongoing cash requirements for operating activities for the next twelve months and thereafter with available cash, cash flows from operations and the collection of advances and notes receivable outstanding from the 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 $6,693,000 in the three months ended September 30, 2002 compared to $6,037,000 in the same period of 2001. Revenues attributable to RL were $4,036,000 and $3,177,000 for the quarters ended September 30, 2002 and 2001, respectively. The $859,000 increase in RL's revenue was primarily attributable to the addition of new distributors. BIR's revenues were $2,657,000 and $2,860,000 for the quarters ended September 30, 2002 and 2001 respectively. Revenues were $15,600,000 and $13,531,000 for the nine month periods ending September 30, 2002 and 2001, respectively for the same reasons as above. Revenues for RL were $12,436,000 and $10,275,000 for the nine month periods ending September 30, 2002 and 2001, respectively, and BIR's revenues were $3,164,000 and $3,256,000 for the same periods. Cost of sales were $5,581,000 and $4,848,000 for the quarters ended September 30, 2002 and 2001 respectively or 83% and 80% as a percentage of revenue. Cost of sales attributable to RL were $2,917,000 and $2,633,000 for the quarters ended September 30, 2002 and 2001 respectively or 72% and 83% as a percentage of revenue. The decrease in RL cost of sales is primarily attributed to efficiencies experienced with higher production volumes as well as more favorable material costs. Gross profit for RL was 28% of sales for the third quarter of 2002 and 17% of sales for the third quarter of 2001. Cost of sales attributable to BIR were $2,664,000 and $2,215,000 for the quarters ended September 30, 2002 and 2001 respectively. The increase in BIR's cost of sales is primarily attributable to the increased amounts spent for maintenance, entertainment and promotion in an effort to increase revenues and attendance. Cost of sales for the nine month periods ended September 30, 2002 and 2001 were $12,029,000 and $10,800,000 respectively for the same reasons described above. Cost of sales attributable to RL were $8,270,000 and $7,945,000 for the nine month periods ended September 30, 2002 and 2001, 5 respectively or 67% and 77% as a percentage of revenues. Cost of sales attributable to BIR for the nine month periods ended September 30, 2002 and 2001 were $3,759,000 $2,855,000, respectively. Selling, general and administrative expenses were $1,152,000 and $1,535,000 for the quarters ended September 30, 2002 and 2001 respectively, or 17% and 25% as a percentage of revenues. Selling, general and administrative expenses attributed to RL were $869,000 and $1,164,000 for the quarters ended September 30, 2002 and 2001 respectively. Included in RL's selling, general and administrative expense for the third quarter of 2001 is goodwill amortization expense of $82,000 which was discontinued in fiscal 2002 with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142. See also "Cumulative Effect of Accounting Change for Goodwill" below. Selling, general and administrative expenses for BIR were $283,000 and $371,000 for the three month period ended September 30, 2002 and 2001 respectively. BIR's selling, general and administrative expenses included goodwill amortization of $15,000 in the third quarter of 2001. Selling, general and administrative expenses were $3,553,000 and $3,736,000 for the nine month periods ended September 30, 2002 and 2001, respectively or 23% and 28% as a percentage of revenues. Selling, general and administrative expenses attributed to RL were $2,912,000 and $3,069,000 for the nine month periods ended September 30, 2002 and 2001, respectively. Included in RL's selling, general and administrative expense for the first nine months of 2001 is goodwill amortization expense of $246,000 which was discontinued in fiscal 2002 with the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142. See also "Cumulative Effort of Accounting Change for Goodwill" below. Selling, general and administrative expenses for BIR were $641,000 and $667,000 for the nine month periods ended September 30, 2002 and 2001, respectively. BIR's selling, general and administrative expenses include goodwill amortization of $45,000 in the nine month period ended September 30, 2001. Interest expense in the third quarter of 2002 decreased by $17,000 from the third quarter of 2001 due to the reduction of outstanding debt. Interest expense in the nine month period ending September 30, 2002 decreased by $72,000 from the same period in 2001 for the same reason. Interest income was $106,000 and $109,000 for the quarters ended September 30, 2002 and 2001 respectively and $308,000 and $428,000 for the nine month periods ending September 30, 2002 and 2001 respectively. Changes in interest income are attributable to excess cash available for investment purposes and interest earned on note receivable-related party. Rental income was $64,000 and $33,000 for the quarters ended September 30, 2002 and 2001 respectively and $192,000 and $95,000 for the nine month periods ending September 30, 2002 and 2001 respectively. In January, February, April and July of 2002, we made non-refundable deposits totaling $205,000 and extended 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 September 30, 2002, these deposits have been expensed and are included in the land development costs. 6 CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR GOODWILL In June 2001, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS 142 requires goodwill to be subject to annual impairment testing instead of amortization. We adopted this standard effective January 1, 2002. If the carrying value of goodwill or an intangible exceeds its fair value, an impairment loss is recognized. We engaged an independent appraisal company who used a discounted cash flow model to determine the fair value of our businesses for purposes of testing goodwill for impairment. The discount rate used was based on a risk-adjusted weighted average cost of capital for each business. The effect of adopting this new standard resulted in a cumulative effect of an accounting change of approximately $1,131,000 or $.02 per basic and diluted share for an impairment loss on goodwill. $1,069,000 of the impairment loss was attributable to our truck accessories business and $62,000 was associated with our racetrack operations. In addition, the adoption eliminated annual amortization expense of approximately $387,000 or $.01 per share. See Note 1 to the condensed financial statements included in Appendix A. RISK FACTORS 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. OWNERSHIP OF OUR COMMON STOCK IS CONCENTRATED IN TWO SHAREHOLDERS, WHO ARE ABLE TO EXERCISE CONTROL AND MAKE DECISIONS THAT MAY NOT BE IN THE BEST INTEREST OF ALL OF OUR SHAREHOLDERS Donald and Patsy Williamson own approximately 98% 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. WE NEED TO MAINTAIN AND ENHANCE OUR WORKING RELATIONSHIP WITH THE NHRA In order to be successful, our raceway operations 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 termination of our sanction agreement 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, 7 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. 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. 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 or abandon our plans to develop the complex. 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. 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 only 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 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. While product quality is an important factor, price is also very important to our customers. We attempt to manufacture a high quality product which is cost competitive. We have faced and will continue to face additional competition from new entrants into our markets. We cannot be certain that we will be able to compete successfully with existing or new competitors. 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 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 petroleum 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 petroleum prices increase, we may be unable to pass the increased raw material 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. 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 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 STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". We adopted this standard effective January 1, 2002. See "Cumulative Effect of Accounting Change for Goodwill" above for a discussion of the effect of adopting SFAS 142. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The new standard requires one model of accounting for long-lived assets to be held and used and disposed of, and broadens the definition of discontinued operations to include a component of a segment. SFAS 144 is effective for fiscal years beginning after December 15, 2001. Management does not believe that the adoption of SFAS 144 will have a material effect on the Company's financial position or results of operations. SEGMENT REPORTING For a discussion of our business segments, see Note 11 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 In response to recent legislation and additional requirements, we have reviewed our internal controls structure and disclosure control and procedures. As a result of such review, enhancements to formalize and document procedures will be implemented prior to the end of 2002. As required, the effectiveness of our internal control structure and disclosure controls and procedures will be evaluated quarterly. Based on their evaluation as of a date within 90 days of filing this Form 10-Q, Gregory T. Strzynski and Donald J. Williamson, our Chief Financial Officer and Chief Executive Officer, respectively, have concluded our disclosure controls and procedures (as defined in rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective to ensure that material information relating to the Company would be made known to them by others within the Company, particularly during the period this Form 10-Q was being prepared. No significant changes were made to our internal controls or in the other factors that could significantly affect these controls subsequent to the date of their evaluation. 10 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 Description 99.1 Certification of Chief Executive Officer 99.2 Certification of Chief Financial Officer (b) Reports on Form 8-K We filed the following reports on Form 8-K during the quarter ended September 30, 2002: Form 8-K Filing Date Description September 6, 2002 Press release dated September 6, 2002 11 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: November 13, 2002 By: /s/ Gregory T. Strzynski ---------------------------------- Gregory T. Strzynski Chief Financial Officer (Duly Authorized Officer and Principal Accounting and Financial Officer of the Registrant) 12 I, Donald J. Williamson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sports Resorts International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a). designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b). evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c). presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date: 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function); a). all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b). any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Donald J. Williamson -------------------------- Donald J. Williamson Chairman of the Board and Chief Executive Officer I, Gregory T. Strzynski, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sports Resorts International, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a). designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b). evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c). presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date: 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function); a). all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b). any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Gregory T. Strzynski ------------------------- Gregory T. Strzynski Chief Financial Officer APPENDIX A A-1 SPORTS RESORTS INTERNATIONAL, INC. CONDENSED BALANCE SHEETS September 30, December 31, 2002 2001 (unaudited) (audited) ----------- --------- ASSETS CURRENT ASSETS: Cash $ 1,563,023 $ 1,232,183 Accounts receivable: Trade (net of allowance for doubtful accounts and cash discounts of $668,000 and $598,000 at September 30, 2002 and December 31, 2001 respectively) 1,029,034 874,932 Note receivable -- related party (Note 2) 145,309 136,874 Federal income taxes receivable (Note 7) -- 913,621 Inventories (Note 3) 1,376,293 1,150,173 Other 449,629 600,252 ------------ -------------- Total current assets 4,563,288 4,908,035 PROPERTY, PLANT AND EQUIPMENT -- Net 11,197,961 9,798,418 (Notes 4 and 5) OTHER ASSETS: Note receivable -- related party (Note 2) 4,628,366 4,738,427 Goodwill (Net of accumulated amortization of $1,819,000 at December 31, 2001) (Note 1) -- 1,130,911 Other 1,581,093 1,614,450 ------------ -------------- Total other assets 6,209,459 7,483,788 ------------ -------------- TOTAL ASSETS $ 21,970,708 $ 22,190,241 ============ ============== A-2 SPORTS RESORTS INTERNATIONAL, INC. CONDENSED BALANCE SHEETS September 30, December 31, 2002 2001 (unaudited) (audited) ----------- --------- LIABILITIES & SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt (Note 5) $ 805,049 $ 1,270,783 Accounts payable 1,906,969 1,269,312 Accrued expenses (Note 6) 1,075,988 1,311,091 Federal income taxes payable (Note 7) 181,958 -- ------------- ------------- Total current liabilities 3,969,964 3,851,186 LONG-TERM DEBT (Note 5) 91,381 608,002 LONG-TERM PORTION OF DEFERRED COMPENSATION -- 10,400 SHAREHOLDERS' EQUITY Common stock: 70,000,000 shares authorized at $0.01 par value, 48,362,953 shares issued and outstanding at September 30, 2002 and December 31, 2001 483,629 483,629 Additional paid-in-capital 5,656,605 5,656,605 Net advances to related parties (Note 2) (1,099,407) (1,495,909) Retained earnings 12,868,536 13,076,328 ------------- ------------- Total shareholders' equity 17,909,363 17,720,653 ------------- ------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 21,970,708 $ 22,190,241 ============= ============= A-3 SPORTS RESORTS INTERNATIONAL, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Nine Months Ending Three Months Ending September 30 September 30 ------------------------------- --------------------------------- 2002 2001 2002 2001 -------------- -------------- ------------- ------------- SALES $ 15,600,329 $ 13,530,893 $ 6,693,149 $ 6,036,509 COST OF SALES 12,028,967 10,800,090 5,580,591 4,848,499 ----------- ------------ ----------- ------------ GROSS PROFIT 3,571,362 2,730,803 1,112,558 1,188,010 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,552,854 3,735,896 1,152,314 1,535,338 NET GAIN (LOSS) ON DISPOSAL OF ASSETS 41,550 12, 435 46,000 (292) ----------- ------------ ----------- ------------ INCOME (LOSS) FROM OPERATIONS 60,058 (992,658) 6,244 (347,620) OTHER INCOME (EXPENSE): Interest expense (91,088) (162,773) (23,743) (40,773) Interest income 308,691 427,769 105,701 109,150 Rental income 192,199 94,507 64,415 33,368 Land development costs (Note 4) (250,500) -- (130,500) -- Other 4,880 14,071 2,765 8,212 ----------- ------------ ----------- ------------ Other income, net 164,182 373,574 18,638 109,957 INCOME (LOSS) BEFORE INCOME TAX BENEFIT 224,240 (619,084) 24,882 (237,663) INCOME TAX BENEFIT (EXPENSE) (Note 7) 698,879 (149,310) -- (149,310) ----------- ------------ ----------- ------------ INCOME (LOSS) BEFORE ACCOUNTING CHANGE 923,119 (768,394) 24,882 (386,973) CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR GOODWILL (NOTE 1) (1,130,911) -- -- -- ----------- ------------ ----------- ------------ NET (LOSS) INCOME $ (207,792) $ (768,394) $ 24,882 $ (386,973) =========== ============ =========== ============ Continued A-4 SPORTS RESORTS INTERNATIONAL, INC. CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Nine Months Ending Three Months ending September 30 September 30 --------------------------- -------------------------- 2002 2001 2002 2001 ----------- ---------- ----------- --------- BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (Note 8) Income (loss) before accounting change $ 0.02 $ (0.02) $ 0.00 $ (0.01) Cumulative effect of change in accounting principle (0.02) -- -- -- ---------- ---------- ---------- ---------- Net Loss $ (0.00) $ (0.02) $ 0.00 $ (0.01) ========== ========== ========== ========== WEIGHTED AVERAGE COMMON SHARES Basic 48,362,953 48,355,610 48,362,953 48,355,610 Effect of dilutive securities: Common share equivalents, common shares issuable upon exercise of outstanding stock options 80,230 -- 54,244 -- ---------- ---------- ---------- ---------- Diluted 48,443,183 48,355,610 48,417,197 48,355,610 ========== ========== ========== ========== Concluded A-5 SPORTS RESORTS INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ending September 30 --------------------------- 2002 2001 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (207,792) $ (768,394) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,525,057 1,786,107 Cumulative effect of accounting change (Note 1) 1,130,911 -- Gain on disposal of property and equipment (41,550) (12,435) Changes in assets and liabilities that (used) provided cash: Accounts receivable (154,102) (747,679) Inventories (226,120) 512,678 Other 173,580 229,892 Accounts payable 637,657 (274,754) Accrued expenses (235,103) (148,170) Income taxes receivable/payable 1,095,579 149,310 ----------- ----------- Net cash provided by operating activities 3,698,117 726,555 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (2,952,426) (818,198) Proceeds from disposal of property and equipment 69,376 17,491 Payments received on notes receivable-related party 101,626 113,939 ----------- ----------- Net cash used in investing activities (2,781,424) (686,768) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (150,675) (160,286) Principal payments on obligations under capital leases (831,680) (768,138) Net advances to related parties 396,502 (216,558) Disgorgement of trading profits (Note 9) -- 225,052 ----------- ----------- Net cash used in financing activities (585,853) (919,930) ----------- ----------- INCREASE (DECREASE) IN CASH 330,840 (880,143) ----------- ----------- CASH, BEGINNING OF PERIOD 1,232,183 2,566,036 ----------- ----------- CASH, END OF PERIOD $ 1,563,023 $ 1,685,893 =========== =========== Continued A-6 SPORTS RESORTS INTERNATIONAL, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ending September 30 --------------------------- 2002 2001 ---------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 150,368 $ 177,204 ========== ========== Cash paid during the period for taxes $ -- $ -- ========== ========== Concluded A-7 SPORTS RESORTS INTERNATIONAL, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Note 1 BASIS OF PRESENTATION Effective March 8, 2001 The Colonel's International, Inc. began doing business under the assumed name of Sports Resorts International, Inc. The Company received the written consent of its majority shareholders to amend its articles of incorporation and legally changed its name on April 16, 2001. The Company changed its name to reflect the increasing prominence of the sports and leisure segment of its business. The Company is a Michigan corporation and a holding company with three active wholly owned subsidiaries. The Company received approval from its Board of Directors and implemented name changes for two of its operating subsidiaries. The Company has changed the name of its subsidiary, The Colonel's Truck Accessories, Inc., which operates in the truck accessories segment, to Rugged Liner, Inc. ("RL"). The name of the Company's subsidiary, The Colonel's Brainerd International Raceway, Inc., which operates in the sports and entertainment segment, became Brainerd International Raceway & Resort, Inc. ("BIR"). All references to the Company's subsidiaries reflect the name changes as described above. These financial statements should be read in conjunction with the audited financial statements and notes to consolidated financial statements included in the Company's 2001 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 29, 2002. 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 2002 except for those changes described in "New Accounting Pronouncements" below. 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. All share and per share data has been restated to conform with the 2 for 1 stock split paid on September 6, 2001, as described in Note 8. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standard Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". SFAS 142 requires goodwill to be subject to annual impairment testing instead of amortization. The Company adopted this standard effective January 1, 2002. If the carrying value of goodwill or an intangible exceeds its fair value, an impairment loss is recognized. The Company engaged an independent appraisal company who used a discounted cash flow model to determine the fair value of the Company's business segments for purposes of testing goodwill for impairment. The discount rate used was based on a risk-adjusted weighted average cost of capital for each business segment. The effect of adopting this new standard resulted in a cumulative effect of an accounting change of approximately $1,131,000 or $.02 A-8 per basic and diluted share for an impairment loss on goodwill. $1,069,000 of the impairment loss was attributable to RL and $62,000 was associated with BIR. In addition, the adoption eliminates annual amortization expense of approximately $387,000 or $.01 per share. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The new standard requires one model of accounting for long-lived assets to be held and used and disposed of, and broadens the definition of discontinued operations to include a component of a segment. SFAS 144 is effective for fiscal years beginning after December 15, 2001. Management does not believe the adoption of SFAS 144 will have a material effect on the Company's financial position or results of operations. RECLASSIFICATIONS -- Certain 2001 amounts have been reclassified to conform to the 2002 presentation. 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 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 secured by a subordinated mortgage and personal guarantee. Net Advances to Related Parties During 2001 and the first six months of 2002, the Company paid certain expenses on behalf of affiliated entities controlled by Donald J. Williamson. These expenses are 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 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. The total amount outstanding at September 30, 2002 and December 31, 2001 was $1,099,000 and $1,496,000 respectively, 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. Note 3 INVENTORIES Inventories are summarized as follows: September 30, December 31, 2002 2001 (unaudited) (audited) ----------- ----------- Finished products $ 980,808 $ 789,674 Raw materials 395,485 360,499 ----------- ----------- Total inventories $ 1,376,293 $ 1,150,173 =========== =========== A-9 Note 4 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized by major classification as follows: September 30, December 31, 2002 2001 (unaudited) (audited) ------------- ------------ Land and improvements $ 3,506,878 $ 2,752,540 Track 1,910,620 1,903,120 Buildings 3,358,648 1,824,484 Condominium units 466,000 466,000 Leasehold improvements 312,569 300,080 Bleachers & fencing 1,699,541 1,702,106 Equipment (including equipment under capital lease) 6,923,451 6,685,617 Transportation equipment 1,439,650 1,267,103 Furniture & fixtures 728,764 716,764 Tooling 3,478,092 3,354,852 ------------- ------------ Total 23,824,213 20,972,666 Less accumulated depreciation (12,626,252) (11,174,248) ------------- ------------ Net property, plant and equipment $ 11,197,961 $ 9,798,418 ============= ============ In January, February, April and July of 2002, the Company made non-refundable deposits totaling $205,000 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 September 30, 2002, these deposits have been expensed and are included in land development costs. A-10 Note 5 LONG TERM DEBT Long-term obligations consist of the following: September 30, December 31, 2002 2001 (unaudited) (audited) ----------- ---------- Term loan, annual installments of $100,675 plus interest at 9% through August 2003; secured by related assets $ 100,675 $ 201,350 Mortgage payable to a bank, interest at the bank's prime rate plus 2%, with a floor of 8% (effective rate of 8% at September 30, 2002 and December 31, 2001) annual principal payments of $50,000 plus interest due quarterly, through September 2004; secured by underlying property 100,000 150,000 Capital lease obligations through October 2003; monthly installments include interest at rates between 7.5% and 8.75%, collateralized by the related machinery and equipment (Note 4) 695,755 1,527,435 ----------- ---------- Total 896,430 1,878,785 Less current portion (805,049) (1,270,783) ----------- ---------- Long-term $ 91,381 $ 608,002 =========== ========== Note 6 ACCRUED EXPENSES Accrued expenses consist of the following: September 30, December 31, 2002 2001 (unaudited) (audited) ------------ ----------- Accrued legal settlements $ 325,000 $ 725,000 Accrued interest 3,088 62,368 Other 747,900 523,723 ------------ ----------- Total $ 1,075,988 $ 1,311,091 ============ =========== Note 7 INCOME TAXES On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 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. The Company received $1,794,000 in Federal income tax refunds in the third quarter of 2002. The tax benefit of the carryback and change in the valuation allowance was recorded in the first quarter of fiscal 2002 as SFAS No. 109, "Accounting for Income Taxes", requires the impact of new tax legislation to be recorded in the period in which the legislation is enacted. 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 A-11 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. Note 8 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. On July 9, 2001, the Company's Board of Directors declared a 2 for 1 stock split payable to shareholders of record on August 9, 2001. In order to effectuate the stock split, the Company obtained the consent of the majority shareholders to amend the Company's articles of incorporation to increase the number of authorized shares of common stock from 35,000,000 to 70,000,000. The stock split was paid on September 6, 2001. All share and per share data in these condensed financial statements has been restated to reflect the stock split. Note 9 DISGORGEMENT OF TRADING PROFITS During the quarter ending June 30, 2001, the Company became aware that one of its officers had engaged in trading in the stock of the Company that was not in compliance with Section 16 of the Securities Exchange Act of 1934. As a result, the Company sought and received the disgorgement of profits received as result of his improper trading. During the quarter ending June 30, 2001, the Company received $208,126, which was credited to paid in capital. In July 2001, the Company received $16,926, satisfying this matter in its entirety. Note 10 CONTINGENCIES On December 17, 1998, the Company sold substantially all of the assets used in its bumper production operations. The sale consisted of substantially all inventory, machinery and equipment, accounts receivable and prepaid items. The purchaser also assumed certain liabilities such as accounts payable and purchase commitments. In June 2000, the Company received notice of an indemnity claim by the purchaser. In February 2002 the Company paid $114,000 to settle this matter. In May 2000, the landlord of a facility formerly occupied by the Company filed suit in the Superior Court for Riverside County, California against the Company, claiming that the Company breached its lease by failing to notify the landlord of its intentions to sublease the facility. In May of 2002, the Company paid $300,000 to settle this matter. Additionally, the Company is responsible for rent that is due through 2004 and certain repairs and costs of reletting. As a result of the crash of an airplane owned by the Company in August 2000, claims have been made against the Company. Three claims have been successfully settled and have been covered under the Company's insurance policy. A fourth claim, of an undisclosed amount, has been made by the estate of a crewmember and is in litigation. In the opinion of Company management and outside legal counsel, who have conducted a thorough review of case settlements and verdicts in the State of Michigan, it is expected that all claims concerning the crash cumulatively should fall within the $25 million per occurrence coverage limits under the Company's insurance policy. However, there can be no assurance that the Company's insurance policy will be adequate to satisfy all the claims concerning the crash. A-12 Note 11 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: Nine Months Ending Three Months Ending September 30 September 30, (unaudited) (unaudited) ------------------------------ -------------------------------- 2002 2001 2002 2001 Sales: Truck Accessories $ 12,435,896 $ 10,275,072 $ 4,036,536 $ 3,176,784 Raceway 3,164,433 3,255,821 2,656,613 2,859,725 ------------ ------------ ------------ ------------ Total $ 15,600,329 $ 13,530,893 $ 6,693,149 $ 6,036,509 ============ ============ ============ ============ Income (Loss)from Operations Truck Accessories $ 1,295,660 $ (722,709) $ 296,608 $ (622,113) Raceway (1,235,602) (269,949) (290,364) 274,493 ------------ ------------ ------------ ------------ Total $ 60,058 $ (992,658) $ 6,244 $ (347,620) ============ ============ ============ ============ A-13 EXHIBIT INDEX (a) Exhibits Description 99.1 Certification of Chief Executive Officer 99.2 Certification of Chief Financial Officer