**U.S.SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM10-QSB**

 

| ý                                                                                                                                                                                                                                                                                   |   | **Quarterly report under  Section 13 or 15 9(d) of the Securities Exchange Act of 1934A** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|
| **For the quarterly period ended March 31, 2004**                                                                                                                                                                                                                                   |
| o                                                                                                                                                                                                                                                                                        |   | **Transition report under  Section 13 or 15(d) of the Securities Exchange Act**           |
| **For the transition period from                        to                    ** |

 

**Commission file number 000-49738**

 

**CarrollShelby International Inc.**

(ExactName of Small Business Issuer as Specified in Its Charter)

 

**Nevada**

(Stateor Other Jurisdiction of Incorporation or Organization)

**86-1012155**

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

**11150 W. Olympic Boulevard, Suite 1050 Los Angeles, CA 90064**

(Addressof Principal Executive Offices)

**(310) 914-1843**

(Insurer’sTelephone Number, Including Area Code)

 

 

(FormerName, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

Check whether the issuer:(1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the restraint was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes  x No

 

**APPLICATION ONLY TO ISSUERS INVOLVED INBANKRUPTCY PROCEEDINGS DURING THEPRECEDING FIVE YEARS**

 

Check whether the registrantfiled all documents and reports required to be filed by Section 12, 13 or15 (d) of the Exchange Act after the distribution of securities under aplan confirmed by a court.

 

Yes   o No  ý

 

**APPLICATION ONLY TO CORPORATE ISSUERS**

 

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date: 13,038,222 shares of common stock, $0.001 per value pershare, as of April 30, 2004. Transition Small Business Disclosure Format(check one):

 

Yes  ý No o

 

 

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**Part I. FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**CARROLL SHELBY INTERNATIONAL INC.**

**CONTENTS**

 
| **FINANCIAL  STATEMENTS**                       |   |
|-------------------------------------------------|--------|
| Consolidated  Balance Sheets                    | 3      |
| Consolidated  Statements of Operation           | 4      |
| Consolidated  Statements of Cash Flow           | 5      |
| Notes  to the Consolidated Financial Statements | 6-14   |

 

2

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CARROLL SHELBY INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

 
|                                                                                                                                                                                      |   | **March 31,  2004** |      | **December 31,  2003** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|-----------------------------|--------|
|                                                                                                                                                                                      |   | **(unaudited)**          |      |                        |   |
| **ASSETS**                                                                                                                                                                                |   |                     |      |                        |   |
|                                                                                                                                                                                      |   |                     |      |                        |   |
| **CURRENT ASSETS:**                                                                                                                                                                       |   |                     |      |                        |   |
| Cash and cash equivalents                                                                                                                                                                 |   | $                        | 883,875   |                        | $      | 2,055,997 |   |
| Accounts receivable                                                                                                                                                                       |   | 72,638                   |      | 142,459                     |   |
| Inventories                                                                                                                                                                               |   | 3,352,097                |      | 2,357,439                   |   |
| Note receivable, current portion                                                                                                                                                          |   | 24,034                   |      | —                      |   |
| Prepaids                                                                                                                                                                                  |   | 419,083                  |      | 285,456                     |   |
| Other current assets                                                                                                                                                                      |   | 18,372                   |      | 17,468                      |   |
| Total current assets                                                                                                                                                                      |   | 4,770,099                |      | 4,858,819                   |   |
| Property and equipment, net                                                                                                                                                               |   | 379,513                  |      | 234,568                     |   |
| Note receivable, long term portion                                                                                                                                                        |   | 115,966                  |      | —                      |   |
| Other assets                                                                                                                                                                              |   | 58,776                   |      | 33,136                      |   |
| Total assets                                                                                                                                                                              |   | $                        | 5,324,354 |                        | $      | 5,126,523 |   |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                                |   |                     |      |                        |   |
|                                                                                                                                                                                      |   |                     |      |                        |   |
| CURRENT LIABILITIES:                                                                                                                                                                      |   |                     |      |                        |   |
| Accounts payable                                                                                                                                                                          |   | $                        | 548,425   |                        | $      | 557,886 |   |
| Accrued expenses                                                                                                                                                                          |   | 472,766                  |      | 245,277                     |   |
| Insurance payable                                                                                                                                                                         |   | 39,357                   |      | 104,534                     |   |
| Taxes payable                                                                                                                                                                             |   | 2,400                    |      | 800                         |   |
| Customer deposits                                                                                                                                                                         |   | 2,086,222                |      | 1,265,145                   |   |
| Current portion of long term debt                                                                                                                                                         |   | 338,361                  |      | 312,015                     |   |
| Current portion of capital leases                                                                                                                                                         |   | 6,036                    |      | 2,464                       |   |
| Advances from shareholder                                                                                                                                                                 |   | 136,434                  |      | 136,434                     |   |
| Notes payable to shareholder                                                                                                                                                              |   | 1,500,000                |      | 2,980,000                   |   |
| Convertible note payable to shareholder  affiliate, net of unamortized beneficial conversion feature of $81,250 as of  December 31, 2003                                             |   | 500,000                  |      | 418,750                     |   |
| Total current liabilities                                                                                                                                                                 |   | 5,630,001                |      | 6,023,305                   |   |
| LONG TERM LIABILITIES                                                                                                                                                                     |   |                     |      |                        |   |
| Long term debt                                                                                                                                                                            |   | 903,598                  |      | 786,645                     |   |
| Capital lease liability                                                                                                                                                                   |   | 11,168                   |      | 5,292                       |   |
|                                                                                                                                                                                      |   | 914,766                  |      | 791,937                     |   |
| COMMITMENTS (Note 8)                                                                                                                                                                      |   |                     |      |                        |   |
|                                                                                                                                                                                      |   |                     |      |                        |   |
| STOCKHOLDERS’ DEFICIT                                                                                                                                                                |   |                     |      |                        |   |
| Common stock-50,000,000 shares authorized,  14,065,331 issued and outstanding; $.001 par value as of December 31,  2003; 14,740,497 issued and outstanding as of March 31, 2004 |   | 14,741                   |      | 14,066                      |   |
| Additonal paid in capital                                                                                                                                                                 |   | 2,323,195                |      | 228,433                     |   |
| Accumulated deficit                                                                                                                                                                       |   | (3,558,349               | )         | (1,931,218                  | )      |
| Total stockholders’ deficit                                                                                                                                                          |   | (1,220,413               | )         | (1,688,719                  | )      |
| Total liabilities and stockholders’ deficit                                                                                                                                          |   | $                        | 5,324,354 |                        | $      | 5,126,523 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

3

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CARROLL SHELBY INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31,2004 and 2003 (unaudited)

 
|                                                                       |   | **2004**        |       | **2003**        |   |
|----------------------------------------------------------------------------|--------|-----------------|------------|-----------------|--------|
|                                                                       |   | **(unaudited)** |       | **(unaudited)** |   |
| Revenues:                                                                  |   |            |       |            |   |
| Royalty income                                                             |   | $               | 74,558     |            | $      | 99,713 |   |
| Automobile and automobile products                                         |   | 730,983         |       | —          |   |
| Equipment rental                                                           |   | —          |       | —          |   |
| Vintage automobile sales, net                                              |   | —          |       | 357,696         |   |
| Total revenues                                                             |   | 805,541         |       | 457,409         |   |
|                                                                       |   |            |       |            |   |
| Cost of good sold                                                          |   | 608,378         |       | —          |   |
| Gross profit                                                               |   | 197,163         |       | 457,409         |   |
|                                                                       |   |            |       |            |   |
| Expenses:                                                                  |   |            |       |            |   |
| Selling and marketing expenses                                             |   | 210,502         |       | 76,274          |   |
| General and administrative expenses                                        |   | 766,631         |       | 111,725         |   |
| Total expenses                                                             |   | 977,133         |       | 187,999         |   |
|                                                                       |   |            |       |            |   |
| Income (loss) from operations                                              |   | (779,970        | )          | 269,410         |   |
|                                                                       |   |            |       |            |   |
| Other income (expense):                                                    |   |            |       |            |   |
| Sublease rental income                                                     |   | 6,000           |       | 6,000           |   |
| Interest income (expense)                                                  |   | (952,817        | )          | (328            | )      |
| Gain on sale of fixed asset                                                |   | 101,256         |       | —          |   |
| Total other income (expense)                                               |   | (845,561        | )          | 5,672           |   |
|                                                                       |   |            |       |            |   |
| Net income (loss) before provision for  income taxes                       |   | (1,625,531      | )          | 275,082         |   |
|                                                                       |   |            |       |            |   |
| Provision for income taxes                                                 |   | 1,600           |       | 54,000          |   |
|                                                                       |   |            |       |            |   |
| Net income (loss)                                                          |   | $               | (1,627,131 | )               | $      | 221,082 |   |
|                                                                       |   |            |       |            |   |
| Basic and diluted net income (loss) per  share                             |   | $               | (0.11      | )               | $      | 0.02 |   |
|                                                                       |   |            |       |            |   |
| Weighted average number of common shares  outstanding - Basic and dilutive |   | 14,371,816      |       | 9,087,866       |   |

 

Theaccompanying notes are an integral part of these consolidated financial statements.

 

4

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CARROLL SHELBY INTERNATIONAL, INC. 

STATEMENTS OFCASH FLOWS 

For the three months ended March 31, 2004 and 2003

 
|                                                                                                    |   | **2004**   |       | **2003** |   |
|---------------------------------------------------------------------------------------------------------|--------|------------|------------|----------|--------|
| Cash Flow from operating activities:                                                                    |   |       |       |     |   |
| Net income (loss)                                                                                       |   | $          | (1,627,131 | )        | $      | 221,082 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) net operating activities: |   |       |       |     |   |
| Depreciation and amortization                                                                           |   | 33,584     |       | 35,754   |   |
| Gain on sale of fixed asset                                                                             |   | (101,256   | )          | —   |   |
| Issuance of options for interest expense                                                                |   | 744,000    |       | —   |   |
| Beneficial conversion feature on note  payable to shareholder affiliate                                 |   | 81,250     |       | —   |   |
| Decrease in receivables                                                                                 |   | 69,821     |       | 69,070   |   |
| Increase in inventories                                                                                 |   | (994,660   | )          | —   |   |
| Increase in prepaids                                                                                    |   | (133,627   | )          | —   |   |
| Increase in other current assets                                                                        |   | (1,541     | )          | (31      | )      |
| Increase in payables and accrued expenses                                                               |   | 154,451    |       | 77,613   |   |
| Increase in customer deposits                                                                           |   | 821,077    |       | —   |   |
|                                                                                                    |   |       |       |     |   |
| Net cash flows provided by (used in)  operating activities                                              |   | (954,032   | )          | 403,488  |   |
|                                                                                                    |   |       |       |     |   |
| Cash flows from investing activities:                                                                   |   |       |       |     |   |
| Purchase of property and equipment                                                                      |   | (257,435   | )          | (10,386  | )      |
| Proceeds from the sale of fixed assets                                                                  |   | 25,000     |       | —   |   |
| Sale of prototype, net                                                                                  |   | 25,000     |       | —   |   |
| Sale of fixed asset, net                                                                                |   | —     |       | 17,304   |   |
| Investment in other assets                                                                              |   | (25,000    | )          | —   |   |
| Net cash flows provided by (used in)  investing activities                                              |   | (232,435   | )          | 6,918    |   |
|                                                                                                    |   |       |       |     |   |
| Cash flow from financing activities:                                                                    |   |       |       |     |   |
| Repayment of notes payable                                                                              |   | —     |       | (37,399  | )      |
| Net advances from shareholder                                                                           |   | —     |       | (104,000 | )      |
| Increase in due from related parties                                                                    |   | —     |       | (82      | )      |
| Repayament of notes payable to shareholder                                                              |   | (1,480,000 | )          | —   |   |
| Notes payable to shareholder affiliate                                                                  |   | —     |       | —   |   |
| Additions to long term debt                                                                             |   | 172,801    |       | —   |   |
| Repayment of long term debt                                                                             |   | (29,503    | )          | —   |   |
| Repayments of capital lease liability                                                                   |   | (391       | )          | —   |   |
| Funds received from private placement, net  of fees                                                     |   | 1,351,437  |       | —   |   |
| Net cash flows provided by (used in)  financing activities                                              |   | 14,344     |       | (141,481 | )      |
| Net increase (decrease) in cash and  equivalents                                                        |   | (1,172,123 | )          | 268,925  |   |
| Cash and cash equivalents, at beginning of  period                                                      |   | 2,055,998  |       | 22,929   |   |
| Cash and cash equivalents, at end of period                                                             |   | $          | 883,875    |     | $      | 291,854 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

5

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**Carroll Shelby International, Inc.**

**Notes toConsolidated Financial Statements**

**March 31, 2004**

**(Unaudited)**

 

**1.****             *****BusinessDescription***

 

Carroll ShelbyInternational, Inc. (“CSI” or “the Company”) is the exclusive holder ofautomotive manufacturer and entrepreneur Carroll Shelby’s trademarks, vehicledesign rights and other intellectual properties, which include some of theworld’s most famous muscle cars and high performance vehicles, including thecar that brought home to the U.S. its first and only FIA World ManufacturersChampionship in 1965, the famous Shelby Cobra Daytona Coupe. Carroll ShelbyLicensing, Inc. (“CSL”) (a Texas corporation formed on April 18,1988) holds trade name and trademark rights for Shelby branded apparel, accessoriesand collectibles.

 

In addition, the Companymanufactures component cars (sometimes referred to as “kit” cars as theygenerally do not have engines or transmissions installed at time of delivery tothe customer) under the brand name “Shelby Cobra” at its wholly ownedsubsidiary Shelby Automobiles, Inc. (“Autos”) (a Nevada corporation formedin May 2003) in Las Vegas, Nevada. It began manufacturing a new series of theCobraTM automobile to replicate the original CobraTM last produced in 1967 and ofwhich only approximately 1,000 units were ever produced. The Company’s CobraTMis substantially built to its original specifications for enthusiasts desiringa genuine replica of the first and only American produced sports car to claimthe aforementioned championship. The Company believes a significant enthusiastmarket exists in the United States for this historic automobile.

 

CSI was originally organizedunder the laws of the State of Nevada on December 4, 2000 (date ofinception) as Ginseng Forest, Inc. (“GFI”) GFI had no operations throughJune 23, 2003 and was considered a development stage company in accordancewith Statement of Financial Accounting Standards No. 7. On June 23,2003, GFI acquired all of the outstanding common stock of CSL and Autos, arecently formed entity, for 9,087,866 shares of GFI common stock and a$2,000,000 secured promissory note to Carroll Shelby. The Company recorded theoffset of this note payable as a distribution. The exchange of stockconstituted a reverse merger with CSL as the acquiring company. GFI changed itsname to Carroll Shelby International, Inc. in September 2003.

 

In the third quarter of 2003Autos began the production of Cobra automobiles due to the financial failure ofa licensee Shelby American Inc. (“SAI”) who was engaged in manufacturingthese component cars. SAI lost its license to produce Shelby licensedautomobiles due to its failure to make its required royalty payments to CSL.Autos finished the production of the ordered Shelby Cobras in order to protectthe Company’s brand name and maintain its customer loyalty. The Companybelieves these properties are the foundation of its future development.

 

On December 30, 2003,the U.S. Bankruptcy Court approved the purchase of certain assets of VentureMolds and Engineering Corporation (“Venture”) by the Company. Venture is theparent Company of SAI. The Company purchased these assets for $1,200,000through a promissory note secured by the assets sold. Payments are made in40 monthly installments of $30,000. The Company imputed the interest onthe note at 5.5% and recorded the principal of the note originally at$1,098,660 as of December 31, 2003 (See Note 4).  As of March 31, 2004 the Note balanceis $1,069,157.  The assets were soldfree and clear of any other liens, claims, and encumbrances.

 

The acquired assets includeleasehold improvements, equipment and furniture primarily used in themanufacture of Shelby Series I automobiles, several autos in variousstages of completion and parts used in manufacturing.

 

Carroll Shelby, director andprincipal shareholder of CSI, is a 25% shareholder in SAI.

 

6

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In December 2003, theCompany formed a wholly owned subsidiary, Shelby Automotive South Africa(“SA”). The purpose of this subsidiary is to produce Cobra chassis. Thissubsidiary began operations in the first quarter of 2004.  For the first quarter of 2004, the Companydid not have material operations in South Africa.

 

**2.**              ***Summary ofSignificant Accounting Policies***

 

**Basis ofPresentation of Interim Financial Data:**   The financial informationas of, and for the three month period ended, March 31, 2004 included inthis report is unaudited.  Suchinformation, however, reflects all adjustments (consisting only of normalrecurring adjustments) which are, in the opinion of management, necessary for afair presentation of results for the interim periods.  The interim statements should be read in conjunction with thefinancial statements and the related notes included in our Annual Report on Form10-KSB for the fiscal year ended December 31, 2003.

 

The results of operationsfor the interim periods presented are not necessarily indicative of the resultsto be expected for the full year.

 

**Consolidation:**   Theconsolidated financial statements include the accounts of CSI and allmajority-owned domestic and foreign subsidiaries in which it has control. Allsignificant intercompany accounts and transactions are eliminated inconsolidation.

 

The financial statements forthe three months ended March 31, 2004 represents the activities andstatement of financial position of CSL.

 

**Cash andCash Equivalents:**   TheCompany considers all highly liquid investments purchased with an originalmaturity of three months or less to be cash equivalents. The Company places itscash and temporary investments with high quality institutions. AtMarch 31, 2004, the Company had deposits with high quality institutions inexcess of FDIC insured limits of $783,875. The Company performs periodicevaluations of the relative credit standing of these financial institutions.

 

**AccountsReceivable and Allowance for Doubtful Accounts:**   A valuation allowance isprovided on the Company’s accounts receivable in management’s judgment thatwill not be collected. All accounts receivable are reviewed on a case by casebasis for collectibility. There is no valuation allowance on the accountsreceivable as of March 31, 2004.

 

**Inventories:**   Partsand material inventories are valued at the lower of standard cost (whichapproximates computation on a first-in first-out basis) or market (netrealizable value or replacement cost). Work in process inventory primarilyrepresents uncompleted vehicles valued at the total of accumulated standardcost of parts and materials plus labor and overhead based upon the estimatedpercentage of completion for each vehicle. Variances from standard costs orhours to complete are charged to cost of goods sold.

 

The components of inventoryas of March 31, 2004 (unaudited) and December 31, 2003 are asfollows:

 

 

|                |   | **March 31,  2004** |      | **December 31,  2003** |   |
|---------------------|--------|--------------------------|-----------|-----------------------------|--------|
| Parts and materials |   | $                        | 1,848,436 |                        | $      | 1,404,217 |   |
| Work in process     |   | 1,503,661                |      | 953,222                     |   |
| Finished vehicles   |   | —                   |      | —                      |   |
|                |   | $                        | 3,352,097 |                        | $      | 2,357,439 |   |

 

**Property,Plant & Equipment:**   Property, plant and equipment are stated at cost lessaccumulated depreciation. Depreciation is recorded principally using thestraight-line method based upon the estimated

 

7

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useful lives of the assets(leasehold improvements 5 years, machinery and equipment 5-7 years,office furniture and equipment 5-7 years). Normal repairs and maintenanceare expensed as incurred. Expenditures, which materially increase values,change capacities or extend useful lives, are capitalized. Replacements are capitalizedand the property and equipment accounts are relieved for the items beingreplaced. The related costs and accumulated depreciation of disposed assets areeliminated and any gain or loss on disposition is included in the statement ofoperations. The Company capitalizes assets in excess of $500.

 

**Impairmentof Long Lived Assets:**   TheCompany reviews long-lived assets to be held and used for impairment wheneverevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable. If the sum of the expected future cash flows(undiscounted and without interest charges) is less than the carrying amount ofthe asset, the Company would recognize an impairment loss based on theestimated fair value of the asset.

 

**Policy andWarranty:**   Provisionsfor estimated expenses related to product warranties are made at the timeproducts are sold. These estimates are established using historical informationon the nature, frequency, and average cost of warranty claims. Managementactively studies trends of warranty claims and takes action to improve vehiclequality and minimize warranty claims. Historically warranty costs have beenminimal and due to the custom nature of the manufactured automobile no warrantyaccrual has been recorded for the three months ended March 31, 2004.

 

**Fair Valueof Financial Instruments:**   Cash, accounts receivable, prepaid expenses, accountspayable, and accrued liabilities are reflected in the accompanying financialstatements at fair value due to the short-term nature of those instruments. Thecarrying amount of notes payable and long-term debt approximates fair value onthe balance sheet date based on borrowing rates currently available to theCompany for loans with similar terms and maturities.

 

**Foreign Currency Translation: **TheCompany’s South African operations use the respective local currencies as thefunctional currency. For all other operations, the Company uses the U.S. dollaras the functional currency. The effect of translating the financial position andresults of operations of local functional currency operations into U.S. dollarsare included in a separate component of stockholders’ deficit.

 

**Foreign Currency Transactions: **Theeffect of re-measuring the non-functional currency assets or liabilities intothe functional currency is marked-to-market, and the result is recorded withinselling, general and administrative expenses in the statement of operations.The Company does not currently hedge its foreign currency risk through the useof foreign exchange financial instruments.

 

**RevenueRecognition:**   Revenuefrom automobiles and accessories sales is recognized when the sale transactionis complete including physical delivery of the merchandise and transfer oftitle. Deposits received from customers for sales contracts are recorded as aliability pending completion of the sales transaction. CSL recognizes revenuefrom royalties when earned, in accordance with the terms of the licensingagreements with manufacturers of automobiles, accessories, clothing, videogames and other. For other product sales, revenue is recognized at the time ofshipment. All revenue is shown net of discounts and returns taken.

 

**IncomeTaxes:**   CarrollShelby Licensing, Inc. was an S Corporation prior to the June 23,2003 Exchange Agreement. The impact of conversion from an S Corporation to a CCorporation for tax purposes was not material to the financial position orstatement of operations of the Company.

 

The Company accounts forincome taxes under SFAS No. 109, Accounting for Income Taxes, pursuant towhich the Company accounts for deferred income taxes by applying enactedstatutory rates in effect for periods in which the difference between the bookvalue and the tax bases of assets and liabilities are scheduled to reverse. Theresulting deferred tax asset or liability is adjusted to reflect changes in taxlaws or rates. Because the Company has incurred losses from operations, nobenefit is realized for the tax effect of the net operating loss carry forwarddue to the uncertainty of its realization.

 

8

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The income tax expense forthree months ended March 31, 2004 represents the minimum state taxes due.

 

**Loss perShare:**   Basicloss per share is computed by dividing loss available to common stockholders bythe weighted-average number of common shares outstanding. Diluted loss pershare is computed similar to basic loss per share except that the denominatoris increased to include the number of additional common shares that would havebeen outstanding if the potential common shares had been issued and if theadditional common shares were dilutive. Because the Company has incurred netlosses, basic and diluted loss per share is the same. As of March 31, 2004100,000 options were outstanding.   Inaddition, the convertible note payable to shareholder affiliate can potentiallyconvert to 125,000 shares of common stock. Further, the warrants attached to this conversion can yield anadditional 125,000 shares of common stock.

 

**ComprehensiveIncome:**   TheCompany utilizes SFAS No. 130, “Reporting Comprehensive Income”. Thisstatement establishes standards for reporting comprehensive income and itscomponents in a financial statement. Comprehensive income as defined includesall changes in equity (net assets) during a period from non-owner sources.Examples of items to be included in comprehensive income, which are excludedfrom net income, include foreign currency translation adjustments andunrealized gains and losses on available-for-sale securities. As of and for thethree month ended March 31, 2004, no comprehensive income was recognized.Comprehensive income is not presented in the Company’s financial statementssince the Company did not have any of the items of comprehensive income in anyperiod presented.

 

**Use ofEstimates:**   Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make certain estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

**Statementof Cash Flows Supplementary Information:** 

 

 

Non Cash Transactions

 

The Company granted 300,000options valued at $744,000 in association with its bridge line of credit fromshareholder.

 

For the three months endedMarch 31, 2004 the Company recorded a beneficial conversion feature of$81,250 against the principal balance of a convertible note payable to ashareholder and shareholder affiliate.

 

In March 2004 theCompany entered into a $9,838 capital lease for office equipment.

 

For the three months endedMarch 31, 2004, the company issued a $140,000 note receivable inconnection with the sale of its truck and trailer.

 

Supplemental Information

 

For the three months endedMarch 31, 2004 and 2003 no income taxes were paid.  Interest paid for the three months endedMarch 31, 2004 was $41,650.  Nointerest was paid for the three months ended March 31, 2003.

 

**3.****             *****NoteReceivable***

 

In January 2004, theCompany sold its truck and trailer to a third party for $165,000.  The Company received $25,000 cash and a$140,000 note receivable.  This notereceivable accrues interest at 7% and is

 

9

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due in 61 monthly paymentsof $2,756.   This note is secured by thetruck and trailer.  This transactionresulted in a gain on sale of fixed assets of $101,256 and is shown in otherincome (expense) for the three months ended March 31, 2004.

 

**4.****             *****Propertyand Equipment***

 

Property and equipment atMarch 31, 2004 (unaudited) and December 31, 2003 consisted of thefollowing:

 

 

|                          |   | **March 31,  2004** |    | **December 31,  2003** |   |
|-------------------------------|--------|--------------------------|---------|-----------------------------|--------|
|                          |   |                     |    |                        |   |
| Truck with trailer            |   | $                        | 216,000 |                        | $      | 478,079 |   |
| Airplane                      |   | 310,384                  |    | 310,384                     |   |
| Automobiles                   |   | 223,700                  |    | 248,700                     |   |
| Furniture and equipment       |   | 63,767                   |    | 50,328                      |   |
| Tooling and equipment         |   | 49,738                   |    | 9,105                       |   |
| Leasehold improvements        |   | 56,501                   |    | 59,301                      |   |
|                          |   | 920,090                  |    | 1,155,897                   |   |
| Less accumulated depreciation |   | (540,577                 | )       | (921,329                    | )      |
|                          |   | $                        | 379,513 |                        | $      | 234,568 |   |

 

Depreciation expense for thethree months ended March 31, 2004 and 2003 is $33,584 and $35,754,respectively.

 

**5.****             *****Long -Term******Debt***

 

Debt consists of the followingat March 31, 2004:

 
| Note Payable - Venture |   | $         | 1,069,159 |   |
|------------------------|--------|-----------|-----------|--------|
| Truck financing        |   | 172,800   |      |
|                   |   | 1,241,959 |      |
| Less Current Portion   |   | (338,361  | )         |
|                   |   | $         | 903,598   |   |

 

*NotePayable - Venture*

 

On December 30, 2003,the U.S. Bankruptcy Court approved the purchase of certain assets of VentureMolds and Engineering Corporation (“Venture”). Venture is the parent Company ofSAI. The Company purchased these assets for $1,200,000 through a promissorynote secured by the assets sold. Payments are made in 40 monthly installmentsof $30,000. The Company imputed the interest on the note at 5.5% and recordedthe principal of the note originally at $1,098,660 as of December 31,2003.  As of March 31, 2004 thenote balance is $1,069,157.  The assetswere sold free and clear of any other liens, claims, and encumbrances.

 

The acquired assets includeleasehold improvements, equipment and furniture primarily used in themanufacture of Shelby Series I automobiles, several autos in variousstages of completion and parts used in manufacturing.

 

Carroll Shelby, director andprincipal shareholder of CSI, is a 25% shareholder in SAI.

 

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*Truck financing*

 

In March 2004, theCompany financed the purchase of truck and trailer with a note pate payable for$172,800.  This loan has an effectiveinterest rate of 7.5% with monthly payments of $3,451 over 60 months.  This note is secured by the truck.

 

**6.****             *****Shareholders’Deficit***

 

In the first quarter of 2004the Company continued to raise capital through a private placement ofunregistered common stock. The Company has received approximately $1,350,000 ofcash, net of fees, from the sale of approximately 675,000 shares of commonstock at $2.25 per share.

 

As of March 31, 2004100,000 options were outstanding with a strike price of $1.50.

 

**7.****             *****RelatedParty Transactions***

 

*NotePayable to Shareholder*

 

Notes payable to shareholderoriginally consisted of a $2,000,000 non-interest bearing note payable toCarroll Shelby originally due on December 31, 2003. The note is secured byall the assets of CSI. This note was extended by mutual agreement between theparties and is currently due by June 30, 2004.  In the first quarter of 2004 the Company paid $500,000 againstthis note payable.  On January 1,2004, this note began accruing interest at the maximum interest rate allowableby law not to exceed 1.5% per month.

 

*NotePayable to Shareholder affiliate*

 

Note payable to shareholderaffiliate consists of a $500,000 note payable, issued on September 30,2003 to Carroll Shelby and Bill Murphy, originally due March 31, 2004 andbearing interest at 18% annually.

 

This note is convertible atthe option of the shareholder affiliate at any time during the term of the noteinto common stock of the Company at a conversion rate of $4.00 per share. Thecommon shares have piggyback registration rights.

 

If the note holder convertsthey shall receive one share of common stock at a conversion rate of $4.00 pershare and one warrant to purchase a share of common stock at an exercise price of$6.00 per share and shall mature 3 years from issuance. The common stockunderlying the Warrant has piggyback registration rights.

 

At the time of issuance ofthis note the Company’s common stock market value was $4.50 per share, andaccordingly this note had a deemed “beneficial conversion feature”.  In addition, the Company incorporated in the“beneficial conversion feature” the value of the underlying warrants associatedwith the conversion.  The warrant’svalue was calculated using the “Black Scholes Model” with assumptions of a2.23% discount interest rate, 3 year term, 42% volatility and a dividend rateof zero. The result of this beneficial conversion feature and warrant is torecord additional interest expense to the consolidated statement of operationsof $81,250 for the three months ended March 31, 2004.

 

The Company repaid $250,000of this note in April 2004 and was given extended terms to pay theremainder of the note by June 30, 2004. No consideration was given forextending the term of this note.

 

*Bridgeline of credit from shareholder*

 

The Company also obtained a$980,000 bridge line of credit from Carroll Shelby on July 1, 2003. Thisnote matured on January 1, 2004 and bears interest at 18% annually onfunds advanced under the line. The Company repaid this line in first quarter of2004.

 

Under the terms of this lineof credit, in the event of non-payment upon maturity, the Company will

 

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issue 300,000 options topurchase common stock at $1.50 per share to the note holder. The options willvest ratably over a three-year period beginning January 1, 2004. TheCompany did not pay this note on the maturity date and issued 100,000 optionsto the shareholder on January 1, 2004. In addition the Company will issue 100,000 options in 2005 and2006.  The Company valued the 300,000options at $744,000 by using the “Black Scholes” method with the followingassumptions: Term 5 years, Volatility 40%; quarterly dividend rate of zero, anda discount rate of 2.23%.  For the threemonths ended March 31, 2004 the Company recorded $744,000 to interestexpense associated with these options.

 

As of March 31, 2004accrued interest expense related to the related party debt outstanding to themajority shareholder and an affiliate is $90,000. For the three months endedMarch 31, 2004 total interest expense associated with a majorityshareholder is $953,650.  For the threemonths ended March 31, 2003 there is no interest expense due to themajority shareholder.

 

The Company is responsiblefor paying royalties to a shareholder’s trust from income generated fromCSL.  Total royalties accrued as ofMarch 31, 2004 are $41,198.

 

The Company’s principalshareholder has advanced funds for operating capital as needed. These advancesare non-interest bearing and do not have a due date. Repayments are made asworking capital is deemed adequate. The outstanding balances of such advancesas of March 31, 2004 and 2003 are $136,434.

 

One of the Company’s threedirectors is an attorney whose firm performs legal services for the Company andsublets office space. For the three months ended March 31, 2004, legalfees paid to this firm amounted to $21,562. No fees were paid to this firm for the three months ended March 31,2003.

 

In the first quarter of2004, the Company paid a $25,000 commission to its majority shareholder andaffiliate in connection with the $500,000 convertible note payable.

 

In conjunction with thepurchase of the assets from Venture, a majority shareholder, the company’s legalcounsel and the general manager of Auto’s received certain inventory ascompensation for their services in connection with the completion of thepurchase of these assets.  Thisinventory was valued at and compensation was recorded for $31,115 in the firstquarter of 2004.

 

See Note 8 “Commitmentsand Contingencies—Licensing Agreement”.

 

**8.****             *****Commitmentsand Contingencies***

 

**Commitments:**

 

***Leases***

 

The Company leases certainoffice and manufacturing space under the noncancellable operating leases havingremaining terms in excess of one year, primarily for headquarters in LosAngeles and its manufacturing facility in Las Vegas. In addition, the Companysubleases a portion of this space to unrelated third parties.   In addition, the Company leases certainoffice equipment under capital leases. As of March 31, 2004 total capital lease balances are $17,204.

 

Rental expenses underoperating leases were $157,432 and $9,206 for the three months endedMarch 31, 2004 and 2003, respectively.

 

The Company subleases a portionof its headquarters to a law firm. Total rental income received for the threemonths ended March 31, 2004 and 2003 is $6,000 and $6,000, respectively.

 

***Licensing Agreement***

 

In 2003 the Company enteredinto a three year licensing agreement with an unaffiliated company to

 

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license certain of itsintellectual properties associated with the manufacturing of the aluminumbodies and frames of the Shelby produced cars.    TheCompany prepaid $131,500 for frames related to its Cobra production from thisunaffiliated company. The Company amortizes $5,000 of this prepaid towards eachframe purchased. Minimum frames to be purchased in 2004 are 30. Under the termsof the agreement the Company is required to purchase an addition 20 frames in2005.  For the three months endedMarch 31, 2004 no frames have been delivered to the Company.  During the first quarter of 2004 the Companypaid an additional $188,000 to this unaffiliated company to continue productionof these frames.  Total prepaid assetrelated to this agreement and the production of aluminum bodies and frames asof March 31, 2004 is $319,500. As part of this purchase agreement theCompany purchased 10% of the outstanding stock of this unaffiliated company for$50,000, which is included in other long term assets at March 31, 2004.This investment is recorded at cost under the cost method.

 

***Finance Agreement***

 

The company finances itsinsurance through a finance company. For the three months ended March 31,2004 total principal and interest paid on this policy is $65,177 and $1,523,respectively.  As of March 31, 2004the balance for this agreement is $39,357.

 

***Letter of Intent***

 

On October 31, 2003,the Company announced it has entered into a letter of intent to acquireautomotive supercharger developer and manufacturer Allen EngineDevelopment Inc. This acquisition will be a combination of cash and equityand if completed, would provide an extended reach for the Shelby brand into thegrowing automotive aftermarket and performance parts market. In addition, ifthe Allen Engine Development acquisition is completed, it will give the Companydepth in engineering services, which include research and development, CADsupport, prototyping as well as full CNC machining services. There can be noassurance that this acquisition will be completed.

 

**Contingencies:**

 

Litigation is always subjectto uncertainties. The outcome of individually litigated matters is notpredictable with any high level of assurance. Various legal actions,governmental investigations, claims and proceedings are pending against theCompany, including those arising out of governmental regulations relating toEnvironmental Protection Agency and National Highway Traffic & SafetyAgency; licensee, dealer, supplier and other contractual relationships.Management believes the ultimate outcome will not be material to the financialstatement.

 

In connection with the 2003assumption of SAI’s Cobra vehicle production (See Note 1) by Autos, theCompany made the decision to protect the Shelby trade name and reputation bycompleting those vehicles started by SAI, but unfinished due to a lack ofworking capital and cessation of business. This decision and the ultimatedisposition of the personal property utilized in completion of the vehicles arethe subject of a legal action brought by entities related to the 75%shareholder of SAI. Management cannot determine the probability of anunfavorable outcome or range of possible loss if any.

 

**9.****             *****SegmentReporting***

 

Our business consists of tworeportable segments: Royalty income generated from licensing and sale of onevintage automobile (“CSL”), revenue generated from the production ofautomobiles and sale of automobile performance parts (“Autos” and “SA”) andcorporate headquarters (“CSI”). These business segments are distinct andseparate. There are no allocations of costs amongst these segments orintercompany revenues.

 

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Business segment informationfor the three months ended March 31, 2004 and 2003 consists of:

 
|                           |   | **2004**  |    | **2003** |   |
|--------------------------------|--------|-----------|---------|----------|--------|
| Revenue:                       |   |      |    |     |   |
| CSL                            |   | $         | 74,558  |     | $      | 457,409 |   |
| Autos and SA                   |   | 730,983   |    | —   |   |
|                           |   |      |    |     |   |
| Operating income (loss):       |   |      |    |     |   |
| CSL                            |   | $         | 18,356  |     | $      | 269,857 |   |
| Autos and SA                   |   | (640,873  | )       | —   |   |
| CSI                            |   | (157,453  | )       | —   |   |
|                           |   |      |    |     |   |
| Depreciation and amortization: |   |      |    |     |   |
| CSL                            |   | $         | 26,187  |     | $      | 35,754 |   |
| Autos and SA                   |   | 7,397     |    | —   |   |
| CSI                            |   | —    |    | —   |   |
|                           |   |      |    |     |   |
| Assets:                        |   |      |    |     |   |
| CSL                            |   | $         | 288,956 |     | $      | 547,966 |   |
| Autos and SA                   |   | 4,281,241 |    | —   |   |
| CSI                            |   | 754,157   |    | —   |   |
|                           |   |      |    |     |   |
| Capital expenditures:          |   |      |    |     |   |
| CSL                            |   | $         | —  |     | $      | 1,044,022 |   |
| Autos and SA                   |   | 267,271   |    | —   |   |
| CSI                            |   | —    |    | —   |   |

 

For the three months endedMarch 31, 2003 the Company operated CSL under one segment.

 

***10.******       SubsequentEvent***

 

InApril 2004 the Company completed its first round of private placementfinancing.  The Company receivedapproximately $4,000,000 in proceeds, net of fees, for the private placement ofapproximately 1,779,000 shares of unregistered common stock.

 

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

 

*CautionaryStatement*

 

*Thefollowing information should be read in conjunction with the ConsolidatedFinancial Statements and Notes thereto included elsewhere in this report andthe audited financial statements and Management Discussion and Analysiscontained in our Annual Report on Form 10-KSB for the year ended December 31, 2003.*

 

The information in thisReport is not a complete description of our business or the risks associatedwith an investment in our common stock. We urge you to carefully review andconsider the various disclosures made by us in this Report and in our otherreports filed with the SEC.

 

The section entitled“Risk Factors” set forth in this Report and in our other SEC filings discussessome of the important risk factors that may affect our business, results ofoperations and financial condition. You should carefully consider those risks,in addition to the other information in this Report and in our other filings withthe SEC, before deciding to invest in our Company or to maintain or increaseyour investment.

 

This Report containsforward-looking statements. These statements relate to future events or ourfuture financial performance. In some cases, you can identify forward-lookingstatements by terminology such as “may,” “will,” “should,” “except,” “plan,”“anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” thenegative of such terms or other comparable terminology. These statements areonly predictions. These statements are not guarantees of future performance andare subject to certain risks, uncertainties and assumptions that are difficultto predict.

 

Therefore, our actualresults could differ materially and adversely from those expressed in anyforward-looking statements as a result of various factors. Moreover, neither wenor any other person assumes responsibility for the accuracy and completenessof the forward-looking statements. We are under no duty to update any of theforward-looking statements after the date of this Report to conform suchstatements to actual results or to changes in our expectations.

 

*Overview*

 

The Company was originallyorganized on December 4, 2000 (date of inception) under the laws of theState of Nevada, as Ginseng Forest, Inc. Through June 23, 2003 theCompany had no operations and in accordance with Statement of FinancialAccounting Standards No. 7, the Company was considered a development stagecompany.

 

On June 23, 2003, theCompany closed an agreement (the “Exchange Agreement”) to acquire all of theoutstanding common stock of CSL and Autos (the “Shelby Companies”) for9,087,866 shares of its common stock and a promissory note issued by GinsengForest, Inc. to the Shelby Companies’ security holders in the amount of$2,000,000 originally due December 31, 2003 of which $500,000 was paid inMarch 2004 and $1,500,000 has been extended to June 30, 2004.

 

In addition, the Companymanufactures component cars (sometimes referred to as “kit” cars as theygenerally do not have engines or transmissions installed at time of delivery tothe customer) under the brand name “Shelby Cobra” at its facilities in LasVegas, Nevada. It began manufacturing a new series of the CobraTM automobile toreplicate the original CobraTM last produced in 1967 and of which onlyapproximately 1,000 units were ever produced. The Company’s CobraTM is substantiallybuilt to its original specifications for enthusiasts desiring a genuine replicaof the first and only American produced sports car to claim the aforementionedchampionship. We believe significant enthusiast market exists in the UnitedStates for this historic automobile.

 

The Company’s strategy is toaggressively pursue new licensing channels for our historic and prominentintellectual properties and hallmark brands such as Shelby Cobra, 427 S/C, FIA289, Cobra

 

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Daytona Coupe, GT 350 and GT500, and to continue building and augmenting both component cars (i.e. 289, 289FIA, 427 S/C and Daytona Coupe) and model year 2005, and beyond, vehicles whichmeet all current federal and state emissions and safety standards (i.e. theFord Shelby Cobra Concept Car, and Ford Expedition). Our strategy includesacquisitions and strategic alliances. The Company will promote its products asnatural enhancements to various products in the retail automotive industry, aswell as auto racing and after market automotive accessories.

 

On October 31, 2003,the Company announced it has entered into a letter of intent to acquireautomotive supercharger developer and manufacturer Allen EngineDevelopment Inc. This acquisition will be a combination of cash and equityand if completed, would provide an extended reach for the Shelby brand into thegrowing automotive aftermarket and performance parts market. In addition, ifthe Allen Engine Development acquisition is completed, it will give us depth inengineering services, which include research and development, CAD support,prototyping as well as full CNC machining services. There can be no assurancethat this acquisition will be completed.

 

**Results of Operations**

 

*Revenues*

 

TheCompany’s revenues increased in the first quarter of 2004 versus the firstquarter of 2003 primarily from the sales of CobraTM automobiles as Autos begansuch production in the third quarter of 2003 as discussed above. Total revenuesincreased $348,312 or 76% from $457,409 for the three months endedMarch 31, 2003 to $805,541 for the three months ended March 31, 2004.Our revenues from licensing decreased 25% from $99,713 in 2003 to $74,558 in2004.  Products that are licensedtypically have a 12 to 18 month cycle.  Royalties generated from these products are higher at thebeginning of the cycle then at the end of the cycle.  In addition, videogames are sold for a one time only fee.  The decrease in licensing revenue isattributable to timing in product life cycle for licensing and more videogamefees in the first quarter of 2003 versus the same time period in 2004.  For the three months ended March 31,2003 versus the same time period in 2004 we added revenues of $730,983 from thesales of automobiles. The Company’s subsidiary Autos sold 12 CobraTM automobilesduring the first quarter of 2004.  Inthe first quarter of 2003 revenue included the sale of one of one vintageautomobiles owned by the Company for $357,696.

 

*Cost ofGoods Sold*

 

The Company did not have acost of goods sold caption in its statement of operations for the three monthsended March 31, 2003.  For 2004,cost of goods sold represents the costs of Cobra automobiles and performanceand other related automotive products sold. Cost of goods sold for three monthsended March 31, 2004 is $608,378 or 75.5% of total revenue and 83% ofautomobile and automobile products revenue. The Company is still in the process of sizing its operations forproduction and anticipates lower costs in the future.

 

*Sellingand Marketing Expense*

 

In the third quarter of 2003the Company’s entered into the production of CobraTM automobiles which meantestablishing a sales and administrative organization. With this new activity,there has been a substantial increase in selling and marketing expenses of$134,228 or 176% from $76,274 for the three months ended March 31, 2003 to$210,502 for the three months ended March 31, 2004. The increase betweenperiods is substantially related to the addition of the CobraTM operations. TheCompany’s selling and marketing expenses included expenditures fortransportation, depreciation, meals and entertainment, printing andreproduction, promotion and public relations, research, trademark support,travel and video duplication.  For thethree months ended March 31, 2004 the Company accrued royalties payable toits primary shareholders trust of approximately $41,000.  This agreement was not in place for thethree months ended March 31, 2003. The Company will continue to promote its trademarks and trade names on aregular basis.

 

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*Generaland Administrative Expenses*

 

As discussed above, theCompany has established an administrative organization related to its CobraTMoperations in the third quarter of 2003. These operations are located inseparate facilities in Las Vegas, Nevada and there are additional expensesrelated to occupancy.  For the threemonths ended March 31, 2004, both CSL and Autos have increased its generaland administrative activities and personnel to comply with its public reportingobligations. General and Administrative expense increased by $654,906 or 586%from $111,725 for the three months ended March 31, 2003, to $766,631 forthe three months ended March 31, 2004. The periods are not comparablebased on the significant change in operations discussed above. The Company’sfacility in Las Vegas was responsible for approximately $494,000 in increasedgeneral and administrative expenses for the quarter ended March 31, 2004versus the same period in 2003. The Company believes that its Las Vegasfacility is adequate for the foreseeable future and its personnel complement isnot expected to increase substantially. The expense category with significantchanges between the first quarter of 2003 and 2004 not directly related to theCobraTM operations were fees primarily related legal accounting and publicrelation fees for the Company sustaining its public reportingrequirements.  In addition, the Companyincurred costs related to investment banking fees for services rendered.

 

*OtherIncome and (Expense)*

 

Other income and (expense)increased $851,233 or 15,008% from income of $5,672 for the three months endedMarch 31, 2003 to expense of $845,561 for the three months endedMarch 31, 2004. The substantial increase in other income (expense) for thethree months ended March 31, 2004 versus the same time period in 2003 isattributable to the increase in interest expense associated with the notespayable issued to the Company’s majority shareholder at the time of its mergerand the continued advances from the majority shareholder in connection with itsexpanded operations.  The interestexpense was offset by a gain on the sale of the Company’s tractor trailer of$101,256 in the first quarter of 2004.

 

For the three months endedMarch 31, 2004 and 2003 other income consisted of sublease rental incomefrom a law firm.

 

*Provisionfor Income Taxes*

 

Carroll ShelbyLicensing, Inc. was an S Corporation prior to the June 23, 2003Exchange Agreement. The impact of conversion from an S Corporation to aC Corporation for tax purposes was not material to the financial positionor statement of operations of the Company.

 

The Company accounts forincome taxes under SFAS No. 109, Accounting for Income Taxes, pursuant towhich the Company accounts for deferred income taxes by applying enactedstatutory rates in effect for periods in which the difference between the bookvalue and the tax bases of assets and liabilities are scheduled to reverse. Theresulting deferred tax asset or liability is adjusted to reflect changes in taxlaws or rates. Because the Company has incurred losses from operations, nobenefit is realized for the tax effect of the net operating loss carry forwarddue to the uncertainty of its realization.

 

The income tax expense forMarch 31, 2004 represents the minimum state taxes due.

 

The total net operatinglosses as of March 31, 2004 of approximately $2,600,000 can be carriedforward through 2024.  These netoperating losses may be affected by future performance of the Company duringits future operations.

 

**Liquidity and Capital Resources**

 

The Company has not achievedprofitable operations through March 31, 2004. It is not presently able todetermine when profitable operations will be obtained. For the three monthsended March 31, 2004 its private placement financing generated in thefourth quarter of 2003 and the first quarter of 2004 and increases in customerdeposits (approximately $821,000) have financed operations through the firstquarter

 

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of 2004.  The Company has a cash balance of $883,875at March 31, 2004. The Company also has substantial current liabilitiesdue including $2.0 million due to its shareholder, $2.1 million ofcustomer deposits to be “offset” when cars are completed and delivered and$338,000 of current maturities of its long term debt. The Company’s balancesheet and financial position are not comparable between years because of theaddition of the CobraTM production operations.

 

Cash flows were provided byoperations of approximately $403,000 in the first quarter of 2003 andoperations used approximately $954,000 in the first quarter of 2004. While notdirectly comparable, the increase in cash resources applied to operations issubstantially related to the CobraTM production operations and specifically toacquiring and producing the inventory to support these operations.

 

Net cash provided byinvesting activities in the first quarter of 2003 was approximately $6,900 ascompared to cash used in investing activities of $232,000 for the first quarterof 2004. This increase was primarily a result of the purchase of property andequipment associated with the start up of the CobraTM production activities andthe purchase of a truck and trailer.

 

The Company’s financingactivities in the first quarter of 2003 used cash resources of approximately$141,000 primarily related to the pay back of shareholder advances. During thefirst quarter of 2004, financing activities provided funds of approximately $14,000.  For the three months ended March 31,2004 cash provided from financing activities consisted of funds received fromthe private placement offering of unregistered shares net of fees ofapproximately $1,350,000, issuance of a note payable to purchase a truck forapproximately $172,000 offset by the repayment of shareholder notes of$1,480,000.

 

In August 2003, theCompany retained an investment banker to provide, among other services,assistance with Company’s financing efforts as it attempts to secure additionalcapital for product development, possible acquisitions and working capital andto assist the Company with general business strategy and advice regardinglisting on a national exchange. The Company intends to continue to raiseadditional capital through the sale of its common shares. Through the firstquarter of 2004 the Company raised capital through a private placement ofunregistered common stock. The Company received approximately $1,350,000 ofcash, net of fees, from the sale of approximately 675,000 shares of commonstock at $2.25 per share.

 

On October 31, 2003,the Company announced it has entered into a letter of intent to acquireautomotive supercharger developer and manufacturer Allen EngineDevelopment Inc. This acquisition will be a combination of cash and equityand if completed, would provide an extended reach for the Shelby brand into thegrowing automotive aftermarket and performance parts market. In addition, ifthe Allen Engine Development acquisition is completed, it will give us depth inengineering services, which include research and development, CAD support,prototyping as well as full CNC machining services. There can be no assurancethat this acquisition will be completed.

 

Currently, the Company isdependent upon its majority shareholder or sales of its common stock to provideliquidity from any shortfall in cash provided by operations. If thisshareholder was unable to provide funding for the Company or it were unable toraise additional equity capital, a resulting lack of capital could have anadverse material impact on the statement of financial position for the Companyand its operations.

 

The Company believes thatinflation has not had a material impact on it operations.

 

Management believes throughits existing cash and cash equivalent of $883,875 , as of March 31, 2004and its “Private Placement” proceeds received through the first quarter of2004, and anticipated proceeds from future equity financing, the Company willhave adequate cash reserves to continue operations through 2004.

 

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**Off BalanceSheet Arrangements**

 

CSI enters intoindemnification provisions under its agreements with other companies in itsordinary course of business. Under these provisions, CSI generally indemnifiesthe indemnified party for losses suffered or incurred by the indemnified partyas a result of CSI’s activities. These indemnification provisions generallysurvive termination of the underlying agreement. CSI has not incurred materialcosts to defend lawsuits or settle claims related to these indemnificationagreements. As a result, CSI believes the estimated fair value of theseagreements is minimal. Accordingly, CSI has no liabilities recorded for theseagreements as of March 31, 2004.

 

**ContractualObligations, Contingent Liabilities and Commitments**

 

CSI has contractualobligations and commitments primarily with regard to facilities leases, aninsurance finance agreement and an inventory commitment. The following tableaggregates CSI’s expected contractual obligations and commitments subsequent toMarch 31, 2004.

 
|                                 |   | **April -  December** |      | **Payments Due by Period** |   | **2008  and  Beyond** |   | **Total** |    |
|--------------------------------------|--------|----------------------------|-----------|----------------------------|--------|-----------------------|--------|-----------|---------|
| **2004**                             |   | **2005**                   |      | **2006**                   |   | **2007**              |
| **Contractual  Obligations**         |   |                       |      |                       |   |                  |   |      |    |   |   |   |   |
| Insurance Finance Agreement          |   | $                          | 39,357    |                       | $      | —                |   | $         | —  |   | $ | — |   | $ |   |   | $ | 39,357 |   |
| Corporate Office Lease               |   | 48,024                     |      | 8,082                      |   | —                |   | —    |    | — |   | 56,106 |   |
| Manufacturing Facility Lease         |   | 101,551                    |      | 139,004                    |   | 143,176               |   | 147,476   |    | 100,264 |   | 631,471 |   |
| Manufacturing Facility Lease(2)      |   | 430,191                    |      | 445,247                    |   | —                |   | —    |    | — |   | 875,438 |   |
| Phone System                         |   | 2,590                      |      | 3,454                      |   | 2,303                 |   | —    |    | — |   | 8,347 |   |
| Phone System (2)                     |   | 3,544                      |      | 4,725                      |   | 3,544                 |   |      |    |   |   | 11,813 |   |
| Aluminum Body Frames for Shelby Cars |   | 955,000                    |      | 720,000                    |   | —                |   | —    |    | — |   | 1,675,000 |   |
| **Total**                            |   | $                          | 1,580,257 |                       | $      | 1,320,512             |   | $         | 149,023 |   | $ | 147,476 |   | $ | 100,264 |   | $ | 3,297,532 |   |

 

All accounts payable andaccrued expenses as presented on the consolidated financial statement areexcluded from this table.

 

*CriticalAccounting Policies*

 

Certain accounting policiesand estimates used by us in preparing our financial statements in accordancewith generally accepted accounting principles are considered critical inproviding readers context that is helpful in understanding our results ofoperations and financial position. Please keep these policies in mind regardingthe following narrative. We believe these policies are critical to ourfinancial statements.

 

We assess the fair value andrecoverability of our long-lived assets whenever events and circumstancesindicate the carrying value of an asset may not be recoverable from estimatedfuture cash flows expected to result from its use and eventual disposition. Indoing so, we make assumptions and estimates regarding future cash flows andother factors to make our determination. The fair value of our long-livedassets is dependent upon the forecasted performance of our business, changes inthe various industries, and the overall economic environment. When we determinethat the carrying value of our long-lived assets may not be recoverable, wemeasure any impairment based upon the excess of the carrying value that exceedsthe estimated fair value of the assets. As a result of our reviews, we havedetermined there is no impairment loss to be recognized at March 31, 2004.

 

Our accounting policy forinventories is a critical accounting policy because it requires that wedetermine the cost of our inventory at the lower of cost or market for rawmaterials, work in process and finished goods pending the sale of thatinventory. We determine our inventory by purchase cost for raw materials and byaccumulating actual costs during production for work process and finishedgoods. We evaluate the lower of cost or market based on current and historicaldata. As a result of our evaluations, we have determined that our inventory isproperly stated at March 31, 2004.

 

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Our accounting policy forrecognition of revenue is a critical accounting policy because it determinesthe amount of sales we recognize from the sale of CobraTM automobiles and therevenues we recognize from the licensing of our trade names, trademarks andintellectual properties. We have determined that sales of automobiles andaccessories are recognized when the sale transaction is complete includingphysical delivery of the merchandise and transfer of title for automobiles.Deposits received from customers for sales contracts are recorded as aliability pending completion of the sales transaction. Revenues from ourlicensing activities are recognized when earned, based on actual reporting fromlicensees or may be estimated when historical data related to a licensee isadequate.

 

**Recent Accounting Pronouncements:**

 

There have been no materialchanges to our disclosure of recent accounting pronouncements provided inManagement’s Discussion and Analysis contained in our Annual Report on Form10-KSB for the year ended December 31, 2003.

 

**Risk Factors**

 

You should carefullyconsider the following risks and the other information contained in this Reportand in our other filings with the Securities and Exchange Commission before youdecide to invest in us or to maintain or increase your investment. The risksand uncertainties described below are not the only ones facing us. Additionalrisks and uncertainties may also adversely impact and impair our business. Ifany of the following risks actually occurs, our business, results of operationsor financial condition would likely suffer. In such case, the trading price ofour Common Stock could decline, and you may lose all or part of yourinvestment.

 

•                  *Our cash, cash equivalentsreserves or income may not be adequate to cover our costs of operations.*To date, we have covered our operating lossesby privately placing securities and receiving funds from advances and notespayable from our majority shareholder. We expect to fund our general operationsand marketing activities for 2004 with our current cash, cash equivalentsreserves, anticipated proceeds from future equity financing and generaloperating income. The Company plans to continue our efforts to raise privateplacement equity.

 

•                  *We may not be able to raisethe capital we need.*It is likely that we will need to raise additionalcapital at some point in the future. If additional funds are raised through theissuance of equity, our shareholders’ ownership will be diluted. There can beno assurance that additional financing will be available on terms favorable tous or at all. If funds are not available or are not available on termsacceptable to us, we may not be able to continue the development of ourproduct, respond to our competitors or continue our business.

 

•                  *We have a history oflosses.*We have a history of operating losses and an accumulated deficit, as ofMarch 31, 2004, of $3,558,349. Our ability to generate revenues andprofits is subject to the risks and uncertainties encountered in thedevelopment or expenses of a business as well as by unforeseen economicconditions.

 

•                  *Our Common Stock is notwidely traded, which may result in illiquidity and increased volatility.*Our Common Stockis not widely traded, and, as a result, the prices quoted for our stock may notreflect its fair market value. Because of the low volume of trading in ourCommon Stock, our shareholders may find it difficult to sell their shares.

 

•                  *Our principal shareholderscan exercise significant control over us and could limit the ability of ourother shareholders to influence the outcome of transactions requiring ashareholder vote.*As of March 31, 2004 approximately 62% of our outstanding CommonStock was owned by our executive officers, directors and principalshareholders. These shareholders have control over all matters requiringapproval by our shareholders, including the election of directors and approvalof significant corporate transactions.

 

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•                  *We have a negative networth and a deficit in working capital*. As of March 31, 2004 we had anegative net worth of $1,220,413 and a deficit in working capital of $859,902.Accordingly, it may be necessary for us to obtain additional long term debt orequity financing, in order to avoid restricting our future operations. Therecan be no assurance that any such financing will be available to us on termssatisfactory to us.

 

•                  *All of our assets are collateralfor a promissory note we issued to Mr. Shelby, which is due and payable onJune 30, 2004*.  Upon the reverse merger weborrowed an aggregate of $2,000,000 from Mr. Shelby, our Chief ExecutiveOfficer. As of March 31, 2004 the outstanding balance on this loan is$1,500,000 this loan is evidenced by a promissory note secured by all of ourassets and due June 30, 2004. In the event we are unable to pay the noteby the due date or arrange for an extension of the note, Mr. Shelby wouldbe in a position to foreclose on all of our assets and take over the operationsof our business.

 

**ITEM 3.****    ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

*InterestRate Risk.*   Ourexposure to market risk for changes in interest rates relates primarily to ourcash equivalents and long-term debt. We currently do not use derivativefinancial instruments in either to hedge debt.

 

We mitigate default risk byconstantly monitoring our cash equivalents to respond appropriately to areduction in credit rating of any investment issuer, guarantor or depository.We maintain a highly liquid portfolio by investing only in cash equivalentsecurities.

 

*ForeignCurrency Risk.*   Wetransact business in South Africa. During the three months ended March 31, 2004, we did not hedge anyof our local currency cash flows. All foreign currency cash flow requirementswere met using spot foreign exchange transactions. Recent fluctuations inforeign exchange rates have not had a material effect on our operations andprofitability; however, there can be no assurance that these fluctuations willnot become more aggravated and result in a material adverse effect on ouroperations and profitability.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

Management, including ourprincipal executive officer and principal financial officer, has evaluated, asof the end of the period covered by this report, the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures withrespect to the information generated for use in this report. Based upon, and asof the date of that evaluation, the principal executive officer and principalfinancial officer concluded that the disclosure controls and procedures wereeffective to provide reasonable assurances that information required to bedisclosed in the reports filed or submitted under the Securities Exchange Actof 1934, as amended, is recorded, processed, summarized and reported within thetime periods specified in the rules and forms of the Securities and ExchangeCommission.

 

In designing and evaluatingthe disclosure controls and procedures, management recognized that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable, not absolute, assurance of achieving the desired control objectivesand management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Based upon theabove evaluation, management believes that its controls do provide suchreasonable assurances. However, the Company currently has a small accountingdepartment and as a result segregation of duties is not always possible and theCompany has retained outside consultants to assist with the financial close andfinancial reporting.

 

There have been no changesin the Company’s internal control over financial reporting that occurred duringthe Company’s last fiscal quarter that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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**PART II. – OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

1.  **Case Name:**In Re: Venture Holdings Company, LLC et. al.,Debtors, Venture Mold & Engineering Corporation v. Carroll Shelby,Carroll Shelby International, Inc. and Shelby Automobile, Inc.

 

**Case No. **03-48939

 

**U.S. Bankruptcy Court, Eastern District of Michigan, SouthernDivision**

 

CarrollShelby, Shelby Automobiles, Inc. and Carroll ShelbyInternational, Inc. (“Shelby Entities”) are named defendants in a lawsuitfiled by Venture Mold & Engineering Corporation and its parentcorporation (“Venture Entities”) as debtors in bankruptcy seeking recovery ofdamages and/or certain vehicle parts and tooling utilized in the manufacture of“Cobra” series component vehicles during calendar year 2003. Carroll Shelby andShelby Automobiles, Inc. utilized Cobra tooling and parts to completecertain customer orders placed with Shelby American, Inc. before it ceaseddoing business in July 2003. Some of these parts were in fact included ina December 30, 2003 asset purchase by Shelby Automobiles, which wasaccomplished with the consent of the Venture Entities and the approval of thebankruptcy court. The Shelby Entities’ answer and counterclaim for damagesagainst the Venture Entities based on breach of contract, breach of fiduciaryduty and tortuous interference were filed with the Court on March 15,2004. In the opinion of this office, it is unlikely that the outcome of thislitigation will be unfavorable to the Shelby Entities, and in fact it is likelythat the Shelby Entities will obtain a net positive recovery against theVenture Entities.

 

2.  **Case Name:**Superformance International, Inc. v.Carroll Shelby, Carroll Shelby Licensing, Inc, Shelby American, Inc.,Carroll Hall Shelby Trust and Carroll Shelby International, Inc.

 

**Case No. **03-11750-RWZ

 

**U.S. District Court, District of Massachusetts**

 

CarrollShelby, Carroll Shelby Licensing, Inc. and Carroll ShelbyInternational, Inc. (“Shelby Entities”) are named defendants in a lawsuitfiled in federal court (Boston, Massachusetts) by a competitor who manufacturesknock-offs of Shelby Cobra 427 S/C and Shelby Cobra Daytona Coupe vehicles, towit: an Illinois based corporation by the name of Superformance, Inc.,whose sole shareholder is a South African based company by the name ofHi-Tech, Inc. This particular litigation was commenced by Superformanceafter the Shelby Entities enforced their intellectual property rights grantedby the U.S. Patent & Trademark Office to the exterior design of theShelby Cobra Daytona Coupe. These rights were enforced by requesting U.S.Customs to impound a knock-off vehicle being imported into the United States bySuperformance, which vehicle violated a trademark granted to Carroll Shelby re:the exterior design of the Daytona Coupe Cobra. The Superformance vehicle wasin fact impounded in the State of New York by the U.S. Customs Office.Subsequently, the vehicle was released from impoundment. Superformance allegesthat the impoundment was unlawful, and that it was damaged by the same. Shelbyvehemently denies Superformance’s allegations, and considers this lawsuit to beutterly without merit. Now pending before the Boston Federal Court is a motionbrought by the Shelby Entities to dismiss the case for lack of jurisdiction,or, in the alternative, transfer the case to the residence of the ShelbyEntities,

 

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to wit: Los Angeles,California. In the opinion of this office, it is unlikely that the outcome ofthe pending litigation will be unfavorable to the Shelby Entities. It isdifficult to estimate an amount or range of potential loss by Superformance forthe simple reason that its lawsuit is based upon claims which have no merit ontheir face, and even if their claims had merit Superformance has no history ofselling its knock-off Daytona Coupe Cobras in the United States. Accordingly,any claim for lost profits would be speculative.

 

**ITEM 2.CHANGE IN SECURITIES**

 

In the first quarter of 2004the Company continued to raise capital through a private placement ofunregistered common stock. The Company has received approximately $1,519,000 ofcash from the sales of approximately 675,224 shares of common stock at $2.25per share.  As of March 31, 2004these shares have not been issued.

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5.OTHER INFORMATION**

 

None.

 

**ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K**

 
| Current report, item 2  Form  8-K                | 2004-01-14 |
|-------------------------------------------------------|------------|
| Current report, items 4, 5, and 7 Form 8-K 2004-03-17 |

 

*Exhibits*

 
| **Number** |   | **Description**                                                                                                                                                       |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1       |   | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act Of 2002— President, Chief  Financial Officer                                               |
| 31.2       |   | Certification pursuant to  Section 302 of the Sarbanes-Oxley Act Of 2002— Chief Executive Officer                                                           |
| 32.1       |   | Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 President, Chief Financial Officer |
| 32.2       |   | Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 Chief Executive Officer            |

 

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**SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to be  signed on its behalf by the undersigned,thereunto duly authorized.

 
|               | CARROLL SHELBY  INTERNATIONAL INC.  (Registrant) |
|--------------------|--------------------------------------------------|
| Date: May 17, 2004 | By:                                              | /s/  CARROLL SHELBY |   |
|               |                                             | CEO and Director |
| Date: May 17, 2004 | By:                                              | /s / JOHN LUFT |   |
|               |                                             | President, CFO and  Director |
|                    |                                                  |  |  |  |

 

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