**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 June 30, 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**                                                                          |
|-------------------------------------------------------------------------------------|
| (State  or Other Jurisdiction of Incorporation or Organization)                     |
| ** **                                                                          |
| **86-1012155**                                                                      |
| (I.R.S.  Employer Identification No.)                                               |
|                                                                                |
| **11150 W. Olympic Boulevard, Suite 1050 Los Angeles, CA  90064**                   |
| (Address  of Principal Executive Offices)                                           |
|                                                                                |
| **(310) 914-1843**                                                                  |
| (Insurer’s  Telephone Number, Including Area Code)                             |
| ** **                                                                          |
| (Former  Name, 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  ýNo  o

 

**APPLICABLE ONLY TO ISSUERS INVOLVED IN**

**BANKRUPTCY PROCEEDINGS DURING THE**

**PRECEDING 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

 

**APPLICABLE ONLY TO CORPORATE ISSUERS**

 

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date: 14,691,081 shares of common stock, $0.001 per value pershare, as of August 13, 2004. Transition Small Business Disclosure Format(check one): Yes  ýNo  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 Operations          | 4      |
| Consolidated  Statements of Cash Flows          | 5      |
| Notes to the  Consolidated Financial Statements | 6-14   |

 

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CARROLL SHELBY INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                                                                     | ** ** | **June 30,  2004** | ** ** | **December 31, 2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                     | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                                                         |       |               |       |                  |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| CURRENT ASSETS:                                                                                                                                                                |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                      |       | $                  | 112,445    |                  | $          | 2,055,997 |   |
| Accounts receivable                                                                                                                                                            |       | 20,476             |       | 142,459               |       |
| Inventories                                                                                                                                                                    |       | 3,877,970          |       | 2,357,439             |       |
| Note receivable, current portion                                                                                                                                               |       | 24,457             |       | —                |       |
| Prepaids                                                                                                                                                                       |       | 366,009            |       | 285,456               |       |
| Other current assets                                                                                                                                                           |       | 16,562             |       | 17,468                |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| Total current assets                                                                                                                                                           |       | 4,417,919          |       | 4,858,819             |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| Property and equipment, net                                                                                                                                                    |       | 363,527            |       | 234,568               |       |
| Note receivable, long term portion                                                                                                                                             |       | 109,690            |       | —                |       |
| Other assets                                                                                                                                                                   |       | 50,998             |       | 33,136                |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| Total assets                                                                                                                                                                   |       | $                  | 4,942,134  |                  | $          | 5,126,523 |   |
|                                                                                                                                                                           |       |               |       |                  |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                     |       |               |       |                  |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                           |       |               |       |                  |       |
| Accounts payable, as of June 30, 2004 and  December 31, 2003 $32,500 and $82,410, respectively is due to related parties                                                       |       | $                  | 857,323    |                  | $          | 557,886 |   |
| Accrued expenses, as of June 30, 2004  $157,500 is due to related parties                                                                                                      |       | 716,104            |       | 245,277               |       |
| Insurance payable                                                                                                                                                              |       | —             |       | 104,534               |       |
| Taxes payable                                                                                                                                                                  |       | 800                |       | 800                   |       |
| Customer deposits                                                                                                                                                              |       | 2,359,904          |       | 1,265,145             |       |
| Current portion of long term debt                                                                                                                                              |       | 340,665            |       | 312,015               |       |
| Current portion of capital leases                                                                                                                                              |       | 6,327              |       | 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                                       |       | 250,000            |       | 418,750               |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| Total current liabilities                                                                                                                                                      |       | 6,167,557          |       | 6,023,305             |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| LONG TERM LIABILITIES                                                                                                                                                          |       |               |       |                  |       |
| Long term debt                                                                                                                                                                 |       | 869,287            |       | 786,645               |       |
| Capital lease liability                                                                                                                                                        |       | 9,045              |       | 5,292                 |       |
|                                                                                                                                                                           |       |               |       |                  |       |
|                                                                                                                                                                           |       | 878,332            |       | 791,937               |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| TOTAL LIABILITIES                                                                                                                                                              |       | 7,045,889          |       | 6,815,242             |       |
|                                                                                                                                                                           |       |               |       |                  |       |
| 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;  14,745,797 issued and outstanding as of June 30, 2004 |       | 14,746             |       | 14,066                |       |
| Additonal paid in capital                                                                                                                                                      |       | 2,273,709          |       | 228,433               |       |
| Accumulated deficit                                                                                                                                                            |       | (4,392,210         | )          | (1,931,218            | )          |
|                                                                                                                                                                           |       |               |       |                  |       |
| Total stockholders’ deficit                                                                                                                                               |       | (2,103,755         | )          | (1,688,719            | )          |
|                                                                                                                                                                           |       |               |       |                  |       |
| Total liabilities and stockholders’ deficit                                                                                                                               |       | $                  | 4,942,134  |                  | $          | 5,126,523 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

3

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CARROLL SHELBY INTERNATIONAL, INC.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30,2004 and 2003 (unaudited)

 
| ** **                                                                 | ** ** | **For the  Three Months Ended  June 30,** | ** ** | **For the  Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                                  | ** ** | **2003**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                 | ** ** | **(unaudited)**                           | ** ** | **(unaudited)**                         | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Revenues:                                                                  |       |                                      |       |                                    |       |   |   |   |   |
| Royalty income                                                             |       | $                                         | 97,055     |                                    | $          | 60,723 |   | $ | 171,613 |   | $ | 160,436 |   |
| Automobile and automobile products                                         |       | 1,075,208                                 |       | —                                  |       | 1,806,191 |   | — |   |
| Vintage automobile sales, net                                              |       | —                                    |       | —                                  |       | — |   | 357,696 |   |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Total revenues, net                                                        |       | 1,172,263                                 |       | 60,723                                  |       | 1,977,804 |   | 518,132 |   |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Cost of good sold                                                          |       | 926,002                                   |       | 227,975                                 |       | 1,534,379 |   | 227,975 |   |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Gross profit (loss)                                                        |       | 246,261                                   |       | (167,252                                | )          | 443,425 |   | 290,157 |   |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Expenses:                                                                  |       |                                      |       |                                    |       |   |   |   |   |
| Selling and marketing                                                      |       | 231,788                                   |       | 110,763                                 |       | 442,290 |   | 187,036 |   |
| General and administrative                                                 |       | 750,238                                   |       | 123,019                                 |       | 1,516,870 |   | 234,297 |   |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Total expenses                                                             |       | 982,026                                   |       | 233,782                                 |       | 1,959,160 |   | 421,333 |   |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Loss from operations                                                       |       | (735,765                                  | )          | (401,034                                | )          | (1,515,735 | ) | (131,176 | ) |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Other income (expense):                                                    |       |                                      |       |                                    |       |   |   |   |   |
| Sublease rental income                                                     |       | 6,000                                     |       | 6,000                                   |       | 12,000 |   | 12,000 |   |
| Gain (loss) on sale of asset                                               |       | (17,606                                   | )          | —                                  |       | 83,650 |   | — |   |
| Interest income (expense), net                                             |       | (86,490                                   | )          | (896                                    | )          | (1,039,307 | ) | (1,670 | ) |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Total other income (expense)                                               |       | (98,096                                   | )          | 5,104                                   |       | (943,657 | ) | 10,330 |   |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Net loss before provision for income taxes                                 |       | (833,861                                  | )          | (395,930                                | )          | (2,459,392 | ) | (120,846 | ) |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Provision for income taxes                                                 |       | —                                    |       | 800                                     |       | 1,600 |   | 800 |   |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Net loss                                                                   |       | $                                         | (833,861   | )                                       | $          | (396,730 | ) | $ | (2,460,992 | ) | $ | (121,646 | ) |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Basic and diluted net loss per share                                       |       | $                                         | (0.06      | )                                       | $          | (0.04 | ) | $ | (0.17 | ) | $ | (0.01 | ) |
|                                                                       |       |                                      |       |                                    |       |   |   |   |   |
| Weighted average number of common shares  outstanding - Basic and dilutive |       | 14,745,384                                |       | 9,422,799                               |       | 14,555,404 |   | 9,255,333 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

4

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CARROLL SHELBY INTERNATIONAL, INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

For the six months ended June 30, 2004 and2003

 
| ** **                                                                       | ** ** | **2004**   | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|----------|------------|
|                                                                             |       |       |       |     |       |
| Cash Flow from operating activities:                                             |       |       |       |     |       |
| Net loss                                                                         |       | $          | (2,460,992 | )        | $          | (121,646 | ) |
| Adjustments to reconcile net loss to net  cash used in net operating activities: |       |       |       |     |       |
| Depreciation and amortization                                                    |       | 62,318     |       | 71,508   |       |
| Net gain on sale of fixed asset                                                  |       | (83,650    | )          | —   |       |
| Non-cash interest expense                                                        |       | 825,250    |       | —   |       |
| (Increase) decrease in receivables                                               |       | 121,983    |       | 101,200  |       |
| Increase in inventory                                                            |       | (1,520,533 | )          | —   |       |
| Increase in prepaid expenses                                                     |       | (81,003    | )          | —   |       |
| (Increase) decrease in other assets                                              |       | 8,497      |       | (7,532   | )          |
| Increase (decreae) in payables and other  accrued expenses                       |       | 665,729    |       | (60,671  | )          |
| Increase in customer deposits                                                    |       | 1,094,759  |       | —   |       |
|                                                                             |       |       |       |     |       |
| Net cash flows used in operating activities                                      |       | (1,367,642 | )          | (17,141  | )          |
|                                                                             |       |       |       |     |       |
| Cash flows from investing activities:                                            |       |       |       |     |       |
| Purchase of property and equipment                                               |       | (299,294   | )          | (16,547  | )          |
| Proceeds from the sale of fixed assets                                           |       | 36,201     |       | —   |       |
| 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                       |       | (263,093   | )          | 757      |       |
|                                                                             |       |       |       |     |       |
| Cash flow from financing activities:                                             |       |       |       |     |       |
| Repayment of notes payable                                                       |       | —     |       | (66,151  | )          |
| Net advances from shareholder                                                    |       | —     |       | 89,288   |       |
| Repayment of notes payable to shareholder                                        |       | (1,480,000 | )          | —   |       |
| Notes payable to shareholder affiliate                                           |       | (250,000   | )          | —   |       |
| Additions to long term debt                                                      |       | 172,801    |       | —   |       |
| Repayment of long term debt                                                      |       | (61,205    | )          | —   |       |
| Repayments of capital lease liability                                            |       | (2,223     | )          | —   |       |
| Repayment of notes receivable                                                    |       | 5,852      |       | —   |       |
| Funds received from private placement, net  of fees                              |       | 1,301,957  |       | —   |       |
| Net cash flows provided by (used in)  financing activities                       |       | (312,818   | )          | 23,137   |       |
| Net increase (decrease) in cash and cash  equivalents                            |       | (1,943,553 | )          | 6,753    |       |
| Cash and cash equivalents, at beginning of  period                               |       | 2,055,998  |       | 22,929   |       |
| Cash and cash equivalents, at end of period                                      |       | $          | 112,445    |     | $          | 29,682 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

5

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**Carroll Shelby International, Inc.**

**Notes toConsolidated Financial Statements**

**June 30, 2004**

**(Unaudited)**

 

**1.****             *****Business Description***

 

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. it 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,accessories and 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”) in Las Vegas, Nevada. InJuly 2003, 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 issubstantially built to its original specifications for enthusiasts. desiring agenuine replica of the first and only American produced sports car to claim theaforementioned championship. We believe a significant enthusiast market existsin the United States for this historic automobile.

 

CSI was originally organizedunder the laws of the State of Nevada on December 4, 2000 as GinsengForest, Inc. (“GFI”) GFI had no operations through June 23, 2003 andwas considered a development stage company in accordance with Statement ofFinancial Accounting Standards No. 7. On June 23, 2003, GFI acquiredall of the outstanding common stock of CSL and Autos for 9,087,866 shares ofGFI common stock and a $2,000,000 secured promissory note payable to CarrollShelby. The Company recorded the offset of this note payable as a distribution.The exchange of stock constituted a reverse merger with CSL as the acquiringcompany. GFI changed its name to Carroll Shelby International, Inc. inSeptember 2003.

 

In the second quarter of2003 Autos began the production of Cobra automobiles due to the financialfailure of a licensee, Shelby American Inc. (“SAI”), who was engaged inmanufacturing these component cars. SAI lost its license to produce Shelbylicensed automobiles due to its failure to make its required royalty payments toCSL. Autos finished the production of the ordered Shelby Cobras in order toprotect the Company’s brand name and maintain its customer loyalty. The Companybelieves these properties will be 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 to be madein 40 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 5).  As of June 30, 2004 the note balance is$1,044,056.  The assets were sold freeand 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.

 

Management believe itsexisting cash and cash equivalent of $112,445 and anticipated cash

 

6

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flows generated fromoperations will not be sufficient to fully execute its business plan.  The Company will be required to raiseadditional funding through the issuance of additional debt or equity.  In addition, the Company will have tosuccessfully negotiate extended terms on the note due to its shareholderCarroll Shelby.  If the Company is unableto do so, it may be required to cease operations.

 

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 asubstantial adverse material impact on the Company and its operations.

 

In December 2003, theCompany formed a wholly owned subsidiary, Shelby Automotive South Africa(“SA”). The purpose of this subsidiary was to produce Cobra chassis. Thissubsidiary began operations in the first quarter of 2004 and subsequentlyclosed its operations in the second quarter of 2004.  The Company recorded a $17,606 loss from theabandonment and sale of the fixed assets. All inventories at the SA location will be shipped to Autos.  SA operations were not material to theconsolidated balance sheet and statement of operations for the three and sixmonths ended June 30, 2004.

 

**2.****             *****Summary of Significant AccountingPolicies***

 

**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.

 

**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. At June 30, 2004,the Company had no deposits in excess of FDIC insured limits of $100,000. Ifnecessary, the Company will perform periodic evaluations of the relative creditstanding 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 June 30, 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 June 30, 2004 (unaudited) and December 31, 2003 are as follows:

 
| ** **          | ** ** | **June 30,  2004** | ** ** | **December  31, 2003** | ** ** |
|---------------------|------------|--------------------|------------|------------------------|------------|
| Parts and materials |       | $                  | 2,057,491  |                   | $          | 1,404,217 |   |
| Work in process     |       | 1,820,479          |       | 953,222                |       |
|                |       | $                  | 3,877,970  |                   | $          | 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 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.

 

7

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Expenditures, which materially increase values, change capacities orextend useful lives, are capitalized. Replacements are capitalized and theproperty and equipment accounts are relieved for the items being replaced. Therelated costs and accumulated depreciation of disposed assets are eliminatedand any gain or loss on disposition is included in the statement of operations.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.  Nowarranty accrual has been recorded for the three and six months ended June 30,2004.

 

**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.

 

**RevenueRecognition:**   Revenuefrom automobiles and accessories sales is recognized when the sale transactionis complete including physical delivery of the merchandise and/or 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.

 

The income tax expense forthe six months ended June 30, 2004 represents the minimum state taxes due.

 

The total net operatinglosses as of June 30, 2004 of approximately $4,400,000 can be carried forwardthrough 2024.

 

**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 June 30, 2004,100,000 options were outstanding.

 

8

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**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. Comprehensiveincome is not presented in the Company’s financial statements since the Companydid not have any of the items of comprehensive income in any period 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

 

During the six months endedJune 30, 2004, the Company issued 100,000 options valued at $248,000 inassociation with its bridge line of credit from shareholder.

 

During the six months endedJune 30, 2004, the Company entered into a $9,838 capital lease for officeequipment.

 

During the six months endedJune 30, 2004, the company issued a $140,000 note receivable in connection withthe sale of its truck and trailer.

 

Supplemental Information

 

For the three and six monthsended June 30, 2004, $1,600 in income taxes were paid.  For the three and six month ended June 30,2003 $800 in income taxes were paid. Interest paid for the three and six months ended June 30, 2004 was$131,160 and $40,075, respectively.  Nointerest was paid for the three months ended June 30, 2003.

 

**3.****             *****Note Receivable***

 

In January 2004, the Companysold 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 due in 61 monthly payments of$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, net oflosses on fixed assets, in other income (expense) for the six months ended June30, 2004.

 

**4.****             *****Property and Equipment***

 

Property and equipment atJune 30, 2004 (unaudited) and December 31, 2003 consisted of the following:

 
| ** **                    | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------|------------|--------------------|------------|------------------------|------------|
|                          |       |               |       |                   |       |
| Truck with trailer            |       | $                  | 232,200    |                   | $          | 478,079 |   |
| Airplane                      |       | 310,384            |       | 310,384                |       |
| Automobiles                   |       | 223,700            |       | 248,700                |       |
| Furniture and equipment       |       | 63,769             |       | 50,328                 |       |
| Tooling and equipment         |       | 21,208             |       | 9,105                  |       |
| Leasehold improvements        |       | 79,081             |       | 59,301                 |       |
|                          |       | 930,342            |       | 1,155,897              |       |
| Less accumulated depreciation |       | (566,815           | )          | (921,329               | )          |
|                          |       | $                  | 363,527    |                   | $          | 234,568 |   |

 

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Depreciation expense for thethree and six months ended June 30, 2004 is $28,734 and $62,318,respectively.  Depreciation expense forthe three and six months ended June 30, 2003 is $35,754 and $71,508,respectively.

 

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

 

       Debtconsists of the following at June 30, 2004:

 
| Note payable - Venture |   | 1,044,056 |    |
|------------------------|--------|-----------|---------|
| Truck financing        |   | 165,896   |    |
|                   |   | 1,209,952 |    |
| Less Current Portion   |   | (340,665  | )       |
|                   |   | $         | 869,287 |   |
|                        |        |           |         |  |

 

*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 monthlyinstallments of $30,000. The Company imputed the interest on the note at 5.5%and recorded the principal of the note originally at $1,098,660 as ofDecember 31, 2003.  As of June 30,2004 the note balance is $1,044,056.  Thenote due from the Company to Venture Mold and Engineering Corporation inconnection with certain inventory relating to the Shelby Series 1 program isfour months in arrears, but not in default under the agreement withVenture.  The Company and Venture are inagreement with respect to the status of the note and the Security Agreementrelated thereto.  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.

 

*Truck financing*

 

In March 2004, the Companyfinanced the purchase of truck and trailer with a note 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 andtrailer.

 

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

 

Through 2004 the Companyraised capital through a private placement of unregistered common stock. TheCompany has received approximately $1,300,000 of cash, net of fees, from thesale of approximately 680,000 shares of common stock at $2.25 per share in thefirst half of 2004.

 

As of June 30, 2004 a totalof 100,000 options were outstanding with a strike price of $1.50.

 

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**7.****             *****Related Party Transactions***

 

*NotePayable to Shareholder*

 

Note 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 due by June 30, 2004 and wassubsequently extended to August 31, 2004. Prior to the extended due date of August 31, 2004 the Company isnegotiating with the shareholder to restructure the terms of this note.  However, there can be no assurance that thisnote can be extended at terms favorable to the Company the result of whichcould cause the Company to cease operations. On January 1, 2004, this note began accruing interest at the maximuminterest rate allowable by law not to exceed 1.5% per month.  Total outstanding due on this note as of June30, 2004 was $1,500,000.

 

*NotePayable to Shareholder affiliate*

 

Note payable to shareholderaffiliate originally consisted of a $500,000 note payable, issued onSeptember 30, 2003 to Carroll Shelby and Bill Murphy, originally due June30, 2004 and bearing interest at 18% annually. The Company repaid $250,000 of this note in April 2004 and wasgiven extended terms to pay the remainder of the note by June 30, 2004 andsubsequently extended to August 31, 2004. Prior to the extended due date of August 31, 2004 the Company isnegotiating with the shareholder to restructure the terms of this note.  However, there can be no assurance that thisnote can be extended at terms favorable to the Company the result of whichcould cause the Company to cease operations. Total outstanding due on this note as of June 30, 2004 is $250,000.

 

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 holders convertthey 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 priceof $6.00 per share and shall mature 3 years from issuance. The commonstock underlying 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” of $.50 pershare associated with its issuance which totals $42,500. In addition, theCompany included in the “beneficial conversion feature” the value of theunderlying warrants associated with the conversion. The warrants are valued at$120,000. The warrant’s value was calculated using the “Black Sholes Model”with assumptions of a 2.23% discount interest rate, 3 year term, 42% volatilityand a dividend rate of zero.  Thisbeneficial conversion feature resulted in additional interest expense on theconsolidated statement of operations of $81,250 for the six months ended June30, 2004.

 

*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 issue300,000 options to purchase common stock at $1.50 per share to the note holder.The options will vest ratably over a three-year period beginningJanuary 1, 2004. The Company did not pay this note on the maturity dateand issued 100,000 options to the shareholder on January 1, 2004.  In addition the Company will issue 100,000options in 2005 and 2006.  The Companyvalued the 300,000 options at $744,000 by using the “Black Sholes” method withthe following assumptions: Term 5 years; Volatility 40%; quarterly dividendrate of zero; and a discount rate of 2.23%. During the first quarter of 2004 the Company recorded $744,000 tointerest expense associated with these options. As of June 30, 2004, 100,000 options were

 

11

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vested under this agreement.

 

As of June 30, 2004 accruedinterest expense related to the related party debt outstanding to the majorityshareholder and an affiliate is $165,000. For the three months and six monthsended June 30, 2004 total interest expense associated with a majorityshareholder is $79,500, and $207,900, respectively.  For the three and six months ended June 30,2003 there was no interest expense due to the majority shareholder.

 

The Company’s principalshareholder was responsible for the creation of the trademarks, trade names andtrade dress now licensed through CSL and is subject to its licensingagreements.  CSL entered into anon-exclusive licensing agreement for use of the trademarks with Autos, itssister company, in June 2003.  Thisagreement provides for a royalty of 5% on all Cobra automobiles, vehicleprograms and parts and accessories. Autos will pay CSL a 10% royalty rate on all other merchandisesold.  Through CSL these royalties are tobe paid to a trust owned by Carroll Shelby. The royalty paid to CSL does not include automobiles that startedproduction with SAI and were continued by Autos.  Total royalties expensed under this agreementfor the three and six months ended June 30, 2004 are $97,192.  There were no royalties expensed under thisagreement for three and six months ended June 30, 2003.  Total royalties accrued under this agreementas of June 30, 2004 are $97,192.

 

The Company is responsiblefor paying royalties to a trust controlled but Carroll Shelby from incomegenerated from CSL.  Total royaltiesexpensed for the three and six months ended June 30, 2004 are $11,817 and$53,016, respectively.  The total amountof royalties accrued as of June 30, 2004 are $1,420.

 

Mr. Shelby advances fundsfor operating capital as needed. These advances are non-interest bearing and donot have a due date. Repayments are made as working capital is deemed adequate.The outstanding balances of such advances as of June 30, 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 and six months ended June 30, 2004, legalfees paid to this firm amounted to $44,930 and $64,933, respectively.  On July 22, 2004 this director resigned fromthe Company’s Board of Directors.  Nofees were paid to this firm for the three and six months ended June 30, 2003.

 

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

 

See Note 8 “Commitmentsand Contingencies—Licensing Agreement”.

 

**8.****             *****Commitments and 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 June 30, 2004 total capital lease balances are $15,372.

 

Rental expenses underoperating leases for the three and six months ended June 30, 2004 were $208,130and $415,941, respectively.  Rentalexpenses under operating leases for the three and six months ended June 30,2003 were $9,701 and $18,907, respectively.

 

The Company subleases aportion of its headquarters to a law firm. Total rental income received for thethree and six months ended June 30, 2004 and 2003 is $6,000 and $12,000 and$6,000 and $12,000, respectively.

 

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***Licensing Agreement***

 

In 2003 the Company enteredinto a three year licensing agreement with an unaffiliated company to licensecertain of its intellectual properties associated with the manufacturing of thealuminum bodies and frames of the Shelby producedcars.    The Company prepaid $131,500 for frames related toits Cobra production from this unaffiliated company. The Company amortizes$5,000 of this prepaid towards each frame purchased. Minimum frames to bepurchased in 2004 are 30. Under the terms of the agreement the Company isrequired to purchase an addition 20 frames in 2005.  For the three months and six months endedJune 30, 2004 two frames have been delivered to the Company.  For the three and six months ended June 30,2004 the Company paid an additional $102,000 and $290,000, respectively to thisunaffiliated company to continue production of these frames.  Total prepaid asset related to this agreementand the production of aluminum bodies and frames as of June 30, 2004 is$348,500. As part of this purchase agreement the Company purchased 10% of theoutstanding stock of this unaffiliated company for $50,000, which is includedin other long term assets at June 30, 2004. This investment is recorded at costunder the cost method.

 

***Finance Agreement***

 

The company finances itsinsurance through a finance company. For the three and six months ended June30, 2004 total principal paid on this policy is $39,357 and $104,534,respectively.  For the three and sixmonths ended June 30, 2004 total interest paid on this policy is $353 and$1,876, respectively.  As of June 30,2004 this agreement has been paid off.

 

***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 (“CSL”), revenuegenerated from the production of automobiles and sale of automobile performanceparts (“Autos” and “SA”) and corporate headquarters (“CSI”). These businesssegments are distinct and separate. There are no allocations of costs amongstthese segments or intercompany revenues.

 

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Business segment informationfor the three and six months ended June 30, 2004 and 2003 consists of:

 
| ** **                      | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | **2004**                       | ** ** | **2003**                     | ** ** | **2004** | ** ** | **2003** | ** ** |
|                            |       |                           |       |                         |       |   |   |   |   |
| Revenue:                        |       |                           |       |                         |       |   |   |   |   |
| CSL and CSI                     |       | $                              | 97,055     |                         | $          | 60,723 |   | $ | 171,612 |   | $ | 518,132 |   |
| Autos and SA                    |       | 1,075,208                      |       | —                       |       | 1,806,191 |   | — |   |
|                            |       |                           |       |                         |       |   |   |   |   |
| Operating  income (loss)        |       |                           |       |                         |       |   |   |   |   |
| CSL                             |       | (27,516                        | )          | (127,403                     | )          | (116,415 | ) | 142,455 |   |
| Autos and SA                    |       | (490,216                       | )          | (256,056                     | )          | (1,023,958 | ) | (256,056 | ) |
| CSI                             |       | (218,033                       | )          | (17,575                      | )          | (375,487 | ) | (17,575 | ) |
|                            |       |                           |       |                         |       |   |   |   |   |
| Depreciation  and Amortization: |       |                           |       |                         |       |   |   |   |   |
| CSL                             |       | 11,572                         |       | 35,754                       |       | 37,759 |   | 71,508 |   |
| Autos and SA                    |       | 17,162                         |       | —                       |       | 24,559 |   | — |   |
| CSI                             |       | —                         |       | —                       |       | — |   | — |   |
|                            |       |                           |       |                         |       |   |   |   |   |
| Assets:                         |       |                           |       |                         |       |   |   |   |   |
| CSL                             |       | 238,023                        |       | 188,321                      |       | 238,024 |   | 188,321 |   |
| Autos and SA                    |       | 4,583,588                      |       | 35,845                       |       | 4,583,588 |   | 35,845 |   |
| CSI                             |       | 120,523                        |       | —                       |       | 120,523 |   | — |   |
|                            |       |                           |       |                         |       |   |   |   |   |
| Capital  expenditures:          |       |                           |       |                         |       |   |   |   |   |
| CSL                             |       | —                         |       | —                       |       | — |   | 16,547 |   |
| Autos and SA                    |       | 41,736                         |       | 6,163                        |       | 299,169 |   | — |   |
| CSI                             |       | —                         |       | —                       |       | — |   | — |   |
|                                 |            |                                |            |                              |            |  |  |  |  |  |  |  |  |

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS.**

 

*Cautionary Statement*

 

*The*following*information should be read in conjunction with the Consolidated FinancialStatements and Notes thereto included elsewhere in this report and the auditedfinancial statements and Management Discussion and Analysis contained in ourAnnual Report on Form 10-K for the year ended December 31, 2003.*

 

The information in this Report is not a complete description of ourbusiness or the risks associated with an investment in our common stock. Weurge you to carefully review and consider the various disclosures made by us inthis Report and in our other reports filed with the SEC.

 

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.

 

**Results of Operations**

 

*Revenues*

 

The Company’s revenuesincreased for the three and six months ended June 30, 2004 versus the same timeperiod for 2003 primarily from the sales of CobraTM automobiles as Autos begangenerating revenue in the third quarter of 2003.  Revenues increased $1,111,540 or 1,831% from$60,723 for the three months ended June 30, 2003 to $1,172,263 for the threemonths ended June 30, 2004. Revenues increased $1,459,672 or 282% from $518,132for the six months ended June 30, 2003 to $1,977,804 for the six months endedJune 30, 2004. Our revenues from licensing increased $36,332 or 60% from$60,723 in the three months ended June 30, 2003 to $97,055 in the same timeperiod in 2004.  In addition royaltyrevenue increased $11,177 or 7% from $160,436 for the six months ended June 30,2003 to $171,613 for the six months ended June 30, 2004.  Products that are licensed typically have a12 to 18 month cycle.  Royaltiesgenerated from these products are higher at the beginning of the cycle then atthe end of the cycle.  In addition,videogames and other concepts are sold for a one time only fee.  The increase in licensing revenue for thethree and six months ended June 30, 2004 versus the same time period in 2003 isattributable to timing in product life cycle for licensing.  For the three and six months ended June 30,2004 versus the same time period in 2003 we added revenues of $1,075,208 and$1,806,191 from the sale of automobiles through Autos.  For the three and six months ended June 30,2004 the Company’s subsidiary Autos sold 14 and 26 CobraTM automobiles,respectively.  For the six months endedJune 30, 2003 revenue included the sale of a vintage automobile for $357,696.

 

*Cost of Goods Sold*

 

For the three and six monthsended June 30, 2003 the assumption of SAI’s Cobra vehicle production by Autosresulted in cost of goods sold of $227,975 with no corresponding productionrevenue.  The Company made this decisionto protect the Shelby trade name and reputation by completing those vehiclesstarted by Shelby American, Inc. (“SAI”), but unfinished due to a lack ofworking capital and cessation of business.

 

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For 2004, cost of goods sold represents the costs of Cobra automobilesand performance and other related automotive products sold. Cost of goods soldfor the three and six months ended June 30, 2004 is $926,002 and $1,534,379,respectively.  For the three and sixmonths ended June 30, 2004 cost of goods sold as a percentage of total saleswas 79% and 78% , respectively.  For thethree and six months ended June 30, 2004 cost of goods sold as a percentage ofautomobile sales through Autos was 86% and 85%, respectively.  The Company is still in the process of sizingits operations for production and anticipates lower costs in the future.

 

*Selling and 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 an increase in selling and marketing expenses of $121,026 or109% from $110,763 for the three months ended June 30, 2003 to $231,789 for thethree months ended June 30, 2004 and $255,255 or 136% from $187,036 for the sixmonths ended June 30, 2003 to $442,291 for the six months ended June 30,2004.  The increase in the three monthand six month period is substantially related to the addition of the CobraTMoperations. The Company’s selling and marketing expenses included expendituresfor transportation, depreciation, meals and entertainment, printing andreproduction, promotion and public relations, research, trademark support,travel and video duplication.  For thethree and six months ended June 30, 2004 the Company incurred royalties to itsprimary shareholder’s trust of approximately $109,009 and $150,208,respectively.  This agreement was not inplace for the three and six months ended June 30, 2003.  The Company will continue to promote itstrademarks and trade names on a regular basis.

 

*General and Administrative Expenses*

 

For the three months endedJune 30, 2004 general and administrative expense increased by $627,218 or 510%from $123,019 for the three months ended June 30, 2003, to $750,237 for thethree months ended June 30, 2004.  Forthe six months ended June 30, 2004 general and administrative expense increasedby $1,282,573 or 547% from $234,297 for the six months ended June 30, 2003, to$1,516,870 for the six months ended June 30, 2004.  The Company established the majority of itsadministrative organization related to Autos in the third quarter of 2003.  However, from the period of Autos inception(May 2003) though June 30, 2003, Autos incurred approximately $28,000 ofgeneral and administrative expenses primarily related to itsincorporation.  Autos operations arelocated in separate facilities in Las Vegas, Nevada and there are additionalexpenses related to occupancy.  For thethree and six months ended June 30, 2004, both CSL and Autos have increased itsgeneral and administrative activities and personnel to comply with its publicreporting obligations. As noted above the periods are not comparable based onthe significant change in operations. Autos was responsible for approximately $423,719 in increased generaland administrative expenses for the three months ended June 30, 2004 and$917,774 for the six months ended June 30, 2004 versus the same periods in2003. The Company believes that Autos is adequate for the foreseeable futureand its personnel complement is not expected to increase substantially. Theexpense category with significant changes between the three and six monthsended June 30, 2003 and 2004 not directly related Autos were fees primarilyrelated legal accounting and public relation fees for the Company sustainingits public reporting requirements.  Inaddition, the Company incurred costs related to investment banking fees for servicesrendered.

 

*Other Income and (Expense)*

 

Other income and (expense)increased $103,200 or 2,022% from income of $5,104 for the three months endedJune 30, 2003 to expense of $98,096 for the three months ended June 30,2004.  Other income and (expense) increased$953,987 or 9,235% from income of $10,330 for the six months ended June 30,2003 to expense of $943,657 for the six months ended June 30, 2004.  The substantial increase in other income(expense) for the three and six months ended June 30, 2004 versus the same timeperiods in 2003 is attributable to the increase in interest expense associatedwith the notes payable issued to the Company’s majority shareholder at the timeof its merger and the continued advances from the majority shareholder inconnection with its expanded operations. For the six months ended June 30, 2004 interest expense was offset bythe net gain on the sale of the Company’s fixed assets primarily its tractortrailer of

 

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$83,650.

 

For the three and six monthsended June 30, 2004 and 2003 other income consisted of sublease rental incomefrom a law firm.

 

*Provision for 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 forthe six moths ended June 30, 2004 represents the minimum state taxes due.

 

The total net operatinglosses as of June 30, 2004 of approximately $4,400,000 can be carried forwardthrough 2024.  These net operating lossesmaybe affected by future performance of the Company during its 2004 operationsand maybe limited to its use in the future by stock issued through its privateplacement.

 

**Liquidity and CapitalResources**

 

Management believes itsexisting cash and cash equivalent of $112,445 and anticipated cash flowsgenerated from operations will not be sufficient to fully execute its businessplan.  The Company will be required toraise additional funding through the issuance of additional debt or equity.  In addition, the Company will have tosuccessfully negotiate extended terms on the note due to its shareholderCarroll Shelby.  If the Company is unableto do so, it may be required to cease operations.

 

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 asubstantial adverse material impact on the Company and its operations.

 

The Company has not achievedprofitable operations through June 30, 2004. It is not presently able todetermine when profitable operations will be obtained. For the six months endedJune 30, 2004 its private placement financing generated in the fourth quarterof 2003 and through out 2004 and increases in customer deposits (approximately$1,094,000) have financed operations through June 30, 2004.  The Company has a cash balance of $112,445 atJune 30, 2004. The Company also has substantial current liabilities dueincluding $1.75 million due to its shareholder, $2.359 million ofcustomer deposits to be “offset” when cars are completed and delivered and$340,665 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 used inoperations of approximately $17,141 for the six months ended June 30, 2003 andused in operations of $1,367,642 for the six months ended June 30, 2004. Whilenot directly comparable, the decrease in cash resources for the six monthperiod ended June 30, 2004 and 2003 is substantially related to resourcesapplied to the CobraTM production operations and specifically to acquiring and producingthe inventory to support these operations.

 

Net cash provided byinvesting activities for the six months ended June 30, 2003 was approximately$757 as compared to cash used in investing activities of $263,093 for the sixmonths ended June 30, 2004. This increase was primarily a result of thepurchase of property and equipment associated with the start up

 

17

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of the CobraTM production activities and the purchase of a truck andtrailer.

 

The Company’s financingactivities for the six months ended June 30, 2003 provided cash resources ofapproximately $23,137 primarily related to shareholder advances offset by thepayments on its tractor trailer note. For the six months ended June 30, 2004, financing activities used fundsof $312,818.  For the six months endedJune 30, 2004 cash provided from financing activities consisted of fundsreceived from the private placement offering of unregistered shares net of feesof approximately $1.3 million, issuance of a note payable to purchase a truckfor approximately $172,000 offset by the repayment of shareholder notes of$1,730,000.

 

In August 2003, theCompany retained an investment banker to provide, among other services,assistance with the Company’s financing efforts as it attempts to secureadditional capital for product development, possible acquisitions and workingcapital and to assist the Company with general business strategy and adviceregarding listing on a national exchange. As of June 30, 2004 the Company hasfinished its first capital raise through the sale of its common shares.  For the six months ended June 30, 2004 the Companyraised capital through a private placement of unregistered common stock. TheCompany received approximately $1,300,000 of cash, net of fees, from the saleof approximately 680,000 shares of common stock at $2.25 per share.

 

The note due from theCompany to Venture Mold and Engineering Corporation in connection with certaininventory relating to the Shelby Series 1 program is four months in arrears,but not in default under the agreement with Venture.  The Company and Venture are in agreement withrespect to the status of the note and the Security Agreement related thereto

 

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.

 

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

 

**Off Balance Sheet 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 June 30, 2004.

 

**Contractual Obligations, Contingent Liabilities andCommitments**

 

CSI has contractualobligations and commitments primarily with regard to facilities leases, aninventory commitment and office equipment leases. The following tableaggregates the Company’s expected contractual obligations and commitmentssubsequent to June 30, 2004.

 
| ** **                           | ** ** | **July – December  Payments Due by Period** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| ** **                           | ** ** | **2004**                                         | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008  and  Beyond** | ** ** | **Total** | ** ** |
| **Contractual Obligations**          |       |                                             |       |   |   |   |   |   |   |   |   |   |   |
| Corporate Office Lease               |       | $                                                | 96,989     |   | $ | 8,082 |   | $ | — |   | $ | — |   | $ | — |   | $ | 105,071 |   |
| Manufacturing Facility Lease         |       | 67,812                                           |       | 139,004 |   | 143,176 |   | 147,476 |   | 100,264 |   | 597,732 |   |
| Manufacturing Facility Lease(2)      |       | 215,721                                          |       | 445,247 |   | — |   | — |   | — |   | 660,968 |   |
| Phone System                         |       | 1,727                                            |       | 3,454 |   | 2,303 |   | — |   | — |   | 7,484 |   |
| Phone System (2)                     |       | 2,363                                            |       | 4,725 |   | 3,544 |   | — |   | — |   | 10,632 |   |
| Aluminum Body Frames for Shelby Cars |       | 693,000                                          |       | 720,000 |   | — |   | — |   | — |   | 1,413,000 |   |
| **Total**                            |       | $                                                | 1,077,612  |   | $ | 1,320,512 |   | $ | 149,023 |   | $ | 147,476 |   | $ | 100,264 |   | $ | 2,794,887 |   |

 

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All accounts payable,accrued expenses and debt as presented on the consolidated financial statementare excluded from this table.

 

**Critical Accounting Policies**

 

Our accounting policies aredescribed in Note 1 of the Consolidated Financial Statements. We prepare ourConsolidated Financial Statements in conformity with accounting principlesgenerally accepted in the United States, which require us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the year.Actual results could differ from those estimates. In Management’s Discussionand Analysis contained in our Annual Report on Form 10-K for the year endedDecember 31, 2003, we summarized the policies and estimates that we believe tobe most critical in understanding the judgments involved in preparing ourfinancial statements and the uncertainties that could affect our results ofoperations, financial condition and cash flows. There have been no materialchanges on such policies or estimates since we filed our Annual Report on Form10-K for the year ended December 31, 2003.

 

**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-K for the year ended December 31, 2003.

 

**ITEM 3. 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 (Neil to Update)**

 

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.

 

**CaseNo. **03-48939

 

**U.S.Bankruptcy Court, Eastern District of Michigan, Southern Division**

 

Carroll Shelby, ShelbyAutomobiles, Inc. and Carroll Shelby International, Inc. (“Shelby Entities”)are named defendants in a lawsuit filed by Venture Mold & EngineeringCorporation and its parent corporation (“Venture Entities”) as debtors inbankruptcy seeking recovery of damages and/or certain vehicle parts and toolingutilized in the manufacture of “Cobra” series component vehicles duringcalendar year 2003. Carroll Shelby and Shelby Automobiles, Inc. utilizedCobra tooling and parts to complete certain customer orders placed with ShelbyAmerican, Inc. before it ceased doing business in July 2003. Some ofthese parts were in fact included in a December 30, 2003 asset purchase byShelby Automobiles, which was accomplished with the consent of the VentureEntities and the approval of the bankruptcy court. The Shelby Entities’ answer andcounterclaim for damages against the Venture Entities based on breach ofcontract, breach of fiduciary duty and tortuous interference were filed withthe Court on March 15, 2004. In the opinion of this office, it is unlikelythat the outcome of this litigation will be unfavorable to the Shelby Entities,and in fact it is likely that the Shelby Entities will obtain a net positiverecovery against the Venture 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.

 

**CaseNo. **03-11750-RWZ

 

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

 

Carroll Shelby, CarrollShelby Licensing, Inc. and Carroll Shelby International, Inc.(“Shelby Entities”) are named defendants in a lawsuit filed in federal court(Boston, Massachusetts) by a competitor who manufactures knock-offs of ShelbyCobra 427 S/C and Shelby Cobra Daytona Coupe vehicles, to wit: an Illinoisbased corporation by the name of Superformance, Inc., whose soleshareholder is a South African based company by the name of Hi-Tech, Inc.This particular litigation was commenced by Superformance after the ShelbyEntities enforced their intellectual property rights granted by the U.S. Patent &Trademark Office to the exterior design of the Shelby Cobra Daytona Coupe.These rights were enforced by requesting U.S. Customs to impound a knock-offvehicle being imported into the United States by Superformance, which vehicleviolated a trademark granted to Carroll Shelby re: the exterior design of theDaytona Coupe Cobra. The Superformance vehicle was in fact impounded in theState of New York by the U.S. Customs Office. Subsequently, the vehicle wasreleased from impoundment. Superformance alleges that the impoundment wasunlawful, and that it was damaged by the same. Shelby vehemently deniesSuperformance’s allegations, and considers this lawsuit to be utterly withoutmerit. Now pending before the Boston Federal Court is a motion brought by the ShelbyEntities to dismiss the case for lack of jurisdiction, or, in the alternative,transfer the case to the residence of the Shelby Entities,

 

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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.  Settlement discussions are ongoing which, ifsuccessful, will resolved and dismiss all lawsuits among and between the Shelbyentities and Superformance.

 

**ITEM 2. CHANGE IN SECURITIES**

 

For the six months endedJune 30, 2004 the Company raised capital through a private placement of unregisteredcommon stock. The Company has received approximately $1,301,276 of cash, net offees, from the sales of approximately 680,524 shares of common stock at $2.25per share.  As of June 30, 2004 1,765,776shares from this offering have been issued.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

None.

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

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

 

*Exhibits*

 

 
| **Number** | ** ** | **Description**                                                                                                                                             |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                  |
| 31.1       |       | Certification pursuant to Section 302 of the Sarbanes-Oxley Act Of  2002-Chief Executive Officer                                                            |
| 31.2       |       | Certification pursuant to Section 302 of the Sarbanes-Oxley Act Of  2002-President, Chief Financial 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 Chief Executive 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 President, Chief Financial  Officer |

 

*Reports on 8-k*

 

Current Report item 5 Form 8K 2004-07-02

 

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**SIGNATURES**

 

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

 
|                  | CARROLL SHELBY INTERNATIONAL INC. |
|-----------------------|-----------------------------------|
|                  | (Registrant)                      |
| Date: August 16, 2004 | By:                               | /s/   CARROLL SHELBY |   |
|                  |                              | Chief Executive Officer and  Director |
| Date: August 16, 2004 | By:                               | /s/   JOHN LUFT |   |
|                  |                              | President, Chief Financial Officer  and Director |

 

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