**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

 

**FORM10-QSB**

 

**ý****  Quarterly report under Section 13 or 159(d) of the Securities Exchange Act of 1934A**

** **

**For the quarterly period ended September 30, 2004**

 

**o****  Transition report under Section 13 or15(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 SinceLast 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  ý  No  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: 14,766,635 shares of common stock, $0.001 per value pershare, as of October 25, 2004. Transition Small Business Disclosure Format(check one): Yes  ý No o

 

 

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**Part I. FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**CARROLL SHELBY INTERNATIONAL INC.**

 

**CONTENTS**

 
| **FINANCIAL  STATEMENTS**                       |   |
|-------------------------------------------------|--------|
| Consolidated Balance Sheets                     | 3      |
| Consolidated  Statements of Operations          | 4      |
| Consolidated  Statements of Cash Flows          | 5      |
| Notes to the  Consolidated Financial Statements | 6-15   |

 

2

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CARROLL SHELBY INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                                                                                                                          | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **(unaudited)**         | ** ** | ** **             | ** ** |
| ASSETS                                                                                                                                                                              |       |                    |       |                   |       |
|                                                                                                                                                                                |       |                    |       |                   |       |
| CURRENT ASSETS:                                                                                                                                                                     |       |                    |       |                   |       |
| Cash and cash equivalents                                                                                                                                                           |       | $                       | 181,381    |                   | $          | 2,055,997 |   |
| Accounts receivable                                                                                                                                                                 |       | 70,003                  |       | 142,459                |       |
| Inventories                                                                                                                                                                         |       | 2,595,390               |       | 2,357,439              |       |
| Note receivable, current portion                                                                                                                                                    |       | 24,888                  |       | —                 |       |
| Prepaids                                                                                                                                                                            |       | 676,332                 |       | 285,456                |       |
| Other current assets                                                                                                                                                                |       | 16,266                  |       | 17,468                 |       |
| Total current assets                                                                                                                                                                |       | 3,564,260               |       | 4,858,819              |       |
|                                                                                                                                                                                |       |                    |       |                   |       |
| Property and equipment, net                                                                                                                                                         |       | 341,776                 |       | 234,568                |       |
| Inventory                                                                                                                                                                           |       | 653,765                 |       | —                 |       |
| Note receivable, long term portion                                                                                                                                                  |       | 103,304                 |       | —                 |       |
| Other assets                                                                                                                                                                        |       | 51,000                  |       | 33,136                 |       |
| Total assets                                                                                                                                                                        |       | $                       | 4,714,105  |                   | $          | 5,126,523 |   |
|                                                                                                                                                                                |       |                    |       |                   |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                                                                                                                          |       |                    |       |                   |       |
|                                                                                                                                                                                |       |                    |       |                   |       |
| CURRENT LIABILITIES:                                                                                                                                                                |       |                    |       |                   |       |
| Accounts payable, as of September 30, 2004  and December 31, 2003 $26,419 and $82,410, respectively is due to related  parties                                                      |       | $                       | 557,937    |                   | $          | 557,886 |   |
| Accrued expenses, as of September 30, 2004  $182,562 is due to related parties                                                                                                      |       | 937,305                 |       | 245,277                |       |
| Deferred interest to shareholder                                                                                                                                                    |       | 55,040                  |       | —                 |       |
| Insurance payable                                                                                                                                                                   |       | 283,934                 |       | 104,534                |       |
| Taxes payable                                                                                                                                                                       |       | 800                     |       | 800                    |       |
| Deferred Revenue                                                                                                                                                                    |       | 62,000                  |       | —                 |       |
| Customer deposits                                                                                                                                                                   |       | 2,536,635               |       | 1,265,145              |       |
| Current portion of long term debt                                                                                                                                                   |       | 534,404                 |       | 312,015                |       |
| Current portion of capital leases                                                                                                                                                   |       | 5,567                   |       | 2,464                  |       |
| Advances from shareholder                                                                                                                                                           |       | 136,434                 |       | 136,434                |       |
| Current portion, notes payable to  shareholder                                                                                                                                      |       | 1,000,000               |       | 2,980,000              |       |
| Convertible note payable to shareholder  affiliate, net of unamortized beneficial conversion feature of $81,250 as of  December 31, 2003                                            |       | —                  |       | 418,750                |       |
| Total current liabilities                                                                                                                                                           |       | 6,110,056               |       | 6,023,305              |       |
|                                                                                                                                                                                |       |                    |       |                   |       |
| LONG TERM LIABILITIES                                                                                                                                                               |       |                    |       |                   |       |
| Notes payable to shareholder, net of  current portion                                                                                                                               |       | 5,500,000               |       | —                 |       |
| Convertible note payable to shareholder  affiliate                                                                                                                                  |       | 250,000                 |       | —                 |       |
| Deferred interest to shareholder                                                                                                                                                    |       | 97,919                  |       | —                 |       |
| Long term debt                                                                                                                                                                      |       | 657,956                 |       | 786,645                |       |
| Capital lease liability                                                                                                                                                             |       | 8,309                   |       | 5,292                  |       |
|                                                                                                                                                                                |       | 6,514,184               |       | 791,937                |       |
| TOTAL LIABILITIES                                                                                                                                                                   |       | 12,624,240              |       | 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 September 30, 2004 |       | 14,066                  |       | 14,066                 |       |
| Additonal paid in capital                                                                                                                                                           |       | (2,725,610              | )          | 228,433                |       |
| Accumulated deficit                                                                                                                                                                 |       | (5,198,591              | )          | (1,931,218             | )          |
| Total stockholders’ deficit                                                                                                                                                    |       | (7,910,135              | )          | (1,688,719             | )          |
|                                                                                                                                                                                |       |                    |       |                   |       |
| Total liabilities and stockholders’ deficit                                                                                                                                    |       | $                       | 4,714,105  |                   | $          | 5,126,523 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

3

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CARROLL SHELBY INTERNATIONAL,INC.

CONSOLIDATEDSTATEMENTS OF OPERATIONS

For the Three and Nine MonthsEnded September 30, 2004 and 2003 (unaudited)

 
| ** **                                                                 | ** ** | **For the  Three Months Ended  September 30,** | ** ** | **For the  Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                 | ** ** | **2004**                                       | ** ** | **2003**                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                 | ** ** | **(unaudited)**                                | ** ** | **(unaudited)**                               | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
| Revenues:                                                                  |       |                                           |       |                                          |       |   |   |   |   |
| Royalty income                                                             |       | $                                              | 95,928     |                                          | $          | 174,565 |   | $ | 267,541 |   | $ | 335,002 |   |
| Automobile and automobile products                                         |       | 1,578,426                                      |       | 849,906                                       |       | 3,384,617 |   | 849,906 |   |
| Vintage automobile sales, net                                              |       | —                                         |       | —                                        |       | — |   | 357,696 |   |
| Total revenues, net                                                        |       | 1,674,354                                      |       | 1,024,471                                     |       | 3,652,158 |   | 1,542,604 |   |
|                                                                       |       |                                           |       |                                          |       |   |   |   |   |
| Cost of good sold                                                          |       | 1,723,109                                      |       | 1,204,817                                     |       | 3,257,488 |   | 1,432,792 |   |
|                                                                       |       |                                           |       |                                          |       |   |   |   |   |
| Gross profit (loss)                                                        |       | (48,755                                        | )          | (180,346                                      | )          | 394,670 |   | 109,812 |   |
|                                                                       |       |                                           |       |                                          |       |   |   |   |   |
| Expenses:                                                                  |       |                                           |       |                                          |       |   |   |   |   |
| Selling and marketing                                                      |       | (10,405                                        | )          | 141,309                                       |       | 431,884 |   | 328,345 |   |
| General and administrative                                                 |       | 693,587                                        |       | 556,781                                       |       | 2,210,131 |   | 792,133 |   |
| Total expenses                                                             |       | 683,182                                        |       | 698,090                                       |       | 2,642,015 |   | 1,120,478 |   |
|                                                                       |       |                                           |       |                                          |       |   |   |   |   |
| Loss from operations                                                       |       | (731,937                                       | )          | (878,436                                      | )          | (2,247,345 | ) | (1,010,666 | ) |
|                                                                       |       |                                           |       |                                          |       |   |   |   |   |
| Other income (expense):                                                    |       |                                           |       |                                          |       |   |   |   |   |
| Sublease rental income                                                     |       | 6,000                                          |       | 6,000                                         |       | 18,000 |   | 18,000 |   |
| Gain on sale of asset                                                      |       | —                                         |       | —                                        |       | 83,650 |   | — |   |
| Interest (expense), net                                                    |       | (80,771                                        | )          | (44,006                                       | )          | (1,120,078 | ) | (45,422 | ) |
| Total other income (expense)                                               |       | (74,771                                        | )          | (38,006                                       | )          | (1,018,428 | ) | (27,422 | ) |
|                                                                       |       |                                           |       |                                          |       |   |   |   |   |
| Net loss before provision for income taxes                                 |       | (806,708                                       | )          | (916,442                                      | )          | (3,265,773 | ) | (1,038,088 | ) |
|                                                                       |       |                                           |       |                                          |       |   |   |   |   |
| Provision for income taxes                                                 |       | —                                         |       | 800                                           |       | 1,600 |   | 800 |   |
|                                                                       |       |                                           |       |                                          |       |   |   |   |   |
| Net loss                                                                   |       | $                                              | (806,708   | )                                             | $          | (917,242 | ) | $ | (3,267,373 | ) | $ | (1,038,888 | ) |
|                                                                       |       |                                           |       |                                          |       |   |   |   |   |
| Basic and diluted net loss per share                                       |       | $                                              | (0.05      | )                                             | $          | (0.07 | ) | $ | (0.22 | ) | $ | (0.10 | ) |
|                                                                       |       |                                           |       |                                          |       |   |   |   |   |
| Weighted average number of common shares  outstanding - Basic and dilutive |       | 14,745,855                                     |       | 12,948,853                                    |       | 14,618,888 |   | 10,486,506 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

4

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CARROLL SHELBY INTERNATIONAL,INC.

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

For the nine months endedSeptember 30, 2004 and 2003

 
| ** **                                                                       | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash Flow from operating activities:                                             |       |       |       |       |       |
| Net loss                                                                         |       | $          | (3,267,373 | )          | $          | (1,038,888 | ) |
| Adjustments to reconcile net loss to net  cash used in net operating activities: |       |       |       |       |       |
| Depreciation and amortization                                                    |       | 87,914     |       | 111,152    |       |
| Net gain on sale of fixed asset                                                  |       | (83,650    | )          | —     |       |
| Non-cash interest expense                                                        |       | 825,250    |       | —     |       |
| Decrease in receivables                                                          |       | 72,456     |       | 40,144     |       |
| Increase in inventory                                                            |       | (891,718   | )          | (678,333   | )          |
| Increase in prepaid expenses                                                     |       | (390,876   | )          | (67,844    | )          |
| (Increase) decrease in other assets                                              |       | 8,342      |       | (12,461    | )          |
| Increase in payables and other accrued  expenses                                 |       | 1,024,437  |       | 307,057    |       |
| Increase in customer deposits                                                    |       | 1,333,490  |       | 455,015    |       |
|                                                                             |       |       |       |       |       |
| Net cash flows used in operating activities                                      |       | (1,281,728 | )          | (884,158   | )          |
|                                                                             |       |       |       |       |       |
| Cash flows from investing activities:                                            |       |       |       |       |       |
| Purchase of property and equipment                                               |       | (302,837   | )          | (84,802    | )          |
| 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 used in investing activities                                      |       | (266,636   | )          | (67,498    | )          |
|                                                                             |       |       |       |       |       |
| Cash flows from financing activities:                                            |       |       |       |       |       |
| Repayment of notes payable                                                       |       | —     |       | (83,167    | )          |
| Note Payable to shareholder and affiliates                                       |       | —     |       | 1,480,000  |       |
| Repayment of advances from shareholders                                          |       | —     |       | (170,704   | )          |
| Redeemption of warrants                                                          |       | —     |       | 6,974      |       |
| Repayment of notes payable to shareholder                                        |       | (1,480,000 | )          | —     |       |
| Notes payable to shareholder affiliate                                           |       | (250,000   | )          | —     |       |
| Additions to long term debt                                                      |       | 172,801    |       | —     |       |
| Additions to short term debt                                                     |       | 44,000     |       |       |       |
| Repayment of short term debt                                                     |       | (3,667     | )          | —     |       |
| Repayment of long term debt                                                      |       | (119,433   | )          | —     |       |
| Repayments of capital lease liability                                            |       | (3,719     | )          | —     |       |
| Repayment of notes receivable                                                    |       | 11,808     |       | —     |       |
| Funds received from private placement, net  of fees                              |       | 1,301,957  |       | —     |       |
| Net cash flows provided by (used in)  financing activities                       |       | (326,253   | )          | 1,233,103  |       |
| Net increase (decrease) in cash and cash  equivalents                            |       | (1,874,617 | )          | 281,447    |       |
| Cash and cash equivalents, at beginning of  period                               |       | 2,055,998  |       | 22,929     |       |
| Cash and cash equivalents, at end of period                                      |       | $          | 181,381    |       | $          | 304,376 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

5

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**Carroll Shelby International, Inc.**

 

**Notes toConsolidated Financial Statement****s**

 

**September 30, 2004**

 

**(Unaudited)**

 

**1.             *BusinessDescription and Recent Events***

 

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. The Company believes a significant enthusiastmarket exists in the United States for this historic automobile.

 

CSI was originally organizedunder the laws of the State of Nevada on December 4, 2000 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 paymentsto CSL. 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 September30, 2004 the note balance is $993,512.  The assets were sold free andclear 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.

 

In December 2003, theCompany formed a wholly owned subsidiary, Shelby Automotive South Africa (“SA”).The purpose of this subsidiary was to produce Cobra chassis. This subsidiarybegan operations in the first quarter of 2004 and subsequently closed itsoperations in the second quarter of 2004.  For the nine months endedSeptember 30, 2004 the Company recorded a $17,606 loss from the abandonment andsale of the fixed assets.  In the third quarter of 2004 all inventories atthe SA location were shipped to Autos.  SA operations were not material tothe consolidated balance sheet and statement of operations for the three andnine months ended September 30, 2004.

 

6

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Recent Events

 

On August 27, 2004, theCompany reached an agreement with Carroll Shelby, the Company’s Chief ExecutiveOfficer, Director and controlling stockholder, to extend to June 30, 2007 thedue date of the $1,500,000 secured promissory note, and to extend to August 27, 2007 that certain secured promissory note with acurrent principal balance equal to $250,000, both of which were due on August31, 2004.  In addition, Shelby agreed tolower the interest rate on these promissory notes from 18% to 7% beginningJanuary 1, 2004.  The differentialbetween the original rate of 18% and the revised rate of 7% for the $1,500,000note resulted in the recording of additional accrued interest of $125,000.  In accordance with Financial AccoutingStandards (“FAS”) 15 the Company will amortize this interest prospectively on astraight line basis over the new term of this note through interest expense.  In addition, as a result of this retroactiverate change the Company paid $27,959 in additional interest to the shareholderaffiliate on its $250,000 note.  UnderFAS 15 the Company will also amortize this amount prospectively over the termof this note through interest expense.

 

On the same date, the Company’s subsidiary, CarrollShelby Licensing, Inc. (CSL), amended the license agreement between it and theCarroll Hall Shelby Trust (“Trust”) to provide for, among other matters, agrant in perpetuity of exclusive rights to Shelby’s intellectual properties inconnection with all automotive products and related merchandise in exchange forthe issuance to Shelby of a $5,000,000 promissory note bearing interest at 5%per annum beginning September 1, 2005 with the initial payment of $1,000,000due September 1, 2005, with subsequent quarterly payments of $250,000thereafter with a final payment on October 1, 2009.  In addition, 5,000,000 stock warrants wereissued at a strike price of $2.00 per share. These warrants were valued at approximately $7,200,000 (See Note6).  Further, the Company has agreed to increase the current royalty paidby CSL to the Carroll Hall Shelby Trust from 10% to 15%.  The Company recorded this transaction as adistribution of shareholder equity.

 

These agreements between the Company, CSL, the Trustand Shelby were approved by the disinterested member of the Company’s Board ofDirectors and were subject to a third-party opinion with respect to valuationof the Company and legal review.

 

Liquidity

 

The Company has generatedlosses since inception, has limited operations, and negative workingcapital.  It is likely that ourindependent registered public accounting firm will express substantial doubtabout the Company’s ability to continue as a going concern in their opinion forthe current year.

 

Management believes itsexisting cash and cash equivalent of $181,381 and anticipated cash flowsgenerated from operations will not be sufficient to fully execute its businessplan.  The Company will be required to raise additional funding throughthe issuance of additional debt or equity.  If the Company is unable to doso, 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.

 

**2.             *Summaryof Significant Accounting Policies***

 

**Basis ofPresentation of Interim Financial Data:**  The financial information as ofand for the three and nine month period ended September 30, 2004 included inthis report is unaudited.  Such information, however, reflects alladjustments (consisting only of normal recurring adjustments) which are, in theopinion of management, necessary for a fair presentation of results for theinterim periods.  The interim statements should be read in conjunctionwith the financial statements and the related notes included in our AnnualReport on Form 10-KSB for the fiscal year ended December 31, 2003.

 

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

 

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

 

**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

 

7

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institutions. At September30, 2004, the Company had deposits in excess of FDIC insured limits of $6,789.If necessary, the Company will perform periodic evaluations of the relativecredit standing of these financial institutions.

 

**AccountsReceivable and Allowance for Doubtful Accounts:**  A valuation allowance is providedon the Company’s accounts receivable in management’s judgment that will not becollected. All accounts receivable are reviewed on a case by case basis forcollectibility. There is no valuation allowance on the accounts receivable asof September 30, 2004.

 

**Inventories:**  Parts andmaterial 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 currentinventory as of September 30, 2004 (unaudited) and December 31, 2003 are asfollows:

 

| ** **          | ** ** | **September 30,  2004** | ** ** | **December  31, 2003** | ** ** |
|---------------------|------------|-------------------------|------------|------------------------|------------|
| Parts and materials |       | $                       | 1,233,395  |                   | $          | 1,404,217 |   |
| Work in process     |       | 1,361,995               |       | 953,222                |       |
|                |       | $                       | 2,595,390  |                   | $          | 2,357,439 |   |

 

The Company has classifiedthe Series 1 inventory purchased from Venture as a long term asset.  The Company believes there is market for thisinventory amongst its current customer base and other car enthusiasts.  However, the Company believes that thisproduct will not be sold within a twelve month period due to its uniquenature.  The Company reviews its Series 1inventory on a regular basis to determine that it is recorded at the lower ofcost or market.   As of September 30, 2004the Company believes the Series 1 inventory is recorded at the lower of cost ormarket.  As of September 30, 2004 thebalance of this long term inventory, which consists primarily of parts andmaterials, is $653,765.

 

**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.

 

Expenditures, whichmaterially increase values, change capacities or extend useful lives, arecapitalized. Replacements are capitalized and the property and equipmentaccounts are relieved for the items being replaced. The related costs andaccumulated depreciation of disposed assets are eliminated and any gain or losson disposition is included in the statement of operations. The Companycapitalizes 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 time productsare sold. These estimates are established using historical information on thenature, frequency, and average cost of warranty claims. Management activelystudies trends of warranty claims and takes action to improve vehicle qualityand minimize warranty claims.  No warranty accrual has been recorded forthe three and nine months ended September 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.

 

8

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**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 basis 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 sinceinception all deferred tax assets have been fully reserved as of September 30,2004.

 

The income tax expense forthe nine months ended September 30, 2004 represents the minimum state taxesdue.

 

The total tax net operatinglosses as of September 30, 2004 of approximately $2,700,000 can be carriedforward through 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 September 30, 2004,100,000 options and 5,000,000 warrants were outstanding.

 

**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 three and ninemonths ended September 30, 2004, the Company issued a promissory note for$5,000,000 and 5,000,000 warrants valued at $7,200,000 to the majorityshareholder.

 

During the three and ninemonths ended September 30, 2004 the Company recorded  “Deferred Interest to Shareholder” of$152,959.

 

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

 

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

 

During the nine months endedSeptember 30, 2004, the company issued a $140,000 note receivable in connectionwith the sale of its truck and trailer.

 

Supplemental Information

 

For the nine months endedSeptember 30, 2004, $1,600 in income taxes were paid.  For the nine monthended September 30, 2003 $800 in income taxes was paid.  Interest paid forthe three and nine months ended September 30, 2004 was $28,173 and $159,333,respectively.  Interest paid for the three and nine months ended September30, 2003 was $44,548.

 

9

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**3.             *NoteReceivable***

 

In January 2004, the Companysold its truck and trailer to a third party for $165,000.  The Companyreceived $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 the truck and trailer.  Thistransaction resulted in a gain on sale of fixed assets of $101,256 and isshown, net of losses on fixed assets, in other income (expense) for the ninemonths ended September 30, 2004.

 

**4.             *Propertyand Equipment***

 

Property and equipment atSeptember 30, 2004 (unaudited) and December 31, 2003 consisted of thefollowing:

 

 

| ** **                    | ** ** | **September 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         |       | 25,053                  |       | 9,105                  |       |
| Leasehold improvements        |       | 79,081                  |       | 59,301                 |       |
|                          |       | 934,187                 |       | 1,155,897              |       |
| Less accumulated depreciation |       | (592,411                | )          | (921,329               | )          |
|                          |       | $                       | 341,776    |                   | $          | 234,568 |   |

 

Depreciation expense for thethree and nine months ended September 30, 2004 is $25,596 and $87,914,respectively.  Depreciation expense for the three and nine months endedSeptember 30, 2003 is $39,644 and $111,152, respectively.

 

**5.             *LongTerm Debt***

 

Debt consists of thefollowing at September 30, 2004 and December 31, 2003:

 

| ** **                            | ** ** | **September  30, 2004** | ** ** | **December 31,  2003** | ** ** |
|---------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Note payable - Venture                |       | $                       | 993,512    |                   | $          | 1,098,660 |   |
| Truck financing                       |       | 158,515                 |       | —                 |       |
| Note payable – Speedway Commerce |       | 40,333                  |       | —                 |       |
|                                  |       | 1,192,360               |       | 1,098,660              |       |
| Less Current Portion                  |       | (534,404                | )          | (312,015               | )          |
|                                  |       | $                       | 657,956    |                   | $          | 786,645 |   |

 

*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 September 30, 2004 the note balance is$993,512.  The note due from the Company to Venture Mold and EngineeringCorporation in connection with certain inventory relating to the Shelby Series1 program is 5 months in arrears, but not in default under the agreement withVenture.  The Company and Venture are in agreement with respect to thestatus of the note and the Security Agreement related thereto.  The assetswere sold free and clear of any other liens, claims, and encumbrances.

 

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

 

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

 

10

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*Truckfinancing*

 

In March 2004, the Companyfinanced the purchase of truck and trailer with a note payable for$172,800.  This loan has an effective interest rate of 7.5% with monthlypayments of $3,451 over 60 months.  This note is secured by the truck andtrailer.  Total balance outstanding onthis note as of September 30, 2004 is $158,515.

 

*Note Payable – Speedway Commerce*

 

In August 2004, the Companyentered into a non interest bearing promissory note with its landlord, SpeedwayCommerce Center, for $44,000.  This notewas the result of negotiations by the Company with its landlord to release theCompany from occupying its originally anticipated facility.  The Company is required to make 12 monthlypayments of $3,667.  Total loanoutstanding as of September 30, 2004 is $40,333.

 

**6.             *Shareholders’Deficit***

 

Through September 30, 2004the Company raised capital through a private placement of unregistered commonstock. The Company has received approximately $1,300,000 of cash, net of fees,from the sale of approximately 680,000 shares of common stock at $2.25 pershare in the first half of 2004.

 

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

 

In connection with the “RecentEvent” transaction discussed in Note 1, 5,000,000 warrants were issued to themajority shareholder in connection with the extension of certain licensingrights.  The warrants are valued at$7,200,000.  The values of these warrantsare determined by using the “Black – Scholes” method using the followingassumptions: Strike Price of $2.00, Term of warrant 10 years, no dividendyield, volatility of 77.49% and a discount rate of 4.49%.

 

**7.             *RelatedParty 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. As part of previous agreement this note was due byJune 30, 2004 and was subsequently extended to August 31, 2004.   As part of the “Recent Event” transaction discussedin Note 1 the Company was able to extend the terms of this note through June30, 2007 and lower the interest rate from 18% to 7% per annum beginning January1, 2004.  The differential between theoriginal rate of 18% and the revised rate of 7% for the $1,500,000 noteresulted in the recording of additional accrued interest of $125,000 which hasbeen recorded as deferred interest to shareholder.  In accordance with FAS 15 the Company willamortize this interest prospectively on a straight line basis over the new termof this note to interest expense.  Totaloutstanding due on this note as of September 30, 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 was given extended terms to paythe remainder of the note by June 30, 2004 and which was then subsequentlyextended to August 31, 2004.  As part of the “Recent Event”transaction discussed in Note 1 the Company was able to extend the termsof this note through August 27, 2004 and lower the interest rate from 18% to 7%per annum. As a result of this retroactive rate change the Company paid$27,959, which has been recorded as deferred interest to shareholder, inadditional interest to the shareholder affiliate on its $250,000 note.  Under FAS 15 the Company will amortize thisamount prospectively over the term of this note.  Total outstanding due on this note as ofSeptember 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

 

11

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note had a deemed “beneficialconversion feature” of $.50 per share associated with its issuance which totals$42,500. In addition, the Company included in the “beneficial conversionfeature” the value of the underlying warrants associated with the conversion.The warrants are valued at $120,000. The warrant’s value was calculated usingthe “Black Scholes Model” with assumptions of a 2.23% discount interest rate, 3year term, 42% volatility and a dividend rate of zero.  This beneficialconversion feature resulted in additional interest expense on the consolidatedstatement of operations of $81,250 for the nine months ended September 30,2004.

 

*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.  Inaddition the Company will issue 100,000 options in 2005 and 2006.  The Companyvalued the 300,000 options at $744,000 by using the “Black Scholes” method withthe following assumptions: Term 5 years; Volatility 40%; quarterly dividendrate of zero; and a discount rate of 2.23%.  During the first quarter of2004 the Company recorded $744,000 to interest expense associated with theseoptions.  As of September 30, 2004, 100,000 options were vested under thisagreement.

 

*Licensing Agreement withShareholder*

 

The Company’s principal shareholder was responsiblefor the creation of the trademarks, trade names and trade dress now licensedthrough CSL and is subject to its licensing agreements. Originally, CSLentered into a non-exclusive licensing agreement for use of the trademarks withAutos, its sister company, in September 2003.  The original agreement providedfor a royalty of 5% on all Cobra automobiles, vehicle programs and parts andaccessories and Autos would pay CSL a 10% royalty rate on all other merchandisesold.   These royalties are to bepaid to the Trust through CSL.  As a result of the “Recent Event”transaction discussed in Note 1 CSL, amended the license agreement between itand the Trust to provide for, among other matters, a grant in perpetuity ofexclusive rights to Shelby’s intellectual properties in connection with allautomotive products and related merchandise in exchange for the issuance toShelby of a promissory note bearing interest at 5% per annum beginningSeptember 1, 2005 with the initial payment of $1,000,000 due September 1,2005, with subsequent quarterly payments of $250,000 thereafter and with afinal payment on October 1, 2009.  Inaddition, 5,000,000 stock warrants were issued at a strike price of $2.00 pershare and valued at $7,200,000.  Further,the Company has agreed to increase the current royalty paid by CSL to the CarrollHall Shelby Trust to 15%.  The Companyrecorded this transaction as a $12,200,000 distribution of shareholder equity.

 

The royalty paid to CSL doesnot include automobiles that started production with SAI and were continued byAutos.  Total royalties expensed under these agreements for the three andnine months ended September 30, 2004 are $6,289, and $83,053,respectively.  There were no royalties expensed under this agreement forthree and nine months ended September 30, 2003.  Total royalties accruedunder this agreement as of September 30, 2004 are $20,669.

 

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 September 30, 2004 and 2003 are$136,434.

 

*Interest due to shareholder*

 

For the three and ninemonths ended September 30, 2004 and 2003 interest expense to the majorityshareholder is as follows:

 

| ** **                                                                                                   | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                   | ** ** | **2004**                       | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Note Payable to Shareholder                                                                                  |       | $                              | 55,000     |                          | $          | — |   | $ | 212,500 |   | $ | — |   |
| Note Payable to Shareholder affiliate  (includes beneficial conversion feature of $81,250)                   |       | 11,250                         |       | —                        |       | 127,000 |   | — |   |
| Bridge line of credit from shareholder  (includes warrants issued for $744,000 included as interest expense) |       | —                         |       | 44,480                        |       | 759,900 |   | 44,480 |   |
|                                                                                                         |       | $                              | 66,250     |                          | $          | 44,480 |   | $ | 1,099,400 |   | $ | 44,480 |   |

 

12

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Total accrued interestpayable as of September 30, 2004 for these notes is $87,500

 

*Related Party Debt Obligations*

 

The following schedule representsthe debt payout for the shareholder debt as of September 30, 2004:

 
| **For the  years ended September 30:** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|
| 2005                                   |       | $          | 1,000,000  |   |
| 2006                                   |       | 750,000    |       |
| 2007                                   |       | 2,750,000  |       |
| 2008                                   |       | 1,000,000  |       |
| 2009                                   |       | 1,000,000  |       |
| Thereafter                             |       | 250,000    |       |
|                                   |       | 6,750,000  |       |
| Current Portion                        |       | (1,000,000 | )          |
|                                   |       | $          | 5,750,000  |   |

 

A director who resigned fromthe Company’s board on July 22, 2004 is an attorney whose firm performs legalservices for the Company and sublets office space. For the three and ninemonths ended September 30, 2004, legal fees paid to this firm amounted to$23,549 and $88,482, respectively.  For the three and nine months ended September 30, 2003 totalexpenditures related to legal fees were $974 and $5,763, respectively.

 

In the first quarter of2004, the Company accrued a $25,000 loan fee to its majority shareholder andaffiliate in connection with the convertible note payable.  Total loan fees paid in connection with thisnote were $25,000.

 

See Note 8 “Commitmentsand Contingencies—Licensing Agreement”.

 

**8.             *Commitmentsand Contingencies***

 

**Commitments:**

 

***Leases***

 

The Company leases certainoffice and manufacturing space under the noncancellable operating leases havingremaining terms in excess of one year, primarily for headquarters in LosAngeles and its manufacturing facility in Las Vegas. In addition, the Companysubleases a portion of this space to unrelated third parties.   Inaddition, the Company leases certain office equipment under capitalleases.  As of September 30, 2004 total capital lease balances are$13,876.

 

Rental expenses underoperating leases for the three and nine months ended September 30, 2004 were$132,937 and $507,146, respectively.  Rental expenses under operatingleases for the three and nine months ended September 30, 2003 were $95,911 and$115,569, respectively.

 

The Company subleases aportion of its headquarters to a law firm. Total rental income received for thethree and nine months ended September 30, 2004 and for the three and ninemonths ended September 30, 2003 is $6,000 and $18,000.

 

***Licensing Agreement***

 

In 2003 the Company enteredinto a three year licensing agreement with a company to license certain of itsintellectual properties associated with the manufacturing of the aluminumbodies and frames of the Shelby produced cars.    TheCompany originally prepaid $131,500 for frames related to its Cobra productionfrom this company. Minimum frames to be purchased in 2004 are 30. Under theterms of the agreement the Company is required to purchase an addition 20frames in 2005.  For the three months and nine months ended September 30,2004 two and four frames, respectively have been delivered to theCompany.  For the three and nine months ended September 30, 2004 theCompany paid an additional $59,500 and $349,500, respectively to this companyto continue production of these frames.  Total prepaid asset related tothis agreement and the production of aluminum bodies and frames as of September30, 2004 is $335,000. As part of this purchase agreement the Company purchased10% of the outstanding stock of this company for $50,000, which is included inother long term assets at September 30, 2004. This investment is recorded at costunder the cost method.

 

13

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***Finance Agreement***

 

The company finances itsinsurance through a finance company. In the third quarter of 2004, the Companyrenewed its insurance policies for the 2004/2005 year.  For the nine months ended September 30, 2004,total principal paid on this policy was $104,534 for the 2003/2004 policy and$81,898 for the 2004/2005 policy.  For the nine months ended September 30,2004 total interest paid on the 2003/2004 policy was $1,876 and $1,266 for the2004/2005 policy.  This finance agreement has a balance of $283,934 as ofSeptember 30, 2004.

 

***Manufacturing Agreement***

 

In December 2003 the Companyentered into a licensing agreement with an unaffiliated company to licensecertain of its intellectual properties associated with the manufacturing of thecarbon fiber and fiberglass fully assembled vehicles, including paint and finaldetail (less engine and transmission only) for the Shelby Cobra CSX4000 Series427 S/C.  The Company is required topurchase the following amount of vehicles over the next five years at a costnot to exceed $30,000 per vehicle:

 
| **Year** | ** ** | **Automobiles Committed** | ** ** |
|----------|------------|---------------------------|------------|
| 2004     |       | 125                       |       |
| 2005     |       | 160                       |       |
| 2006     |       | 195                       |       |
| 2007     |       | 120                       |       |
| 2008     |       | 120                       |       |

 

**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% shareholderof SAI. Management cannot determine the probability of an unfavorable outcomeor range of possible loss if any.

 

**9.             *SegmentReporting***

 

Our business consists of threereportable 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.

 

Business segment informationfor the three and nine months ended September 30, 2004 and 2003 consists of:

 

14

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| ** **                      | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|---------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                      | ** ** | **2004**                       | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|                            |       |                           |       |                          |       |   |   |   |   |
| Revenue:                        |       |                           |       |                          |       |   |   |   |   |
| CSL and CSI                     |       | $                              | 95,928     |                          | $          | 174,565 |   | $ | 267,541 |   | $ | 692,698 |   |
| Autos and SA                    |       | 1,578,426                      |       | 849,906                       |       | 3,384,617 |   | 849,906 |   |
|                            |       |                           |       |                          |       |   |   |   |   |
| Operating  income (loss)        |       |                           |       |                          |       |   |   |   |   |
| CSL                             |       | (9,913                         | )          | 29,672                        |       | (126,329 | ) | 171,872 |   |
| Autos and SA                    |       | (738,414                       | )          | (811,111                      | )          | (1,762,557 | ) | (1,067,166 | ) |
| CSI                             |       | 16,390                         |       | (96,997                       | )          | (358,459 | ) | (115,372 | ) |
|                            |       |                           |       |                          |       |   |   |   |   |
| Depreciation  and Amortization: |       |                           |       |                          |       |   |   |   |   |
| CSL                             |       | 11,187                         |       | 23,556                        |       | 48,946 |   | 95,064 |   |
| Autos and SA                    |       | 14,313                         |       | 16,088                        |       | 36,182 |   | 16,088 |   |
| CSI                             |       | —                         |       | —                        |       | — |   | — |   |
|                            |       |                           |       |                          |       |   |   |   |   |
| Assets:                         |       |                           |       |                          |       |   |   |   |   |
|                            |       |                           |       |                          |       |   |   |   |   |
| CSL                             |       | 409,534                        |       | 187,823                       |       | 409,534 |   | 187,823 |   |
| Autos and SA                    |       | 1,875,798                      |       | (242,791                      | )          | 1,875,798 |   | (242,791 | ) |
| CSI                             |       | 2,428,773                      |       | 1,394,601                     |       | 2,428,773 |   | 1,394,601 |   |
|                            |       |                           |       |                          |       |   |   |   |   |
| Capital  expenditures:          |       |                           |       |                          |       |   |   |   |   |
| CSL                             |       | —                         |       | —                        |       | — |   | 10,384 |   |
| Autos and SA                    |       | 3,845                          |       | 62,220                        |       | 312,852 |   | 74,418 |   |
| CSI                             |       | —                         |       | —                        |       | — |   | — |   |
|                                 |            |                                |            |                               |            |  |  |  |  |  |  |  |  |

 

15

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.**

 

*CautionaryStatement,*

 

*The*following *informationshould be read in conjunction with the Consolidated Financial Statements andNotes thereto included elsewhere in this report and the audited financialstatements and Management Discussion and Analysis contained in our AnnualReport on Form 10-K for the year ended December 31, 2003.*

 

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

 

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,” the negative ofsuch terms or other comparable terminology. These statements are onlypredictions. These statements are not guarantees of future performance and aresubject to certain risks, uncertainties and assumptions that are difficult topredict.

 

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 ofOperations**

 

*Revenues*

 

Revenues increased $649,883or 63% from $1,024,471 for the three months ended September 30, 2003 to$1,674,354 for the three months ended September 30, 2004. Revenues increased$2,109,554 from $1,542,604 for the nine months ended September 30, 2003 to$3,652,158 nine months ended September 30, 2004. Our revenues from royalty incomedecreased $78,637 or 45% from $174,565 in the three months ended September 30,2003 to $95,928 in the same time period in 2004.  In addition royaltyrevenue decreased $67,461 or 20% from $335,002 for the nine months endedSeptember 30, 2003 to $267,541 for the nine months ended September 30,2004.  Products that are licensed typically have a 12 to 18 monthcycle.  Royalties generated from these products are higher at thebeginning of the cycle then at the end of the cycle.  In addition,videogames and other concepts are sold for a one time only fee.  Thedecrease in licensing revenue for the three and nine months ended September 30,2004 versus the same time period in 2003 is attributable to timing in productlife cycle for licensing.  For the three and nine months ended September30, 2004 versus the same time period in 2003 we added revenues of  $728,520 and $2,534,711 from the sale ofautomobiles through Autos.  The increase in car revenue from the respectiveperiods is primarily attributable to the start up of the Autos operation in2003.  For the three and nine monthsended September 30, 2004 the Autos sold 17 and 43 CobraTM automobiles,respectively and $302,499 and $672,969, respectively  of accessories and automotive parts.  For the three and nine months ended September30, 2003 Autos sold 9 automobiles and $68,000 of accessories.  As of September 30, 2004 Autos’ backlog of121 cars includes cars in production and yet to enter production.  In addition, for the nine months endedSeptember 30, 2003 revenue included the sale of a vintage automobile for$357,696.

 

*Cost ofGoods Sold*

 

Cost of goods soldrepresents the costs of Cobra automobiles and performance and other relatedautomotive products sold by Auto’s.

 

For the three and ninemonths ended September 30, 2003 cost of goods sold was 142% and 169% of Auto’srevenue.  For the three and nine monthsended September 30, 2003 cost of goods sold was 118% and 93% of totalrevenue.  The assumption of SAI’s Cobravehicle production by Autos resulted in negative gross profit margins for thethree and nine months ended September 30, 2003.  The Company made thisdecision to protect the Shelby trade name and reputation by completing thosevehicles started by Shelby American, Inc. (“SAI”), but unfinished due to a lackof working capital and cessation of business.

 

For the three and ninemonths ended September 30, 2004 cost of goods sold is $1,723,109 and$3,257,488, respectively.  For the three and nine months ended September30, 2004 cost of goods sold as a percentage of total sales was 103% and 89%,

 

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respectively.  For thethree and nine months ended September 30, 2004 cost of goods sold as apercentage of automobile sales through Autos was 109% and 96%, respectively. The Company is still in the process of sizing its operations for production andanticipates lower costs in the future. Contributing to Autos flat and negative gross profit margin was theclosure of our South African operation. For the three and nine months ended September 30, 2004 the South Africanoperations contributed costs of $84,505 and $188,644, respectively.  A majority of these costs related to thefabrication of certain parts.  Uponclosure of the South African operation these parts were shipped to Autos.  Upon review of these parts, Autos’ managementdeemed many of these parts as unusable. In addition, upon the closure of the South African operation Autoscontracted with a new vendor to produce the cars originally intended for theSouth African production.  The start upcosts and increased cost per unit associated with this outside vendor alsocontributed to the negative margin since the selling price for the contractedautomobiles for sale could not be adjusted.

 

*Sellingand Marketing Expense*

 

Selling and marketingexpenses decreased by $151,714 or 107% from $141,309 for the three months endedSeptember 30, 2003 to $(10,405) for the three months ended September 30, 2004and $103,539 or 32% from $328,345 for the nine months ended September 30, 2003to $431,884 for the nine months ended September 30, 2004.  The increase inselling and marketing expenses for the nine months ended September 30, 2004 isprimary related to royalties paid to the shareholder’s trust of$90,611.   For the three monthsended September 30, 2004 versus the same period in 2003 the decrease in sellingand marketing expense is attributable to overaccrued royalities from the secondquarter of 2004 which were adjusted in the third quarter of 2004.  This royalty agreement was not in place forthe three and nine months ended September 30, 2003. The Company’s selling andmarketing expenses also includes expenditures for transportation, depreciation,meals and entertainment, printing and reproduction, promotion and publicrelations, research, trademark support, travel and video duplication.  TheCompany will continue to promote its trademarks and trade names on a regularbasis.

 

*Generaland Administrative Expenses*

 

For the three months endedSeptember 30, 2004 general and administrative expense increased by $136,806 or25% from $556,781 for the three months ended September 30, 2003, to $693,587for the three months ended September 30, 2004.  For the nine months endedSeptember 30, 2004 general and administrative expense increased by $1,417,998or 179% from $792,133 for the nine months ended September 30, 2003, to$2,210,131 for the nine months ended September 30, 2004.  The Companyestablished the majority of its administrative organization related to Autos inthe third quarter of 2003.  Autosoperations are located in separate facilities in Las Vegas, Nevada and thereare additional expenses related to occupancy.   Autos was responsible for approximately$96,000 in increased general and administrative expenses for the three months endedSeptember 30, 2004 and approximately $1,042,000 for the nine months endedSeptember 30, 2004 versus the same periods in 2003. The Company believes thatAutos’ general and administrative cost structure is adequate for theforeseeable future and its personnel complement is not expected to increasesubstantially. The expense category with significant changes between the threeand nine months ended September 30, 2003 and 2004 not directly related Autoswere fees primarily related to legal, accounting and public relation fees forthe Company sustaining its public reporting requirements.  In addition,the nine months ended September 30, 2004 the Company incurred costs related toinvestment banking fees for services rendered.

 

*OtherIncome and (Expense)*

 

Other income and (expense)increased $36,765 or 97% from expense of $38,006 for the three months endedSeptember 30, 2003 to expense of $74,771 for the three months ended September30, 2004.  Other income and (expense) increased $991,006 or 3,614% from expenseof $27,422 for the nine months ended September 30, 2003 to expense of$1,018,428 for the nine months ended September 30, 2004.  The substantialincrease in other income (expense) for the three and nine months endedSeptember 30, 2004 versus the same time periods in 2003 is attributable to theincrease in interest expense associated with the notes payable issued to theCompany’s majority shareholder at the time of its merger and the continuedadvances from the majority shareholder in connection with its expandedoperations.  For the nine months ended September 30, 2004 interest expensewas offset by the net gain on the sale of the Company’s fixed assets primarilyits tractor trailer of $83,650.

 

For the three and ninemonths ended September 30, 2004 and 2003 other income consisted of subleaserental income from a law firm.

 

*Provisionfor Income Taxes*

 

Carroll ShelbyLicensing, Inc. was an S Corporation prior to the September 23,2003 Exchange Agreement. The impact of conversion from an S Corporation toa C Corporation for tax purposes was not material to the financialposition or statement of operations of the Company.

 

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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 sinceinception all deferred tax assets have been fully reserved as of September 30,2004.

 

The income tax expense forthe nine moths ended September 30, 2004 represents the minimum state taxes due.

 

The total net operatinglosses as of September 30, 2004 of approximately $2,700,000 can be carriedforward through 2024.  These net operating losses maybe affected by futureperformance of the Company during its 2004 operations and maybe limited to itsuse in the future by stock issued through its private placement.

 

**Liquidityand Capital Resources**

 

The Company has generatedlosses since inception, has limited operations, and negative workingcapital.  It is likely that ourindependent registered public accounting firm will express substantial doubtabout the Company’s ability to continue as a going concern in their opinion forthe current year.

 

Management believes itsexisting cash and cash equivalent of $181,381 and anticipated cash flowsgenerated from operations will not be sufficient to fully execute its businessplan.  The Company will be required to raise additional funding throughthe issuance of additional debt or equity.  If the Company is unable to doso, 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 this shareholderwas unable to provide funding for the Company or it were unable to raiseadditional equity capital, a resulting lack of capital could have a substantialadverse material impact on the Company and its operations.

 

The Company has not achievedprofitable operations through September 30, 2004. It is not presently able todetermine when profitable operations will be obtained. For the nine monthsended September 30, 2004 its private placement financing generated in thefourth quarter of 2003 and through out 2004 (approximately $1,300,000) andincreases in customer deposits (approximately $1,333,000) have financedoperations through September 30, 2004.  The Company has a cash balance of$181,381 at September 30, 2004. The Company also has substantial currentliabilities due including $2.75 million due to its shareholder,$2.5 million of customer deposits to be “offset” when cars are completedand delivered and $1.9 million of accounts payable and accrued expenses.

 

For the nine months endedSeptember 30, 2004 and 2003 cash flows used in operations were $1,281,728 and$884,158, respectively.  The increase ofcash used in operations is primarily related to our net loss, increases ininventory for production which were offset by increases in customer deposits,payables and accrued expenses.

 

Net cash used in investingactivities for the nine months ended September 30, 2003 was approximately$67,498 as compared to cash used in investing activities of $266,636 for thenine months ended September 30, 2004. This increase was primarily a result ofthe purchase of property and equipment associated with the ramp up of theCobraTM production activities and the purchase of a truck and trailer.

 

The Company’s financingactivities for the nine months ended September 30, 2003 provided cash resourcesof $1,233,103 primarily related to the issuance of additional shareholder debtoffset by the payments on its tractor trailer note.  For the nine monthsended September 30, 2004, financing activities used funds of $326,253. For the nine months ended September 30, 2004 cash provided from financingactivities consisted of funds received from the private placement offering ofunregistered shares net of fees of approximately $1,300,000, issuance of a notepayable to purchase a truck for approximately $172,000, issuance of a notepayable for a rent settlement of $44,000, offset by the repayment ofshareholder notes of $1,730,000 and long term debt of approximately $119,000.

 

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. Through out the nine months ended September 30, 2004 the Company raised capitalthrough a private placement of unregistered common stock. The Company receivedapproximately $1,300,000 of cash, net of fees, from the sale of approximately680,000 shares of common stock at $2.25 per share.

 

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

 

**Off BalanceSheet Arrangements**

 

CSI enters intoindemnification provisions under its agreements with other companies in itsordinary course of business. Under these provisions, CSI generally indemnifiesthe indemnified party for losses suffered or incurred by the indemnified partyas a result of CSI’s activities. These indemnification provisions generallysurvive termination of the underlying agreement. CSI has not incurred materialcosts to defend lawsuits or settle claims related to these indemnificationagreements. As a result, CSI believes the estimated fair value of theseagreements is minimal. Accordingly, CSI has no liabilities recorded for theseagreements as of September 30, 2004.

 

**ContractualObligations, Contingent Liabilities and Commitments**

 

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

 
| ** **                           | ** ** | **2004**  | ** ** | **2005**  | ** ** | **2006**  | ** ** | **2007**  | ** ** | **2008 and  Beyond** | ** ** | **Total**  | ** ** |
|--------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|----------------------|------------|------------|------------|
| **Contractual Obligations**          |       |      |       |      |       |      |       |      |       |                 |       |       |       |
| Corporate Office Lease               |       | $         | 48,495     |      | $          | 8,082     |       | $         | —     |                 | $          | —     |       | $ | — |   | $ | 56,577 |   |
| Manufacturing Facility Lease         |       | 108,486   |       | 445,247   |       | —    |       | —    |       | —               |       | 553,733    |       |
| Phone System                         |       | 863       |       | 3,454     |       | 2,303     |       | —    |       | —               |       | 6,620      |       |
| Phone System (2)                     |       | 1,181     |       | 4,725     |       | 3,544     |       | —    |       | —               |       | 9,450      |       |
| Aluminum Body Frames for Shelby Cars |       | 511,000   |       | 720,000   |       | —    |       | —    |       | —               |       | 1,231,000  |       |
| Carbon and Fiberglass Vehicles       |       | 3,750,000 |       | 4,800,000 |       | 5,850,000 |       | 3,600,000 |       | 3,600,000            |       | 21,600,000 |       |
| **Total**                            |       | $         | 4,420,025  |      | $          | 5,981,508 |       | $         | 5,855,847  |                 | $          | 3,600,000  |       | $ | 3,600,000 |   | $ | 23,457,380 |   |

 

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

 

The Company expects to meetthese future commitments through a combination of working capital andadditional equity and or debt placements or issunances.

 

**CriticalAccounting 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.

 

**RecentAccounting 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**

 

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

 

**CaseNo. **03-48939

 

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

 

Carroll Shelby, ShelbyAutomobiles, Inc. and Carroll Shelby International, Inc. (“ShelbyEntities”) are named defendants in a lawsuit filed by Venture Mold &Engineering Corporation and its parent corporation (“Venture Entities”) asdebtors in bankruptcy seeking recovery of damages and/or certain vehicle partsand tooling utilized in the manufacture of “Cobra” series component vehiclesduring calendar year 2003. Carroll Shelby and Shelby Automobiles, Inc.utilized Cobra tooling and parts to complete certain customer orders placedwith Shelby American, Inc. before it ceased doing business inJuly 2003. Some of these parts were in fact included in aDecember 30, 2003 asset purchase by Shelby Automobiles, which wasaccomplished with the consent of the Venture Entities and the approval of thebankruptcy court. The Shelby Entities’ answer and counterclaim for damagesagainst the Venture Entities based on breach of contract, breach of fiduciaryduty and tortuous interference were filed with the Court on March 15, 2004.In the opinion of this office, it is unlikely that the outcome of thislitigation will be unfavorable to the Shelby Entities, and in fact it is likelythat the Shelby Entities will obtain a net positive recovery against theVenture Entities.

 

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

 

**CaseNo. **03-11750-RWZ

 

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

 

Carroll Shelby, CarrollShelby Licensing, Inc. and Carroll Shelby International, Inc. (“ShelbyEntities”) are named defendants in a lawsuit filed in federal court (Boston,Massachusetts) by a competitor who manufactures knock-offs of Shelby Cobra 427S/C and Shelby Cobra Daytona Coupe vehicles, to wit: an Illinois basedcorporation by the name of Superformance, Inc., whose sole shareholder isa South African based company by the name of Hi-Tech, Inc. This particularlitigation was commenced by Superformance after the Shelby Entities enforcedtheir 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.

 

An agreement in principalhas been reached, subject to court approval, to settle all pending litigationbetween the parties.  No writtenagreement has been signed as of yet.  Thecompany will issue and file a press release and 8-K when and if the settlementis signed and approved by the court.

 

3. **Case Name:**Denice Shakarian Halicki v. Carroll Shelby, Carroll ShelbyInternational, Inc., Carroll Shelby Licensing, Inc,, Carroll HallShelby Trust, Carroll Shelby Engineering, Inc, Carroll Shelby Motors, Inc.,Carroll Shelby Distribution International, Inc.,  Unique Motorcars, Inc., and Sanderson Sales& Marketing

 

**Case No**.  **CV04-8813**

 

**U.S.District Court, Central District of California**

 

Carroll Shelby, CarrollShelby International, Inc., Carroll Shelby Licensing, Inc,, CarrollHall Shelby Trust, Carroll Shelby Engineering, Inc, Carroll Shelby Motors, Inc.,Carroll Shelby Distribution International, Inc.,  Unique Motorcars, Inc., and Sanderson Sales& Marketing are named defendants in a lawsuit filed in federal court (LosAngeles, California) by Denice Shakarain Halicki alleging copyrightinfringement and  trademark infringement,over the use of the name “Eleanor” and the film title *Gone in 60Seconds. *Shelby is the ownerof the trademark name “Eleanor” as recognized by the United States Patent andTrademark Office (Reg. #2,837,333).  Thisclearly grants rights to the name “Eleanorâ“ for Class 12 products, which includeautomobiles, engines for automobiles and structural parts for automobiles.Shelby also owns the trademark for “Eleanor” used in connection with toys,namely die-cast metal model cars. The “Eleanor” vehicle currently is marketedand sold by Shelby licensee Unique Motorcars as the Shelby GT-500E. It is thecompany’s opinion that Shelby’s right to market and sell the vehicle is clearand such actions do not constitute infringement of any alleged common lawtrademark rights which Ms. Halicki may have to the “Eleanor” name in connectionwith the production or sale of the movie *Gone in 60 Seconds.*Further,with respect to the movie title *Gone in 60 Seconds*,Unique Motorcars has referenced the movie title in some of its advertising forthe Shelby GT-500E.  However, this usehas been strictly in an historical context (i.e. noting in the ads that a car “similarto” the Shelby GT-500 was seen in the movie *Gone in 60 Seconds.)*  Ms. Halicki’s use of the Shelby car designand name trademarks to make and sell the movie *Gone in 60Seconds* was never authorized by Shelby, which owns all of the Shelbytrademarks used in the movie. Shelby will vigorously pursue a counter-suit fortrademark infringement and damages and considers Ms. Halicki’s lawsuitfrivolous and malicious.

 

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**ITEM 2.CHANGE IN SECURITIES**

 

For the nine months endedSeptember 30, 2004 the Company raised capital through a private placement ofunregistered common stock. The Company has received approximately $1,300,000 ofcash, net of fees, from the sales of approximately 680,524 shares of commonstock at $2.25 per share.  As of September 30, 2004 approximately1,761,000 shares from this offering have been issued.

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

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

 

None.

 

**ITEM 5.OTHER INFORMATION**

 

None.

 

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

 

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 |

 

Reportson 8-k

 

Current Report item 5 Form8K 2004-08-27

 

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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: November 15, 2004 | By:                                | /s/   CARROLL  SHELBY |   |
|                    |                               | Chief Executive Officer  and  Director |
| Date: November 15, 2004 | By:                                | /s/   JOHN LUFT |   |
|                    |                               | President, Chief Financial  Officer  and Director |
|                         |                                    |  |  |  |

 

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