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The Offering 

 

Common stock offered by selling

stockholders

Up to 62,934,506 shares, including the following:

·

up to 22,980,782 shares of common stock issuable upon the conversion of preferred stock, and

 

·

up to 13,548,411 shares of common stock issuable upon the exercise of common stock purchase warrants.

This number represents 51.07% of our current outstanding stock.

Common stock to be outstanding

after the offering

Up to186,150,663 shares.

Use of proceeds

We will not receive any proceeds from the sale of the common stock. However, we will receive the sale price of any common stock we sell to the selling stockholder upon the exercise of the warrants. We expect to use the proceeds received from the exercise of the warrants, if any, for general working capital purposes.

Over-The-Counter Bulletin Board

Symbol

SRCO

  

The above information regarding common stock to be outstanding after the offering is based on 123,216,157 shares of common stock outstanding as of April 30, 2007 and assumes the subsequent conversion of our Series A Preferred Stock and exercise of warrants by our selling stockholders.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements in this prospectus contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to, our ability to increase our revenues, develop our brands, implement our strategic initiatives, economic, political and market conditions and fluctuations, government and industry regulation, U.S. and global competition, and other factors. Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made in this prospectus. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this prospectus in its entirety, including the risks described in "Risk Factors." Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. For any forward-looking statements contained in any document, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements speak only as of the date of this prospectus, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

 

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RISK FACTORS

 

This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this prospectus. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment.

 

Risks Related to Our Financial Results

 

OUR LACK OF OPERATING DATA MAKES PREDICTING OUR FUTURE PERFORMANCE DIFFICULT.

 

We have only 2 years of operating history upon which an evaluation of our prospects can be based. We do not have any substantial historical financial data on which to base planned operating expenses or forecast revenues. As a result of these factors, it is difficult to evaluate our prospects, and our future success is more uncertain than if we had a longer or more proven history of operations. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of a business enterprise, particularly companies in highly competitive markets.

 

WE HAVE A LIMITED OPERATING HISTORY WITH NO HISTORY OF SIGNIFICANT REVENUES.

 

The year ended April 30, 2006 saw our transition from a development stage company to an operating company. We are presently authorized to do business in 33 states. We will continue to obtain regulatory approval in additional states, where required, prior to commencing active operations in those states. While we are actively signing up dealers to participate in our financing programs, including our private label financing programs, we have no significant operating history. Through April 30, 2006, we have generated nominal sales revenues, have incurred significant expenses, and have sustained significant losses; our sales revenue for the 9 month period ended January 31, 2007 was $625,839. Our net loss attributed to common stockholders for the year ended April 30, 2006 and nine months ended January 31, 2007 was $7,872,772 (after giving effect to a $1,755,000 charge for the beneficial conversion discount on our Convertible Preferred shares, non-cash charge of $2,056,130 for equity based compensation , a $973,607 non-cash charge for stock based finance cost and a $141,255 charge for Preferred dividends payable) and $3,079,741 (after giving effect to a non-cash charge of $376,744 for equity based compensation and $89,810 for Preferred dividends), respectively. As of April 30, 2006 our working capital was $345,246 and as of January 31, 2007, we had a working capital deficit of$1,987,857. We may continue to incur losses for the near future. There can be no assurance that we will achieve or sustain profitability on a quarterly or annual basis.

 

WE HAVE ENTERED INTO A CREDIT LINE WITH AN INSTITUTIONAL LENDER, WHO HAS REQUIRED PREFERENCES AND RIGHTS SENIOR TO THOSE OF OUR PREFERRED STOCK AND PLACED RESTRICTIONS ON THE PAYMENT OF DIVIDENDS.

 

We entered into a secured senior credit facility with a major third party lender, for a revolving line of credit. The lender has received a security interest in substantially all of our assets with seniority over the rights of our preferred stock and our common stock. Unless the security interests are released, assets will not be available to us to secure future indebtedness, which may adversely affect our ability to borrow in the future. If we are unable to repay our outstanding indebtedness under the credit line, the lender could foreclose on all of our assets. If we do not have sufficient cash flow to repay the credit line indebtedness or if we cannot refinance the obligation, we will not be able to implement our business plan, which would have a material adverse affect on our future viability. The lender, in granting the credit line, has also required that we meet certain financial criteria in order to pay dividends on any of our preferred shares and common shares. We may not be able to repay our outstanding indebtedness under the credit line.

 

Our business requires capital and we will need to obtain additional financing in the near future. We estimate that we will need approximately $1,800,000 in additional funds to fully implement our business plan during the next twelve months for a credit line reserve and for our general operating expenses. Although we obtained a senior credit facility in July 2005, subsequently renewed in July 2006, which allowed us to commence our initial active operations, this facility does not allow us to finance individuals with lower FICO scores nor does it provide financing for other markets we wish to enter. Thus, we will need to obtain additional credit facilities to fully implement our business plan. We are presently seeking those additional credit facilities and long term debt. This additional, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. If we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources to finance our growth, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition, and we will have to adjust our planned operations and development on a more limited scale.

 

Our business requires extensive amounts of capital for credit reserve purposes. As our business grows, we will be required to maintain higher levels of credit reserves. To the extent that our revenues do not provide sufficient cash flow to cover such credit reserve levels, we may have to obtain additional financing to fund the credit reserve requirement existing at the time. There can be no assurance that we will be able to secure a line of credit or have the requisite capital reserve, or that we will be able to obtain additional financing for such purposes. The failure to obtain additional funds, when required, on satisfactory terms and conditions, would have a material and adverse effect on our business, operating results and financial condition.

 

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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

		High			Low
Fiscal Year 2005 (May 1, 2004 - April 30, 2005)
First quarter (May 1, 2004 - July 31, 2004)		$	1.60		$	0.80
Second quarter (August 1, 2004 - October 31, 2004)		$	0.96		$	0.48
Third quarter (November 1, 2004 - January 31, 2005)		$	0.96		$	0.48
Fourth quarter (February 1, 2005 - April 30, 2005)		$	1.05		$	0.45
Fiscal Year 2006 (May 1, 2005 - April 30, 2006)
First quarter (May 1, 2005 - July 31, 2005)		$	1.01		$	0.25
Second quarter (August 1, 2005 - October 31, 2005)		$	0.96		$	0.59
Third quarter (November 1, 2005 - January 31, 2006)		$	0.81		$	0.41
Fourth quarter (February 1, 2006 - April 30, 2006)		$	0.73		$	0.42
Fiscal Year 2007 (May 1, 2006 - April 30, 2007
First quarter (May 1, 2006 - July 31, 2006		$	0.54		$	0.18
Second quarter (August 1, 2006 - October 31, 2006)		$	0.27		$	0.09
Third quarter (November 1, 2006 - January 31, 2007)		$	0.15		$	0.06
Fourth quarter (February 1, 2007 - April 30, 2007)		$	0.11		$	0.05

 

* On December 27, 2004, we effected a net effective 25:200 common stock split. Fiscal year 2004 stock prices have not been adjusted to give effect for such 25:200 stock split effected.

 

As of April 30, 2007, there were approximately 3009 holders of record of our common stock.

 

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We have appointed Executive Registrar & Transfer Inc. 3615 South Huron Street, Suite 104, Englewood, CO 80110, as transfer agent for our shares of common stock.

 

Equity Compensation Plan Information

 

In July 2004, we adopted a stock incentive compensation plan. The plan authorized our board of directors to grant securities, including stock options, to employees, directors and others, in the aggregate amount of 8,500,000 shares of common stock. Securities issued under the plan may be stock awards, non-qualified options, incentive stock options, or any combination of the foregoing. In general, stock options granted under the plan have a maximum duration of ten years from the date of the grant and are not transferable. The per share exercise price of any incentive stock option granted under the plan may not be less than the fair market value of the common stock on the date of grant. Incentive stock options granted to persons who have voting control over ten percent or more of our capital stock are granted at 110% of fair market value of the underlying common stock on the date of grant and expire five years after the date of grant. No options may be granted after July 1, 2014. During the year ended April 30, 2006, no securities were granted under this plan.

 

On April 29, 2005, pursuant to an options agreement with Richard Trotter, our Chief Operating Officer, we issued stock options to purchase up to 875,000 shares of a common stock. Subject to vesting, the stock options are exercisable for five years from the vesting date at $0.605 per share. On November 1, 2006, stock options to purchase 525,000 shares vested, and the remaining options are to vest in equal installments over the next two anniversary date of the agreement.

 

In April 2005, we issued options to purchase 200,000 shares of our common stock to Jaffoni & Collins Incorporated pursuant to a consulting agreement for public relations services. The options are exercisable for three years at $0.195 per share. In March 2006 this contract was cancelled and we rescinded 100,000 of such options.

 

								Number of Shares
								Remaining Available
		Number of Shares to						for Future Issuance
		Be Issued upon						Under Equity
		Exercise of			Weighted-Average			Compensation Plans
		Outstanding			Exercise Price of			(Excluding Shares
		Options, Warrants			Outstanding Options,			Reflected in
Plan Category(1)		and Rights			Warrants and Rights			Column (a))
		(a)			(b)			(c)
Equity Compensation plans approved by stockholders			160,000		$	0.59			8,340,000
Equity Compensation plans not approved by stockholders			1,075,000		$	0.529			N/A
Total			1,235,000		$	0.537			8,340,000

 

 

FORWARD-LOOKING INFORMATION

 

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.

 

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

 

MERGER AND CORPORATE RESTRUCTURE

 

Prior to February 27, 2004, we did not conduct any substantive operations. On February 27, 2004, pursuant to an Agreement and Plan of Reorganization, we acquired Sparta Commercial Services, LLC, in a transaction viewed as a reverse acquisition. The purpose of the transaction was to try to create some value for our shareholders. As an inactive publicly registered shell corporation with no significant assets or operations, our business plan was to seek an acquisition candidate. Sparta sought access to financing, as a publicly-held company. As a result of the reverse acquisition, there was a change in control of our company. In accordance with SFAS No. 141, Sparta Commercial Services LLC was the acquiring entity. While the transaction is accounted for using the purchase method of accounting, in substance the Agreement is a recapitalization of the Company's capital structure and is recorded as a capital transaction rather than a business combination under SFAS 141.

 

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For accounting purposes, the Company has accounted for the transaction as a reverse acquisition and Sparta Commercial Services, Inc. shall be the surviving entity. The Company did not recognize goodwill or any intangible assets in connection with the transaction and there were no adjustments to the Company’s historic carrying values of the assets and liabilities.

 

Until January 31, 2005, Sparta was a development stage company. Efforts had been principally devoted to developing business as an originator and indirect lender for retail installment loan and lease financing for the purchase or lease of new and used motorcycles (specifically 600cc and higher) and utility-oriented 4-stroke all terrain vehicles (ATVs).

 

To date, we have generated limited sales revenues, have incurred expenses and have sustained losses. Consequently, our operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from October 1, 2001 (date of Sparta's inception) through April 30, 2006, we have accumulated losses of $14,150,429.

 

RESULTS OF OPERATIONS

 

COMPARISON OF THE NINE MONTHS ENDED JANUARY 31, 2007 TO THE NINE MONTHS ENDED JANUARY 31, 2006

For the nine months ended January 31, 2007 and 2006, we have generated limited, but increasing, sales revenues, have incurred significant expenses, and have sustained significant losses. We believe we will continue to earn increasing revenues from operations during the remainder of fiscal 2007 and in the upcoming fiscal year.

REVENUES

Revenues totaled $625,839 during the nine months ended January 31, 2007 as compared to $90,629 during the nine months ended January 31, 2006. Current period revenue was comprised primarily of $530,400 in lease revenue, $61,317 in private label fees and Preferred Provider Program and $28,126 in other income. Prior period revenue was comprised primarily of $62,806 in lease revenue, $6,747 in dealer fees and $9,900 in private label fees.

COSTS AND EXPENSES

General and administrative expenses were $3,405,213 during the nine months ended January 31, 2007, compared to $3,819,526 during the nine months ended January 31, 2006, a decrease of $414,313, or 11%. Expenses incurred during the current nine month period consisted primarily of the following expenses: Compensation and related costs, $1,306,994; Accounting, audit and professional fees,$380,407; Consulting fees, $231,421; Rent and utilities, $227,827, Travel and entertainment, $108,184 and stock based compensation $703,264. Expenses incurred during the comparative nine month period in 2006 consisted primarily of the following expenses: Compensation and related costs, $947,440; Accounting, audit and professional fees, $219,785; Consulting fees, $2,142,477; Rent, $114,404; and Travel and entertainment, $58,457.

During nine months ending January 31, 2007, we recorded non-cash income of $299,663 related to the decrease in value of warrants issued with registration rights and other expenses. We incurred a non-cash charge of $831,658 during the nine months ended January 31, 2007 related to options and shares of common stock issued for consulting fees, services and financing cost. For the nine months ended January 31, 2006, we had expensed non-cash costs of $406,665 related to warrants granted to a private placement agent. Additionally, we incurred a non-cash charge of $605,442 during the nine months ended January 31, 2006 related to shares of common stock issued in connection with debt financing and has recorded an expense of $2,040,000 related to the failure to have an effective registration statement covering the underlying shares of common stock issuable upon conversion of it preferred stock and the related warrants.

NET LOSS

We incurred a net loss before preferred dividends of $2,989,931 for our nine months ended January 31, 2007 as compared to $6,734,000 for the corresponding interim period in 2005. The $3,744,069 or 56% decrease in our net loss before preferred dividends for our nine month interim period ended January 31, 2007 was attributable to an increase in revenue, a decrease in operating expenses and non-cash financing costs, and a partial recovery, in the amount of $299,663, of prior years charges for warrant liability and other expense.

We also incurred non-cash preferred dividend expense of $89,810 for our nine month period ended January 31, 2007 as compared with a non-cash expense of $1,886,683 in the corresponding interim period of 2006. The decrease in preferred dividend expense was primarily attributable to the beneficial conversion feature expense of $1,775,000 in the corresponding interim period in 2006 (related to warrants issued with the convertible preferred stock and a beneficial conversion feature associated with the preferred stock) with no such comparable expense in the current period. Preferred dividends in the current period also decreased as a result of preferred stock conversions to common stock.

 

Our net loss attributable to common stock holders decreased to $3,079,741 for our nine month period ended January 31, 2007 as compared to $8,620,683 for the corresponding period in 2006. The $5,540,942 decrease is net loss attributable to common stock holders for our nine month period ended January 31, 2007 was due to the decrease in net loss and decrease in preferred dividends.

 

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COMPARISON OF THE YEAR ENDED APRIL 30, 2006 TO THE YEAR ENDED APRIL 30, 2005

For the year ended April 30, 2006, we have generated limited sales revenues, have incurred significant expenses, and have sustained significant losses. We believe we will begin to earn increasing revenues from operations in fiscal 2007 as we have completed our transition to an operating company.

Revenues

Revenues totaled $169,106 in fiscal 2006 compared to $65,833 revenues in fiscal 2005. Fiscal 2006 revenue was comprised of 136,700 in income from Operating Leases and Retail Installment Sales Contracts, $13,200 in private label fees, $7,347 in dealer fees, $506 in interest income and $11,353 in other fees and income. A portion of our net income is expected to come from an interest rate spread, which is the difference between the interest rates paid by us on interest-bearing liabilities, and the interest rate we receive on interest-earning assets, such as loans and leases extended to customers. Interest rates are highly sensitive to many factors that are beyond our control, such as inflation, recession, global economic disruptions and unemployment. Under the borrowing structure with our current lender, interest rate spreads are “locked-in” on each lease and loan. If the nature of this borrowing relationship changes or if we enter into a financing relationship with another lender, there is no assurance that the then level of interest rate spread will not decline in the future. Any material decline would have a material adverse effect on our business and profitability. As interest rates rise, the demand for motorcycles may decrease together with other consumer

expenditures that are normally financed which would have the effect of lowering revenues. In addition, in order to offset the impact of rising interest rates on our customers, we may narrow the spread we receive which would result in lower revenues. One benefit to Sparta in periods of raising interest rates is our lease program. As interest rates raise, customers become increasingly payment conscious. With the option of a lease with lower monthly payments than an equivalent loan, we believe Sparta has product offering not offered by any of our major competitors.

Costs and Expenses

The Company incurred licensing fees of $67,000 for the year ended April 30, 2006 and $150,663 for the year ended April 30, 2005, respectively. The costs incurred were for the licensing of certain proprietary software, operating systems and processes for use in connection with the extension of credit and underwriting techniques for the purchase and lease of motor vehicles. The decrease from fiscal 2005 to fiscal 2006 reflects the fact that this process is completed.

The Company incurred organization costs of $197,507 for the year ended April 30, 2006, and $294,408 for the year ended April 30, 2005, respectively. Organizational costs consist of establishing business procedures, filing to do business web site development and related activities. The year to year decrease in organization costs is primarily attributed to the wind down of organizational activity.

The Company incurred compensation costs of $1,228,856 for the year ended April 30, 2006 compared with $828,298 in fiscal 2005. The increase is related to the costs of the Company increasing its employee base during the year from 8 employees at fiscal year end 2005 to 15 at fiscal year end 2006. Additionally, for the fiscal year ended 2006 we incurred $93,436 in costs for temporary help versus $4,317 for fiscal year ended April 30, 2005. As the Company continues to expand, the Company will incur additional costs for personnel. In order for the Company to attract and retain quality personnel, management anticipates it will continue to offer competitive salaries and issue common stock to consultants and employees.

The Company paid $337,221and $233,333 to its Chairman and Chief Executive Officer, in fiscal 2006 and 2005, respectively. These payments were charged to operations, and are included in the compensation costs shown above.

In connection with placement transactions, the Company expensed non-cash costs of $406,665 for the year ended April 30, 2006 and $383,284 to issue warrants to the private placement agent for the year ended April 30, 2005 These amounts were charged to financing costs. The Company has expensed non-cash costs of $1,775,000 and $1,810,000 respectively for the fiscal years ended April 30, 2006 and 2005. These charges were for the intrinsic value of the imbedded beneficial conversion feature for the Preferred Stock holders. At April 30, 2006 and April 30, 2005, accrued preferred dividends of $141,255 and $28,906 respectively were charged to retained earnings. Additionally, for the fiscal year ended April 30, 2006 the Company charged $652,910 to financing costs representing the value of shares issued to settle debts and shares issuable for the Company’s failure to timely file a registration statement in connection with a private placement. .

 

The Company incurred consulting costs of $2,552,304 for the year ended April 30, 2006, as compared to $84,365 for the year ended April 30, 2005. Of the costs incurred in fiscal 2006, $2,285,604 were non-cash charges representing the market value of shares of the Company’s common stock issued to a private placement agent and to consultants.

 

The Company incurred legal and accounting fees of $335,938 for the year ended April 30, 2006, as compared to $197,385 for the year ended April 30, 2005. The increase in costs is related to legal and accounting expenses associated with finalizing the private placement and complying with various federal and state securities statutes, rules and regulations. The Company incurred other operating expenses of $879,193 for the year ended April 30, 2006. Notable expenses in this category are rent of $142,584, depreciation and amortization of $112,904, repairs, maintenance and equipment of $86,807, travel of $63,030, filing fees of $57,561, advertising of $36,594, loss reserve of 36,152, telephone of $33,023, meals and entertainment of $29,084, utilities of $28,671, insurance of $23,067, interest of $22,684, postage of $19,411, printing of $15,184 and other normal operating costs totaling $172,437. In fiscal 2005, other operating costs totaled $791,647. Notable expenses in this category are the cost of a purchase option for a portfolio of equipment leases of $250,000, rent of $125,214, consulting expenses of $84,365, travel of $79,547, advertising of $28,107, telecommunications of $21,476 and depreciation of $22,626. The remainder is comprised of expenses for postage, shipping, storage, repairs and other normal operating costs

 

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Net Loss

Our net loss attributable to common shareholders for the year ended April 30, 2006 was $7,872,772 in contrast to a loss attributable to common shareholders of $4,418,727 for the year ended April 30, 2005. The increase in net loss attributable to common shareholders was primarily due to increased compensation costs associated with an almost 100% increase in the number of employees as well as temporary employees, the fact that the Company incurred expenses related to the private placement transaction, consisting of a non-cash expense of a beneficial conversion discount of $1,775,000, non-cash expense of $2,285,604 for shares issued to our placement agent and consultants and non-cash expense of $406,665 for warrants issued to the placement agent in 2006 and to the fact that the Company has increased its resources and spending in 2006 as it completed the transition from a development stage to an operating entity.

Our net loss per common share (basic and diluted) attributable to common shareholders was $0.08 for the year ended April 30, 2006 and $0.05 for the year ended April 30, 2005.

 

 

Number of Employees

 

From our inception through the period ended January 31, 2007, we have relied on the services of outside consultants for services and currently have 21 employees. In order for us to attract and retain quality personnel, we anticipate we will have to offer competitive salaries to future employees. If we fully implement our business plan, we anticipate our salary base may increase by approximately 40% during the next twelve months. As we continue to expand, we will incur additional cost for personnel. This projected increase in personnel is dependent upon our generating revenues and obtaining sources of financing. There is no guarantee that we will be successful in raising the funds required or generating revenues sufficient to fund the projected increase in the number of employees.

 

INFLATION

 

The impact of inflation on the costs of the Company, and the ability to pass on cost increases to its customers over time is dependent upon market conditions. The Company is not aware of any inflationary pressures that have had any significant impact on the Company's operations over the past quarter, and the Company does not anticipate that inflationary factors will have a significant impact on future operations.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect our reported assets, liabilities, revenues, and expenses, and the disclosure of contingent assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Future events, however, may differ markedly from our current expectations and assumptions. While there are a number of significant accounting policies affecting our consolidated financial statements; we believe the following critical accounting policy involves the most complex, difficult and subjective estimates and judgments.

 

REVENUE RECOGNITION

 

We originate leases on new and used motorcycles and other powersports vehicles from motorcycle dealers throughout the United States. Our leases are accounted for as either operating leases or direct financing leases. At the inception of operating leases, no lease revenue is recognized and the leased motorcycles, together with the initial direct costs of originating the lease, which are capitalized, appear on the balance sheet as "motorcycles under operating leases-net". The capitalized cost of each motorcycle is depreciated over the lease term, on a straight-line basis, down to the original estimate of the projected value of the motorcycle at the end of the scheduled lease term (the "Residual"). Monthly lease payments are recognized as rental income. An acquisition fee classified as fee income on the financial statements is received and recognized in income at the inception of the lease. Direct financing leases are recorded at the gross amount of the lease receivable, and unearned income at lease inception is amortized over the lease term.

 

We realize gains and losses as the result of the termination of leases, both at and prior to their scheduled termination, and the disposition of the related motorcycle. The disposal of motorcycles, which reach scheduled termination of a lease, results in a gain or loss equal to the difference between proceeds received from the disposition of the motorcycle and its net book value. Net book value represents the residual value at scheduled lease termination. Lease terminations that occur prior to scheduled maturity as a result of the lessee's voluntary request to purchase the vehicle have resulted in net gains, equal to the excess of the price received over the motorcycle's net book value.

 

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Early lease terminations also occur because of (i) a default by the lessee, (ii) the physical loss of the motorcycle, or (iii) the exercise of the lessee's early termination. In those instances, the Company receives the proceeds from either the resale or release of the repossessed motorcycle, or the payment by the lessee's insurer. We record a gain or loss for the difference between the proceeds received and the net book value of the motorcycle.

 

We charge fees to manufacturers and other customers related to creating a private label version of our financing program including web access, processing credit applications, consumer contracts and other related documents and processes. Fees received are amortized and booked as income over the length of the contract.

 

STOCK-BASED COMPENSATION 

 

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123R (revised 2004), “Share-Based Payment” which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation.” Statement 123R supersedes APB opinion No. 25, “Accounting for Stock Issued to Employees”, and amends FASB Statement No. 95, “Statement of Cash Flows”. Generally the approach in Statement 123R is similar to the approach described in Statement 123. However, Statement 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro-forma disclosure is no longer an alternative. On April 14, 2005, the SEC amended the effective date of the provisions of this statement. The effect of this amendment by the SEC is that the Company will have to comply with Statement 123R and use the Fair Value based method of accounting no later than the fourth quarter of 2006. Management has elected to apply Statement 123R in the third quarter of fiscal year 2006.

 

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The adoption of SFAS No. 154 did not have a material impact on the Company's financial position and results of operations.

 

In February 2006, the FASB issued SFAS 155, which applies to certain "hybrid financial instruments," which are instruments that contain embedded derivatives. The new standard establishes a requirement to evaluate beneficial interests in securitized financial assets to determine if the interests represent freestanding derivatives or are hybrid financial instruments containing embedded derivatives requiring bifurcation. This new standard also permits an election for fair value remeasurement of any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation under SFAS 133. The fair value election can be applied on an instrument-by-instrument basis to existing instruments at the date of adoption and can be applied to new instruments on a prospective basis. Management is assessing the implications of this standard, which may materially impact the Company's results of operations in the fourth quarter of fiscal year 2006 and thereafter.

 

In February 2006, the FASB issued FASB Staff Position ("FSP") No. FAS 123(R)-4, "Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event," which amends SFAS No. 123(R) to require that options issued with a cash settlement feature that can be exercised upon the occurrence of a contingent event that is outside the employee's control should not be classified as liabilities until it becomes probable that the event will occur. For companies that adopted SFAS No. 123(R) prior to the issuance of the FSP, application is required in the first reporting period beginning after February 3, 2006. Currently, the Company has no stock options outstanding with contingent cash settlement features, and as a result, the FSP will not impact the Company's consolidated financial statements.

In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of Financial Assets - an amendment to FASB Statement No. 140. Statement 156 requires that an entity recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a service contract under certain situations. The new standard is effective for fiscal years beginning after September 15, 2006. The adoption of SFAS No. 156 did not have a material impact on the Company's financial position and results of operations.

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company does not expect that the adoption of FIN 48 will have an impact on the Company’s financial position and results of operations.

 

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In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was issued in order to eliminate the diversity of practice in how public companies quantify misstatements of financial statements, including misstatements that were not material to prior years’ financial statements. We will initially apply the provisions of SAB 108 in connection with the preparation of our annual financial statements for the year ending April 30, 2007. We have evaluated the potential impact SAB 108 may have on our financial position and results of operations and do not believe the impact of the application of this guidance will be material.

In September 2006, the FASB issued SFAS 157 `Fair Value Measurements'. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Adoption of SFAS 157 will not have a significant impact on our results of operations or financial condition.

In September 2006, the FAS issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, which requires employers to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity. The Company does not believe that the pronouncement will have a material affect on its financial statements as it does not participate in defined benefit pension plans.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115,” which permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reporting earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of the Company’s first fiscal year that begins after November 15, 2007.

 

WEBSITE DEVELOPMENT COSTS

 

We have incurred costs to develop a proprietary web-based private label financing program for processing including web access, processing credit applications, consumer contracts and other related documents and processes. The Company has elected to recognize the costs of developing its website and related intellectual property the website development costs in accordance with Emerging Issue Task Force ("EITF") No. 00-02, "Accounting for Website Development Costs." As such, the Company expenses all costs incurred that relate to the planning and post implementation phases of development of its website. Direct costs incurred in the development phase are capitalized and recognized over the estimated useful life. Costs associated with repair or maintenance for the website are included in cost of net revenues in the current period expenses.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.

 

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BUSINESS

 

OUR ORGANIZATION HISTORY

 

We were incorporated under the laws of the State of Nevada on May 13, 1980 under the name Tomahawk Oil and Minerals, Inc. and engaged in oil and gas exploration activities.

 

On November 6, 1983, we changed our corporate name to Tomahawk Industries, Inc.

 

In 1984, Tomahawk entered the business of installing energy recovery and energy saving devices.

 

In July 1987, Tomahawk filed for protection under Chapter 11 of the U. S. Bankruptcy Code and operated as a debtor-in-possession. The petition for bankruptcy protection was denied. Tomahawk ceased all business operations, liquidated its former subsidiary and abandoned all net assets remaining by April 30, 1988. Tomahawk effectively had no operations, assets or liabilities since its fiscal year ended April 30, 1988 through February 27, 2004.

 

On February 27, 2004, pursuant to an Agreement and Plan of Reorganization, we acquired Sparta Commercial Services, LLC, in a transaction viewed as a reverse acquisition. Under the terms of the agreement, we acquired all of the outstanding membership interests in Sparta Commercial Services, LLC in exchange for the agreement to issue such number of shares of our common stock as would represent approximately 91.75% percent of our outstanding shares. Sparta Commercial Services, LLC also entered into a consulting agreement for business and financial services with Glenn A. Little, the former principal of Tomahawk. The agreement was for a term of one year. Mr. Little received a fee of $100,000 pursuant to the consulting agreement.

 

As a result of the acquisition, a change in control occurred in the ownership and management of Tomahawk. In connection with the acquisition, the managing member of Sparta, Anthony Havens, was appointed President and Chairman of Tomahawk. The former directors and officers of Tomahawk resigned as of the acquisition date.

 

On August 25, 2004, we changed our corporate name from "Tomahawk Industries, Inc." to "Sparta Commercial Services, Inc."

 

On September 13, 2004, we filed a Certificate of Amendment to the Articles of Incorporation with the Secretary of State of the State of Nevada increasing the authorized capital from 200,000,000 to 700,000,000 shares, of which 690,000,000 shares are common stock, par value $0.001 and 10,000,000 shares are preferred stock, par value $0.001.

 

Effective December 27, 2004, pursuant to a Certificate of Amendment to the Articles of Incorporation with the Secretary of State of the State of Nevada, our authorized capital was reduced from 700,000,000 shares, of which 690,000,000 shares were common stock and 10,000,000 shares are preferred stock, to 350,000,000 shares, of which 340,000,000 shares are common stock and 10,000,000 shares are preferred stock. In connection with the decrease in authorized capital, we effected a 1:200 reverse stock split, with fractional shares paid in cash, followed immediately by a 25:1 forward stock split.

 

On December 28, 2004, we filed a Certificate of Designation with the Secretary of State of the State of Nevada in connection with its 10,000,000 shares are preferred stock, designating 35,850 shares as Series A Redeemable Preferred Stock.

 

OUR BUSINESS

 

We seek to become a specialized consumer finance company engaged primarily in the origination of lease and retail installment sales contracts of new and used motorcycles, scooters, and ATVs. We believe that the market for consumer finance programs for motorcycles and ATVs is underserved by traditional lenders.

 

We are developing relationships with vehicle dealers and manufacturers to provide our financing programs to their customers. We also seek to provide motorcycle, scooter, and all-terrain vehicle manufacturers a private label version of our financing programs for their customers.

 

BUSINESS OVERVIEW

 

Sparta's business model has been designed to generate revenue from several sources:

 

·	Retail installment sales contracts and leases;

·	Municipal Leasing of Police Motorcycles;

·	Private Label programs for manufacturers and distributors;

·	Ancillary products and services, such as private label gap coverage and private label service contracts; and

·	Remarketing of off-lease and repossessed vehicles.

Sparta’s management believes that by offering dealers (and their customers) the option of either financing or leasing, Sparta will be able to capture a greater share of the dealer’s business. Additionally, by offering both alternatives, once profitability is achieved, Sparta believes that it will be in a position to achieve greater cash-flow than it could by offering only the financing alternative because depreciation generated by Sparta’s leasing activities will reduce income tax due on income resulting from Sparta’s retail installment sales contracts.

 

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RETAIL INSTALLMENT SALES CONTRACTS AND LEASES

 

Retail Installment Sales - Sparta intends to purchase retail installment sales contracts from both franchised and independent powersports dealers who qualify as Sparta Authorized Dealers and/or as Private Label Authorized Dealers under Sparta's Private Label Programs. Sparta has developed policies and procedures for credit evaluation, collections, insurance follow up, and asset recovery. Sparta imposes strict credit criteria to determine which retail installment sales contract applications to approve. This credit criterion has been developed to be in compliance with the credit criterion required by our lenders. The dealers understand that if they consummate a credit transaction with a buyer on whose application we have given them a conditional approval that Sparta will purchase that contract if it is in full compliance with all terms and conditions of that approval and contained in our dealer agreement.

 

To insure that Sparta's Credit Evaluation Process and Collateral Guidelines are consistently applied and that the credit/underwriting decision process provides rapid decisioning to Sparta Authorized Dealers and the Private Label Dealers, Sparta has developed a point of sale credit application and contract decisioning system. This system is named "iPLUS™" and is structured as an Application Service Provider ("ASP") and has the capability of providing the dealer with conditional approvals without human involvement seven days a week, twenty-four hours a day. This technology provides quick, consistent credit decisions for our dealer network and reduces the number of credit analysts required, thereby, reducing Sparta's personnel expense. Depending on Sparta's arrangement with its lending sources, in the case of consumer finance contracts, Sparta may finance its purchase of the contracts by borrowing from a lending source and pledging the retail finance contracts as collateral for the loan.

 

All of the installment sale contracts will be secured by qualified, titled motorcycles with 600+cc and higher engines, 4-stroke all-terrain vehicles (ATVs), or select scooters. Customer financing needs are projected to range from approximately $2,000 to $35,000. Contract terms of 24 to 60 months will be offered.

 

Leases - Sparta intends to purchase qualified vehicles for lease to customers of its Sparta Authorized Dealers and/or Private Label Dealers. While the steps in the leasing process are almost identical to those in the installment sales contract process, the major difference is that when a lease "approval" is transmitted to a dealer, the "approval" describes the terms and conditions under which Sparta will purchase a specific vehicle from the dealer and lease it to the applicant. Unlike an installment service contract which finances a customer's purchase of a vehicle owned by the customer, the lease contract contains the payment terms and conditions under which Sparta will allow the customer to use (lease) the vehicle, which is owned by Sparta, and also contains a vehicle purchase price option which provides the customer with the right to purchase the vehicle at the lease-end. Depending on Sparta's arrangement with its lending sources, in the case of leases, Sparta may finance its purchase of leased vehicles by borrowing from a lending source and assigning or pledging the lease and leased vehicle as collateral for the loan. Lease terms range from 24 to 60 months, although most lease terms are either 36 or 60 months. Leases generally have lower monthly payments than retail installment sales contracts because they finance only part of the vehicle with the balance being financed by the lessor.

In July 2006, we announced an agreement for routing of motorcycle loan applications with a Fortune 500 global diversified financial provider. In October 2006, this agreement was extended for a minimum of one year. Under the agreement the company electronically transmits to Sparta loan applications which meet Sparta’s lending/leasing criteria. Our iPLUS™ underwriting system will immediately approve or decline the application, and, if approved, notify the applicant through the internet within minutes. This agreement will allow consumers to be pre-approved before they even start shopping. We will pay that company a fee for each funded transaction. In January 2007, this application went “live” in 12 states with plans to roll out to 38 additional states over a mutually agreed schedule.

 

MUNICIPAL LEASING OF POLICE MOTORCYCLES

In February 2007, Sparta launched a new Municipal Leasing Program designed expressly to meet the needs of law enforcement agencies throughout the U.S. Sparta estimates that the annual municipal market for new law enforcement motorcycles exceeds $200 million annually, based upon extensive discussions that the company conducted among Harley-Davidson, Honda, and BMW dealers, with those brands being the most prominent in the municipal environment. Sparta believes that most of these agencies have historically been purchasing these vehicles with few, if any, financing alternatives, therefore, we developed a leasing alternative for governmental organizations to acquire the motorcycles they need, and reduce their capital outlays at the same time.

PRIVATE LABEL PROGRAMS FOR MANUFACTURERS AND DISTRIBUTORS

 

To date, we have entered into four "private label" 5-year financing agreements with the U.S. distributors of major manufacturers of scooters and ATVs. Under these agreements, we allow the manufacturer to put its name on our finance and lease products, and offer such financing facilities to its dealers for their customers. We own the retail installment sales contracts and leases generated under these "private label" programs, and derive revenues from sales of the distributor's product line to the dealer's customers. The private label program also expands our dealer base by the number of dealerships in the distributor's chain, thereby generating additional opportunities to sell our own financial services to these dealers for their customers interested in non-"private label" vehicles. These agreements are with:

 

(1) MALAGUTI USA - the North American Distributor for Malaguti SPA.

 

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(2) KYMCO Motorsports - the exclusive importer and distributor of KYMCO brand scooters for the USA.

 

(3) CMSI (Classic Motorcycle and Sidecars, Inc.) - manufacturer and distributor of the Flying Tiger Motorcycle and TN'G Scooters.

 

(4) ETON America, LLC. - the U.S. subsidiary of ETON Worldwide.

 

These four distributors have over 1,200 dealers who, in addition to becoming our Private Label dealers, can sign up to become our Authorized Dealers, which will enable them to use us as a source for financing their non-private label vehicles.

 

In May 2007, Sparta announced the launch of a consumer leasing program for Moto Guzzi and Aprilia, the two motorcycle brands distributed by Piaggio Group Americas, Inc. The program will enable all Moto Guzzi and Aprilia dealers to offer Sparta's Flex Lease product to their customers as alternatives to traditional installment loan financing. Piaggio Group's US dealer network currently numbers approximately 400, including retailers of Vespa and Piaggio, the two well known brands of scooters also distributed by the Piaggio Group. Among those dealers, more than 180 carry the Moto Guzzi and/or Aprilia brands. Piaggio Group Americas, Inc. is a subsidiary of Piaggio & C. S.p.A., based in Pontedera, Italy.

 

REVENUE FROM ANCILLARY PRODUCTS AND SERVICES

 

We expect to receive additional revenue related to servicing our portfolio, such as lease acquisition fees, late payment fees, vehicle disposition fees at lease-end, early termination fees, charges for excess wear-and-tear on leased vehicles, and from ancillary products and services.

 

We are being positioned as a full service organization providing products and services to our dealers that are costly to obtain on an individual dealer basis. Also, we offer a private label GAP (Guaranteed Auto Protection) plan for our dealers:

 

GAP COVERAGE - Sparta markets its private label gap coverage on a fee basis to customers through dealers. This coverage protects the customer should the vehicle be stolen or wrecked and the holder's primary insurance is not adequate to cover their payoff to the creditor that holds the lien on the vehicle.

 

Sparta intends to continue to evaluate additional ancillary products and services and believes that it can create products and services to meet dealers' needs, creating company brand loyalty in the dealer community and generating other revenue streams.

 

REVENUE FROM REMARKETING OFF-LEASE AND REPOSSESSED VEHICLES

 

RE-LEASING TO ORIGINAL LESSEES - Management intends to commence its re-leasing efforts as early as eleven months prior to the end of the scheduled lease term. Lessees' options are expected to include: extending the lease, returning the vehicle to Sparta or buying the vehicle at the buy-out option price established at the beginning of the lease. Sparta's policy requires lessees who wish to return their vehicles, return the vehicle to the originating dealer. If the lessee has moved, then the vehicle should be returned to the Sparta Authorized Dealer closest to the lessee. If this is impracticable, then Sparta will arrange to have the vehicle transported at the lessee's expense

 

RETURNED LEASE VEHICLES - When a vehicle is returned to a Sparta Authorized Dealer at the end of the scheduled lease term, the dealer will inspect it for excessive wear and mileage over maximum levels specified under the lease agreement and prepare it for resale/lease. All Sparta Authorized Dealers and all Sparta Private Label Dealers are contractually bound to charge no more than cost plus ten-percent for repairs and to provide free storage for all consignment vehicles. Thereafter, Sparta plans to consign the vehicle to the originating dealer for sale or re-lease to a new party. Should the dealer decline to take the vehicle on consignment, it will be electronically marketed on the Classified Pages of the Sparta web site. Sparta believes the market for used vehicles is significant, and the opportunity to remarket the same vehicle numerous times is a key selling point with prospective dealerships. Sparta believes that using its dealer network in such a manner will result in a better overall economic return on its portfolio as well as strengthen dealer relationships.

 

REPOSSESSED VEHICLES - All repossessed vehicles are similarly returned to the originating Sparta Authorized Dealer to be reconditioned (if needed) for consignment sale or re-lease in the same manner and conditions as returned vehicles.

 

SECOND CHANCE EXPRESS - Sparta allows its Authorized Dealers to offer its inventory of returned or repossessed vehicles not only to customers with approved credit applications but, also to customers with less than prime credit. Applicants with low credit scores are evaluated under Sparta's Second Chance Express Program. This unique finance/lease product is designed to offer a financing program tailored to this non-prime customer. The program allows Sparta to serve those customers who can offset their credit risk with higher down payments. A key benefit of this program to Sparta is that the minimum down-payment requirement is 20% in order to bring the amount financed in line with the current wholesale value of the vehicle. Under the Second Chance Express Program, Sparta pays its dealers a commission on any Sparta inventory vehicle, held on consignment on their "floor" or offered on the Sparta Classified Web Page, for which they arrange a sale or finance.

 

CREDIT AND COLLECTIONS

 

POLICIES AND PROCEDURES

 

Based on management's experience in vehicle financing and leasing, we have developed policies and procedures for credit evaluation, collections, insurance follow up, and asset recovery. We impose strict credit and demographic criteria to determine which retail installment sales contract and lease applications are approved.

 

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CREDIT EVALUATION PROCESS AND COLLATERAL GUIDELINES

 

 

iPLUSÔ (INTERNETPURCHASING LEASING UNDERWRITING SERVICING)

 

Sparta's retail installment sales contract and leasing programs are delivered through a proprietary, web-based, credit application processing system. This system is named iPLUS and is structured as an Application Service Provider ("ASP") and has the capability of providing the dealer with conditional approvals without human involvement seven days a week, twenty-four hours a day. This system also provides the powersports dealer with system capabilities comparable to those of new car franchises. Sparta believes iPLUS will provide the Sparta Authorized Dealers and Private Label Dealers with a competitive advantage and will increase Sparta's ability to garner a larger share of the dealer's business.

 

Major features of iPLUS include:  

 

·	100% WEB Browser Based (www.spartacommercial.com)

·	User friendly system

·	No costly software required by the users

·	Operates on any dial-up connection as slow as 28.8

·	Required Internet Explorer 5.5 or above, Adobe Acrobat Reader 5.0 or above, both available at no charge on the Internet

·	Integrated scorecard and decision engine

·	Integrated credit bureau retrieval and review (can access any of the 3 major bureaus)

·	Once application is submitted; decisions in seconds/7 Days a Week/ 24 Hours a Day

·	Easy to complete customer application

·	Dealer application management

·	Dealer Desking Tool - Profit Manager (Assists dealer in structuring any approved application.)

·	Prints approved customer contract and contract package

·	Captures information in electronic format

·	Complete underwriting documentation and control system

·	Dealer communication

·	Allows the dealer to track the entire decisioning, underwriting, and funding process in real time

 

Additionally, this technology provides quick, consistent credit decisions for our dealer network and reduces the number of credit analysts required, thereby, reducing Sparta's personnel expense.

 

Sparta has established program guidelines that are an integral function of the iPLUS decision process. These program guidelines establish and clarify credit criteria such as credit tiers, maximum amount financed, term and rate, dealer rate participation, deal structure, buyer profile, credit bureau parameters, budget parameters, and eligible collateral, including maximum loan-to-value ratios for each of its retail installment sales contracts and lease contracts, depending on the applicant's credit rating and stability. Sparta has developed its own credit tier system by using an empirical score card and then assigning its own credit tiers based on Sparta's experience. This credit tier is used as the basis to determine the terms and conditions under which an applicant is approved or declined.

 

Sparta plans to conduct both applicant credit risk and asset evaluation before approving financing. Sparta's policy is that it will not finance more than 100% of a vehicle's retail value, but Sparta may lend an additional 10% above retail value to cover add-ons, extended warranty and other costs. Should the customer seek financing above this threshold, Sparta intends to ask for a down payment from the borrower or lessee to close the gap between selling price and retail value. The size of the down payment will be a function of the applicant's credit rating, stability, budget, and the value of the underlying asset.

 

COLLECTION PROCEDURES

 

Approving retail installment sales contracts and leases that comply with the policies and procedures established by Sparta is just the first step. A principal factor in the success of Sparta's business model is its ability to track contract and lease performance.

 

A third party provides the software Sparta uses to manage its assets, customer base, collections, insurance, and accounting systems. Using a variety of basic and customized reports generated by this software, Sparta monitors its customers' compliance with their obligations under retail installment sales contracts or lease contracts. These reports are accessed on a real-time basis by employees of Sparta and are distributed to management personnel for review. The reports include delinquency reports, collection tickler (promises) reports, insurance status reports, termination reports, inventory reports, maturing contract reports, etc.

 

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Sparta requires continuous physical damage insurance on all financed vehicles and continuous liability and physical damage insurance coverage on all leased vehicles. In addition, Sparta is required to be listed as Additional Named Insured and Loss Payee. Continuous insurance is critical, and Sparta intends to quickly repossess a vehicle if coverage lapses. Lapsed or cancelled policies will be covered by a "blanket" VSI insurance policy, which Sparta intends to purchase. Any lapse in insurance coverage for any reason will lead to automatic repossession of leased vehicles.

 

USING DIVERSIFICATION TO REDUCE PORTFOLIO RISK

 

Management will reduce portfolio risk not only by carefully screening applicants and monitoring covenant compliance, but also by diversifying its financing activities across credit tiers and Sparta's list of motorcycle, ATV and scooter models that it will finance or lease.

CREDIT TIERS - Sparta expects that it will maintain a portfolio dominated by A/B credit applicants over C applicants in the ratio of at least 70/30. Management anticipates that it will be able to rebalance its portfolio by training its sales force to work closely with dealerships in their territories to help Sparta maintain its conservative 70/30 target.

 

Sparta will also be able to manage this ratio by revising the variables in its various programs (terms and conditions under which Sparta will lease vehicles or purchase retail installment contracts), such as minimum income, debt ratios, payment to income ratios, minimum down payment required, acquisition fees (paid by dealer), discounts (paid by dealer), etc.

 

SPARTA APPROVED VEHICLE MODELS - Advance rates and other credit restrictions will be in effect for certain models and years based on the relevant facts and circumstances.

 

MARKET INFORMATION

 

As reported in the 2006 Annual Statistical Report of the Motorcycle Industry Council, retail sales of new motorcycles have grown steadily from 1991 through 2006. North American registrations of new 651cc and higher motorcycles reached 543,000 in 2006. This represents a 5% increase over 2004. Registrations have increased for 15 consecutive years. Retail sales of new and used motorcycles reached $10.7 billion in 2004.

 

U.S. sales of new ATVs were estimated to be 747,581 units in 2006, a 4.2% decline from 2005 as reported in Powersports Business Magazine in the February 12, 2007 issue.

 

U.S. scooter unit sales were approxinately115,000 in 2006 up significantly from 50,000 in 2001.

 

SALES AND MARKETING

 

Normally, vehicle finance programs are sold primarily at the dealer level, rather than the consumer level. Our strategy is to utilize an in-house direct sales force that promotes our products and services to qualified dealers, train them, and provide them with point-of-sale marketing materials. Our vehicle financing programs are already gaining market acceptance as evidenced by the four Private Label Contracts. This in-house direct sales force is comprised of a Marketing Group and a Dealer Support Group.

 

The Marketing Group continues to work directly with the manufacturers and distributors to obtain additional Private Label affiliations and to monitor our competition. The Private Label partners will assist us directly in training the Private Label Dealers. This is done at the manufacturers/distributors place of business, at industry shows, or with a group of dealers in a common geographic area.

 

The Dealer Support Group accepts dealer application packages from dealers that want to be either or both our Authorized Dealers or Private Label Dealers. They then notify the approved dealers that they have been approved and provide them with the required information to process applications and print contracts through iPLUS, including a Dealer Sign Up packet. The Dealer Support Group is available to directly assist dealers by telephone and follow up with dealers on conditional approvals to assist dealers in forwarding the funding packages to us for purchase. This group will also accept all incoming calls from dealers, answering their inquiries or directing them, if necessary, to the appropriate department.

 

Authorized dealers are able to advertise both new and used vehicles in the Classified Section of our website, at no cost to the dealer. We plan to use this feature of the website to re-market our own inventory (both repossessed and returned end-of-term vehicles) throughout the country. Our exclusive "Second-Chance Express" program for customers with a poor or limited credit history was created to help re-market our inventory. Incentives are in place for authorized dealers who sell or lease either our inventory vehicle at their dealership or one that is at another dealership in our network.

While we do not market or sell directly to consumers, we expect consumers to visit our website. We have provided a consumer oriented PowerPoint presentation for their review.

Additionally, visiting consumers will be able to view our advertising, news, and find general information about vehicle makes and models, road rallies, and other areas of powersports interest. They will also be able to utilize our Dealer Locator to find our nearest Authorized dealer or Private Label Dealer in their area. Consumers will be able to view the Classified Section of the website and any consumer inquiring about the program will be directed to their nearest authorized dealer.

 

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COMPETITION

 

The consumer finance industry is highly fragmented and highly competitive. Broadly speaking, Sparta competes with commercial banks, savings & loans, industrial thrift and credit unions, and a variety of local, regional and national consumer finance companies. While there are numerous financial service companies that provide consumer credit in the automobile markets, including banks, other consumer finance companies, and finance companies owned by automobile manufacturers and retailers, most financial service companies are reluctant to lend to motorcyclists. Customers who approach these lending sources to take out installment loans are often encouraged to pursue personal loans instead.

 

There are few companies that provide nationwide dealer-based leasing options in the motorcycle industry segment, and these tend to be private label factory programs supporting their own brands. Because of their narrow focus (such as requiring that the equipment be covered by the brand's warranty), these companies have met with limited success.

 

Independent consumer financial services companies and large commercial banks that participated in this market have withdrawn substantially from the motorcycle loan niche over the past two years or have toughened their underwriting criteria. Sparta believes that those companies may have suffered as a result of compromising their underwriting criteria for the sake of volume. In addition, management believes that our competitors' practice of financing all makes and models of a particular manufacturer results in lower overall portfolio performance because of the poor demographics associated with some of those product lines. The marketplace also includes small competitors such as local credit unions, local banks and a few regional players.

 

Sparta will compete for customers with commercial banks, savings and loans, credit unions, consumer financing companies, and manufacturers' finance subsidiaries. Additionally, some powersports manufacturers such as Harley-Davidson and BMW have subsidiaries that provide financing.

 

The more significant competitors of Sparta include: GE Retail Services, Capital One, HSBC/Household Bank, and Sheffield Financial/BB&T To management's knowledge, none of these firms offer leases for powersports vehicles.

 

The largest of these firms, GE Retail Services, markets both directly to dealers in Powersports market and through co-branded private label programs. GE recently has co-branded with Yamaha, Moto Guzzi, Aprillia Brands and other national manufacturers and distributors of Powersports and recreational products such as Coachmen Industries. GE also offers dealer and distributor floor plan financing and private label credit cards.

 

Capital One markets a product for Capital One Bank, offering consumer direct and dealer indirect consumer contracts to the powersports industry. They offer smaller dealers the ability to have customers apply via the web site affiliate program and larger dealers can go direct to Capital One finance. Capital One recently announced the purchase of Onyx Finance and truly entered the vehicle financing arena with the purchase of Peoples First Finance. Typical terms range from 30 to 60 months with a minimum of individuals approved for a product named "The Blank Check". Capital One Auto Finance, America's largest online vehicle lender, provides vehicle loans to customers directly via the Internet, as well as through a nationwide dealership network.

 

While some of Sparta's larger competitors have vast sources of capital and may be able to offer lower interest rates due to lower borrowing costs, Sparta believes that the combination of management's experience, expedient service, availability of the lease option and iPLUS give Sparta an advantage over its competitors.

 

REGULATION

Our planned financing operations are subject to regulation, supervision and licensing under various federal, state and local statutes and ordinances. Additionally, the procedures that we must follow in connection with the repossession of vehicles securing contracts are regulated by each of the states in which we plan to do business. Accordingly, the laws of such states, as well as applicable federal law, govern our operations. Compliance with existing laws and regulations has not had a material adverse affect on our operations to date. Our management believes that we maintain all requisite licenses and permits and are in material compliance with all applicable local, state and federal laws and regulations. We will periodically review our office practices in an effort to ensure such compliance.

 

The following constitute certain of the federal, state and local statutes and ordinances with which we must comply:

 

· Fair Debt Collection Act. The Fair Debt Collection Act and applicable state law counterparts prohibit us from contacting customers during certain times and at certain places, from using certain threatening practices and from making false implications when attempting to collect a debt.

 

· Truth in Lending Act. The Truth in Lending Act requires us and the dealers we do business with to make certain disclosures to customers, including the terms of repayment, the total finance charge and the annual percentage rate charged on each Contract or direct loan.

 

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· Consumer Leasing Act. The Consumer Leasing Act applies to any lease of consumer goods for more than four months. The law requires the seller to disclose information such as the amount of initial payment, number of monthly payments, total amount for fees, penalties for default, and other information before a lease is signed.

 

· The Consumer Credit Protection Act of 1968. The Act required creditors to state the cost of borrowing in a common language so that the consumer could figure out what the charges are, compare costs, and shop for the best credit deal.

 

· Equal Credit Opportunity Act. The Equal Credit Opportunity Act prohibits creditors from discriminating against loan applicants on the basis of race, color, sex, age or marital status. Pursuant to Regulation B promulgated under the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection.

 

· Fair Credit Reporting Act. The Fair Credit Reporting Act requires us to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency.

 

· Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act requires us to maintain privacy with respect to certain consumer data in our possession and to periodically communicate with consumers on privacy matters.

 

· Soldiers' and Sailors' Civil Relief Act. The Soldiers' and Sailor's Civil Relief Act requires us to reduce the interest rate charged on each loan to customers who have subsequently joined, enlisted, been inducted or called to active military duty.

 

· Electronic Funds Transfer Act. The Electronic Funds Transfer Act prohibits us from requiring our customers to repay a loan or other credit by electronic funds transfer ("EFT"), except in limited situations that do not apply to us. We are also required to provide certain documentation to our customers when an EFT is initiated and to provide certain notifications to our customers with regard to preauthorized payments.

 

· Telephone Consumer Protection Act. The Telephone Consumer Protection Act prohibits telephone solicitation calls to a customer’s home before 8 a.m. or after 9 p.m. In addition, if we make a telephone solicitation call to a customer's home, the representative making the call must provide his or her name, our name, and a telephone number or address at which our representative may be contacted. The Telephone Consumer Protection Act also requires that we maintain a record of any requests by customers not to receive future telephone solicitations, which must be maintained for five years.

 

· Bankruptcy. Federal bankruptcy and related state laws may interfere with or affect our ability to recover collateral or enforce a deficiency judgment

 

EMPLOYEES

 

As of April 30, 2007, we had 25 full-time employees.

 

None of our employees are covered by a collective bargaining agreement. We have never experienced a work stoppage and we believe that we have satisfactory working relations with our employees.

 

FACILITIES

 

Our executive offices are located at 462 Seventh Avenue, 20th Floor, New York, NY 10018. We have an agreement for use of office space at this location under a lease expiring on November 30, 2007. The office space contains approximately 7,000 square feet. The annual rate is $167,280 (annualized) for the first six months of calendar year 2006, $174,080 (annualized) for the second six months of calendar year 2006, and $178,432 for the calendar year 2007.

 

 

LEGAL PROCEEDINGS

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. We are not currently aware of any such legal proceedings or claims.

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DIRECTORS AND EXECUTIVE OFFICERS

 

Our executive officers and directors and their respective ages and positions as of May 12, 2006 are as follows:

Name		Age		Position
Anthony L. Havens		52		Chief Executive Officer, President, Acting Chief Financial Officer and Chairman
Kristian Srb		51		Director
Jeffrey Bean		52		Director
Anthony W. Adler		67		Executive Vice President
Richard P. Trotter		63		Chief Operating Officer
Sandra L. Ahman		42		Vice President, Secretary and Director

 

ANTHONY L. HAVENS, CHIEF EXECUTIVE OFFICER, PRESIDENT, ACTING CHIEF FINANCIAL OFFICER AND CHAIRMAN. On February 27, 2004, Mr. Havens became our Chief Executive Officer, President and Chairman of the Board. Mr. Havens has been the Managing Member and Chief Executive Officer of Sparta Commercial Services, LLC since its inception in 2001 and the acting Chief Financial Officer since July 2005. He is involved in all aspects of Sparta's operations, including providing strategic direction, and developing sales and marketing strategies. From 1994 to 2004, Mr. Havens has been Chief Executive Officer and a director of American Motorcycle Leasing Corp. He co-founded American Motorcycle Leasing Corp. in 1994, and developed its operating platform and leasing program to include a portfolio which includes both prime and sub-prime customers. Mr. Havens has over 20 years of experience in finance and investment banking.

 

KRISTIAN SRB, DIRECTOR. Mr. Srb joined our board of directors in December 2004. Mr. Srb has been a director of American Motorcycle Leasing Corp. from 1994 to the present. Mr. Srb was President of American Motorcycle Leasing Corp. from 1994 to 1999. Since 1999, Mr. Srb has engaged in private investment activities. He has over 16 years experience in international brand development and management, including for 13 years with Escada A.G.

 

JEFFREY BEAN, DIRECTOR. Mr. Bean joined our Board of Directors in December 2004. Mr. Bean is the founding partner of GoMotorcycle.com. Formed in January 1999, GoMotorcycle.com is currently engaged in the sale of motorcycle parts and accessories over the Internet. Prior to founding GoMotorcycle.com, Mr. Bean was an institutional broker and trader at Refco, Inc. from 1985 to 1997. From 1977 to 1985, Mr. Bean was President of Thomaston Press, Ltd., a sales printing concern. He received a B.A. degree from the University of Virginia.

 

ANTHONY W. ADLER, Executive Vice President and interim Chief Financial Officer. From March 2004 to August 2006 Mr. Adler was a full time consultant to the Company. From 1995 to March 2004, he was Chief Financial Officer of American Motorcycle Leasing Corp. From 1993 to 1994 Mr. Adler was Chief Executive Officer of Innotek, Inc., a public company engaged in the development and distribution of skin-care products. Prior to 1993, Mr. Adler served in numerous executive capacities including Director of Research and Vice President, Corporate Finance for two New York Stock Exchange Member Firms. Mr. Adler holds an MBA from New York University and a BA from Columbia College.

 

RICHARD P. TROTTER, CHIEF OPERATING OFFICER. Mr. Trotter has been our Chief Operating Officer since November 2004. From 2001 to 2004, Mr. Trotter was President, Chief Credit Officer, of American Finance Company, Inc., purchasing retail automobile installment contracts from independent automobile dealers nationwide. From 1996 to 2001, he was Senior Vice President of Originations for Consumer Portfolio Services, Inc., one of the nation's leading purchasers of non-prime retail automobile installment contracts. From 1994 to 1996, he was Senior Vice President of Marketing for Consumer Portfolio Services, Inc. His experience also includes positions as Chief Operating Officer, Executive Director and President, and Chief Credit Officer for banks and financial institutions in California. Mr. Trotter has over 30 years experience in financial institutions and over 20 years experience specializing in the automobile lending, servicing, and collecting industry.

 

SANDRA L. AHMAN, VICE PRESIDENT, SECRETARY AND DIRECTOR. On March 1, 2004, Sandra Ahman became Vice President of Operations and Secretary of Sparta, and a Director on June 1, 2004. She has been a Vice President of Sparta Commercial Services, LLC since formation. From 1994 to 2004, she was Vice President of Operations of American Motorcycle Leasing Corp. Prior to joining American Motorcycle Leasing Corp., Ms. Ahman was with Chatham Capital Partners, Ltd. Before joining Chatham in 1993, she was Manager, Human Resources for Comart and Aniforms, a sales promotion and marketing agency in New York, where she worked from 1986 to 1993. For the past 10 years, Ms. Ahman has been an active volunteer with The Children's Aid Society in New York City. She is the Chairperson of its Associates Council, a membership of 500 committed volunteers.

 

There are no family relationships between any of our directors or executive officers.

 

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Board Committees

 

Our Board does not maintain a separate audit, nominating or compensation committee. Functions customarily performed by such committees are performed by our Board as a whole. We are not required to maintain such committees under the applicable rules of the Over-the-Counter Bulletin Board. None of our independent directors qualify as an "audit committee financial expert."

 

The Board of Directors has not adopted a specific process with respect to security holder communications, but security holders wishing to communicate with the Board of Directors may do so by mailing such communications to the Board of Directors at our offices.

 

Code of Ethics

 

We have not yet adopted a "code of ethics", as defined by the SEC, that applies to our Chief Executive Officer, Chief Financial Officer, principal accounting officer or controller and persons performing similar functions. We are in the process of drafting and adopting a Code of Ethics.

 

Director Compensation

 

Directors are reimbursed for reasonable out-of-pocket expenses incurred in connection with attendance at Board meetings.

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EXECUTIVE COMPENSATION

 

 

Summary Compensation Table

 

Prior to February 27, 2004, management spent less than five hours per month on company matters. Accordingly, no officer or director received any compensation other than reimbursement for out-of-pocket expenses incurred on our behalf, and no cash compensation, deferred compensation, employee stock options, or long-term incentive plan awards were issued or granted to our management through February 27, 2004.

					Annual Compensation									Long Term Compensation Awards
Name and Principal Position		Year			Salary			Bonus			Other Annual Compensation			Restricted Stock Awards			Securities Underlying Options/SARS			All Other Compensation
Anthony L.			2006		$	280,000		$	57,221
Havens (1)			2005		$	233,333		$	0		$	0			0			0		$	0
Chief Executive Officer, President, and Director			2004		$	46,667		$	0		$	0			0			0		$	0
Anthony W.			2006		$	77,083.30					$	85,463.00						4,000,000	(10)
Adler (9)			2005								$	107,279.36
Executive Vice President Interim Chief Financial Officer			2004								$	74,000.00
Richard P.			2006		$	199,999.92
Trotter (2)			2005		$	80,000		$	0		$	0			125,000	(3)		875,000	(4)	$	0
Chief Operating Officer
Michael J.			2006
Mele (5)			2005		$	3,125		$	0		$	0			0			0		$	0
Chief Financial Officer
Daniel J.			2005		$	105,001		$	0		$	0			227,272	(7)		0		$	0
Lanjewar (6)
Former Chief Financial Officer
Sandra L.			2006		$	87,948		$	20,143
Ahman (8)			2005		$	75,000		$	0		$	0			0			0		$	0
Vice President and Secretary			2004		$	12,500		$	0		$	0			0			0		$	0

 

(1) Mr. Haven became an officer on February 27, 2004. His reported fiscal year 2004 compensation covers the period February 27, 2004 through April 30, 2004.

 

(2) Mr. Trotter became an officer on November 1, 2004. His reported fiscal year 2005 compensation covers the period November 1, 2004 through April 30, 2005.

 

(3) Refers to restricted stock, subject to vesting, granted. Pursuant to an employment agreement, Mr. Trotter is entitled to up to 125,000 shares of common stock. The grant of shares is subject to vesting and subject to continued employment. On November 1, 2004, 25,000 shares vested. An additional 100,000 shares are subject to vesting at a future date, subject to proportionate adjustment in the event of employment termination for any incomplete vesting period, as follows: 25,000 shares on November 1, 2005; 25,000 shares on November 1, 2006; 25,000 shares on November 1, 2007; 12,500 shares on November 1, 2008; and 12,500 on November 1, 2009. 

 

(4) Refers to stock options, subject to vesting, granted. Pursuant to option agreement dated April 29, 2005, Mr. Trotter is entitled to up to 875,000 stock options, subject to vesting. The stock options are exercisable for five years from the vesting date at $0.605 per share. On April 29, 2005, stock options to purchase 175,000 shares vested, and the remaining options are to vest in equal installments over the next four anniversary date of the agreement.

 

(5) Mr. Mele became an officer on April 29, 2005. His reported fiscal year 2005 compensation covers the period from April 29, 2005. Mr. Mele resigned as our Chief Financial Officer on July 29, 2005.

 

(6) Became an officer on August 2, 2004, and resigned on April 29, 2005. His reported fiscal year 2005 compensation covers the period August 2, 2004 through April 29, 2005.

 

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(7) Refers to shares vested. Pursuant to an employment agreement, Mr. Lanjewar was entitled to up to 568,175 shares of common stock. The grant of shares was subject to vesting and subject to continued employment. On January 1, 2005, 113,635 shares vested, and the reminder of the shares were to vest in equal portions on July 1, 2005, July 1, 2006, July 1, 2007, and July 1, 2008, subject to proportionate adjustment in the event of employment termination for any incomplete vesting period. In April 2005, Mr. Lanjewar resigned as our Chief Financial Officer, and was vested with an additional 113,637 shares of common stock.

 

(8) Became an officer on March 1, 2004. Her reported fiscal year 2004 compensation covers the period March 1, 2004 through April 30, 2004.

 

(9) Mr. Adler became an officer September 22, 2006. Prior to that time he was a paid consultant to the company.

 

(10) Refers to stock options, subject to vesting. Pursuant to an option agreement dated September 22, 2006, Mr. Adler is entitled to up to 4,000,000 options subject to vesting. The options are exercisable for a period of five years from the vesting date at $0.1914 per share. On September 22, 2006 stock options to purchase 800,000 shares vested, with 800,000 options to vest on September 22, 2007 and 1,200,000 options each to vest on September 22, 2008 and September 22, 2009.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS

Number of Securities

% of Total Options/SARs

Underlying Options/SARs

Granted to Employees in

Exercise or base price

Expiration

Name

Granted(#)

Fiscal Year

($/Sh)

Date

Richard P. Trotter

875,000

(a)

100

%

$

0.605

4-29-10

(b)

 

(a) Refers to stock options, subject to vesting, granted. Pursuant to option agreement dated April 29, 2005, Mr. Trotter is entitled to up to 875,000 stock options, subject to vesting. The stock options are exercisable for five years from the vesting date at $0.605 per share. On April 29, 2005, stock options to purchase 175,000 shares vested, and the remaining options are to vest in equal installments over the next four anniversary date of the agreement.

 

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR

AND FY-END OPTION/SAR VALUES

		Shares Acquired on Exercise			Value Realized			Number of securities underlying unexercised Options/SARs at FY-end (#)						Value of unexercised in-the-money options/SARs at FY-end ($)(a)
Name		(#)			($)			Exercisable			Unexercisable			Exercisable			Unexercisable
Richard P. Trotter			—			—			175,000			700,000		$	0		$	0

 

(a) The dollar values were calculated by determining the difference between the fair market value at fiscal year-end of the common stock underlying the options and the exercise price of the options. The last sale price of a share of Sparta's common stock on April 30, 2007as reported by the OTC Bulletin Board was $0.09.

 

Employment Agreement with Executive Officers

 

We have an employment agreement with Anthony L. Havens, Anthony W. Adler and Richard P. Trotter. The remaining officers serve at the discretion of our board of directors and hold office until their successor is elected and qualified or until their earlier resignation or removal.

 

Employment Agreement with CEO

 

We entered into an employment agreement, dated as of February 27, 2004, with Anthony L. Havens who serves as our Chief Executive Officer. The employment is for a term of five years. The employment term is to be automatically extended for one five-year period, and additional one-year periods, unless written notice is given three months prior to the expiration of any such term that the term will not be extended. His base salary is at an annual rate of $280,000. He is entitled to defer a portion of his base salary each year. He is entitled to annual increases in his base salary and other compensation as may be determined by the Board of Directors. He is entitled to a $1,000,000 term insurance policy. He is entitled to six weeks of paid vacation per year, and health insurance, short term and long term disability insurance, retirement benefits, fringe benefits, and other employee benefits on the same basis as is generally made available to other senior executives. He is entitled to reimbursement of reasonable business expenses incurred by him in accordance with company policies. If terminated, he is entitled to three months of severance for up to six months of service for each year of employment, plus full participation in all standard employee benefits during the period of severance payments. The employment agreement provides for termination for cause. If he resigns for good reason or is terminated without cause within twelve months after a change in control, he is entitled to receive an additional lump sum payment equal to the greater of the severance payment or the balance of his base salary for the remaining employment term, continued coverage under any welfare benefits plans for two years, and full vesting of any account balance under a 401(k) plan. For purposes of the employment agreement, a change in control refers to:

 

· a change in voting power, due to a person becoming the beneficial owner of 50% or more of the voting power of our securities and our largest shareholder;

 

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· during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors, including later approved directors, ceasing to consisted a majority of the Board of Directors;

 

· a merger or consolidation of our company with a third party, after which our shareholders do not own more than 50% of the voting power; or

 

· a sale of all or substantially all of our assets to a third party.

If we elect not to renew the employment agreement, he shall be entitled to receive severance equal to thirty months of his base salary plus standard employment benefits. If we fail to fully perform all or any portion of our post-termination obligations, we are be obligated to pay to him an amount equal to five times the value of the unperformed obligation.

 

Employment Agreement with EVP

 

We entered into an employment agreement, effective September 22, 2006, with Anthony W. Adler, to serve as our Executive Vice President and interim Chief Financial Officer. The term of employment is three years. The employment term may be extended for one year upon written agreement by the Company and Mr. Adler, His initial base salary is at an annual rate of $185,000. He is entitled to annual increases in his base salary and other compensation as may be determined by the Board of Directors. He is entitled to a grant of options for 4,000,000 shares of our common stock. The grant of options is subject to vesting and subject to continued employment. On September 22, 2006, options for 800,000 shares vested, on September 22, 2007 options for an additional 800,000 shares will vest and on September 22, 2009 and 2010 respectively options for an additional 1,200,000 shares will vest. subject to proportionate adjustment in the event of employment termination for any incomplete vesting period, He is entitled to four weeks of paid vacation during the first year of employment, and five weeks per year thereafter. He is entitled to health insurance, short term and long term disability insurance, retirement benefits, fringe benefits, and other employee benefits on the same basis as is made generally available to other employees. He is entitled to reimbursement of reasonable business expenses incurred by him in accordance with company policies. The employment agreement provides for termination for cause. If terminated without cause, he is entitled to severance. As severance, he shall be receive his full base salary through the end of the then current employment term.

 

Employment Agreement with COO

 

We entered into an employment agreement, effective November 1, 2004, with Richard P. Trotter, to serve as our Chief Operating Officer. The term of employment is one year. The employment term is to be automatically extended for one two-year period, and an additional two-year period, unless written notice is given three months prior to the expiration of any such term that the term will not be extended. His initial base salary is at an annual rate of $160,000. On May 1, 2005, his base salary increases to $200,000. He is entitled to annual increases in his base salary and other compensation as may be determined by the Board of Directors. He is entitled to a grant of 1,000,000 shares of our common stock. The grant of shares is subject to vesting and subject to continued employment. On November 1, 2004, 25,000 shares vested and on November 1, 2005, an additional 25,000 shares vested. An additional 75,000 shares are subject to vesting at a future date, subject to proportionate adjustment in the event of employment termination for any incomplete vesting period, as follows: 25,000 shares on November 1, 2006; 25,000 shares on November 1, 2007; 12,500 shares on November 1, 2008; and 12,500 on November 1, 2009. He is entitled to three weeks of paid vacation during the first year of employment, and four weeks per year thereafter. He is entitled to health insurance, short term and long term disability insurance, retirement benefits, fringe benefits, and other employee benefits on the same basis as is made generally available to other employees. He is entitled to reimbursement of reasonable business expenses incurred by him in accordance with company policies. The employment agreement provides for termination for cause. If terminated without cause, he is entitled to severance. As severance, he shall be entitled to one week's base salary as of the date of termination for the first full year of service, and thereafter, two weeks' base salary for each succeeding year of service, up to an aggregate of four months of such base salary.

 

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

On February 27, 2004, pursuant to an Agreement and Plan of Reorganization with Sparta Commercial Services, LLC and its members, we acquired all of the membership interests of Sparta in exchange for the agreement for the issuance of such number of shares of our common stock as would represent approximately 91.75% of our outstanding shares. At February 26, 2004, we had an authorized capital of 200,000,000 shares and 56,637,228 shares issued and outstanding, and we issued the remaining balance of authorized capital of 143,362,772 shares (pre-split) to Sparta members. The remaining unissued balance of 486,511,854 shares (pre-split) due to the Sparta members were subsequently issued upon completion of an increase in our authorized capital. Pursuant to the acquisition, all of our former directors and officers resigned, and nominated Anthony Havens, the designee of Sparta, as the officer and director. Present officers of the company, Anthony Havens and Sandra Ahman, acquired their respective ownership interest in our common stock pursuant to their exchange of membership interests of Sparta. Glenn A. Little, the former principal stockholder of the company, prior to the completion of acquisition owned 40,000,000 shares, or 71%, of our then issued and outstanding shares of common stock. Sparta also entered into a consulting agreement for business and financial services with Glenn A. Little. The agreement was for a term of one year. Mr. Little received a fee of $100,000 pursuant to the consulting agreement.

 

We entered into a license agreement, dated as of June 1, 2002, and as amended on December 3, 2003, with American Motorcycle Leasing Corp., an entity controlled by our president and a significant shareholder. Under the agreement, we have a non-exclusive, perpetual right to use American Motorcycle Leasing Corp.'s proprietary operating systems related to consumer credit underwriting procedures, vehicle and vehicle lease value evaluation methods, rental stream collection and insurance tracking policies and procedures. The license fee consisted of $300,000 and 330,433 membership interests of Sparta Commercial Services, LLC, which will be exchanged for 34,256,941 shares of Tomahawk upon an increase in our authorized capital.

 

We entered into a services agreement, dated as of March 1, 2004, with American Motorcycle Leasing Corp. For a period of three years, American Motorcycle Leasing Corp. is to provide personnel, computer equipment and software, and facilities, in connection with our credit and underwriting activities and our use of the operating systems that we had licensed from American Motorcycle Leasing Corp. In return for such services, we agreed to pay $100,000 by March 1, 2005, and for the time of the personnel utilized at their salary rate at American Motorcycle Leasing Corp.

 

On August 2, 2004, pursuant to an employment agreement with Daniel J. Lanjewar, our former Chief Financial Officer, we agreed to issue 568,175 shares of our common stock in a transaction deemed exempt from registration pursuant to Section 4(2) of the Securities Act. The grant of shares was subject to vesting and subject to continued employment. On January 1, 2005, 113,635 shares vested, and the reminder of the shares were to vest in equal portions on July 1, 2005, July 1, 2006, July 1, 2007, and July 1, 2008, subject to proportionate adjustment in the event of employment termination for any incomplete vesting period. In April 2005, Mr. Lanjewar resigned as our Chief Financial Officer, and was vested with an additional 113,637 shares of common stock.

 

We entered into a purchase option agreement with American Motorcycle Leasing Corp. on November 2, 2004 at a cost to Sparta Commercial Services of $250,000. This agreement granted Sparta Commercial Services the right, for a two year period, to purchase portions of a certain portfolio of equipment leases that American Motorcycle Leasing Corp. owns. The portfolio is secured by a first priority security interest in favor of Citibank, N.A. or its assigns. The cost of $250,000 has been charged to operations in fiscal 2005. As of April 30, 2005, payments against this obligation of $81,000 were made. In June, 2005, an additional $20,000 was paid.

 

In January 2005, we received a loan of $25,000 from Kristian Srb, one of our directors. This loan was non-interest bearing and was payable on demand and has subsequently been repaid.

 

On April 29, 2005, pursuant to an option agreement with Richard Trotter, our Chief Operating Officer, we agreed to issue options to purchase up to 875,000 shares of our common stock. Subject to vesting, the stock options are exercisable for five years from the vesting date at $0.605 per share. Twenty percent of the options vested on April 29, 2005, and the remaining options are to vest in equal installments over the next four anniversary date of the agreement.

 

In June 2005, Kristian Srb, one of our directors, purchased on various dates, an aggregate of 10,800 shares of our common stock at prices of $0.45 to $0.55 per share in the open market, as follows: on 6/13/2005, purchased 3,062 shares at $0.51 per share; on 6/13/2005, purchased 1,938 shares at $0.55 per share; on 6/14/2005, purchased 800 shares at $0.55 per share; and on 6/20/2005, purchased 5,000 shares at $0.45 per share.

 

During nine months ended January 31, 2007, the Company borrowed from a Kristian Srb and officer $135,000 and $8,500, respectively on a demand basis without interest. The Company also owes $13,760 to another Director and Officer an interest free demand loan received on August 24, 2006. As of January 31, 2007, aggregated loans payable to officers were $157,260. These loans are classified as current on the Company’s balance sheet. [Please indicate which director this is]

 

At January 31, 2007, included in accounts payable, is $9,460 due to American motorcycle Leasing Corp., a company controlled by the Company's Chief Executive Officer and a director, for the purchase of motorcycles.

 

We believe that the terms of all of the above transactions are commercially reasonable and no less favorable to us than we could have obtained from an unaffiliated third party on an arm's length basis. Our policy requires that all related parties recuse themselves from negotiating and voting on behalf of our company in connection with related party transactions.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information regarding the beneficial ownership of our common stock as of May 12, 2007 by:

· each person known by us to be the beneficial owner of more than 5% of our Common Stock;

 

· each of our directors;

· each of our executive officers; and

· our executive officers and directors as a group.

 

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power. Under SEC rules, a person is deemed to be the beneficial owner of securities which may be acquired by such person upon the exercise of options and warrants or the conversion of convertible securities within 60 days from the date on which beneficial ownership is to be determined. Each beneficial owner's percentage ownership is determined by dividing the number of shares beneficially owned by that person by the base number of outstanding shares, increased to reflect the beneficially-owned shares underlying options, warrants or other convertible securities included in that person's holdings, but not those underlying shares held by any other person.

 

Name		Number of Shares Beneficially Owned Prior to Offering			Percentage of Class Beneficially Owned Prior to Offering			Number of Shares Offered			Number of Shares Beneficially Owned After the Offering			Percentage of Class Beneficially Owned After the Offering
Anthony L. Havens (1)			32,983,262			28.9	%		0			32,983,262	(1)		28.9	%
Kristian Srb (2)			33,056,562			29.0	%		0			33,056,562			29.0	%
Jeffrey Bean			0			*			0			0			*
Richard P. Trotter (3)			200,000			*			0			200,000			*
Sandra L. Ahman			580,865			*			0			580,865			*
Glenn A. Little (4) 211 West Wall Midland, Texas 79701			6,648,527			5.8	%		1,520,321			5,128,206			4.5	%
All current directors and named officers as a group (5 in all)			66,820,689	(5)		58.6	%(5)					66,820,689	(5)

 

* Represents less than 1%

 

(1) Mr. Havens' minor son owns 500,000 shares of common stock in a trust account. Mr. Havens is not the trustee for his son's trust account, and does not have direct voting control of such shares. Mr. Havens does not have the sole or shared power to vote or direct the vote of such shares, and, as a result, Mr. Havens disclaims beneficial ownership of such shares held in his son's trust account.

 

(2) Includes 62,500 shares of common stock held by Mr. Srb’s minor daughter, for which Mr. Srb may be deemed to have beneficial ownership of such shares.

 

(3) Includes 75,000 vested shares, pursuant to an employment agreement, Mr. Trotter is entitled to up to 125,000 shares of common stock. The grant of shares is subject to vesting and subject to continued employment. On November 1, 2004, 25,000 shares vested. An additional 25,000 shares vested on each of November 1, 2005 and 2006. An additional 50,000 shares are subject to vesting at a future date, subject to proportionate adjustment in the event of employment termination for any incomplete vesting period, as follows: 25,000 shares on November 1, 2007; 12,500 shares on November 1, 2008; and 12,500 on November 1, 2009. Also includes 525,000 vested stock options, pursuant to an option agreement, Mr. Trotter is entitled to up to 875,000 stock options to purchase shares of our common stock, subject to vesting. The stock options are exercisable for five years from the vesting date at $0.605 per share. On November 1, 2004, 2005 and 2006 , stock options to purchase 175,000 shares vested each date, and the remaining options are to vest in equal installments over the next four anniversary dates of the agreement.

 

(4) Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 368,590 shares issuable upon exercise of warrants.

 

(5) Does not include 1,205,000 shares of common stock and 800,000 vested stock options, pursuant to an option agreement owned by Mr. Adler. Mr. Adler is entitled to up to 4,000,000 stock options to purchase shares of our common stock, subject to vesting. The stock options are exercisable for five years from the vesting date at $0.1914 per share.

 

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DESCRIPTION OF SECURITIES TO BE REGISTERED

 

COMMON STOCK

 

We are authorized to issue up to 340,000,000 shares of common stock, par value $0.001. As of April 30, 2007 , there were 123,216,157 shares of common stock outstanding. Holders of the common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefore. Upon the liquidation, dissolution, or winding up of our company, the holders of common stock are entitled to share ratably in all of our assets which are legally available for distribution after payment of all debts and other liabilities and liquidation preference of any outstanding common stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of common stock are validly issued, fully paid and nonassessable.

 

INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

 

Section 78.7502 of the Nevada Revised Statutes allows a corporation to indemnify any officer, director, employee or agent who is a party or is threatened to be made a party to a litigation by reason of the fact that he or she is or was an officer, director, employee or agent of the corporation, or is or was serving at the request of the corporation as an officer, director, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by such director or officer if:

 

· there was no breach by the officer, director, employee or agent of his or her fiduciary duties to the corporation involving intentional misconduct, fraud or knowing violation of law; or

 

· the officer, director, employee or agent acted in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful.

 

Our bylaws further provide that our Board of Directors has sole discretion to indemnify our officers and other employees. We may limit the extent of such indemnification by individual contracts with our directors and executive officers, but have not done so. We are required to advance, prior to the final disposition of any proceeding, promptly on request, all expenses incurred by any director or executive officer in connection with that proceeding on receipt of an undertaking by or on behalf of that director or executive officer to repay those amounts if it should be determined ultimately that he or she is not entitled to be indemnified under our bylaws or otherwise. We are not, however, required to advance any expenses in connection with any proceeding if a determination is reasonably and promptly made by our Board of Directors by a majority vote of a quorum of disinterested Board members that (a) the party seeking an advance acted in bad faith or deliberately breached his or her duty to us or our stockholders and (b) as a result of such actions by the party seeking an advance, it is more likely than not that it will ultimately be determined that such party is not entitled to indemnification pursuant to the applicable sections of our bylaws.

 

 

PLAN OF DISTRIBUTION

 

The selling stockholders and any of their respective pledgees, donees, assignees and other successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:

 

· ordinary brokerage transactions and transactions in which the broker-dealer solicits the purchaser;

· block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

· purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

· an exchange distribution in accordance with the rules of the applicable exchange;

· privately-negotiated transactions;

 

· short sales that are not violations of the laws and regulations of any state or the United States;

· broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share;

· through the writing of options on the shares;

· a combination of any such methods of sale; and

· any other method permitted pursuant to applicable law.

 

The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus. The selling stockholders shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time.

 

32

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The selling stockholders may also engage in short sales against the box, puts and calls and other transactions in our securities or derivatives of our securities and may sell or deliver shares in connection with these trades.

 

The selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may also sell the shares directly to market makers acting as principals and/or broker-dealers acting as agents for themselves or their customers. Such broker-dealers may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of shares for whom such broker-dealers may act as agents or to whom they sell as principal or both, which compensation as to a particular broker-dealer might be in excess of customary commissions. Market makers and block purchasers purchasing the shares will do so for their own account and at their own risk. It is possible that a selling stockholder will attempt to sell shares of common stock in block transactions to market makers or other purchasers at a price per share which may be below the then market price. The selling stockholders cannot assure that all or any of the shares offered in this prospectus will be issued to, or sold by, the selling stockholders. The selling stockholders and any brokers, dealers or agents, upon effecting the sale of any of the shares offered in this prospectus, may be deemed to be "underwriters" as that term is defined under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or the rules and regulations under such acts. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act.

 

We are required to pay all fees and expenses incident to the registration of the shares, including fees and disbursements of counsel to the selling stockholders, but excluding brokerage commissions or underwriter discounts.

 

The selling stockholders, alternatively, may sell all or any part of the shares offered in this prospectus through an underwriter. No selling stockholder has entered into any agreement with a prospective underwriter and there is no assurance that any such agreement will be entered into.

 

The selling stockholders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. The selling stockholders and any other persons participating in the sale or distribution of the shares will be subject to applicable provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations under such act, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the shares by, the selling stockholders or any other such person. In the event that the selling stockholders are deemed affiliated purchasers or distribution participants within the meaning of Regulation M, then the selling stockholders will not be permitted to engage in short sales of common stock. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. In regards to short sells, the selling stockholder can only cover its short position with the securities they receive from us upon conversion. In addition, if such short sale is deemed to be a stabilizing activity, then the selling stockholder will not be permitted to engage in a short sale of our common stock. All of these limitations may affect the marketability of the shares.

 

We have agreed to indemnify the selling stock holders, on their transferees or assignees, against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or to contribute to payments the selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may be required to make in respect of such liabilities.

 

Pursuant to a requirement by the National Association of Securities Dealers, Inc., or NASD, the maximum commission or discount to be received by any NASD member or independent broker/dealer may not be greater than 8.0% of the gross proceeds received by us for the sale of any securities being registered pursuant to SEC Rule 415.

 

Until March 2008, we have granted Maxim the right of first refusal to act as lead underwriter or minimally as a co-manager, for certain types of equity and debt offerings.

 

If the selling stockholders notify us that they have a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the registration statement of which this prospectus is a part, and file a prospectus supplement to describe the agreements between the selling stockholders and the broker-dealer.

 

33

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PENNY STOCK

 

The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:

 

· that a broker or dealer approve a person's account for transactions in penny stocks; and

· the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

 

In order to approve a person's account for transactions in penny stocks, the broker or dealer must

 

· obtain financial information and investment experience objectives of the person; and

· make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:

 

· sets forth the basis on which the broker or dealer made the suitability determination; and

· that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

34

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SELLING STOCK HOLDERS

 

The following table sets forth the common stock ownership of the selling stockholders as of May 12, 2006. The selling stockholders acquired their securities through a loan financing which closed in November 2004 and December 2004, a private placement of Series A Convertible Preferred Stock with warrants which placement had its final closing on July 27, 2005, a loan financing which closed in November 2005 and December 2005, and a private placement of common stock which had its final closing on March 29, 2006.

 

Name		Total Shares Owned and Issuable Upon Exercise of Warrants and Conversion of Preferred Stock Before Offering			Percentage of Common Stock,Assuming Full Conversion and Exercise			Number of Shares Offered for Sale			Number of Shares Owned After Completion of Offering (1)			Percentage of Common Stock Owned After Completion of Offering (2)
Robert G. Dello-Russo (3)			3,511,540			3.1	%		3,511,540			0			*
Arthur O. Silver Trust (4)			2,021,411			1.8	%		2,021,411			0			*
Ronald K. Marks (5)			500,385			*			500,385			0			*
Lee A. Pearlmutter Trust (6)			740,770			*			740,770			0			*
SA Properties Co LP (7)			1,986,154			1.7	%		1,986,154			0			*
Neil Ellman			1,027,821			*			1,027,821			0			*
Raymond J. Brown (8)			98,077			*			98,077			0			*
Morrco Properties Co LP (9)			461,538			*			461,538			0			*
Richard E. Kent IRA			260,000			*			260,000			0			*
The Russell Family Investments LP (10)			1,002,564			*			1,002,564			0			*
Thomas Blatner (11)			368,590			*			368,590			0			*
Michael Friedman			130,000			*			130,000						*
Family Trust under Natalie L. Kuhr Revocable Trust (12)			260,000			*			260,000			0			*
Allen Coburn			62,000			*			62,000			0			*
John O'Neal Johnston Trust (13)			320,385			*			320,385			0			*
Emeric Holderith			90,000			*			90,000			0			*
Roy G. Shaw, Jr. (14)			585,770			*			585,770			0			*
Andrew Morris Roth IRA			130,000			*			130,000			0			*
Robert A. & Susan DeLuca			317,000			*			317,000			0			*

 

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Name		Total Shares Owned and Issuable Upon Exercise of Warrants and Conversion of Preferred Stock Before Offering			Percentage of Common Stock,Assuming Full Conversion and Exercise			Number of Shares Offered for Sale			Number of Shares Owned After Completion of Offering (1)			Percentage of Common Stock Owned After Completion of Offering (2)
Lee Westerheide			260,000			*			260,000			0			*
John C. Moss			78,477			*			78,477			0			*
Leo Long (15)			16,880,971			14.8	%		16,880,971			0			*
Neil Prete			550,000			*			550,000			0			*
Albert Carocci			260,000			*			260,000			0			*
Bill McCurtain			105,000			*			105,000			0			*
Rodolfo Beeck (16)			192,308			*			192,308			0			*
Elizabeth K. Millan (17)			151,154			*			151,154			0			*
JoAnn Stock			154,000			*			154,000			0			*
Reed Kean			390,000			*			390,000			0			*
Edward Wilson			120,000			*			120,000			0			*
WNSJ Properties LLC (18)			130,000			*			130,000			0			*
Nite Capital LP (19)			512,821			*			512,821			0			*
Larry Warner			515,000			*			515,000			0			*
Larry & Rebecca Warner			153,846			*			153,846			0			*
Crestview Capital Master, LLC (20)			2,564,200			2.2	%		2,564,200			0			*
RTK Partners (21)			130,000			*			130,000			0			*
Saul Kaminsky			260,000			*			260,000			0			*
United Empire Capital Mgt. Inc. (22)			200,000			*			200,000			0			*
Joseph Bianco 130,000			130,000			*			130,000			0			*
Emilile J. Corsiglia IRA			130,000			*			130,000			0			*
Leon Bialik 179,487			179,487			*			179,487			0			*
Paul Lodi (23)  567,308			567,308			*			567,308			0			*
Jacobs Pond LLC (24)			391,026			*			391,026			0			*
Robert J. Corsiglia Trust (25)			2,115,386			1.9	%		2,115,386			0			*
Robert J. Corsiglia IRAR (26)			1,490,385			1.3	%		1,490,385			0			*
Robert J. Corsiglia ROL IRA (27)			480,770			*			480,770			0			*
Emilie J. Corsiglia (28)			240,385			*			240,385			0			*

 

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Name		Total Shares Owned and Issuable Upon Exercise of Warrants and Conversion of Preferred Stock Before Offering			Percentage of Common Stock,Assuming Full Conversion and Exercise			Number of Shares Offered for Sale			Number of Shares Owned After Completion of Offering (1)			Percentage of Common Stock Owned After Completion of Offering (2)
Juliet Lodi (29)			144,231			*			144,231			0			*
Paul & Edith Lodi (30)			192,308			*			192,308			0			*
Christopher J. Kennan (31)			1,099,907			*			1,099,907			0			*
Alfonse M. D'Amato (32)			961,539			*			961,539			0			*
Steven E. Erickson and Dean Erickson Trust (33)			240,385			*			240,385			0			*
B. Jerry L. Huff and Judith T. Huff Revocable Living Trust (34)			120,192			*			120,192			0			*
William N. & Deborah L. Hicks (35)			182,192			*			182,192			0			*
Bankhaus B Metzler seel Sohn & Co. (36)			1,028,526			*			961,539			66,987			*
Helmut Janssen (37)			348,077			*			348,077			0			*
RF JM Partners LLC (38)			552,886			*			552,886			0			*
Richard E. and Laura T. Kent (39)			480,770			*			480,770			0			*
Marcos Aszelowicz (40)			138,221			*			138,221			0			*
Corinne Lozach (41)			961,539			*			961,539			0			*
Leonard Herzfeld (42)			192,308			*			192,308			0			*
W.R. Sauey (43)			961,539			*			961,539			0			*
Glenn A. Little (44)			1,520,321			1.3	%		1,520,321			0			*
The Sherman Family Partners (45)			961,539			*			961,539			0			*
John Barlow			33,334			*			33,334			0			*
Ludwig von Hanstein			444,167			*			216,667			227,500			*
Maxim Group LLC (46)			5,255,155			4.5	%		5,255,155			0			*
Suan Investments, Inc. (47)			128,205			*			128,205			0			*
Joshua Lifshitz			84,103			*			84,103			0			*
Steve Schnipper (48)			244,359			*			224,359			0			*
Robert Stranczek (49)			480,770			*			480,770			0			*

 

* Less than 1%.

 

(1) Assumes that all securities registered will be sold.

 

(2) Applicable percentage ownership is based on 114,100,173 shares of common stock outstanding as of April 25, 2006, together with securities exercisable or convertible into shares of common stock within 60 days of April 25, 2006 for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of April 25, 2006 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

(3) Includes (i) 1,282,052 issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 737,180 shares issuable upon exercise of warrants, and (iii) 1,492,308 shares of common stock.

 

(4) Includes (i) 320,513 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 160,257 shares issuable upon exercise of warrants and (iii) 1,540,641 shares of common stock. Arthur O. Silver has the voting and dispositive rights over the shares held by Arthur O. Silver Trust.

 

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(5) Includes (i) 160,257 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 80,128 shares issuable upon exercise of warrants, and (iii) 260,000 shares of common stock.

 

(6) Includes (i) 320,514 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 160,256 shares issuable upon exercise of warrants and (iii) 260,000 shares of common stock. Lee A. Pearlmutter has the voting and dispositive rights over the shares held by Lee A. Pearlmutter Trust.

 

(7) John W. Russell has the voting and dispositive rights over the shares held by SA Properties Co LP.

 

(8) Includes (i) 32,051 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 16,026 shares issuable upon exercise of warrants, and (iii) 50,000 shares of common stock.

 

(9) John W. Russell has the voting and dispositive rights over the shares held by Morrco Properties Co LP.

 

(10) John W. Russell has the voting and dispositive rights over the shares held by The Russell Family Investments LP.

 

(11) Includes (i) 160,257 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 80,128 shares issuable upon exercise of warrants, and (iii) 128,205 shares of common stock.

 

(12) Adam Kuhr has the voting and dispositive rights over the shares held by Family Trust under Natalie L. Kuhr Revocable Trust.

 

(13) Includes (i) 160,256 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 80,128 shares issuable upon exercise of warrants, and (iii) 80,000 shares of common stock. John O'Neal Johnston has the voting and dispositive rights over the shares held by John O'Neal Johnston Trust.

 

(14) Includes (i) 320,513 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 160,257 shares issuable upon exercise of warrants, and (iii) 105,000 shares of common stock.

 

(15) Includes (i) 10,733,980 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 5,366,991 shares issuable upon exercise of warrants, and (iii) 780,000 shares of common stock. The actual number of shares of common stock offered in this prospectus, and included in the registration statement of which this prospectus is a part, includes (i) 10,733,974 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 5,366,991 shares issuable upon exercise of warrants, and (iii) 780,000 shares of common stock. However Mr. Long has contractually agreed to restrict his ability to convert the Series A Convertible Preferred Stock or exercise his warrants and receive shares of our common stock such that the number of shares of common stock beneficially held by him in the aggregate after such exercise does not exceed 4.9% of the then issued and outstanding shares of common stock as determined in accordance with Section 13(d) of the Exchange Act. Accordingly, the number of shares of common stock set forth in the table for the selling stockholder exceeds the number of shares of common stock that the selling stockholders could own beneficially at any given time through their ownership of the warrants. In that regard, the beneficial ownership of the common stock by the selling stockholder set forth in the table is not determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended

 

(16) Includes (i) 96,154 shares issuable upon exercise of warrants, and (iii) 96,154 shares of common stock.

 

(17) Includes (i) 64,103 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 32,051 shares issuable upon exercise of warrants, and (iii) 55,000 shares of common.

 

(18) Walter N. Rothschild III has the voting and dispositive rights over the shares held by WNSJ Properties LLC.

 

(19) Keith A. Goodman has the voting and dispositive rights over the shares held by Nite Capital LP.

 

(20) Stewart R. Flink has the voting and dispositive rights over the shares held by Crestview Capital Master, LLC.

 

(21) John W. Russell has the voting and dispositive rights over the shares held by RTK Partners.

 

(22) Shay Kostner has the voting and dispositive rights over the shares held by United Empire Capital Mgt. Inc.

 

(23) Includes (i) 224,359 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 112,180 shares issuable upon exercise of warrants and (iii) 230,769 shares of common.

 

(24) Includes (i) 243,590 issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 121,795 shares issuable upon exercise of warrants, and (iii) 25,641 shares of common stock. Paul Lodi has the voting and dispositive rights over the shares held by Jacobs Pond LLC.

 

(25) Includes (i) 1,410,257 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 705,129 shares issuable upon exercise of warrants.

 

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(26) Includes (i) 993,590 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 496,795 shares issuable upon exercise of warrants.

 

(27) Includes (i) 320,513 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 160,257 shares issuable upon exercise of warrants.

 

(28) Includes (i) 160,256 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 80,128 shares issuable upon exercise of warrants.

 

(29) Includes (i) 96,154 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 48,077 shares issuable upon exercise of warrants.

 

(30) Includes (i) 128,205 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 64,103 shares issuable upon exercise of warrants.

 

(31) Includes (i) 480,769 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 272,436 shares issuable upon exercise of warrants and (iii) 346,702 shares of common stock.

 

(32) Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 320,513 shares issuable upon exercise of warrants.

 

(33) Includes (i) 160,257 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 80,128 shares issuable upon exercise of warrants.

 

(34) Includes (i) 80,128 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 40,064 shares issuable upon exercise of warrants.

 

(35) Includes (i) 80,128 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 40,064 shares issuable upon exercise of warrants and (iii) 62,000 shares of common stock.

 

(36) Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 320,513 shares issuable upon exercise of warrants.

 

(37) Includes (i) 32,051 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 16,026 shares issuable upon exercise of warrants, and (iii) 300,000 shares of common stock

 

(38) Includes (i) 368,590 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 184,295 shares issuable upon exercise of warrants.

 

(39) Includes (i) 320,513 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 160,257 shares issuable upon exercise of warrants.

 

(40) Includes (i) 92,147 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 46,074 shares issuable upon exercise of warrants.

 

(41) Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 320,513 shares issuable upon exercise of warrants.

 

(42) Includes (i) 128,205 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 64,103 shares issuable upon exercise of warrants.

 

(43) Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 320,513 shares issuable upon exercise of warrants.

 

(44) Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible Preferred Stock, (ii) 320,513 shares issuable upon exercise of warrants and (iii) 558,782 shares of common stock.

 

(45) Includes (i) 641,026 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 320,513 shares issuable upon exercise of warrants.

 

(46) Maxim Partners LLC owns 94% of Maxim Group LLC, a registered broker dealer. MJR Holdings LLC owns 73.5% of Maxim Partners LLC. Mike Rabinowitz is the principal manager of MJR Holdings and has principal voting and dispositive power with respect to the securities owned by Maxim Partners LLC. The number of share beneficially owned include: (i) 3,500,018 shares of common stock and (ii) warrants to acquire 1,755,537 shares of common stock, which were issued to Maxim Partners, as nominee of Maxim Group, for services provided to the company in its recent private placement offering that began in December 2005.

 

39

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(47) Ernest Gottdiener has the voting and dispositive rights over the shares held by Suan Investments, Inc. Includes (i) 32,051 shares issuable upon exercise of warrants, and (ii) 96,154 shares of common stock.

 

(48) Includes (i) 16,025 shares issuable upon exercise of warrants, and (ii) 228,334 shares of common stock.

 

(49) Includes (i) 320,513 shares issuable upon conversion of the Series A Convertible Preferred Stock, and (ii) 160,257 shares issuable upon exercise of warrants.

 

40

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 LEGAL MATTERS

 

 

AVAILABLE INFORMATION

 

We have filed with the SEC a registration statement on Form SB-2 to register the securities offered by this prospectus. For future information about us and the securities offered under this prospectus, you may refer to the registration statement and to the exhibits filed as a part of the registration statement.

 

In addition, after the effective date of this prospectus, we will be required to file annual, quarterly, and current reports, or other information with the SEC as provided by the Securities Exchange Act. You may read and copy any reports, statements or other information we file at the SEC's public reference facility maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room. Our SEC filings are also available to the public through the SEC Internet site at http\\www.sec.gov.

 

41

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TABLE OF CONTENTS

 

	Page
Condensed Consolidated Balance Sheets as of January 31, 2007 (unaudited) and April 30, 2006	F-1
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended January 31, 2007 and 2006	F-2
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended January 31, 2007 and 2006	F-3
Notes to Unaudited Condensed Consolidated Financial Statements	F-4
Report of Registered Independent Certified Public Accounting Firm	F-13
Consolidated Balance Sheets as of April 30, 2006 and 2005	F-14
Consolidated Statements of Losses for the years ended April 30, 2006 and 2005	F-15
Consolidated Statements of Deficiency in Stockholder's Equity for the years ended April 30, 2006 and 2005	F-16
Consolidated Statements of Cash Flows for the years ended April 30, 2006 and 2005	F-17
Notes to Consolidated Financial Statements	F-18

SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2006 and 2005

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

Allowance for Loan Losses

 

The allowance for loan losses is increased by charges against earnings and decreased by charge-offs (net of recoveries). In addition to the allowance for loan losses, a reserve for credit losses has been established using unearned interest and dealer discounts to absorb potential credit losses. To the extent actual credit losses exceed these reserves, a bad debt provision is recorded; and to the extent credit losses are less than the reserve, the reserve is accreted into income over the remaining estimated life of the pool. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions.

 

The Company charges-off receivables when an individual account has become more than 120 days contractually delinquent. In the event of a repossession, the charge-off will occur in the month in which the vehicle was repossessed.

 

Derivative Financial Instruments

In connection with the private placement described above, the Company granted 1,755,537 common stock purchase warrants to the placement agent. The warrants are exercisable immediately, have an exercise price of $0.215 per share and expire in five years. The warrants were valued at $1,033,100 using the Black-Sholes pricing model. The assumption ranges used in the Black-Scholes model are as follows:  (1) dividend yield of 0%; (2) expected volatility of 174% - 177%, (3) risk-free interest rate of 3.65% - 4.7%, and (4) expected life of 2 years.

Since the warrants contain registration rights for the underlying shares and since the delivery of such registered shares was not deemed controllable by the Company, we recorded the net value of the warrants at the date of issuance as a warrant liability on the balance sheet ($1,033,100) and included the change in fair value from the date of issuance to April 30, 2006 in other income (expense), in accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. The fair value of the warrants was $834,924 at April 30, 2006.

Property and Equipment

Property and equipment are recorded at cost. Minor additions and renewals are expensed in the year incurred. Major additions and renewals are capitalized and depreciated over their estimated useful lives. Depreciation is calculated using the straight-line method over the estimated useful lives. Estimated useful lives of major depreciable assets are as follows:

 

Leasehold improvements	3 years
Furniture and fixtures	7 years
Website costs	3 Years
Computer Equipment	5 years

Advertising Costs

The Company follows a policy of charging the costs of advertising to expenses incurred. During the years ended April 30, 2006 and 2005, the Company incurred advertising costs of $36,594 and $28,107, respectively.

Net Loss Per Share

The Company uses SFAS No. 128, “Earnings Per Share” for calculating the basic and diluted loss per share. We compute basic loss per share by dividing net loss and net loss attributable to common shareholders by the weighted average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional shares were dilutive. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.

 

F-21

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SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2006 and 2005

NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)

Per share basic and diluted net loss attributable to common stockholders amounted to $0.08 and $0.05 for the years ended April 30, 2006 and 2005, respectively. At April 30, 2006 and 2005, 27,069,527 and 19,263,642 potential shares, respectively, were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.

Reclassifications

Certain reclassifications have been made to conform to prior periods' data to the current presentation. These reclassifications had no effect on reported losses.

New Accounting Pronouncements

 

In March 2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of Financial Assets - an amendment to FASB Statement No. 140. Statement 156 requires that an entity recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a service contract under certain situations. The new standard is effective for fiscal years beginning after September 15, 2006. The Company does not expect its adoption of this new standard to have a material impact on its financial position, results of operations or cash flows.

In February 2006, the FASB issued SFAS 155, which applies to certain "hybrid financial instruments," which are instruments that contain embedded derivatives. The new standard establishes a requirement to evaluate beneficial interests in securitized financial assets to determine if the interests represent freestanding derivatives or are hybrid financial instruments containing embedded derivatives requiring bifurcation. This new standard also permits an election for fair value remeasurement of any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation under SFAS 133. The fair value election can be applied on an instrument-by-instrument basis to existing instruments at the date of adoption and can be applied to new instruments on a prospective basis. Management is assessing the implications of this standard, which may materially impact the Company's results of operations in the fourth quarter of fiscal year 2006 and thereafter.

In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS) No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS 154 requires retrospective application to prior periods’ financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The Company does not expect the adoption of this SFAS to have a material impact on its consolidated financial position, results of operations or cash flows.

F-22

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SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2006 and 2005

NOTE B - MOTORCYCLES AND OTHER VEHICLES UNDER OPERATING LEASES

Motorcycles and other vehicles under operating leases at April 30, 2006 and 2005 consist of the following:

 

			2006			2005
Motorcycles and other vehicles		$	759,568		$	113,278
Less: accumulated depreciation			(75,873	)		(13,392	)
Motorcycles and other vehicles, net of accumulated depreciation			683,695			99,886
Less: estimated reserve for residual values			(16,409	)		--
Motorcycles and other vehicles under operating leases, net		$	667,286		$	99,886

At April 30, 2006, motorcycles and other vehicles are being depreciated to the estimated residual values of $395,869 over the lives of their lease contracts. Depreciation expense for the years ended April 30, 2006 and 2005 was $75,033 and $13,392, respectively. Certain of the assets are pledged as collateral for the note described in Note E.

The following is a schedule by years of minimum future rentals on non cancelable operating leases as of April 30, 2006:

 

Year ending April 30,
2007		$	226,915
2008			81,608
2009			52,733
2010			36,437
2011			19,144
Total		$	416,837

 

NOTE C - RETAIL INSTALLMENT RECEIVABLES

Retail installment sale receivables, which are carried at cost, were $822,624 and $36,285 at April 30, 2006 and 2005, respectively. The following is a schedule by years of future payments related to these receivables. Future payments include amortization of cost as well as a profit margin. Certain of the assets are pledged as collateral for the note described in Note E.

Year ending April 30,
2007		$	279,839
2008			240,856
2009			200,039
2010			168,986
2011			109,249
			998,969
Less: interest portion			(176,345	)
			822,624
Less: allowance for doubtful receivables			(19,743	)
			802,881
Less: current receivables			(206,986	)
		$	595,895

 

F-23

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SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2006 and 2005

NOTE D - PROPERTY AND EQUIPMENT

Major classes of property and equipment at April 30, 2006 and 2005 consist of the followings:

		2006			2005
Computer equipment , web site and furniture		$	174,793		$	122,187
Less: accumulated depreciation and amortization			53,249			15,378
Net property and equipment		$	121,544		$	106,809

Depreciation and amortization expense was $37,871 and $15,348 for the years ended April 30, 2006 and 2005, respectively.

NOTE E - NOTES PAYABLE

The company finances certain of its leases through a third party. The repayment terms are generally three to five years and the notes are secured by the underlying assets. The assets securing the notes have an aggregate book value of $674,064 at April 30, 2006. The weighted average interest rate at April 30, 2006 is 8.879%.

At April 30, 2006, the notes payable mature as follows:

Year ended April 30		Amount
2007		$	358,549
2008			-
2009			18,685
2010			12,529
2011			299,585
		$	689,348

 

Notes payable at April 30, 2005 consisted of the following:

		April 30, 2005
Notes payables; 10% interest, unsecured, originally scheduled to expire on April
30, 2005, the note holders are entitled to an "Equity Kicker" equal to 128,206
restricted shares of common stock for each $100,000 loaned, in the event of
default, as penalty, the repayment after default of promissory note shall be
collateralized by certain security interest as per the terms of the agreement
Notes were subsequently extended until August 31, 2005 and beyond, with interest
increased to 20% in certain instances, and the Equity Kicker equal to
192,308 restricted shares of common stock for each $100,000 loaned in certain instances		$	300,000
Note payable to officer of the Company, unsecured, non-interest bearing, payable on demand (Note F)			25,000
			325,000
Less: current portion			(325,000	)
Notes payable - long term		$	—

During the year ended April 30, 2006, the Company repaid $175,000 of the loans in cash. Additionally, during August 2005, the Company issued 651,124 shares of common stock in payment of $150,000 of principal amount of notes payable and $12,781 of related accrued interest. The shares were issued at a value below market price and the Company has recorded a financing cost of $323,672 related to this discount.

 

F-24

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SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2006 and 2005

NOTE F - RELATED PARTY TRANSACTIONS

The Company entered in to a licensing agreement relating to the use of a proprietary operating system, with an entity controlled by the Company's President and Chief Executive Officer. During the years ended April 30, 2006 and 2005, the Company charged to operations $67,000 and $150,633, respectively, in connection with the licensing agreement.

The Company entered into a purchase option agreement with American Motorcycle Leasing Corp., an entity controlled by the Company's President and a significant shareholder, on November 2, 2004 at a cost to Sparta Commercial Services of $250,000. This agreement granted Sparta Commercial Services the right, for a two year period, to purchase portions of a certain portfolio of equipment leases that American Motorcycle Leasing Corp. owns. The portfolio is secured by a first priority security interest in favor of Citibank, N.A. or its assigns. The cost of $250,000 has been charged to operations in fiscal 2005. As of April 30, 2005, payments against this obligation of $81,000 were made. The balance of $169,000 was paid during the year ended April 30, 2006.

During the year ended April 30, 2006, the Company purchased certain of its vehicles from American Motorcycle Leasing Corp. These purchases aggregated $105,748. At April 30, 2006, the Company had a payable to American Motorcycle Leasing Corp. in the amount of $20,224 related to such purchases.

Up to November 30, 2004, the Company leased office space from an entity controlled by the Company's President and Chief Executive Officer.

In January 2005, the Company received a loan of $25,000 from an officer. This loan is non-interest bearing and is payable on demand. The loan was repaid during the year ended April 30, 2006.

NOTE G - EQUITY INSTRUMENTS

The Company is authorized to issue 10,000,000 shares of preferred stock with $0.001 par value per share and $100 stated value per share, of which 35,840 shares have been designated as Series A convertible preferred stock, and 340,000,000 shares of common stock with $0.001 par value per share. As of April 30, 2006 and 2005, the Company has issued and outstanding 19,795 and 18,100 shares of preferred stock issued and outstanding, respectively. The Company has 114,180,301 and 86,005,415 shares of common stock issued and outstanding as of April 30, 2006 and 2005, respectively.

On December 27, 2004, the Company effected a one-for-two hundred reverse stock split followed by a forward split of twenty five-for-one of its authorized and outstanding shares of common stock, $.001 par value. All references in the financial statements and notes to financial statements, numbers of shares and share amounts have been retroactively restated to reflect the reverse split.

Common Stock

During the year ended April 30, 2006, the Company issued 464,745 shares of common stock, valued at $243,270, as additional costs related to loans received by the Company. This amount has been charged to financing cost. Additionally, as consideration for loans received during the third quarter of fiscal 2006, the Company will issue 70,000 shares of common stock. The value of these shares has been recorded at $38,500 and this amount is included in accrued expenses at April 30, 2006 and has been charged to financing cost.

During August 2005, the Company issued 651,124 shares of common stock in payment of $150,000 of principal amount of notes payable and $12,781 of related accrued interest. The shares were issued at a value below market price and the Company has recorded a financing cost of $323,672 related to this discount.

 

F-25

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SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2006 and 2005

NOTE G - EQUITY INSTRUMENTS (continued)

During the year ended April 30, 2006, the Company issued an aggregate of 850,000 shares of common stock, pursuant to a consulting agreement. The shares have been valued at $649,000 and this amount is being amortized over the term of the agreement, commencing August 1, 2005. During the year ended April 30, 2006 the Company has charged $355,500 to expense.

During October 2005, the Company issued 113,637 shares of common stock, valued at $85,228, for services.

During October and November 2005, the Company received $330,000 pursuant to subscription agreements for units, at $0.60 per unit, of the Company’s securities, with each unit consisting of one share of common stock and one warrant.

The Company will issue 250,000 shares of common stock as payment of consulting fees. These fees have been accrued in the financial statements at a value of $85,000 as of April 30, 2006 and the shares were issued in July 2006.

During December 2005, the Company entered into an agreement pursuant to which it agreed to issue 2,650,000 shares of common stock for consulting and advisory services rendered and to be rendered. The shares have been valued at $1,590,000, based on the fair value of the Company’s common stock on the date of the agreement. The shares were issued during the fourth quarter.

During the year ended April 30, 2006, the Company sold 17,555,369 shares of common stock through a private placement. The Company received net proceeds of $2,977,946 from the sale. Costs of $405,760 were deducted from the gross proceeds and additional costs of $39,591 were paid by the Company.

In connection with the private placement described above, the Company granted 1,755,537 common stock purchase warrants to the placement agent. The warrants are exercisable immediately, have an exercise price of $0.215 per share and expire in five years. The warrants were valued at $1,033,100 using the Black-Sholes pricing model. The assumption ranges used in the Black-Scholes model are as follows:  (1) dividend yield of 0%; (2) expected volatility of 174% - 177%, (3) risk-free interest rate of 3.65% - 4.7%, and (4) expected life of 2 years.

Since the warrants contain registration rights for the underlying shares and since the delivery of such registered shares was not deemed controllable by the Company, we recorded the net value of the warrants at the date of issuance as a warrant liability on the balance sheet ($1,033,100) and included the change in fair value from the date of issuance to April 30, 2006 in other income (expense), in accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”. The fair value of the warrants was $834,924 at April 30, 2006.

During December 2005, the Company granted options to purchase an aggregate of 160,000 shares of common stock to two employees. The options have been valued at $75,795 using the Black-Sholes option pricing model with the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 177%, (3) risk-free interest rate of 4.38%, and (4) expected life of 3 years. The options have an exercise price of $0.59, vest over a 38 month period and expire if unexercised in ten years.

During January and February 2006, the Company issued 10,291,666 shares of common stock upon conversion of 16,055 shares of preferred stock.

During February 2006, the Company issued 1,436,647 shares of common stock upon the cashless exercise of 1,923,079 warrants.

During March 2006, the Company entered into an agreement pursuant to which it agreed to issue 70,000 shares of common stock for consulting and advisory services. The shares have been valued at $47,600, based on the fair value of the Company’s common stock on the date of the agreement. The shares were issued in July 2006 and are recorded as an accrued expense at April 30, 2006.

 

 

F-26

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SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2006 and 2005

NOTE G - EQUITY INSTRUMENTS (continued)

During April 2006, the Company entered into an agreement pursuant to which it agreed to issue a total of 3,050,000 shares of common stock for consulting and advisory services. Of these shares, 550,000 were due upon execution of the agreement, with the remainder payable over a twelve month period. The vested shares have been valued at $286,000, based on the fair value of the Company’s common stock on the date of the agreement. The shares were issued in May 2006 and are recorded as an accrued expense at April 30, 2006.

In January, 2005, 113,635 shares of restricted stock issued to the former Chief Financial Officer, Daniel Lanjewar, were vested and issued.

In April, 2005, 96,155 shares were issued pursuant to an agreement with two individuals who provided short term note payable financing to the Company.

Preferred Stock Series A

In December 2004, the Company commenced a private placement to raise up to $3,000,000 through the sale of up to 30 units of our securities at $100,000 per unit. Each unit consists of (i) 1,000 shares of series A convertible, redeemable preferred stock and (ii) warrants to purchase 320,513 shares of common stock, exercisable for three years at $0.195 per share. The preferred stock has a stated value of $100 per share, carries a 6% annual cumulative dividend, payable semi-annually in arrears, and is convertible into shares of common stock at the rate of one preferred share into 641 shares of common stock.

In December 2004, the Company began a private placement transaction utilizing a designated registered broker-dealer as a placement agent. During the year ended April 30, 2005, the Company issued 12,250 preferred shares at a stated value of $100 per share and warrants to purchase 3,926,286 shares of common stock, exercisable for three years at $0.195 per share, for aggregate gross proceeds of $1,225,000 received from investors. In connection with the private placement, during the year ended April 30, 2005, the Company issued as compensation to the placement agent warrants to 785,257 shares of common stock, exercisable for five years at $0.172 per share. The warrants, which were valued at approximately $383,284 using the Black-Scholes option pricing model, were recognized as a cost of issuance of the Series A Preferred shares.

During the year ended April 30, 2005, the Company sold rights to acquire securities of the Company to investors for aggregate gross proceeds of $585,000. Pursuant to the terms of the rights, as the Company conducted a closing to a private placement transaction in 2004 utilizing a designated registered broker-dealer as a placement agent, on January 1, 2005, the rights have automatically converted into 5,850 preferred shares at a stated value of $100 per share and warrants to purchase 1,875,001 shares of common stock, exercisable for three years at $0.195 per share.

In accordance with Emerging Issues Task Force Issue 98-5, Accounting for Convertible Securities with a beneficial Conversion Features or Contingently Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded beneficial conversion feature present in the Preferred Stock. The Company recognized and measured an aggregate of $1,810,000, which equals to the intrinsic value of the imbedded beneficial conversion feature, to additional paid-in capital and a return to the Preferred Stock holders. Since the preferred shares were convertible at the date of issuance, the return to the preferred shareholders attributed to the beneficial conversion feature has been recognized in full at the date the Preferred Stock was issued.

During the three months ended July 31, 2005, the Company issued 17,750 preferred shares at a stated value of $100 per share and warrants to purchase 5,689,108 shares of common stock, exercisable for three years at $0.195 per share, for aggregate gross proceeds of $1,775,000 received from investors. Costs of $182,484 were deducted from the proceeds. In connection with the private placement, during the three months ended July 31, 2005, the Company issued as compensation to the placement agent warrants to purchase 1,137,822 shares of common stock, exercisable for five years at $0.172 per share. The warrants, which were valued at $406,665 using the Black-Scholes option pricing model, were recognized as an expense during the quarter. The assumptions used in the Black Scholes model are as follows: (1) dividend yield of 0%; (2) expected volatility of 188%, (3) weighted average risk-free interest rate of 3.65%, and (4) expected life of 2 years.

 

F-27

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SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2006 and 2005

NOTE G - EQUITY INSTRUMENTS (continued)

In accordance with EITF 00-27, a portion of the proceeds were allocated to the class ‘C’ warrants based on their relative fair value, which totaled $931,800 using the Black Scholes option pricing model. Further, the Company attributed a beneficial conversion feature of $843,200 to the series ‘A’ preferred shares based upon the difference between the conversion price of those shares and the closing price of the Company’s common shares on the date of issuance. The assumptions used in the Black Scholes model are as follows: (1) dividend yield of 0%; (2) expected volatility of 188%, (3) weighted average risk-free interest rate of 3.65%, and (4) expected life of 2 years as the conversion feature and warrants are immediately exercisable. Both the fair value of the class ‘C’ warrants and the beneficial conversion feature were recorded as a dividend and are included in the accompanying financial statements.

In the event that a registration statement covering all of the securities issued pursuant to the private placement of preferred shares is not declared effective by the Securities and Exchange Commission by July 31, 2005, the number of shares issuable upon conversion of the preferred stock and the exercise of the warrants will be increased by 0.75% for each 30 day period during a six month term following July 31, 2005 that a registration statement has not been declared effective. Following this initial six month term, the number of shares issuable upon conversion of the preferred stock and the exercise of the warrants will be increased by 1.50% for each 30 day period during a six month term following January 31, 2006 that a registration statement has not been declared effective. There was not an effective registration statement as of July 31, 2005, nor is there one as of April 30, 2006. Additionally, if a registration statement has not been filed as of October 27, 2005, the number of shares issuable upon conversion of the preferred stock and the exercise of the warrants will be increased by 1% for each 30 day period until a registration statement is filed. A Registration statement was not filed as of October 27, 2005, and was filed on April 28, 2006. On May 31, 2006 the Securities and Exchange Commission declared the Registration Statement effective. The Company has obtained waivers covering a substantial amount of the potential penalty shares and warrants. The Company has accrued an expense of $47,468 during the year ended April 30, 2006 relative to the penalty provisions for which it did not obtain waivers. This amount will be settled through the issuance of equity securities. As of April 30, 2006, an aggregate of 60,086 penalty shares and 30,048 penalty warrants has been accrued.

During January and February 2006, the Company issued 10,291,666 shares of common stock upon conversion of 16,055 shares of preferred stock.

NOTE H - INCOME TAXES

Financial Accounting Standard No. 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant.

At April 30, 2006, the Company has available for federal income tax purposes a net operating loss carry forward of approximately $9,650,000, expiring in the year 2026, that may be used to offset future taxable income. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company; it is more likely than not that the benefits will not be realized. Also, due to change in the control after reverse acquisition of Sparta Commercial Services, Inc., the Company's past accumulated losses to be carried forward may be limited.

 

Components of deferred tax assets as of April 30, 2006 are as follows:

Non current:
Net operating loss carry forward		$	3,281,000
Valuation allowance			(3,281,000	)
Net deferred tax asset		$	—

 

The valuation allowance increased by $1,751,000 during the year ended April 30, 2006.

F-28

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SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2006 and 2005

NOTE I - LOSSES PER COMMON SHARE

The following table presents the computation of basic and diluted loss per share:

		2006			2005
Net loss available for common shareholders		$	(7,872,772	)	$	(4,418,727	)
Basic and diluted loss per share		$	(0.08	)	$	(0.05	)
Weighted average common shares outstanding-basic
Diluted			95,479,102			85,812,006

 

NOTE J - STOCK OPTIONS AND WARRANTS

On April 29, 2005, the Company issued to the Chief Operating Officer non qualified stock options to purchase 875,000 shares of the company's common stock at an exercise price of $0.605 per share. The options have a five year life.

During December 2005, the Company granted options to purchase an aggregate of 160,000 shares of common stock to two employees. The options have been valued at $75,795 using the Black-Sholes option pricing model with the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 177%, (3) risk-free interest rate of 4.38%, and (4) expected life of 3 years. The options have an exercise price of $0.59, vest over a 38 month period and expire if unexercised in ten years.

a) The following table summarizes the stock options issued to officers and employees outstanding and the related price.

Stock Options Outstanding

Stock Options Exercisable

Weighted Average

Weighted

Weighted

Remaining

Average

Average

Number

Contractual

Exercise

Number

Exercise

Outstanding

Life (Years)

Price

Exercisable

Price

1,035,000

4.9

$

0.60

350,000

$

0.60

		Number of Shares			Weighted Average Price Per Share
Outstanding at April 30, 2004			—		$	—
Granted			875,000			0.61
Exercised			—			—
Outstanding at April 30, 2005			875,000		$	0.61
Granted			160,000		$	0.59
Exercised			—			—
Canceled or expired			—			—
Outstanding at April 30, 2006			1,035,000		$	0.60

 

The weighted-average fair value of stock options granted during the years ended April 30, 2006 and 2005 was $0.47 and $0.28, respectively, and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model are as follows:

 

Significant Assumptions (weighted average):		2006			2005
Risk free interest rate at grant date:			4.3	%		3	%
Expected stock price volatility			177	%		60	%
Expected dividend payout			0			0
Expected option life in years			3			5

F-29

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SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2006 and 2005

NOTE J - STOCK OPTIONS AND WARRANTS (CONTINUED)

 

F-30

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SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2006 and 2005

 

NOTE J - STOCK OPTIONS AND WARRANTS (CONTINUED)

The amount of the expense charged to operations for compensatory warrants granted in exchange for services was $406,665 and $473,264 for the years ended April 30, 2006 and 2005, respectively.

 

NOTE K - COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

In October 2004, the Company entered into a lease agreement with an unrelated party for office space in New York City from December 1, 2004 through November 30, 2007. Total lease rental expense for the years ended April 30, 2006 and 2005, was $142,584 and $125,214, respectively.

Year ended April 30,		Amount
2007		$	177,061
2008			104,973
		$	282,034

 

Employment and Consulting Agreements

The Company does not have employment agreements with any of its non-executive employees.

The Company has consulting agreements with outside contractors to provide marketing and financial advisory services. The Agreements are generally for a term of 12 months from inception and renewable automatically from year to year unless either the Company or Consultant terminates such engagement by written notice.

We entered into an employment agreement, dated as of July 12, 2004, with Anthony L. Havens, our Chief Executive Officer. The employment is for a term of five years. The employment term is to be automatically extended for one five-year period, and additional one-year periods, unless written notice is given three months prior to the expiration of any such term that the term will not be extended. He is entitled to six weeks of paid vacation per year, and health insurance, short term and long term disability insurance, retirement benefits, fringe benefits, and other employee benefits on the same basis as is generally made available to other senior executives. He did not receive any equity compensation as part of this agreement.

On November 1, 2004, the Company entered into an employment agreement with Richard P. Trotter, pursuant to which the Company agreed to issue 125,000 shares of common stock during the course of the agreement. The grant of shares is subject to vesting and subject to continued employment. On November 1, 2004, 25,000 shares vested and are yet to be issued, and the remainder of the shares are to vest, subject to proportionate adjustment in the event of employment termination for any incomplete vesting period, as follows: 25,000 shares on November 1, 2005; 25,000 shares on November 1, 2006; 25,000 shares on November 1, 2007; 12,500 shares on November 1, 2008; and 12,500 on November 1, 2009. During the years ended April 30, 2006 and 2005, the Company has recorded $20,000 as expense for each year as per this employment agreement.

Litigation

The Company is subject to legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions or settlements may occur, the Company believes that the final disposition of such matters should not have a material adverse effect on its financial position, results of operations or liquidity.

 

F-31

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SPARTA COMMERCIAL SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

APRIL 30, 2006 and 2005