As filed with the Securities and Exchange Commission on May 25, 2006
An Exhibit List can be found on page II-3
Registration No. 333-133644
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
----------------------------
Amendment No. 1 to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
SPARTA COMMERCIAL SERVICES, INC.
(Name of small business issuer in its charter)
Nevada 6199 30-0298178
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
462 Seventh Ave
20th Floor
New York, NY 10018
(212) 239-2666
(Address and telephone number of principal executive offices
and principal place of business)
Anthony L. Havens, Chief Executive Officer and President
Sparta Commercial Services, Inc.
462 Seventh Ave
20th Floor
New York, NY 10018
(212) 239-2666
(Name, address and telephone number of agent for service)
Copies to:
Gregory Sichenzia, Esq.
Yoel Goldfeder, Esq.
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Flr.
New York, New York 10018
(212) 930-9700
(212) 930-9725 (fax)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
1
If any securities being registered on this Form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. _________
2
CALCULATION OF REGISTRATION FEE
-------------------------------------------------------------------------------------------------------------
Proposed
maximum Proposed
offering maximum
Title of each class of Number of Shares price per aggregate Amount of
securities to be registered to be registered share offering price registration fee
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, $0.001 par 26,405,313 $0.42(1) $ 11,090,231.46 $ 1,186.65
value
------------------------------- -------------------- ---------------- ------------------ --------------------
Common stock, $0.001 par 22,980,782 $0.42(1) $ 9,651,928.44 $ 1,032.76
value issuable upon
conversion of Series A
Preferred Stock
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $0.001 par 11,792,874 $0.195(2) $ 2,299,610.43 $ 246.06
value issuable upon exercise
of Warrants
------------------------------- -------------------- ---------------- ------------------ --------------------
Common Stock, $0.001 par 1,755,537 $0.2145(2) $ 376,562.69 $ 40.29
value issuable upon exercise
of Warrants
------------------------------- -------------------- ---------------- ------------------ --------------------
Total 62,934,506 $ 2,505.76
------------------------------- -------------------- ---------------- ------------------ --------------------
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) and Rule 457(g) under the Securities Act of
1933, using the average of the high and low price as reported on the
Over-The-Counter Bulletin Board on May 23, 2006, which was $0.42 per
share
(2) Calculated in accordance with Rule 457(g)(1).
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
3
The information in this Prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement is filed with the Securities and Exchange Commission and becomes
effective. This Prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the sale is not
permitted.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED May 25, 2006
SPARTA COMMERCIAL SERVICES, INC.
62,934,506 SHARES OF
COMMON STOCK
This prospectus relates to the resale by the selling stockholders of up to
62,934,506 shares of our common stock, including up to 22,980,782 shares of
common stock issuable upon conversion of preferred stock and up to 13,548,411
issuable upon the exercise of common stock purchase warrants. The selling
stockholders may sell common stock from time to time in the principal market on
which the stock is traded at the prevailing market price or in negotiated
transactions. The selling stockholders may be deemed underwriters of the shares
of common stock, which they are offering. We will pay the expenses of
registering these shares.
We are not selling any shares of common stock in this offering and
therefore will not receive any proceeds from the sale of common stock hereunder.
We may receive proceeds from any exercise of outstanding warrants.
Our common stock listed on the Over-The-Counter Bulletin Board under the
symbol "SRCO." The last reported sales price per share of our common stock as
reported by the Over-The-Counter Bulletin Board on May 23, 2006, was $0.42.
Investing in these securities involves significant risks. See "Risk
Factors" beginning on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ________, 2006.
The information in this Prospectus is not complete and may be changed.
This Prospectus is included in the Registration Statement that was filed by
Sparta Commercial Services, Inc. with the Securities and Exchange Commission.
The selling stockholders may not sell these securities until the registration
statement becomes effective. This Prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the sale is not permitted.
4
PROSPECTUS SUMMARY
The following summary highlights selected information contained in this
prospectus. This summary does not contain all the information you should
consider before investing in the securities. Before making an investment
decision, you should read the entire prospectus carefully, including the "risk
factors" section, the financial statements and the notes to the financial
statements.
SPARTA COMMERCIAL SERVICES, INC.
We were incorporated under the laws of the State of Nevada on May 13, 1980
under the name Tomahawk Oil and Minerals, Inc. and we changed our name to
Tomahawk Industries, Inc. on November 6, 1983. On February 27, 2004, pursuant to
an Agreement and Plan of Reorganization, Tomahawk Industries, Inc. acquired
Sparta Commercial Services, LLC, a Delaware limited liability company. Effective
August 25, 2004, we changed our name to Sparta Commercial Services, Inc., by
filing a Certificate of Amendment to our Articles of Incorporation with the
Secretary of State of the State of Nevada.
For the nine month period ended January 31, 2006, we generated $90,629 in
revenue and a net loss of $6,734,000. In addition, for the year ended April 30,
2005, we generated $65,833 in revenue and a net loss of $2,579,821. As a result
of recurring losses from operations our auditors, in their report dated July 15,
2005, have expressed substantial doubt about out ability to continue as a going
concern.
Our executive offices are located at 462 Seventh Ave, 20th Floor, New
York, NY 10018, and our telephone number is (212) 239-2666. We are a Nevada
corporation.
The Offering
Common stock offered by selling
stockholders.................... Up to 62,934,506 shares, including the
following:
o up to 22,980,782 shares of common stock
issuable upon the conversion of preferred
stock, and
o up to 13,548,411 shares of common stock
issuable upon the exercise of common stock
purchase warrants.
This number represents 55.2% of our current
outstanding stock.
Common stock to be outstanding
after the offering.............. Up to 159,713,903 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 114,100,173 shares of common stock outstanding as of May
12, 2006 and assumes the subsequent conversion of our Series A Preferred Stock
and exercise of warrants by our selling stockholders.
5
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 are in the "developmental" stage of business and have yet to commence
any substantive commercial operations. We have no 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. Our proposed business is unproven. 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, 2005 was a developmental stage period for us,
setting up credit procedures, setting our arrangements with vehicle
distributors, obtaining personnel, seeking financing to support our
developmental efforts, and seeking additional credit facilities. 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, 2005, we have generated nominal sales revenues, have incurred
significant expenses, and have sustained significant losses. Our net loss
attributed to common stockholders for the year ended April 30, 2005 and nine
months ended January 31, 2006 was $4,418,727 (after giving effect to a
$1,810,000 charge for the beneficial conversion discount on our Convertible
Preferred shares and a $28,906 charge for Preferred dividends payable) and
$8,620,683 (after giving effect to a charge of $1,886,683 for Preferred
dividends), respectively. As of April 30, 2005 and as of January 31, 2006, we
had a working capital deficit of $728,207 and $3,023,127, respectively. 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.
Our business requires extensive amounts of capital for credit reserve
purposes. Presently, we have sufficient operating capital to fund reserve
requirements and to fulfill our business plans over the next 12 months. We
believe that we have sufficient capital resources to obtain additional credit
facilities and fund any initial reserve requirement pursuant to obligations with
a lending institution. 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.
6
Auditor's opinion expresses doubt about our ability to continue as a "going
concern"
The independent auditors report on our April 30, 2005 financial statements
state that our historical losses and the lack of revenues raise substantial
doubts about our ability to continue as a going concern, due to our status as a
development stage company and our lack of significant operations. We cannot
assure you that we will be able to generate revenues or maintain any line of
business that might prove to be profitable. Accordingly, a purchase of our
common stock should be considered a high-risk investment because investors will
be placing their funds at risk in a development stage company with the attendant
unforeseen costs, expenses and problems that a company in this phase of business
may encounter. Our ability to continue as a going concern is subject to our
ability to generate a profit or obtain necessary funding from outside sources,
including obtaining additional funding from the sale of our securities,
increasing sales or obtaining credit lines or loans from various financial
institutions where possible. If we are unable to develop our business, we may
have to discontinue operations or cease to exist, which would be detrimental to
the value of our common stock. We can make no assurances that our business
operations will develop and provide us with significant cash to continue
operations.
We will be required to raise additional capital to fund our operations.
To the extent we raise additional capital by issuing equity securities,
our stockholders may experience substantial dilution. Also, any new equity
securities may have greater rights, preferences or privileges than our existing
common stock. A material shortage of capital will require us to take drastic
steps such as reducing our level of operations, disposing of selected assets or
seeking an acquisition partner. If cash is insufficient, we will not be able to
continue operations.
Risks Related To Our Business
A significant number of customers may fail to perform under their loans.
As a lender, one of the largest risks we face is the possibility that a
significant number of borrowers will fail to pay their loans when due. If
borrowers' defaults cause losses in excess of our allowance for loan losses, it
could have an adverse effect on our business, profitability and financial
condition. If a borrower enters into bankruptcy, we may have no means of
recourse. We have established an evaluation process designed to determine the
adequacy of the allowance for loan losses. While this evaluation process uses
historical and other objective information, the establishment of loan losses is
dependent to a great extent on management's experience and judgment. We cannot
assure you that our loan reserves will be sufficient to absorb future loan
losses or prevent a material adverse effect on our business, profitability or
financial condition.
A variety of factors and economic forces may affect our operating results.
Our operating results may differ from current forecasts and projections
significantly in the future as a result of a variety of factors, many of which
are outside our control. These factors include, without limitation, the receipt
of revenues, which is difficult to forecast accurately, the rate of default on
our loans, the amount and timing of capital expenditures and other costs
relating to the expansion of our operations, the introduction of new products or
services by us or our competitors, borrowing costs, pricing changes in the
industry, technical difficulties, general economic conditions and economic
conditions specific to the motorcycle industry. The success of an investment in
a retail loan based venture is dependent, at least in part, on extrinsic
economic forces, including the supply of and demand for such services and the
rate of default on the retail installment loans. No assurance can be given that
we will be able to generate sufficient revenue to cover our cost of doing
business. Furthermore, our revenues and results of operations will be subject to
fluctuations based upon general economic conditions. Economic factors like
unemployment, interest rates, the rate of inflation and consumer perceptions of
the economy may affect the rate of prepayment and defaults on customer leases
and loans and the ability to sell or dispose of the related specified vehicles
for an amount at least equal to their residual values which will have a material
adverse effect on our business.
7
A material reduction in the interest rate spread could have a negative impact on
our business and profitability.
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.
There is no assurance that our current 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.
Failure to perfect a security interest could harm our business.
An ownership interest or security interest in a motor vehicle registered
in most states may be perfected against creditors and subsequent purchasers
without notice for valuable consideration only by one or more of the following:
depositing with the state's department of motor vehicles a properly endorsed
certificate of title for the vehicle showing the transferee or secured party as
legal owner or lien holder thereon, filing a sworn notation of lien with the
state's department of motor vehicles and noticing such lien on the certificate
of title, or if the vehicle has not been previously registered, filing an
application for an original registration together with an application for
registration of the secured party as legal owner or lien holder, as the case may
be, with the state's department of motor vehicles. We may not have a validly
perfected ownership interest and security interest, respectively, in some
vehicles during the period of the loan. As a result, our ownership or security
interest in these vehicles will not be perfected and our interest could be
inferior to interests of other creditors or purchasers who have taken the steps
described above. If such creditors or purchasers successfully did so, the
affected vehicles would not be available to generate their expected cash flow,
which would have a material adverse effect on our business.
Risks associated with leasing.
Our business is subject to the risks generally associated with the
ownership and leasing of equipment. A lessee may default in performance of its
lease obligations and we may be unable to enforce our remedies under a lease. As
a result, certain of these customers may pose credit risks to us. Our inability
to collect receivables due under a lease and its inability to sell or re-lease
off-lease motorcycles could have a material adverse effect on our business,
financial condition or results of operations.
Adverse changes in used vehicle prices may harm our business.
Significant increases in the inventory of vehicles may depress the prices
at which we can sell or lease our inventory of repossessed or off-lease vehicles
or may delay sales or leases. Factors that may affect the level of used vehicles
inventory include consumer preferences, leasing programs offered by our
competitors and seasonality. In addition, average used powersports vehicle
prices have fluctuated in the past, and any softening in the used powersports
vehicle market could cause our recovery rates on repossessed or off-lease
vehicles to decline below current levels. Lower recovery rates increase our
credit losses and reduce the amount of cash flows we receive.
Our business is dependent on intellectual property rights and we may not be able
to protect such rights successfully.
Our intellectual property, including our license agreements and other
agreements, which establish our rights to proprietary intellectual property, are
of great value to our business operations. Infringement or misappropriation of
our intellectual property or by us could materially harm our business. We rely
on a combination of trade secret, copyright, trademark, patent and other
proprietary rights laws to protect our rights to this valuable intellectual
property. Third parties may try to challenge our intellectual property rights.
In addition, our business is subject to the risk of third parties infringing or
circumventing our intellectual property rights. We may need to resort to
litigation in the future to protect our intellectual property rights, which
could result in substantial costs and diversion of resources. Our failure to
protect our intellectual property rights could have a material adverse effect on
our business and competitive position.
8
We may not be able to compete in the industry.
We will compete with commercial banks, savings and loans, industrial
thrifts, credit unions and consumer finance companies, including large consumer
finance companies such as HSBC/Household, General Electric and Transamerica.
Many of these competitors have well developed infrastructure systems in place as
well as greater financial and marketing resources than we have. Additionally,
competitors may be able to provide financing on terms significantly more
favorable to motorcycle purchasers than we can offer. Providers of motorcycle
financing have traditionally competed on the basis of interest rates charged,
the quality of credit accepted, the flexibility of contract terms offered and
the quality of service provided to dealers and customers. We seek to compete
predominantly on the basis of our high level of dealer service, strong dealer
relationships and by offering flexible terms. Many of our competitors focus
their efforts on different segments of the credit quality spectrum. Our business
may be adversely affected if any of such competitors in any of our markets
choose to intensify their competition in the segment of the prime or sub-prime
credit spectrum on which we focus or if dealers become unwilling to forward to
us applications of prospective customers. To the extent that we are not able to
compete effectively within our credit spectrum and to the extent that the
intensity of competition causes the interest rates we charge to be lower, our
results of operations can be adversely affected.
Our business is subject to various government regulations.
We are subject to numerous federal and state consumer protection laws and
regulations and licensing requirements, which, among other things, may affect:
(i) the interest rates, fees and other charges we impose; (ii) the terms and
conditions of the contracts; (iii) the disclosures we must make to obligors; and
(iv) the collection, repossession and foreclosure rights with respect to
delinquent obligors. The extent and nature of such laws and regulations vary
from state to state. Federal bankruptcy laws limit our ability to collect
defaulted receivables from obligors who seek bankruptcy protection. Prospective
changes in any such laws or the enactment of new laws may have an adverse effect
on our business or the results of operations. Compliance with existing laws and
regulations has not had a material adverse affect on our operations to date. We
will need to periodically review our office practices in an effort to ensure
such compliance, the failure of which may have a material adverse effect on our
operations and our ability to conduct business activities.
We are controlled by current officers, directors and principal stockholders.
Our directors, executive officers and principal stockholders beneficially
own approximately 64.4% of voting stock outstanding on a fully diluted basis.
Accordingly, these persons and their respective affiliates have the ability to
exert substantial control over the election of our Board of Directors and the
outcome of issues submitted to our stockholders, including approval of mergers,
sales of assets or other corporate transactions. In addition, such control could
preclude any unsolicited acquisition of us and could affect the price of our
Common Stock.
We are dependent on our management and the loss of any officer could hinder the
implementation of our business plan.
We are heavily dependent upon management, the loss of any of whom could
have a material adverse affect on our ability to implement our business plan.
While we have entered into employment agreements with certain executive
officers, including our Chief Executive Officer and Chief Operating Officer,
employment agreements could be terminated for a variety of reasons. If, for some
reason, the services of management, or of any member of management, were no
longer available to us, our operations and proposed businesses and endeavors may
be materially adversely affected. In our start-up stages, Mr. Havens, our Chief
Executive Officer, has been primarily responsible for setting up our business
plan and our infrastructure. As we entered into our development stages, other
officers may been instrumental in setting up our financial and operational
controls and procedures, and we have not yet hired additional personnel to
perform such functions. Any failure of management to implement and manage our
business strategy and growth may have a material adverse affect on us. There can
be no assurance that our operating and financial control systems will be
adequate to support its future operations and anticipated growth. Failure to
manage our growth properly could have a material adverse affect on our business,
financial condition or result of operations. Furthermore, the inability to
continue to upgrade the operating and financial control systems, the inability
to recruit and hire necessary personnel or the emergence of unexpected expansion
difficulties could have a material adverse affect on our business, financial
condition or results of operations.
9
Risks Related To This Offering
There is no assurance of an established public trading market, which would
adversely affect the ability of investors in our company to sell their
securities in the public markets.
Although our common stock trades on the Over-the-Counter Bulletin Board
(the "OTCBB"), a regular trading market for the securities may not be sustained
in the future. The NASD has enacted recent changes that limit quotations on the
OTCBB to securities of issuers that are current in their reports filed with the
Securities and Exchange Commission. The effect on the OTCBB of these rule
changes and other proposed changes cannot be determined at this time. The OTCBB
is an inter-dealer, Over-The-Counter market that provides significantly less
liquidity than the NASD's automated quotation system (the "NASDAQ Stock
Market"). Quotes for stocks included on the OTCBB are not listed in the
financial sections of newspapers as are those for The Nasdaq Stock Market.
Therefore, prices for securities traded solely on the OTCBB may be difficult to
obtain and holders of common stock may be unable to resell their securities at
or near their original offering price or at any price. Market prices for our
common stock will be influenced by a number of factors, including:
o the issuance of new equity securities;
o changes in interest rates;
o competitive developments, including announcements by competitors of
new products or services or significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments;
o variations in quarterly operating results;
o change in financial estimates by securities analysts;
o the depth and liquidity of the market for our common stock;
o investor perceptions of our company and the technologies industries
generally; and
o general economic and other national conditions.
The limited prior public market and trading market may cause volatility in the
market price of our common stock.
Our common stock is currently traded on a limited basis on the OTCBB under
the symbol "SRCO." The quotation of our common stock on the OTCBB does not
assure that a meaningful, consistent and liquid trading market currently exists,
and in recent years such market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of many smaller
companies like us. Our common stock is thus subject to volatility. In the
absence of an active trading market:
o investors may have difficulty buying and selling or obtaining market
quotations;
o market visibility for our common stock may be limited; and
o a lack of visibility for our common stock may have a depressive
effect on the market for our common stock.
Our common stock could be considered a "penny stock."
Our common stock could be considered to be a "penny stock" if it meets one
or more of the definitions in Rules 15g-2 through 15g-6 promulgated under
Section 15(g) of the Securities Exchange Act of 1934, as amended. These include
but are not limited to the following: (i) the stock trades at a price less than
$5.00 per share; (ii) it is NOT traded on a "recognized" national exchange;
(iii) it is NOT quoted on The Nasdaq Stock Market, or even if so, has a price
less than $5.00 per share; or (iv) is issued by a company with net tangible
assets less than $2.0 million, if in business more than a continuous three
years, or with average revenues of less than $6.0 million for the past three
years. The principal result or effect of being designated a "penny stock" is
that securities broker-dealers cannot recommend the stock but must trade in it
on an unsolicited basis.
Broker-dealer requirements may affect trading and liquidity.
10
Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule
15g-2 promulgated thereunder by the SEC require broker-dealers dealing in penny
stocks to provide potential investors with a document disclosing the risks of
penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor's
account.
Potential investors in our common stock are urged to obtain and read such
disclosure carefully before purchasing any shares that are deemed to be "penny
stock." Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve
the account of any investor for transactions in such stocks before selling any
penny stock to that investor. This procedure requires the broker-dealer to (i)
obtain from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.
Shares eligible for future sale may adversely affect the market price of our
common stock, as the future sale of a substantial amount of our restricted stock
in the public marketplace could reduce the price of our common stock.
From time to time, certain of our stockholders may be eligible to sell all
or some of their shares of common stock by means of ordinary brokerage
transactions in the open market pursuant to Rule 144, promulgated under the
Securities Act ("Rule 144"), subject to certain limitations. In general,
pursuant to Rule 144, a stockholder (or stockholders whose shares are
aggregated) who has satisfied a one-year holding period may, under certain
circumstances, sell within any three-month period a number of securities which
does not exceed the greater of 1% of the then outstanding shares of common stock
or the average weekly trading volume of the class during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the sale
of securities, without any limitations, by a non-affiliate of our company that
has satisfied a two-year holding period. Any substantial sale of common stock
pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse
effect on the market price of our securities.
11
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by the selling stockholders. We will not receive any
proceeds from the sale of shares of common stock in this offering. However, we
will receive the sale price of any common stock we sell to the selling
stockholder upon exercise of the warrants. We expect to use the proceeds
received from the exercise of the warrants, if any, for general working capital
purposes.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the OTC Bulletin Board, referred to herein
as the OTCBB, under the symbol "SRCO.ob." The following table sets forth, for
the calendar periods indicated, the range of the high and low last reported bid
prices of our common stock, as reported by the OTCBB. The quotations represent
inter-dealer prices without retail mark-ups, mark-downs or commissions, and may
not necessarily represent actual transactions.
High Low
Fiscal Year 2004 (May 1, 2003 - April 30, 2004) *
First quarter (May 1, 2003 - July 31, 2003) $ 0.01 $ 0.01
Second quarter (August 1, 2003 - October 31, 2003) $ 0.05 $ 0.01
Third quarter (November 1, 2003 - January 31, 2004) $ 0.03 $ 0.017
Fourth quarter (February 1, 2004 - April 30, 2004) $ 0.20 $ 0.03
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
* 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 25, 2006, there were approximately 3003 holders of record of
our common stock.
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, 2005, no securities were granted under this plan.
12
On April 29, 2005, pursuant to an option agreement with Richard Trotter,
our Chief Operating Officer, we issued stock 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. 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.
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.
The following table summarizes our equity compensation plan information as
of April 30, 2005.
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
and Rights Warrants and Rights Column (a))
Plan Category(1) (a) (b) (c)
----------------------------------------- ------------------- -------------------- -------------------
Equity Compensation plans approved by
stockholders........................... 0 N/A 8,500,000
Equity Compensation plans not approved by
stockholders........................... 1,075,000 $0.529 N/A
Total................................ 1,075,000 $0.529 8,500,000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATIONS
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.
13
For accounting purposes, the Company has accounted for the transaction as
a reverse acquisition and Sparta Commercial Services LLC 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, 2005, we
have accumulated losses of $6,277,658.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED JANUARY 31, 2006 TO THE NINE MONTHS ENDED
JANUARY 31, 2005
For the nine months ended January 31, 2006 and 2005, we have generated
limited, but increasing sales revenues, have incurred significant expenses, and
have sustained significant losses. We believe we will begin to earn increasing
revenues from operations during the remainder of fiscal 2006 and in the upcoming
fiscal year.
Revenues
Revenues totaled $90,629 during the nine months ended January 31, 2006 as
compared to $47,879 during the nine months ended January 31, 2005. Current
period revenue was comprised primarily of $62,806 in lease revenue, $6,747 in
dealer fees, and $9,900 in private label fees. Prior period revenue was
comprised primarily of $16,607 in lease revenue, $20,300 in dealer fees and
$9,517 in private label fees.
Costs and Expenses
General and administrative expenses were $3,819,526 during the nine months
ended January 31, 2006, compared to $1,523,941 during the nine months ended
January 31, 2005, an increase of $2,295,585, or 151%. Expenses incurred during
the current nine month period 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. Expenses incurred during the comparative nine
month period consisted primarily of the following expenses: Compensation and
related costs, $623,400; Accounting, audit and professional fees, $143,038;
Consulting fees, $164,068; Rent, $50,364; Travel and entertainment, $58,480
License fees, $150,633, and the value of warrants issued to the private
placement agent of $105,303. Of the current nine months consulting expense,
$1,590,000 will be paid through the issuance of 2,650,000 shares of common
stock.
In connection with its private placement transactions, the Company has
expensed non-cash costs of $406,665 during the nine months ended January 31,
2006 related to warrants granted to the private placement agent, with no related
expense during the comparative period. The Company also incurred a non-cash
charge of $605,442 during the nine months ended January 31, 2006 related to
shares of common stock issued or to be issued in connection with debt financing
and has recorded an expense of $2,040,000 related to the failure to file a
registration statement or have an effective registration statement covering the
underlying shares of common stock issuable upon conversion of it preferred stock
and the related warrants. This expense will be settled through the issuance of
shares and warrants. There were no comparable expenses during the nine months
ended January 31, 2005. We have also recorded non-cash income of $126,177
related to the decrease in value of warrants issued with registration rights.
The fair value of these warrants is classified as a liability on the balance
sheet.
14
Net Loss
We incurred a net loss before preferred dividends of $6,734,000 for our
nine months ended January 31, 2006 as compared to $1,493,850 for the
corresponding interim period in 2005. The $5,240,150 or 351% increase in our net
loss before preferred dividends for our nine month interim period ended January
31, 2006 was attributable primarily to a $2,295,585 increase in general and
administrative expense and a net increase of $2,924,771 in non-cash financing
costs.
We also incurred preferred dividend expense of $1,886,683 for our nine
month period ended January 31, 2006 with an expense of $810,000 in the
corresponding interim period of 2005. The increase in preferred dividend expense
was attributable to the sale of convertible preferred stock that commenced in
December, 2004 and concluded in July 2005. In addition to dividends payable on
the outstanding preferred stock, preferred dividend expense for 2006 and 2005
includes an aggregate charge of $1,775,000 and $810,000, respectively, related
to warrants issued with the convertible preferred stock and a beneficial
conversion feature associated with the preferred stock.
Our net loss attributable to common stockholders increased to $8,620,683
for our nine month period ended January 31, 2006 as compared to $2,303,850 for
the corresponding period in 2005. The $6,316,833 increase in net loss
attributable to common stockholders for our nine month period ended January 31,
2006 was due to the $5,240,150 increase in our net loss before preferred
dividends, increased by the aforesaid $1,076,683 increase in preferred dividend
expense.
COMPARISON OF THE YEAR ENDED APRIL 30, 2005 TO THE YEAR ENDED APRIL 30, 2004
For the year ended April 30, 2005, 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 2006 as we complete our transition to an operating company.
Revenues
Revenues totaled $65,833 in fiscal 2005 compared to $0 revenues in fiscal
2004. Fiscal 2005 revenue was comprised of $22,800 in dealer fees, $9,900 in
private label fees, $17,575 in lease payments and $15,558 in other fees and
income.
Costs and Expenses
The Company incurred licensing fees of $150,633 for the year ended April
30, 2005, and $730,433 for the year ended April 30, 2004, 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 of contracts and of leased motor
vehicles. The decrease from fiscal 2004 to fiscal 2005 reflects the fact that
this process is nearing completion.
The Company incurred organization costs of $294,408 for the year ended
April 30, 2005, and $670,486 for the year ended April 30, 2004, 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 initial
organizational activity.
The Company incurred compensation costs of $828,298 for the year ended
April 30, 2005 compared with $223,968 in fiscal 2004. The increase is related to
the costs of the Company increasing its employment base during 2005 including
the addition of a Chief Operating Officer and a Chief Financial Officer as well
as several administrative personnel. At April 30, 2005, the headcount was eight.
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.
15
The Company paid $233,333 and $135,140 to its managing member, who is
Chairman and Chief Executive Officer, in fiscal 2005 and 2004, respectively.
These payments were charged to operations, and are included in the compensation
costs shown above.
In connection with the private placement transaction, the Company has
expensed non cash costs of $383,284 to issue warrants to the private placement
agent for the year ended April 30, 2005 and $0 in fiscal 2004. The Company has
expensed non cash costs $1,810,000 which equals the intrinsic value of the
imbedded beneficial conversion feature for the Preferred Stock holders for the
year ended April 30, 2005 and $0 in fiscal 2004. At April 30, 2005, accrued
preferred dividends of $28,906 were charged to operations. There was no accrual
made in fiscal 2004.
The Company incurred legal and accounting fees of $197,384 for the year
ended April 30, 2005, as compared to $85,962 for the year ended April 30, 2004,
respectively. 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 $791,647 for the year
ended April 30, 2005. 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. In fiscal 2004, other operating costs totaled
$70,119, comprised of rent of $19,772, travel of $18,430, advertising of $4,057
and all other expenses of $27,860.
Net Loss
Our net loss for the year ended April 30, 2005 was $4,418,727 in contrast
to a loss of $1,772,257 for the year ended April 30, 2004, respectively. The
increase in net loss was due primarily to the fact that the Company incurred
expenses related to the private placement transaction, consisting of non cash
expense of a beneficial conversion discount of $1,810,000, and a non cash
expense of $383,284 for warrants issued to the placement agent in 2005 and to
the fact that the Company has increased its resources and spending in 2005 as it
transitioned from a development stage to an operating entity. The payment of
$250,000 for a purchase option for equipment leases from American Motorcycle
Leasing Corp. ("AML") also contributed to the loss. While AML is not a
shareholder of the Company, our President and Chief Executive Officer is an
officer and a minority shareholder of AML.
As a result of significant restrictions on transfers of the equipment
leases owned by AML including, but not limited to, obtaining approvals from
AML's secured lender, and the agreement's non-exclusivity, the Company has
accounted for the fee as an expense and has charged the $250,000 to operations
in the current year.
While the Company has charged the fee to operations during the current
year, the Company believes that the purchase option, subject to the terms and
conditions described, may provide us with the opportunity to expand its
equipment leasing portfolio, which would benefit the Company. However, there is
no guaranty that we will acquire any of the assets held by AML at terms and
conditions acceptable to us.
Our net loss per common share (basic and diluted) was $0.05 for the year
ended April 30, 2005 and $0.25 for the year ended April 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2006, the Company had a working capital deficit of
$3,023,127. The Company generated a deficit in cash flow from operations of
$2,172,063 for the nine months ended January 31, 2006. This deficit is primarily
attributable to the Company's net loss from operations of $6,734,000, partially
offset by depreciation and amortization of $58,045 and the fair value attributed
to stock and warrants issued of $1,172,910, and to changes in the balances of
current assets and liabilities. Accounts payable and accrued expenses increased
by $3,458,030, deferred revenue increased by 91,860 and prepaid expenses and
deposits increased by $184,675. Included in accounts payable and accrued
expenses at January 31, 2006 are accrued penalties of $2,040,000 related to the
failure to file a registration statement or have an effective registration
statement covering the underlying shares of common stock issuable upon
conversion of it preferred stock and the related warrants. This expense will be
settled through the issuance of shares and warrants or the cancellation of the
obligation through negotiation with shareholders. Also included in accounts
payable and accrued expenses at January 31, 2006 are accrued consulting and
advisory fees of $1,590,000, which will be paid through the issuance of
2,650,000 shares of common stock.
16
The Company, pursuant to the terms of the private placement of Series A
Convertible Preferred Stock with Warrants (the "Units"), which placement had its
final closing on July 27, 2005, is required to issue to the holders of such
Units and the Placement Agent penalty shares such that the number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock and the
exercise of the Warrants and the Placement Agent Warrants shall be increased
each month until the Company files with the Securities and Exchange Commission
(the "SEC"),a registration statement registering the common shares underlying
the Units. As of January 31, 2006, the aggregate number of penalty shares
accrued for the shares issuable upon conversion of the Series A Convertible
Preferred Stock is 1,953,290 and the fair value expensed for these shares at
January 31, 2006 is $1,332,000. The aggregate number of penalty shares accrued
upon exercise of the Warrants and Placement Agent Warrants is 1,140,146 and the
fair value expense for these shares at January 31, 2006 is $708,000.
Additionally, for each month, or fraction thereof, subsequent to January 2006
and until such registration statement is filed, the Company will be required to
issue an additional 574,498 penalty shares for the shares issuable upon
conversion of the Series A Convertible Preferred Stock and 335,537 penalty
shares upon exercise of the Warrants and Placement Agent Warrants. Pursuant to
the terms of the $3 million private placement of the Company's common stock
which commenced in December 2005 and terminated in March 2006 (the "PPM"), the
Company is required to file with the SEC a registration statement registering
the common shares sold pursuant to the PPM. If such registration statement is
not filed by April 28, 2006, and for each month or fraction thereof until such
registration is filed, the Company will be required to issue up to 179,487
additional penalty shares to the purchasers of the PPM and the Placement Agent.
As of March 16, 2006, the Company has obtained, from Unit holders, conditional
waivers which cancel the Companies obligation to issue a total of approximately
775,000 penalty shares representing valuation expense of approximately $524,000
at January 31, 2006. Assuming the condition is met the $524,000 will be
recognized as a reduction of non-cash financing cost with a like reduction in
accrued accounts payable. Such waivers are conditioned upon the Company filing
with the SEC a registration statement registering the common shares underlying
the Units within 30 days of the final closing of the Company's current private
placement offering. The Company is seeking to obtain penalty waivers from the
remaining Unit holders and Placement Agent. There is no assurance that such
additional waivers can or will be obtained.
Cash flows used in investing activities for the nine months ended January
31, 2006 was $592,976, primarily due to the purchase of property and equipment
of $32,390, payments for motorcycles and vehicles of $200,524 and investments in
leases of $353,562.
The Company met its cash requirements during the nine month period through
net proceeds from the issuance of equity of $3,319,497, debt financing of
$372,675 and subscriptions for units of our securities, consisting of one share
of common stock and a warrant to purchase one share of common stock exercisable
for three years at $0.80 per share, of $330,000, all partially offset by
payments on bridge loans and other financing of $357,244. Additionally, the
Company has received limited revenues from leasing and financing motorcycles and
other vehicles, its recently launched private label programs and from dealer
sign-up fees.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required in order to meet our current
and projected cash flow deficits from operations and development. We are seeking
financing, which may take the form of debt, convertible debt or equity, in order
to provide the necessary working capital. There is no guarantee that we will be
successful in raising the funds required.
We estimate that we will need approximately $1,750,000 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. As of the date of this
filing, we have more than sufficient operating capital to continue our planned
business operations for the next twelve months and for our general operating
expenses. Although the Company obtained a senior credit facility in July 2005,
which allowed us to commence our initial active operations, this facility
finances only three of our five credit tiers, 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 the operating
flexibility of the Company. 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.
17
AUDITOR'S OPINION EXPRESSES DOUBT ABOUT THE COMPANY'S ABILITY TO CONTINUE AS A
"GOING CONCERN"
The independent auditors report on our April 30, 2005 and 2004 financial
statements included in the Company's Annual Report states that the Company's
historical losses and the lack of revenues raise substantial doubts about the
Company's ability to continue as a going concern, due to the losses incurred and
its lack of significant operations. If we are unable to develop our business, we
have to discontinue operations or cease to exist, which would be detrimental to
the value of the Company's common stock. We can make no assurances that our
business operations will develop and provide us with significant cash to
continue operations.
PLAN OF OPERATIONS
ADDRESSING THE GOING CONCERN ISSUES
In order to improve the Company's liquidity, the Company's management is
actively pursing additional financing through discussions with investment
bankers, financial institutions and private investors. There can be no assurance
the Company will be successful in its effort to secure additional financing.
We continue to experience net operating losses. Our ability to continue as
a going concern is subject to our ability to develop profitable operations. We
are devoting substantially all of our efforts to developing our business and
raising capital. Our net operating losses increase the difficulty in meeting
such goals and there can be no assurances that such methods will prove
successful.
The primary issues management will focus on in the immediate future to
address this matter include:
o seeking additional credit lines from institutional lenders;
o seeking institutional investors for debt or equity investments in
our company; and
o initiating negotiations to secure short term financing through
promissory notes or other debt instruments on an as needed basis.
To address these issues, we are negotiating the potential sale of
securities with investment banking companies to assist us in raising capital. We
are also presently in discussions with several institutions about obtaining
additional credit facilities.
Product Research and Development
We do not anticipate incurring significant research and development
expenditures during the next twelve months.
Acquisition or Disposition of Plant and Equipment
We do not anticipate the sale of any significant property, plant or
equipment during the next twelve months. We do not anticipate the acquisition of
any significant property, plant or equipment during the next twelve months.
Number of Employees
18
From our inception through the period ended January 31, 2006, we have
relied on the services of outside consultants for services and currently have
nine 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 employment base may
increase by approximately 50% 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.
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
19
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 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.
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.
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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:
o Retail installment sales contracts and leases;
o Private label programs for manufacturers and distributors;
o Ancillary products and services, such as private label gap coverage
and private label service contracts; and
o 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.
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.
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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.
(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
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.
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RETURNED LEASED 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.
CREDIT EVALUATION PROCESS AND COLLATERAL GUIDELINES
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 worked closely with a leading provider of interactive
credit accessing and decisioning solutions, to develop the iPLUS point of sale
credit application and contract decisioning system.
IPLUS (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:
o 100% WEB Browser Based ( www.spartacommercial.com)
o User friendly system
o No costly software required by the users
o Operates on any dial-up connection as slow as 28.8
o Requires Internet Explorer 5.5 or above, Adobe Acrobat Reader 5.0 or
above, both available at no charge on the Internet
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o Integrated scorecard and decision engine
o Integrated credit bureau retrieval and review (can access any of the
3 major bureaus)
o Once application is submitted; decisions in seconds/7 Days a Week/
24 Hours a Day
o Easy to complete customer application
o Dealer application management
o Dealer Desking Tool - Profit Manager (Assists dealer in structuring
any approved application.)
o Prints approved customer contract and contract package
o Captures information in electronic format
o Complete underwriting documentation and control system
o Dealer communication
o 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.
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.
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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 2005 Annual Statistical Report of the Motorcycle
Industry Council, retail sales of new motorcycles have grown steadily from 1991
through 2005. North American registrations of new 651cc and higher motorcycles
reached 517,600 in 2005. This represents a 5% increase over 2004. Registrations
have increased for 14 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 780,435 units in 2005 with a
market value of $1.6 billion and scooter sales approached 57,000 in 2005 and are
growing at a 17% annual rate, as reported in Powersports Business Magazine in
the April 3, 2006 issue.
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 ourAuthorized 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.
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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.
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, Sheffield Financial/BB&T, Lending Tree, CIT
Bank, AIG, and Transamerica. 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
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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:
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
o 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.
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o 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.
o 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 May 12, 2006, we had 15 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.
We believe that our existing facilities will be adequate to meet our needs
for the foreseeable future. Should we need additional space, management believes
it will be able to secure additional space at commercially reasonable rates.
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.
MANAGEMENT
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
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.
29
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.
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.
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.
30
Director Compensation
Directors are reimbursed for reasonable out-of-pocket expenses incurred in
connection with attendance at Board meetings.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation paid
to our Chief Executive Officer and the other executive officers. We refer to all
of these officers collectively as our "named executive officers."
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 Other Restricted Securities
Principal Annual Stock Underlying All Other
Position Year Salary Bonus Compensation Awards Options/SARS Compensation
Anthony L. 2005 $ 233,333 $ 0 $ 0 0 0 $ 0
Havens (1) 2004 $ 46,667 $ 0 $ 0 0 0 $ 0
Chief
Executive
Officer,
President, and
Director
Richard P. 2005 $ 80,000 $ 0 $ 0 125,000(3) 875,000(4) $ 0
Trotter (2)
Chief
Operating
Officer
Michael J. 2005 $ 3,125 $ 0 $ 0 0 0 $ 0
Mele (5)
Chief
Financial
Officer
Daniel J. 2005 $ 105,001 $ 0 $ 0 227,272(7) 0 $ 0
Lanjewar (6)
Former Chief
Financial
Officer
Sandra L. 2005 $ 75,000 $ 0 $ 0 0 0 $ 0
Ahman (8) 2004 $ 12,500 $ 0 $ 0 0 0 $ 0
Vice President
and Secretary
(1) Became an officer on February 27, 2004. His reported fiscal year 2004
compensation covers the period February 27, 2004 through April 30, 2004.
(2) 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.
31
(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 $0.605 per share. On April 29, 2005,
stock options to purchase 175,000 shares vested, and the remaining options
are to vest in equal installments over the next four anniversary date of
the agreement.
(5) Became an officer on April 29, 2005. His reported fiscal year 2005
compensation covers the period from April 29, 2005.
(6) Became an officer on August 2, 2004, and resigned on April 29, 2005. His
reported fiscal year 2005 compensation covers the period August 2, 2004
through April 29, 2005.
(7) Refers to shares vested. Pursuant to an employment agreement, Mr. Lanjewar
was entitled to up to 568,175 shares of common stock. The grant of shares
was subject to vesting and subject to continued employment. On January 1,
2005, 113,635 shares vested, and the reminder of the shares were to vest
in equal portions on July 1, 2005, July 1, 2006, July 1, 2007, and July 1,
2008, subject to proportionate adjustment in the event of employment
termination for any incomplete vesting period. In April 2005, Mr. Lanjewar
resigned as our Chief Financial Officer, and was vested with an additional
113,637 shares of common stock.
(8) Became an officer on March 1, 2004. Her reported fiscal year 2004
compensation covers the period March 1, 2004 through April 30, 2004.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
Number of
Securities Underlying % of Total Options/SARs Exercise or
Options/SARs Granted to Employees in base price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
Richard P. 875,000 (a) 100 % $0.605 4-29-10(b)
Trotter
(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 $0.605 per share. On April 29, 2005,
stock options to purchase 175,000 shares vested, and the remaining options
are to vest in equal installments over the next four anniversary date of
the agreement.
(b) Refers to expiration date of vested options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Shares Number of securities
Acquired on underlying unexercised Value of unexercised
Exercise Value Options/SARs in-the-money options/SARs
Realized at FY-end (#) at FY-end ($)(a)
Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable
Richard P. -- -- 175,000 700,000 $0 $0
Trotter
(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 29, 2005 as reported by the OTC
Bulletin Board was $0.605.
32
Employment Agreements with Executive Officers
We have an employment agreement with Anthony L. Havens 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:
o 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;
o 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;
o 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
o 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 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.
33
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.
34
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.
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.
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, 2006 by:
o each person known by us to be the beneficial owner of more than 5%
of our Common Stock;
o each of our directors;
o each of our executive officers; and
o 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.
Unless indicated otherwise, the address for each person named is c/o
Sparta Commercial Services, Inc., 462 Seventh Ave, 20th Floor, New York, NY
10018.
Number of Percentage Percentage of
Shares of Class Class
Beneficially Beneficially Number of Number of Shares Beneficially
Owned Prior to Owned Prior Shares Beneficially Owned Owned After the
Name Offering to Offering Offered After the Offering Offering
------------------------------- -------------- ------------ --------- ------------------ ---------------
Anthony L. Havens (1) 32,833,250 28.8% 0 32,833,250 (1) 20.6%
Kristian Srb (2) 33,045,750 29.0% 0 33,045,750 20.7%
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 6,792,758 6.0% 1,664,552 5,128,206 3.2%
All current directors and named
officers as a group (5 in all) 66,659,865 58.4% 66,659,865 41.7%
35
* Represents less than 1%
(1) Mr. Havens' minor son owns 150,000 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 50,000 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 November 1, 2005. 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. Also
includes 175,000 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 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
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.
36
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 May 12, 2006, there were 114,100,173 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 therefor. 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:
o 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
o 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.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act" or "Securities Act") may be permitted to directors,
officers or persons controlling us pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
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:
37
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits the purchaser;
o 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;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately-negotiated transactions;
o short sales that are not violations of the laws and regulations of
any state or the United States;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o through the writing of options on the shares;
o a combination of any such methods of sale; and
o 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.
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.
38
We have agreed to indemnify the selling stockholders, or 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.
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:
o that a broker or dealer approve a person's account for transactions
in penny stocks; and
o 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
o obtain financial information and investment experience objectives of
the person; and
o 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:
o sets forth the basis on which the broker or dealer made the
suitability determination; and
o 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.
39
SELLING STOCKHOLDERS
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.
We will not receive any proceeds from the resale of the common stock by
the selling stockholders. Assuming all the shares registered below are sold by
the selling stockholders, none of the selling stockholders will continue to own
any shares of our common stock. Other than as set forth in the following table,
the selling stockholders have not held any position or office or had any other
material relationship with us or any of our predecessors or affiliates within
the past three years. In addition, except as set forth below, the selling
stockholders are not registered broker-dealers.
Total Percentage
Shares Owned Number of of Common
and Issuable Percentage Shares Stock
Upon Exercise of Common Owned Owned
of Warrants Stock, After After
and Conversion Assuming Number of Completion Completion
of Preferred Full Shares of of
Stock Before Conversion Offered for Offering Offering
Name Offering and Exercise Sale (1) (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 0 *
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 *
40
Total Percentage
Shares Owned Number of of Common
and Issuable Percentage Shares Stock
Upon Exercise of Common Owned Owned
of Warrants Stock, After After
and Conversion Assuming Number of Completion Completion
of Preferred Full Shares of of
Stock Before Conversion Offered for Offering Offering
Name Offering and Exercise Sale (1) (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 0 *
Emilile J. Corsiglia IRA 130,000 * 130,000 0 *
Leon Bialik 179,487 * 179,487 0 *
Paul Lodi (23) 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 *
41
Total Percentage
Shares Owned Number of of Common
and Issuable Percentage Shares Stock
Upon Exercise of Common Owned Owned
of Warrants Stock, After After
and Conversion Assuming Number of Completion Completion
of Preferred Full Shares of of
Stock Before Conversion Offered for Offering Offering
Name Offering and Exercise Sale (1) (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 *
American Capital Ventures, Inc.
(50) 3,050,000 2.8% 3,050,000 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.
42
(3) Includes (i) 1,282,052 shares 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.
(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.
43
(24) Includes (i) 243,590 shares 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.
(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.
44
(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.
(50) Shares to be granted pursuant to an Investor Relations Agreement, dated as
of April 11, 2006, pursuant to which 550,000 shares were issued upon
execution and the remaining shares are to be issued in monthly
installments over a 36 month period.
LEGAL MATTERS
Sichenzia Ross Friedman Ference LLP, New York, New York will issue an
opinion with respect to the validity of the shares of common stock being offered
hereby.
EXPERTS
Our financial statements as of April 30, 2005, and for each of the years
in the two year period then ended, have been included herein in reliance upon
the report of Russell Bedford Stefanou Mirchandani LLP, independent registered
public accounting firm, appearing elsewhere herein, and upon authority of said
firm as experts in accounting and auditing.
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.
45
SPARTA COMMERCIAL SERVICES, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
Condensed Consolidated Balance Sheets as of January 31, 2006 (unaudited)
and April 30, 2005 F-1
Unaudited Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended January 31, 2006 and 2005 F-2
Unaudited Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended January 31, 2006 and 2005 F-3
Notes to Unaudited Condensed Consolidated Financial Statements F-4
Report of Registered Independent Certified Public Accounting Firm F-12
Consolidated Balance Sheets as of April 30, 2005 and 2004 F-13
Consolidated Statements of Losses for the years ended
April 30, 2005 and 2004 F-14
Consolidated Statements of Deficiency in Stockholder's Equity
for the years ended April 30, 2005 and 2004 F-15
Consolidated Statements of Cash Flows for the years ended
April 30, 2005 and 2004 F-16 - F-17
Notes to Consolidated Financial Statements F-18
46
SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, April 30,
2006 2005
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 983,238 $ 108,365
Lease payments receivable, current portion 114,425 14,764
Prepaid expenses 74,090 --
Other current assets 6,034 6,700
------------ ------------
Total current assets 1,177,787 129,829
Motorcycles and other vehicles under operating leases, net of
accumulated depreciation of $38,742 and $13,392, respectively 270,203 99,886
Property and equipment, net of accumulated depreciation and
amortization of $43,215 and $15,378, respectively 111,361 106,809
Finance receivables, net of current portion 306,921 21,521
Deposits 159,552 48,967
------------ ------------
Total assets $ 2,025,824 $ 407,012
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 2,026,869 $ 509,936
Accrued equity penalties (Note C) 2,040,000 --
Notes payable 28,985 300,000
Deferred revenue 105,060 23,100
Due to related party -- 25,000
------------ ------------
Total current liabilities 4,200,914 858,036
Notes payable, long term portion 136,446 --
Warrant liability 451,752 --
------------ ------------
Total liabilities 4,789,112 858,036
------------ ------------
Stockholders' deficit:
Preferred stock, $0.001 par value; 10,000,000 shares authorized
of which 35,850 shares have been designated as Series A
convertible preferred stock, with a stated value of $100
per share, 21,875 and 18,100 shares issued and outstanding,
respectively 2,187,500 1,810,000
Common stock, $0.001 par value; 340,000,000 shares
authorized, 106,944,654 and 86,005,415 shares issued
and outstanding, respectively 106,945 86,005
Common stock subscribed 330,000 --
Additional paid-in capital 9,820,151 3,930,629
Deferred compensation (309,543) --
Accumulated deficit (14,898,341) (6,277,658)
------------ ------------
Total stockholders' deficit (2,763,288) (451,024)
------------ ------------
Total liabilities and stockholders' deficit $ 2,025,824 $ 407,012
============ ============
The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
F-1
SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2006 AND 2005
(UNAUDITED)
For The Three Months For The Nine Months
ended January 31, ended January 31,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Revenue $ 43,008 $ 26,416 $ 90,629 $ 47,879
------------ ------------ ------------ ------------
Operating expenses:
General and administrative 2,322,057 739,320 3,819,526 1,523,941
Depreciation and amortization 22,157 10,131 58,044 17,788
------------ ------------ ------------ ------------
Total operating expenses 2,344,214 749,451 3,877,570 1,541,729
Loss from operations (2,301,206) (723,035) (3,786,941) (1,493,850)
Other expense:
Interest expense and financing cost, net (1,483,522) -- (3,066,736) --
Change in value of warrant liability 126,177 -- 126,177 --
Loss on sale of asset -- -- (6,500) --
------------ ------------ ------------ ------------
Net loss (3,658,551) (723,035) (6,734,000) (1,493,850)
Preferred dividend 29,191 810,000 1,886,683 810,000
------------ ------------ ------------ ------------
Net loss attributed to common stockholders $ (3,687,742) $ (1,533,035) $ (8,620,683) $ (2,303,850)
============ ============ ============ ============
Basic and diluted loss per share $ (0.04) $ (0.01) $ (0.08) $ (0.02)
============ ============ ============ ============
Basic and diluted loss per share attributed to
common stockholders $ (0.04) $ (0.02) $ (0.10) $ (0.03)
============ ============ ============ ============
Weighted average shares outstanding 95,648,989 85,934,261 89,586,901 85,934,261
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-2
SPARTA COMMERCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 2006 AND 2005
(UNAUDITED)
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,734,000) $(1,493,850)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 58,045 17,788
Valuation allowance on deposit -- 61,000
Amortization of deferred revenue (9,900) --
Amortization of deferred compensation 240,252 --
Stock issued for services 85,228 82,500
Stock based finance cost 973,607 105,303
Change in warrant liability (126,177) --
Loss on sale of assets 6,500 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Lease payments receivable (31,499) --
Prepaid expenses (74,090) (101,800)
Other current assets 666 (13,187)
Deposits (110,585) --
Increase (decrease) in:
Accounts payable and accrued expenses 1,418,030 337,880
Accrued equity penalties 2,040,000
Deferred revenue 91,860 33,971
----------- -----------
Net cash used in operating activities (2,172,063) (970,395)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of asset 25,000 --
Cost of asset sold (31,500) --
Payments for motorcycles and other vehicles (200,524) (81,634)
Investment in leases (353,562) --
Purchases of property and equipment (32,390) (137,063)
Net proceeds from marketable securities -- 13,379
----------- -----------
Net cash provided by investing activities (592,976) (205,318)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of preferred stock, net 1,592,517 810,000
Proceeds from sale of common stock, net 1,726,980 --
Repayment of affiliate advances (25,000) (23,885)
Proceeds from notes 372,675 400,000
Payments on notes (357,244) --
Common stock subscription 330,000 --
Payments for fractional shares (16) --
----------- -----------
Net cash provided by financing activities 3,639,912 1,186,115
----------- -----------
Net increase in cash 874,873 10,402
Cash and cash equivalents, beginning of year 108,365 11,973
----------- -----------
Cash and cash equivalents, end of year $ 983,238 $ 22,375
=========== ===========
Cash paid for:
Interest $ 15,788 $ --
Income taxes -- --
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-3
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
Basis of Presentation
The accompanying unaudited consolidated financial statements as of January 31,
2006 and for the nine month periods ended January 31, 2006 and 2005 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission, including Form 10-QSB and Regulation S-B. The
information furnished herein reflects all adjustments (consisting of normal
recurring accruals and adjustments), which are, in the opinion of management,
necessary to fairly present the operating results for the respective periods.
Certain information and footnote disclosures normally present in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to such
rules and regulations. The company believes that the disclosures provided are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the audited financial statements
and explanatory notes for the year ended April 30, 2005 as disclosed in the
company's 10-KSB for that year as filed with the SEC, as it may be amended.
The results of the nine months ended January 31, 2006 are not necessarily
indicative of the results to be expected for the full year ending April 30,
2006.
The unaudited condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary, Sparta Commercial Services, LLC.
All significant intercompany transactions and balances have been eliminated in
the consolidated financial statements.
Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Revenue Recognition
The Company originates leases on new and used motorcycles and other powersports
vehicles from motorcycle dealers throughout the United States. The Company's
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 Company's 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. 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.
F-4
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
The Company realizes 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.
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. The Company records a gain or loss for the difference between
the proceeds received and the net book value of the motorcycle.
The Company charges fees to manufacturers and other customers related to
creating a private label version of the Company's 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. At January 31, 2006, the Company had recorded
deferred revenue related to these contracts of $13,200.
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.
Per share basic and diluted net loss attributable to common stockholders
amounted to $0.04 and $0.02 for the three months ended January 31, 2006 and
2005, respectively, and $0.10 and $0.03 for the nine months ended January 31,
2006 and 2005, respectively. For the nine months ended January 31, 2006 and
2005, 29,685,131 and 7,932,486 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.
F-5
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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 Pronouncement
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.
F-6
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(UNAUDITED)
NOTE B - RELATED PARTY TRANSACTIONS
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 January 31,
2006 this amount has been paid in full.
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 as of
January 31, 2006.
NOTE C - STOCKHOLDERS' EQUITY
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 nine months ended January 31, 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 January 31, 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.
During September and October 2005, the Company issued an aggregate of 600,000
shares of common stock, pursuant to a consulting agreement. The shares have been
valued at $474,000 and this amount is being amortized over the one year term of
the agreement, commencing August 1, 2005.
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 January 31, 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. This amount has been charged to expense in the third quarter and,
since the shares have not been issued as of January 31, 2006, this amount is
included in accrued expenses in the financial statements.
F-7
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(UNAUDITED)
NOTE C - STOCKHOLDERS' EQUITY (continued)
Common Stock (continued)
During December 2005 and January 2006, the Company sold 10,151,400 shares of
common stock through a private placement. The Company received net proceeds of
$1,726,980 from the sale. Costs of $212,952 were deducted from the gross
proceeds and additional costs of $39,590 were paid by the Company.
In connection with the private placement described above, the Company granted
1,015,140 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 $577,929 using the
Black-Sholes pricing model. The assumptions used in the Black-Scholes model are
as follows: (1) dividend yield of 0%; (2) expected volatility of 177%, (3)
risk-free interest rate of 3.65%, 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 ($577,929) and included the change in
fair value from the date of issuance to January 31, 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 $451,752 at January 31, 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 2006, the Company issued 8,958,333 shares of common stock upon
conversion of 13,975 shares of preferred stock.
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.
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-8
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(UNAUDITED)
NOTE C - STOCKHOLDERS' EQUITY (continued)
Preferred Stock Series A (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 January 31, 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 one has not
been filed as of January 31, 2006. As a result, the Company has accrued an
expense of $1,440,000 and $2,040,000 during the three and nine months ended
January 31, 2006, respectively, related to these penalty provisions. This amount
will be settled through the issuance of equity securities. As of January 31,
2006, an aggregate of 1,953,290 penalty shares and 1,140,146 penalty warrants
has accrued. As of March 16, 2006, the Company has obtained waivers covering
approximately 775,000 penalty shares and 388,000 penalty warrants. These waivers
aggregate approximately $761,000 of the accrued expense. The waivers are
contingent upon the company filing a registration statement covering the
original shares and warrants within 30 days of the final closing of the
Company's current private placement offering.
During the three months ended January 31, 2005, the Company issued 2,250
preferred shares at a stated value of $100 per share and warrants to purchase
721,154 shares of common stock, exercisable for three years at $0.195 per share,
for aggregate gross proceeds of $225,000 received from investors. In connection
with the private placement, during the nine months ended January 31, 2005, the
Company issued as compensation to the placement agent warrants to 144,231 shares
of common stock, exercisable for five years at $0.172 per share. The warrants,
which were valued at approximately $105,303 using the Black-Scholes option
pricing model, were recognized as a cost of issuance of the Series A Preferred
shares.
In accordance with EITF 98-5, the Company recognized an imbedded beneficial
conversion feature present in the Preferred Stock. The Company recognized and
measured an aggregate of $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.
F-9
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(UNAUDITED)
NOTE C - STOCKHOLDERS' EQUITY (continued)
Preferred Stock Series A (continued)
During the nine months ended January 31, 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.
NOTE D - GOING CONCERN MATTERS
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the accompanying
consolidated financial statements the Company has realized minimal revenue from
operations and has incurred significant operating losses since inception. These
factors among others may indicate that the Company will be unable to continue as
a going concern for a reasonable period of time.
The Company's existence is dependent upon management's ability to develop
profitable operations. Management is devoting substantially all of its efforts
to developing its business and raising capital and there can be no assurance
that the Company's efforts will be successful. However, the planned principal
operations have not commenced and no assurance can be given that management's
actions will result in profitable operations or the resolution of its liquidity
problems. The accompanying statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
In order to improve the Company's liquidity, the Company's management is
actively pursing additional equity financing through discussions with investment
bankers and private investors. There can be no assurance the Company will be
successful in its effort to secure additional equity financing.
F-10
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2006
(UNAUDITED)
NOTE E - NON-CASH FINANCIAL INFORMATION
During the nine months ended January 31, 2006 the Company:
o Recorded a dividend on preferred stock of $1,775,000 related to the
fair value of the class 'C' warrants issued with preferred stock and
the related beneficial conversion feature.
o Incurred costs of $182,483 related to the sale of preferred stock.
These costs were deducted from the proceeds.
o Issued 464,745 shares of common stock, valued at $243,270, as
additional costs related to loans received by the Company.
o 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.
o Issued an aggregate of 600,000 shares of common stock, pursuant to a
consulting agreement. The shares have been valued at $474,000 and
this amount is being amortized over twelve months, commencing August
1, 2005.
o Issued 113,637 shares of common stock, valued at $85,228, for
services.
o Issued 8,958,333 shares of common stock upon conversion of 13,975
shares of preferred stock.
o Incurred costs of $212,952 related to the sale of common stock.
These costs were deducted from the proceeds.
o Granted an aggregate of 160,000 stock options to employees. These
options have been valued at $75,795.
During the nine months ended January 31, 2005 the Company:
o Recorded a dividend on preferred stock of $810,000 related to the
fair value of the class 'C' warrants issued with preferred stock and
the related beneficial conversion feature.
NOTE F - 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 vehicles. The weighted average interest rate at January 31, 2006 is
9.2%.
NOTE G - SUBSEQUENT EVENT
In February 2006, the Company completed a private placement offering of
1,565,667 shares of common stock, par value $0.001 per share, to accredited
investors for net proceeds of $258,768.
In March 2006, the Company completed a private placement offering of 4,039,200
shares common stock, par value $0.001 per share, to accredited investors for net
proceeds of $691,127.
F-11
RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------
REPORT OF REGISTERED INDEPENDENT CERTIFIED PUBLIC ACCOUNTING FIRM
Board of Directors
Sparta Commercial Services, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Sparta
Commercial Services, Inc., as of April 30, 2005 and 2004, and the related
consolidated statements of losses, deficiency in stockholders' equity and cash
flows for each of the two years in the period ended April 30, 2005. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on the financial statements based upon
our audits.
We have conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Sparta
Commercial Services, Inc. at April 30, 2005 and 2004, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended April 30, 2005, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming the
company will continue as a going concern. As discussed in the Note O to the
accompanying financial statements, the company has suffered recurring losses
from operations that raises substantial doubt about the company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note O. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ RUSSELL BEDFORD STEFANOU MIRCHANDANI LLP
---------------------------------------------
Russell Bedford Stefanou Mirchandani LLP
Certified Public Accountants
New York, New York
July 15, 2005
F-12
SPARTA COMMERCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2005 and 2004
2005 2004
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 108,365 $ 11,973
Retail installment sale contract receivables-current (Note E) 14,764 --
Marketable securities -- 13,379
Other current assets, net 6,700 --
----------- -----------
Total current assets 129,829 25,352
Motorcycles and other vehicles under operating leases, net of accumulated
depreciation of $13,392 and $0, at April 30, 2005 and April 30, 2004,
respectively (Note D) 99,886 --
Property and equipment, net of accumulated depreciation and amortization of $15,378 and
$30, at April 30, 2005 and 2004, respectively (Note F) 106,809 1,193
Other assets:
Prepaid expenses and deposits (see Note C) 48,967 --
Retail installment sale contract receivables (Note E) 21,521 --
----------- -----------
Total other assets 70,488 --
Total assets $ 407,012 $ 26,545
=========== ===========
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 509,936 $ 81,721
Note payable (Note G) 300,000 --
Deferred revenue (Note A) 23,100 --
Due to related party (Note H) 25,000 23,885
----------- -----------
Total current liabilities 858,036 105,606
Commitments and contingencies (Note M)
Deficiency in Stockholders' Equity: (Note I)
Preferred Stock, $0.001 par value: 10,000,000 shares authorized of which 35,850
shares have been designated as Series A convertible preferred stock, with a
stated value of $100. 18,100 and 0 shares of convertible preferred stock are
issued and outstanding
at April 30, 2005 and 2004, respectively 1,810,000 --
Common Stock, $0.001 par value; 340,000,000 and 200,000,000 shares authorized at
April 30, 2005 and 2004, respectively; 86,005,415 and 7,079,654 shares
issued and outstanding at April 30, 2005 and 2004, respectively 86,005 7,080
Common stock - subscription payable -- 17,920
Additional paid-in-capital 3,930,629 1,754,870
Accumulated deficit (6,277,658) (1,858,931)
----------- -----------
Total deficiency in stockholders' equity (451,024) (79,061)
----------- -----------
Liabilities and deficiency in stockholders' equity $ 407,012 $ 26,545
=========== ===========
See accompanying notes to consolidated financial statements
F-13
SPARTA COMMERCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF LOSSES
For the Year Ended April 30,
----------------------------
2005 2004
------------ ------------
Revenue $ 65,833 $ --
------------ ------------
Operating Expenses:
General and administrative 2,366,914 1,780,968
Payment for option to purchase portfolio from a related party 250,000 --
Depreciation and amortization (Note F) 28,740 --
------------ ------------
Total Operating Expenses 2,645,654 1,780,968
Loss from Operations (2,579,821) (1,780,968)
Other Income (Expenses) -- 8,711
Income Taxes (Note J) -- --
Net Loss (2,579,821) (1,772,257)
------------ ------------
Preferred dividend payable 28,906 --
Preferred dividend-beneficial conversion discount on
convertible preferred 1,810,000 --
------------ ------------
Net Loss Available to Common Stockholders $ (4,418,727) $ (1,772,257)
============ ============
Loss per common share (basic and assuming dilution) (Note K) $ (0.05) $ (0.25)
============ ============
Weighted average common shares outstanding (basic and diluted), as 85,812,006 7,079,654
restated for splits
See accompanying notes to consolidated financial statements
F-14
SPARTA COMMERCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED April 30, 2005 and 2004
Sparta
Commercial Subscription
Services LLC Common Payable-
Membership Common Shares Common Subscription Preferred
Interest Shares Amount Shares Payable Shares
------------ ------------ ------------ ------------ ------------ ------------
Balance at April 30, 2003 $ 5,265,000 -- $ 165,250 $ -- $ -- --
Proceeds from capital
contributions 775,000 -- 775,000 -- -- --
Membership interests issued
to consultants in exchange for
services in June 2003 at $1 per
unit 448,000 -- 448,000 -- -- --
Membership interests issued
in exchange for
licensing fees in December
2003 at $1 per unit 330,433 -- 330,433 -- -- --
Tomahawk Shares retained by
Tomahawk stockholders in
connection with merger with
Sparta Commercial Services
LLC in February 2004, as
restated -- 7,079,654 7,080 -- -- --
Shares deemed to be issued to
Sparta members in relation to
merger with Sparta
Commercial Services LLC in
February 2004 (6,818,433) -- (1,718,683) 17,920,346 17,920 --
Net Loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at April 30, 2004 $ -- 7,079,654 $ 7,080 17,920,346 $ 17,920 --
Shares issued to Sparta
members in relation to merger
with Sparta Commercial
Services LLC in February
2004 (Note B) -- 17,920,346 17,920 (17,920,346) (17,920) --
Balance of shares issued to
members -- 60,795,625 60,796 -- (60,796)
Preferred shares issued to
subscription holders -- -- -- -- -- 18,100
Warrants issued to placement
agent in January 2005 -- -- -- -- -- --
Warrants on convertible
preferred shares -- -- -- -- -- --
Beneficial conversion discount
on convertible preferred
shares -- -- -- -- -- --
Warrants Issued for services
Issuance Cost of Preferred
shares -- -- -- -- -- --
Shares Issued For Notes
Payable -- 96,155 96 -- -- --
Shares issued to employees
(vested portion) -- 113,635 113 -- -- --
Net Loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at April 30, 2005 $ -- 86,005,415 $ 86,005 -- $ -- 18,100
============ ============ ============ ============ ============ ============
Total
Preferred Additional Stockholders'
Shares Paid-in Accumulated Equity
Amount Capital Deficit (Deficiency)
------------ ------------ ------------ ------------
Balance at April 30, 2003 $ -- $ -- $ (86,674) $ 78,576
Proceeds from capital
contributions -- -- -- 775,000
Membership interests issued
to consultants in exchange for
services in June 2003 at $1 per
unit -- -- -- 448,000
Membership interests issued
in exchange for
licensing fees in December
2003 at $1 per unit -- -- -- 330,433
Tomahawk Shares retained by
Tomahawk stockholders in
connection with merger with
Sparta Commercial Services
LLC in February 2004, as
restated -- 54,107 -- 61,187
Shares deemed to be issued to
Sparta members in relation to
merger with Sparta
Commercial Services LLC in
February 2004 -- 1,700,763 -- --
Net Loss -- -- (1,772,257) (1,772,257)
------------ ------------ ------------ ------------
Balance at April 30, 2004 -- $ 1,754,870 $ (1,858,931) $ (79,061)
Shares issued to Sparta
members in relation to merger
with Sparta Commercial
Services LLC in February
2004 (Note B) -- -- --
Balance of shares issued to
members
Preferred shares issued to
subscription holders 1,810,000 -- -- 1,810,000
Warrants issued to placement
agent in January 2005 -- 383,284 -- 383,284
Warrants on convertible
preferred shares -- 487,660 -- 487,660
Beneficial conversion discount
on convertible preferred
shares -- 1,322,340 -- 1,322,340
Warrants Issued for services
Issuance Cost of Preferred
shares -- 89,980 -- 89,980
Shares Issued For Notes
Payable -- (129,000) -- (128,904)
Shares issued to employees
(vested portion) -- 82,291 -- 82,404
Net Loss -- -- (4,418,727) (4,418,727)
------------ ------------ ------------ ------------
Balance at April 30, 2005 1,810,000 $ 3,930,629 $ (6,277,658) $ (451,024)
============ ============ ============ ============
See accompanying notes to consolidated financial statements
F-15
SPARTA COMMERCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Year Ended April 30,
----------------------------
2005 2004
----------- -----------
Cash flows from Operating Activities:
Net loss $(4,418,727) $(1,772,257)
Adjustments to reconcile net loss to net cash used in operating activities:
Warrants issued with convertible preferred shares (Note I) 487,660 --
Beneficial conversion discount on convertible preferred stock (Note I) 1,322,340 --
Depreciation and amortization (Note F) 28,740 30
----------- -----------
Cost of warrants issued 473,264 --
Shares issued to employees (vested portion) 82,500 --
Shares issued in exchange for licensing fees -- 330,433
Shares issued to consultants for services (Note I) -- 448,000
Acquisition costs(Note B) -- 61,187
Gain on sale of investments -- (8,711)
(Increase)decrease in:
Retail installment sale contract receivable (36,285) --
----------- -----------
Other current assets (6,700) --
Prepaid expenses and deposits (48,967) --
Increase(decrease) in:
Accounts payable 428,215 79,221
Increase in deferred revenue 23,100 --
Due to related party (23,885) 80,999
----------- -----------
Net Cash used in Operating Activities (1,688,745) (781,098)
Cash Flows From Investing Activities:
Net payments for property and equipment (120,964) (1,223)
Payments for motorcycles (113,278) --
(Payments for) proceeds from sale (purchase) of marketable securities 13,379 (4,668)
----------- -----------
Net Cash used in Investing Activities (220,863) (5,891)
Cash Flows From Financing Activities:
Proceeds from note payable(Note G) 300,000 --
Proceeds from note payable -related party(Note G) 25,000 --
Proceeds form sale of equity interests, net 1,681,000 775,000
----------- -----------
Net Cash Provided by Financing Activities 2,006,000 775,000
See accompanying notes to consolidated financial statements
F-16
SPARTA COMMERCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Continued)
For the Years Ended April 30,
-----------------------------
2005 2004
---------- ----------
Net increase (decrease) in cash and equivalents 96,392 (11,989)
Cash and equivalents at beginning of period 11,973 23,962
---------- ----------
Cash and equivalents at end of period $ 108,365 $ 11,973
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ -- $ --
---------- ----------
Cash paid during the period for taxes $ -- $ --
---------- ----------
Non Cash Investing and Financing Transactions:
Shares issued in exchange for services (Note I) $ -- $ 448,000
Shares issued to employees (vested portion) 82,500 --
Cost of warrants issued 473,264 --
Warrants issued with convertible preferred shares 487,660
----------
Shares issued in exchange for licensing fees -- 330,433
Beneficial conversion discount on convertible preferred stock 1,322,340 --
Merger with Sparta: (Note B)
Common stock retained -- --
Liabilities assumed in excess of assets acquired -- --
Shares issued in exchange for services(Note B) -- 61,187
See accompanying notes to consolidated financial statements
F-17
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE A - SUMMARY OF ACCOUNTING POLICICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
Business and Basis of Presentation
----------------------------------
Sparta Commercial Services, Inc., formerly known as Tomahawk Industries, Inc.
(the "Company" or "Tomahawk") was formed on May 13, 1980 under the laws of the
State of Nevada. On February 27, 2004, the Company entered into an Agreement of
Plan and Reorganization ("Agreement") with Sparta Commercial Services, LLC
("Sparta"), a limited liability company formed on October 1, 2001 under the laws
of the State of Delaware under the name of Sparta Financial Services, LLC. .In
accordance with SFAS No. 141, Sparta 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. As a result of the Agreement, there was a change in control of the
Company. Also, subsequently, the Company's name was changed from Tomahawk
Industries, Inc. to Sparta Commercial Services, Inc. From April 1988 until the
date of the Agreement, the Company was an inactive publicly registered shell
corporation with no significant assets or operations (see Note B).
The Company is in the 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 500cc and higher) and utility-oriented 4-stroke all
terrain vehicles (ATVs). The Company was in the development stage till January
31, 2005, as defined by Statement of Financial Accounting Standards No. 7 ("SFAS
No. 7").
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Sparta Commercial Services, LLC. All significant
intercompany transactions and balances have been eliminated in the consolidated
financial statements.
Estimates
---------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Revenue Recognition
-------------------
The Company originates leases on new and used motorcycles and other powersports
vehicles from motorcycle dealers throughout the United States. All of the
Company's leases, which the Company enters into, are accounted for as operating
leases. At the inception of the lease, 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 Company's 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.
The Company realizes 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.
F-18
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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. The Company records a gain or loss for the difference between
the proceeds received and the net book value of the motorcycle.
The company also provides financing for motorcycles and other powersports
vehicles through the origination of retail installment sale contracts, where
revenue is recognized over the term of the loan contract. Provision is made for
delinquent accounts.
The Company charges fees to manufacturers and other customers related to
creating a private label version of the Company's financing program including
web access, processing credit applications, consumer contracts and other related
documents and processes. Fees received is amortized and booked as income over
the length of the contract. At April 30, 2005 and 2004, the Company had recorded
deferred revenue of $23,100 and $0, respectively.
Website Development Costs
-------------------------
The Company recognizes 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.
Cash Equivalents
----------------
For the purpose of the accompanying financial statements, all highly liquid
investments with a maturity of three months or less are considered to be cash
equivalents.
Marketable Securities
---------------------
The Company classifies its marketable securities as "available for sale"
securities which may be sold in response to changes in interest rates, liquidity
needs and for other purposes. Securities classified as "available for sale" are
carried in the financial statement at fair value. Realized gains and losses are
included in other income. Unrealized gains and losses are reported as a separate
component of stockholders' equity.
At April 30, 2005, the marketable securities balance was $0. At April 30, 2004,
marketable securities consist of:
Unrealized Fair
Cost Gain Market Value
Equity securities $ -- $ -- $ --
Mutual funds 13,379 -- 13,379
Total $13,379 $ -- $13,379
======= ====== =======
F-19
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Income Taxes
------------
Deferred income taxes are provided using the asset and liability method for
financial reporting purposes in accordance with the provisions of Statements of
Financial Standards No. 109, "Accounting for Income Taxes". Under this method,
deferred tax assets and liabilities are recognized for temporary differences
between the tax bases of assets and liabilities and their carrying values for
financial reporting purposes and for operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be removed or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the statements
of operations in the period that includes the enactment date. Temporary
differences between taxable income reported for financial reporting purposes and
income tax purposes are insignificant.
Impairment of Long-Lived Assets
-------------------------------
The Company has adopted Statement of Financial Accounting Standards No. 121
(SFAS 121). The Statement requires that long-lived assets and certain
identifiable intangibles held and used by the Company be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. SFAS No. 121 also requires assets to be
disposed of be reported at the lower of the carrying amount or the fair value
less costs to sell.
Intangible Assets
-----------------
Organization costs have been expensed as incurred.
Comprehensive Income
--------------------
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income," establishes standards for reporting and displaying of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. At April 30, 2005 and 2004, the Company has $0, as
accumulated unrealized gain (loss) on marketable securities classified as held
for sale.
Segment Information
-------------------
The Company does not have separate, reportable segments under Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The information disclosed
herein, materially represents all of the financial information related to the
Company's principal operating segment.
F-20
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Stock Based Compensation
------------------------
In December 2003, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation.
In addition, this statement amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in APB Opinion No. 25 and related interpretations.
Accordingly, compensation expense for stock Warrants is measured as the excess,
if any, of the fair market value of the Company's stock at the date of the grant
over the exercise price of the related option. The Company has adopted the
annual disclosure provisions of SFAS No. 148 in its financial reports from
January 1, 2003.
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows (transactions involving stock
options issued to employees and Black-Scholes model assumptions are presented in
Note G):
2005 2004
----------- -----------
Net loss - as reported $(4,418,727) $(1,772,257)
Add: Total stock based employee
compensation expense as reported under
intrinsic value method (APB. No. 25) 82,500 --
Deduct: Total stock based employee
compensation expense as reported under fair value based
method (SFAS No. 123) (247,100) --
----------- -----------
Net loss - Pro Forma $(4,583,327) $(1,772,257)
=========== ===========
Net loss attributable to common stockholders - Pro forma $(4,583,327) $(1,772,257)
=========== ===========
Basic (and assuming dilution) loss per share - as reported $ (0.05) $ (0.25)
=========== ===========
Basic (and assuming dilution) loss per share - Pro forma $ (0.05) $ (0.25)
=========== ===========
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 third quarter of 2006. Management is
assessing the implications of this revised standard, which may materially impact
the Company's results of operations in the third quarter of fiscal year 2006 and
thereafter.
Liquidity
---------
As shown in the accompanying financial statements, the Company incurred a net
loss of $(6,277,658) during the period October 1, 2001 (date of inception)
through April 30, 2005. The Company's current liabilities exceeded its current
assets by $ 728,207 as of April 30, 2005.
F-21
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
Concentrations of Credit Risk
-----------------------------
Financial instruments and related items, which potentially subject the Company
to concentrations of credit risk, consist primarily of cash, cash equivalents
and trade receivables. The Company places its cash and temporary cash
investments with high credit quality institutions. At times, such investments
may be in excess of the FDIC insurance limit. The Company periodically reviews
its trade receivables in determining its allowance for doubtful accounts. At
April 30, 2005 and 2004, allowance for doubtful accounts receivables was $0.
Research and Development
------------------------
Company-sponsored research and development costs related to both present and
future products will be expended in the period incurred.
Property and Equipments
-----------------------
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 5 years
Automobiles 5 years
Furniture and equipment 5 years
Computer Equipment 3 years
The Company follows a policy of charging the costs of advertising to expenses
incurred. During the years ended April 30, 2005 and 2004, the Company incurred
advertising costs of $28,107 and $4,057, respectively.
Net Earnings (Losses) Per Common Share
--------------------------------------
The Company computes earnings per share under Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"). Net earnings (losses) per
common share is computed by dividing net income (loss) by the weighted average
number of shares of common stock and dilutive common stock equivalents
outstanding during the year. Dilutive common stock equivalents consist of shares
issuable upon conversion of convertible preferred shares and the exercise of the
Company's stock options and warrants (calculated using the treasury stock
method).
Reclassifications
-----------------
Certain reclassifications have been made to conform to prior periods' data to
the current presentation. These reclassifications had no effect on reported
losses.
F-22
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements
-----------------------------
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS
151, Inventory Costs-- an amendment of ARB No. 43, Chapter 4. This Statement
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify
the accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4,
previously stated that ". . . under some circumstances, items such as idle
facility expense, excessive spoilage, double freight, and rehandling costs may
be so abnormal as to require treatment as current period charges. . . ." This
Statement requires that those items be recognized as current-period charges
regardless of whether they meet the criterion of "so abnormal." In addition,
this Statement requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. This Statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Management does not believe the
adoption of this Statement will have any immediate material impact on the
Company.
In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate
Time-Sharing Transactions--an amendment of FASB Statements No. 66 and 67" ("SFAS
152) The amendments made by Statement 152 This Statement amends FASB Statement
No. 66, Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real
Estate Time-Sharing Transactions. This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,
to state that the guidance for (a) incidental operations and (b) costs incurred
to sell real estate projects does not apply to real estate time-sharing
transactions. The accounting for those operations and costs is subject to the
guidance in SOP 04-2. This Statement is effective for financial statements for
fiscal years beginning after June 15, 2005 with earlier application encouraged.
The Company does not anticipate that the implementation of this standard will
have a material impact on its financial position, results of operations or cash
flows.
F-23
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE A - SUMMARY OF ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements (Continued)
-----------------------------------------
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock Warrants, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. On April 14, 2005, the
SEC amended the effective date of the provisions of this statement. Accordingly,
the Company will implement the revised standard in the forth quarter of fiscal
year 2006. Currently, the Company accounts for its share-based payment
transactions under the provisions of APB 25, which does not necessarily require
the recognition of compensation cost in the financial statements. Management is
assessing the implications of this revised standard, which may materially impact
the Company's results of operations in the third quarter of fiscal year 2006 and
thereafter.
On December 16, 2004, FASB issued Statement of Financial Accounting Standards
No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions (" SFAS 153"). This statement amends APB
Opinion 29 to eliminate the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. Under SFAS 153, if a
nonmonetary exchange of similar productive assets meets a commercial-substance
criterion and fair value is determinable, the transaction must be accounted for
at fair value resulting in recognition of any gain or loss. SFAS 153 is
effective for nonmonetary transactions in fiscal periods that begin after June
15, 2005. The Company does not anticipate that the implementation of this
standard will have a material impact on its financial position, results of
operations or cash flows.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than the end of its fiscal 2006. The Company does
not expect the adoption of this Interpretation to have a material impact on its
consolidated financial position, results of operations or cash flows.
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-24
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE B - MERGER AND CORPORATE RESTRUCTURE
On February 27, 2004, the Company entered into an Agreement of Plan and
Reorganization ("Agreement" or "Merger") with Sparta Commercial Services LLC
("Sparta"). As a result of the Merger, there was a change in control of the
public entity. In accordance with SFAS No. 141, Sparta was the acquiring entity.
While the transaction is accounted for using the purchase method of accounting,
in substance the Agreement is a recapitalization of Sparta's capital structure.
For accounting purposes, the Company accounted for the transaction as a reverse
acquisition and Sparta is the surviving entity. The total purchase price and
carrying value of net assets acquired was $61,187. The Company did not recognize
goodwill or any intangible assets in connection with the transaction. From April
1988 until the date of the Agreement, the Company was an inactive corporation
with no significant assets and liabilities.
Effective with the Agreement, all previously outstanding membership interests
owned by the Sparta's members were exchanged for an aggregate of 17,920,346
shares of the Company's common stock. The value of the stock that was issued was
the historical cost of the Company's net tangible assets, which did not differ
materially from their fair value.
The total consideration paid was $61,187 and the significant components of the
transaction are as follows:
Common stock retained $ 56,637
Assets acquired (594)
Liabilities assumed 5,144
Cash paid --
--------
Total consideration paid/organization cost $ 61,187
========
In accordance with SOP 98-5, the Company expensed $61,187 as organization costs.
NOTE C - PREPAID EXPENSE AND DEPOSITS
Prepaid expenses and deposits at April 30, 2005 and 2004 consist of the
following:
2005 2004
--------- ------
Security deposit to landlord $ 40,800 $ --
Advance lease system deposit 5,000 --
Consolidated electric deposit 3,167 --
Purchase option deposit 250,000 --
Less: valuation allowance (250,000) --
--------- ------
Total prepaid expenses and deposits $ 48,967 $ --
========= ======
F-25
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE D - MOTORCYCLES AND OTHER VEHICLES UNDER OPERATING LEASES
Motorcycles and other vehicles under operating leases at April 30, 2005 and 2004
consist of the following:
2005 2004
--------- ------
Motorcycles and other vehicles $ 113,278 $ --
Less: accumulated depreciation (13,392) --
--------- ------
Motorcycles and other vehicles, net of accumulated depreciation 99,886 --
--------- ------
Less: estimated reserve for residual values -- --
--------- ------
Motorcycles and other vehicles under operating leases, net
$ 99,886 $ --
========= ======
At April 30, 2005, motorcycles and other vehicles are depreciated to the
estimated residual values of $42,964 over the lives of their lease contracts.
The following is a schedule by years of minimum future rentals on non cancelable
operating leases as of April 30, 2005:
Year ending April 30,
2006 $25,818
2007 30,700
2008 18,858
2009 2,530
-------
Total $77,906
=======
NOTE E - RETAIL INSTALLMENT RECEIVABLES
Retail installment sale receivables, which are carried at cost, were $36,285 and
$0 at April 30, 2005 and 2004, 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.
Year ending April 30,
2006 $ 17,426
2007 17,300
2008 7,109
2009 991
--------
42,826
Less: interest portion (6,541)
========
36,285
Less: allowance for doubtful receivables --
--------
36,285
Less: current receivables (14,764)
--------
$ 21,521
========
F-26
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE F - PROPERTY AND EQUIPMENT
Major classes of property and equipment at April 30, 2005 and 2004 consist of
the followings:
2005 2004
-------- --------
Computer equipment , web site and furniture $122,187 $ 1,223
Less: accumulated depreciation and amortization 15,378 30
-------- --------
Net property and equipment $106,809 $ 1,193
======== --------
Depreciation and amortization expense was $15,348 and $30 for the years ended
April 30, 2005 and 2004, respectively.
NOTE G - NOTES PAYABLE
Notes payable at April 30, 2005 and 2004 are as follows:
2005 2004
--------- ------
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 H) 25,000 --
--------- ------
325,000 --
Less: current portion (325,000) --
--------- ------
Notes payable - long term $ -- $ --
========= ======
F-27
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE H - 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, 2005 and
2004, the Company charged to operations $150,633 and $730,433, respectively, in
connection with the licensing agreement. At April 30, 2005 and 2004, the balance
outstanding on account of licensing agreement payable to related party was $0.
During the years ended April 30, 2005 and 2004, the Company paid $81,000 and $0,
for a purchase option agreement whereby the Company has the option to purchase
from a related party, portions of a certain portfolio of equipment leases for
motorcycles.
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. In June, 2005, an
additional $20,000 was paid.
Up to November 30, 2004, the Company leased office space from an entity
controlled by the Company's President and Chief Executive Officer. From December
1, 2004, the Company has entered into a lease agreement for office premises with
an unrelated party. (Note M)
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. (Note G)
NOTE I - 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, 2005 and 2004, the Company has issued and outstanding 18,100 and 0 shares of
preferred stock issued and outstanding, respectively. The Company has 86,005,415
and 7,079,654 shares of common stock issued and outstanding as of April 30, 2005
and 2004, 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
------------
In June 2003, Sparta issued 448,000 shares of membership interest to various
consultants in exchange for services valued at $1 per share. The units of
membership interest issued was valued at approximately $1 per share, which
represents the fair value of the units issued, which did not differ materially
from the value of the services rendered.
During the year ended April 30, 2004, Sparta issued for cash 775,000 shares of
membership interest for $775,000.
F-28
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE I - EQUITY INSTRUMENTS (continued)
In December 2003, Sparta issued 330,433 shares of membership interest for
licensing fees payable to a company controlled by principal members of Sparta.
The units of membership interest issued was valued at approximately $1 per
share, which represents the fair value of the units issued, which did not differ
materially from the value of the services rendered.
In February 2004, as per agreement of Plan and Reorganization ("Agreement") with
Sparta, all previously outstanding membership interests owned by the Sparta's
members were exchanged for an aggregate of 17,920,346 shares of the Company's
common stock. In September 2004, the Company issued 17,920,346 shares of common
stock. The value of the stock that was issued was the historical cost of the
Company's net tangible assets, which did not differ materially from their fair
value. After the authorized capital of the company was increased, the Company
issued an additional 60,813,982 shares of its common stock that was due to
Sparta's former members under the merger agreement. Also, as per the Agreement,
7,079,654 shares of common stock were retained by the stockholders of the
Company.
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.
F-29
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE J - 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, 2005, the Company has available for federal income tax purposes a
net operating loss carry forward of approximately $4,500,000, expiring in the
year 2024, 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, 2005 are as follows:
Non current:
Net operating loss carry forward $ 1,530,000
Valuation allowance (1,530,000)
-----------
Net deferred tax asset $ --
===========
NOTE K - LOSSES PER COMMON SHARE
The following table presents the computation of basic and diluted loss per
share:
2005 2004
------------ -----------
Net loss available for common shareholders $ (4,418,727) $(1.772,257)
============ ===========
Basic and diluted loss per share $ (0.05) $ (0.25)
============ ===========
Weighted average common shares outstanding-basic
Diluted 85,812,006 7,079,654
F-30
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE L - 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.
a) The following table summarizes the stock options issued to officers and
employees outstanding and the related price. These are the first options issued
under the plan.
Stock Options Outstanding Stock Options Exercisable
------------------------- -------------------------
Weighted Average
Remaining Weighted Average Weighted Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
------ ----------- ------- ----- ----------- -----
$ 0.605 875,000 5.00 $0.605 175,000 $0.605
Transactions involving stock options issued to employees are summarized as
follows:
Weighted Average
Number of Shares Price Per Share
---------------- ---------------
Outstanding at April 30, 2003 -- $ --
------- ------
Granted -- --
Exercised -- --
Outstanding at April 30, 2004 -- --
------- ------
Granted 875,000 $0.605
Exercised -- --
Canceled or expired -- --
------- ------
Outstanding at April 30, 2005 875,000 $0.605
------- ------
The weighted fair value of the stock options granted during the years ended
April 30, 2005 and 2004 and the weighted average significant assumptions used to
determine fair values, using the Black Scholes option pricing model are as
follows:
Significant Assumptions (weighted average): 2005 2004
Risk free interest rate at grant date: 3% n/a
Expected stock price volatility 60% n/a
Expected dividend payout 0 n/a
Expected option life in years 5 n/a
If the Company recognized compensation cost for the non qualified stock option
plan in accordance with SFAS No. 123, the company would have incurred an
additional $247,100 in expense resulting in a pro forma net loss of
$(4,665,827), or $(0.05) per share.
F-31
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE L - STOCK OPTIONS AND WARRANTS (CONTINUED)
b) The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
non-employees of the Company.
Warrants Outstanding Warrants Exercisable
-------------------- --------------------
Weighted Average
Remaining Weighted Average Weighted Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
------ ----------- ------- ----- ----------- -----
$0.195 200,000 3.00 $0.195 100,000 $0.195
$0.172 785,257 5.00 $0.172 785,257 $0.172
$0.195 3,926,286 3.00 $0.195 3,926,286 $0.195
$0.195 1,875,001 3.00 $0.195 1,875,001 $0.195
------ --------- ---- ------ --------- ------
$0.195 6,786,544 3.11 $0.194 6,686,544 $0.194
====== ========= ==== ====== ========= ======
Non- Employee Stock Warrants (Continued)
----------------------------------------
Transactions involving stock warrants issued to non-employees are summarized as
follows:
Weighted
Average
Price
Number Per
of Shares Share
--------- ------
Outstanding at April 30, 2003 -- $ --
--------- ------
Granted -- --
Exercised -- --
Outstanding at April 30, 2004 -- --
--------- ------
Granted 6,786,544 $0.194
Exercised -- --
Canceled or expired -- --
--------- ------
Outstanding at April 30, 2005 6,786,544 $0.194
--------- ------
The weighted-average fair value of stock warrants granted to non-employees
during the years ended April 30, 2005 and 2004 and the weighted-average
significant assumptions used to determine those fair values, using a
Black-Scholes option pricing model are as follows:
2005 2004
-------- --------
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 3% n/a
Expected stock price volatility 60% n/a
Expected dividend payout -- --
Expected option life-years (a) 3.11 yrs n/a
(a) The expected option life is based on contractual expiration dates.
The amount of the expense charged to operations for compensatory warrants
granted in exchange for services was $473,264 and $0 for the years ended April
30, 2005 and 2004, respectively.
F-32
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE M - 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, 2005 and
2004, was $125,214 and $19,772, respectively.
Commitments for minimum rentals under non-cancelable leases at April 30, 2005
are as follows:
Year ended April 30, Amount
2006 $ 116,224
2007 177,061
2008 104,973
---------
$ 449,258
Employment and Consulting Agreements
------------------------------------
The Company has employment agreements with all of its employees. In addition to
salary and benefit provisions, the agreements include non-disclosure and
confidentiality provisions for the protection of the Company's proprietary
information.
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.
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 reminder 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 year ended April 30, 2005, the Company has recorded $20,000 as
expenses 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-33
SPARTA COMMERCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 2005 and 2004
NOTE N - SUBSEQUENT EVENTS
In the period since April 30, 2005, the Company has received an additional
$1,775,000 related to the private placement transaction. In connection with
these proceeds, the Company has issued 17,775 preferred shares at a stated value
of $100 per share and warrants to purchase 6,312,505 shares of common stock,
exercisable for three years at $0.195 per share, and as compensation to the
placement agent warrants to 1,137,822 shares of common stock, exercisable for
five years at $0.172 per share. A subscription received prior to April 30,2005
for 0.05 units was subsequently rescinded.
In the period since April 30, 2005, the Company also received an additional
$5,000 from a private investor with terms consistent with the private placement.
NOTE O - GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the accompanying
financial statements during the period October 1, 2001 (date of inception)
through April 30, 2005, the Company incurred a loss of $6,277,658. These factors
among others may indicate that the Company will be unable to continue as a going
concern for a reasonable period of time.
The Company's existence is dependent upon management's ability to develop
profitable operations. Management is devoting substantially all of its efforts
to developing its business and raising capital and there can be no assurance
that the Company's efforts will be successful. However, the planned principal
operations have not commenced and no assurance can be given that management's
actions will result in profitable operations or the resolution of its liquidity
problems. The accompanying statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
In order to improve the Company's liquidity, the Company's management is
actively pursing additional equity financing through discussions with investment
bankers and private investors. There can be no assurance the Company will be
successful in its effort to secure additional equity financing.
F-34
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Nevada Revised Statutes and our Amended Articles of
Incorporation, our directors and officers will have no individual liability to
us or our stockholders or creditors for any damages resulting from the officer's
or director's act or failure to act in his or her capacity as an officer or
director unless it is proven that (i) the officer's or director's act or failure
to act constituted a breach of his or her fiduciary duties as an officer or
director; and (ii) the officer's or director's breach of those duties involved
intentional misconduct, fraud or a knowing violation of law. The effect of this
statute and our Amended Articles of Incorporation is to eliminate the individual
liability of our officers and directors to the corporation or its stockholders
or creditors, unless any act or failure to act of an officer or director meets
both situations listed in (i) and (ii) above.
Our Amended Articles of Incorporation provide for the indemnification of
our officers and directors to the maximum extent permitted by Nevada law. The
Nevada Revised Statutes also provide that a corporation may indemnify any
officer or director 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 or director
of the corporation, or is or was serving at the request of the corporation as an
officer or director 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 officer
or director if (i) there was no breach by the officer or director of his or her
fiduciary duties to the corporation involving intentional misconduct, fraud or
knowing violation of law; or (ii) the officer or director 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.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, if any, payable by the Registrant
relating to the sale of common stock being registered. All amounts are estimates
except the SEC registration fee.
SEC registration fee $ 2,505.76
Printing and engraving expenses 5,000.00
Legal fees and expenses 30,000.00
Accounting fees and expenses 20,000.00
Transfer agent and registrar's fees and expenses 10,000.00
Miscellaneous expenses 10,000.00
-----------
Total.......................................................... $ 77,505.76
===========
The Registrant has agreed to bear expenses incurred by the selling
stockholders that relate to the registration of the shares of common stock being
offered and sold by the selling stockholders.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On March 29, 2006, we concluded a private placement, commenced in December
2005, to raise up to $3,500,000 throough the sale of our common stock in which
sold at a price of $0.195 per share. In transactions with accredited investors
exempt from registration pursuant to Section 4(2) of the Securities Act we sold
an aggregate of 17,555,369 shares for proceeds of $3,423,297. The private
placement was conducted by a placement agent on a best efforts basis. The units
were being offered solely to accredited investors. The placement agent is
entitled to 10% of the cash proceeds from the private placement and
reimbursement for expenses, and warrants to purchase such number of shares of
common stock, exercisable for five years at $0.2145 per share from the date of
issuance, as equals 10% of the number of shares of common stock underlying the
preferred stock sold.
II-1
In December 2005, three individuals loaned the Company $175,000 at 10% for
90 days. These individuals were issued a total of 70,000 shares of common stock
in connection with the loans. The loans were repaid in January 2006.
On July 20, 2005, we concluded a private placement, commenced in December
2004, to raise up to $3,000,000 through the sale of up to 30 units of our
securities at $100,000 per unit. In transactions with accredited investors
exempt from registration pursuant to Section 4(2) of the Securities Act we sold
an aggregate of 29.95 units for proceeds of $2,995,000. Each unit consisted 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. The private placement was conducted by a
placement agent on a best efforts basis. The units were being offered solely to
accredited investors. The placement agent is entitled to 10% of the cash
proceeds from the private placement and reimbursement for expenses, and warrants
to purchase such number of shares of common stock, exercisable for five years at
$0.172 per share from the date of issuance, as equals 10% of the number of
shares of common stock underlying the preferred stock sold.
In July 2005, we sold an accredited investor in a transaction exempt from
registration pursuant to Section 4(2) of the Securities Act, for the sum of
$5,000, 50 shares of series A convertible, redeemable preferred stock and
warrants to purchase 6,026 shares of common stock, exercisable for three years
at $0.195 per share.
Between May and July 2004, we sold certain rights to seven accredited
investors for aggregate gross proceeds of $585,000 in transactions deemed exempt
from registration pursuant to Section 4(2) of the Securities Act. Pursuant to
the terms of the rights, in the event that we conduct a private placement
transaction in 2004 utilizing a designated registered broker-dealer as a
placement agent, the rights automatically convert into the securities sold in
such private placement at the private placement sale price. On January 1, 2005,
these rights were automatically converted into 5.85 units. 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.
In October and November 2004, pursuant to loan agreements, we issued
promissory notes for the aggregate principal amount of $375,000. Pursuant to the
loan agreements, the notes carried interest at the rate of 10% per year, and we
agreed to grant 128,206 restricted shares of common stock to the note holders
for each $100,000 loaned. The notes were to mature in April 2005. In the event
of default on repayment of the promissory notes, as penalty, (i) the interest
rate on the unpaid principal shall be increased to a rate of 20% per annum
commencing from the date of default, (ii) the equity kicker shall be increases
to a rate of 192,308 restricted shares of common stock for each $100,000 loaned,
and (iii) the repayment after default of the promissory notes shall be
collateralized by a subordinated security interest in our assets. The security
interest shall be subordinate to the rights of any lending institution, any
asset-based lending agreement, and any rights and preferences of any subscribers
in the private placement of units that commenced in December 2004. Through April
29, 2005, we repaid notes with an aggregate principal amount of $150,000 and
accrued interest thereon, and issued 192,309 shares of common stock to the note
holders. In April 2005, the four note holders of the remaining principal amount
of $225,000 agreed to extend the maturity date of the loans from April 30, 2005
to May 31, 2005. In consideration of the extension, the interest rate on three
notes were increased to the rate of 20% per year and the shares of common stock
issuable to certain of those note holders will be based on 192,308 restricted
shares of common stock for each $100,000 loaned. On or about May 25, 2005 and
May 27, 2005, the four note holders further agreed to extend the maturity date
of the loans, so that one note in the principal amount of $50,000 was due June
15, 2005, and the three other notes in the aggregate principal amount of
$175,000 were due June 30, 2005. In June 2005, we repaid two notes with the
principal amount of $75,000 and issued 96,155 shares of common stock to the note
holders with 48076 shares yet to be issued. In June 2005, a holder of a $50,000
note due June 30, 2005 agreed to extend the maturity date to August 15, 2005,
and another holder of a $100,000 note due June 30, 2005 agreed to extend the
maturity date to September 1, 2005. In November, 2005 the holders of the
$150,000 remaining notes agreed to convert their notes plus $12,780.83 in
accrued interest thereon into 651,124 shares of common stock at the conversion
rate of $.25 per share.
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In April 2005, in a transaction deemed exempt from registration pursuant
to Section 4(2) of the Securities Act, 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.
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, which is yet to be
issued
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 in a transaction deemed exempt from
registration pursuant to Section 4(2) of the Securities Act. 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 dates of the agreement.
In July, 2005, we sold one accredited investor in a transaction deemed
exempt from registration pursuant to Section 4(2) of the Securities Act, for the
sum of $5,000, 50 shares of Series A convertible, redeemable preferred stock and
warrants to purchase 6,026 shares of common stock, exercisable for three years
at $.0195 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 a rate of one preferred share into
641 shares of common stock. We used the proceeds for working capital purchases.
* All of the above offerings and sales were deemed to be exempt under
Section 4(2) of the Securities Act of 1933, as amended. No advertising or
general solicitation was employed in offering the securities. The offerings and
sales were made to a limited number of persons, all of whom were accredited
investors, business associates of our company or executive officers of our
company, and transfer was restricted by our company in accordance with the
requirements of the Securities Act of 1933. In addition to representations by
the above-referenced persons, we have made independent determinations that all
of the above-referenced persons were accredited or sophisticated investors, and
that they were capable of analyzing the merits and risks of their investment,
and that they understood the speculative nature of their investment.
Furthermore, all of the above-referenced persons were provided with access to
our Securities and Exchange Commission filings.
Except as expressly set forth above, the individuals and entities to whom
we issued securities as indicated in this section of the registration statement
are unaffiliated with us.
ITEM 27. EXHIBITS.
Exhibit 2.1 Agreement and Plan of Reorganization, dated as of February 27,
2004 (Incorporated by reference to Exhibit 2 of Form 10-KSB
filed on August 13, 2004)
Exhibit 3(i)(1) Articles of Incorporation of Tomahawk Oil and Minerals, Inc.
(Incorporated by reference to Exhibit 3(i)(1) of Form 10-KSB
filed on August 13, 2004)
Exhibit 3(i)(2) Certificate of Amendment of Articles of Incorporation,
November 1983 (Incorporated by reference to Exhibit 3(i)(2) of
Form 10-KSB filed on August 13, 2004)
Exhibit 3(i)(3) Certificate of Amendment of Articles of Incorporation for name
change, August 2004 (Incorporated by reference to Exhibit 3(i)
of Form 8-K filed on August 27, 2004)
Exhibit 3(i)(4) Certificate of Amendment of Articles of Incorporation for
increase in authorized capital, September 2004 (Incorporated
by reference to Exhibit 3(i) of Form 8-K filed on September
17, 2004)
Exhibit 3(i)(5) Certificate of Amendment of Articles of Incorporation for
decrease in authorized capital, December 2004 (Incorporated by
reference to Exhibit 3(i) of Form 8-K filed on December 23,
2004)
Exhibit 3(i)(6) Certificate of Designation for Series A Redeemable Preferred
Stock, December 2004 (Incorporated by reference to Exhibit
3(i) of Form 8-K filed on January 4, 2005)
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Exhibit 3(ii)(1) By-laws (Incorporated by reference to Exhibit 3(ii)(1) of Form
10-KSB filed on August 13, 2004)
Exhibit 3(ii)(2) By-laws Resolution (Incorporated by reference to Exhibit
3(ii)(2) of Form 10-KSB filed on August 13, 2004)
Exhibit 3(ii)(3) Board of Directors Resolutions amending By-laws (Incorporated
by reference to Exhibit 3(ii) of Form 10-QSB filed on December
15, 2004)
Exhibit 4.1 2005 Stock Incentive Compensation Plan (Incorporated by
reference to Exhibit 4 of Form 10-KSB filed on August 13,
2004)
Exhibit 5.1* Opinion of Sichenzia Ross Friedman Ference LLP
Exhibit 10.1 Service Agreement with American Motorcycle Leasing
Corp.(Incorporated by reference to Exhibit 10.1 of Form 10KSB
filed on August 13, 2004)
Exhibit 10.2 License Agreement with American Motorcycle Leasing Corp.
(Incorporated by reference to Exhibit 10.1 of Form 10KSB filed
on August 13, 2004)
Exhibit 10.3 Amended License Agreement with American Motorcycle Leasing
Corp. (Incorporated by reference to Exhibit 10.1 of Form 10KSB
filed on August 13, 2004)
Exhibit 10.4 Form of Employment Agreement with Anthony Havens (Incorporated
by reference to Exhibit 10.4 of Form 10-KSB filed on August
13, 2004)
Exhibit 10.5 Employment Agreement with Danny Lanjewar (Incorporated by
reference to Exhibit 10.5 of Form 10-KSB filed on August 13,
2004)
Exhibit 10.6 Consulting Agreement with Glenn Little (Incorporated by
reference to Exhibit 10.6 of Form 10-KSB filed on August 13,
2004)
Exhibit 10.7 Employment Agreement with Richard Trotter (Incorporated by
reference to Exhibit 10 of Form 8-K filed on October 29, 2004)
Exhibit 10.8 Purchase Option Agreement with American Motorcycle Leasing
Corp., dated November 2, 2004 (Incorporated by reference to
Exhibit 10.8 of Form 10-KSB filed on July 25, 2005)
Exhibit 10.9 Lease for office facilities (Incorporated by reference to
Exhibit 10 of Form 10-QSB filed on December 15, 2004)
Exhibit 10.10 Option Agreement with Richard Trotter (Incorporated by
reference to Exhibit 10.1 of Form 8-K filed on May 5, 2005)
Exhibit 10.11 Master Loan and Security Agreement - Motor Vehicles
(Incorporated by reference to Exhibit 10.1 of Form 8-K filed
on July 28, 2005)
Exhibit 10.12 Master Loan and Security Agreement (Installment Sale Contract)
(Incorporated by reference to Exhibit 10.2 of Form 8-K filed
on July 28, 2005)
Exhibit 10.13 Form of Warrant included in Units (Incorporated by reference
to Exhibit 10.1 of Form 10-QSB filed on March 22, 2006)
Exhibit 10.14 Form of Loan Agreement, December 2005 (Incorporated by
reference to Exhibit 10.1 of Form 10-QSB filed on March 22,
2006)
Exhibit 10.15 Form of Subscription Agreement (Incorporated by reference to
Exhibit 10.1 of Form 8-K filed on January 4, 2006)
Exhibit 21.1* List of Subsidiaries
Exhibit 23.1* Consent of Russell Bedford Stefanou Mirchandani LLP
Exhibit 23.2* Consent of Sichenzia Ross Friedman Ference LLP (see
exhibit 5.1).
---
* Filed herewith.
ITEM 28. UNDERTAKINGS.
The undersigned Company hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, as amended (the "Securities Act");
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(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of the securities offered would
not exceed that which was registered) and any deviation from the low or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act if, in the aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement, and
(iii) Include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorizes this registration
statement to be signed on its behalf by the undersigned, in the City of New
York, State of New York, on May 25, 2006.
Sparta Commercial Services, Inc.
By: /s/ Anthony L. Havens
----------------------
Anthony L. Havens
Chief Executive Officer, President
and Principal Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Anthony L. Havens his or her true and lawful
attorneys-in-fact, with full power of substitution and resubstitution, for him
or her and in his or her name, place and stead, in any and all capacities to
sign any and all amendments (including post-effective amendments) to this
registration statement and to sign a registration statement pursuant to Section
462(b) of the Securities Act of 1933, and to file the same with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
---------------------- ------------------------------------- --------------
May 25, 2006
/s/ Anthony L. Havens Chief Executive Officer, President,
---------------------- Director and Principal Financial
Anthony L. Havens Officer (Principal Executive Officer)
* Chief Operating Officer May 25, 2006
----------------------
Richard P. Trotter
* Vice President, Secretary and May 25, 2006
---------------------- Director
Sandra L. Ahman
* Director May 25, 2006
----------------------
Kristian Srb
* Director
----------------------
Jeffrey Bean
* By Anthony L. Havens ahnthorized under Power of Attorney filed with Form
SB-2 (File No. 133644), filed with the Securities and Exchange Commission
on April 28, 2006.
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