Initial Public Offering (IPO): Registration of Securities by a Small-Business Issuer — Form SB-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SB-1 Registration of Securities by a Small-Business 42 187K
Issuer
9: EX-1 Articles of Incorporation 2± 12K
10: EX-2 Bylaws of Covenant Econet, Inc. 11 40K
2: EX-3 Promissory Note of Marcus Dukes 2 13K
3: EX-4 Promissory Note of Teresa Hodge 2 13K
4: EX-5 Private Placement Promissory Note 3 12K
11: EX-6 Employment Agreement of Curtis Price 7 27K
5: EX-7 Subscription Escrow Agreement 1 5K
6: EX-8 Subsidiaries of the Registrant 1 5K
7: EX-9 Consent of Stokes and Company (Accountants) 1 7K
13: EX-10 Cease and Desist Order Alabama 13 49K
12: EX-11 Cease and Desist Order Maryland 6 19K
8: EX-12 Rescission Letter 2 10K
SB-1 — Registration of Securities by a Small-Business Issuer
Document Table of Contents
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form SB-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Amendment No. )
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Approximate date of commencement of proposed sale to the public August 1,
2001
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. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 426(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. [ ]
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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. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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[Enlarge/Download Table]
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CALCULATION OF REGISTRATION FEE
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Title of each class Dollar Proposed maximum Proposed maximum
of securities to be Amount to be Offering price per aggregate offering Amount of
Registered Registered unit price registration fee
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Common $5,000,000 $1.00 $5,000,000 $1,000
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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 Commission, acting pursuant to said Section 8(a),
may determine.
Disclosure alternative used (check one): Alternative 1 ; Alternative 2 x
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Subject to Completion, Dated June 17, 2001
PROSPECTUS
The information in this prospectus is not completed and may be changed. We may
not sell the securities until the registration statement filed with the
Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
500,000 to 5,000,000 Shares of Common Stock
Covenant EcoNet, Inc.
58 Hawthorne Court, NE, STE 1316
Washington, D.C. 20017
(202) 331-9797
We are offering a minimum of 500,000 and a maximum of 5,000,000 shares of
our Common Stock for sale at $1.00 per share on a best-efforts basis without
the assistance of an underwriter. There are no minimum purchase requirements
as a condition of the offering. Accordingly, we will close the offering from
the earlier of the date we sell five million common shares or September 30,
2001, unless we extend the offering for up to an additional three months.
Until we sell 500,000 shares, we will deposit the proceeds from the sale of
the shares in an escrow account at Adams National Bank in Washington, D.C. In
the event we do not sell the minimum 500,000 shares, we will promptly return
all funds to subscribers without interest or deduction.
There is no public market for our common stock and we can give no
assurance that a market will develop. The Company intends to file for listing
on the OTC Bulletin Board.
The shares offered hereby involve a high degree of risk.
See "Risk Factors" at page 1.
THESE SECURITIES ARE OFFERED FOR SALE IN THE STATE OF MARYLAND PURSUANT TO
REGISTRATION WITH THE DIVISION OF SECURITIES OF THE DEPARTMENT OF LAW OF
MARYLAND, BUT REGISTRATION IS PERMISSIVE ONLY AND DOES NOT CONSTITUTE A
FINDING THAT THIS PROSPECTUS IS TRUE, COMPLETE, AND NOT MISLEADING, NOR HAS
THE DIVISION OF SECURITIES PASSED IN ANY WAY UPON THE MERITS OF, RECOMMENDED,
OR GIVEN APPROVAL TO THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Price to public and
net proceeds (1)
Per share. $1.00
Minimum. . . . . . . . . . . $500,000
Maximum. . . . . . . . . . . $5,000,0000
(1) Before deducting expenses payable by the Company estimated at $200,000.
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 , 2001.
Table of Contents
"Risk Factors" at page 13
Dilution.........................................................9
Plan of Distribution.............................................10
Use of Proceeds.........................................................12
Description of Business............13
Description of Property............16
Directors, Executive Offices
and Significant Employees 16
Renumeration of Directors
and Officers....................................18
Security Ownership of Management and Certain
Securityholders....................................19
Interest of Management and others In Certain
Transactions.............................................20
Securities Being Offered.........................20
Relationship with Covenant Econect
of Experts Named
in The Registration
Statement...................................22
Legal Proceedings................................................22
Changes in and Disagreements
with Accountants..................23
Disclosure of Commission Position on
Indemnification for Securities
Act Liabilities.................23
RISK FACTORS
The shares of Common Stock we are offering through this prospectus involve
a high degree of risk and represent a highly speculative investment. You should
not purchase these shares if you cannot afford the loss of your entire
investment. In addition to the other information contained in this prospectus,
you should carefully consider the following risk factors in evaluating our
Company, our business prospects and an investment in our shares of Common
Stock.
Lack of Operating History
The Company has no operating history by which investors can evaluate its
business and prospects. We were incorporated in the state of Nevada on April
12, 2001, and our predecessor, Covenant EcoNet LLC, a District of Columbia
limited liability company, was organized on February 23, 2000. Covenant EcoNet
LLC was engaged in business consulting, marketing and business development for
other businesses based in Asia seeking to establish business relationships in
the United States. We have shifted the focus of our operations. Our future
operating results will be subject to all of the risks and uncertainties
inherent in the development and maturation of a business. Our business model is
new, unproven and changing.
Our new business model consists of offering different levels of membership
in our wholly-owned operating subsidiary, Financial Warfare Club. Membership
costs are $99 for Associate Members, $299 for Executive Club Members, $459 for
Organizational Members and $649 for Chairman Circle Members. In addition to
each of the preceding memberships, each member is required to pay an annual
membership fee in the amount of $50. Members participate in courses that give
biblically-based instruction on how members can build personal wealth via the
securities market. Our principals have only recently applied our business
model on a test basis through a not-for-profit Maryland corporation, also known
as Financial Warfare Club. (For clarity, the not-for-profit Financial Warfare
Club will be referred to as the "Maryland Predecessor.") Therefore, it is
unproven and will need to be further developed. Accordingly, our business
model may not be successful, and we may need to change it. Our ability to
generate sufficient revenues to achieve profitability will depend, in large
part, on our ability to successfully market our brand initially to church
members in the African-American community. Anyone is permitted to become a
member without regard to ethnicity; however, our business model is designed
for the underserved community in general.
We launched the Maryland Predecessor in September 2000. Therefore, you
should also consider our prospects in light of the risks and difficulties
frequently encountered by early stage companies. These risks include, but are
not limited to, an unpredictable business environment, the difficulty of
managing growth and the successful application of our business model. Our
strategy is dependent on our ability to create and sell programs, products and
services to members of predominantly underserved communities our initial
concentration is within the African-American churches and additional markets.
Although we are currently developing new programs and products we may need to
rely upon the willingness of presenters, authors and producers of products and
programs to sell or license their products and programs to us. There can be no
assurance that Covenant EcoNet will be able to develop or acquire rights to
additional products and programs on acceptable terms. Furthermore, market
conditions and the level of customer interest may not be sufficient to sustain
our planned operations, and there can be no assurance that the Company will be
able to compete favorably with, and obtain market acceptance for, any products
and programs. Failing to successfully develop, acquire, introduce and market
new products and programs could have a materially adverse effect on our
business and future prospects.
No Assurance of Profitability and No Dividends
Our limited operating history, lack of any revenue to date and the
uncertainty of the market to whom we are directing our services and products
make any prediction of our future results of operations difficult or
impossible. Over the next couple of years, we expect to considerably increase
our operating expenses to develop our franchise and we do not expect our
revenues will cover these expenses. We have had no earnings, we have paid no
dividends to date and there are no plans for the payment of dividends in the
foreseeable future. We may incur significant losses and we may need to raise
additional capital to survive. We cannot guarantee we will be able to raise
additional capital and we do not know what the terms of any such capital
raising would be.
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Any future sale of our equity securities could dilute the ownership and
control of our stockholders and could be at prices substantially below the
offering price in this transaction. Covenant EcoNet was formed very recently
and its predecessor company only operated for a few months beginning in 2000.
We have not generated any revenue since our April 12, 2001, incorporation. In
order to achieve profitability, we must further develop our brand and
educational curriculum and attract people to our courses. We cannot assure we
can achieve this goal nor can we assure we will become profitable.
The Company is in the early stages of developing its core curriculum. The
core curriculum is designed to teach and explain how the monetary system in the
United States works. A substantial and deliberate emphasis is placed on how the
capital markets, in general, and Wall Street, specifically, works. The core
curriculum encourages the members to save and invest money. The core
curriculum covers the basic language of investing in common stocks and bonds.
The centerpiece of our programs includes education rather than day trading,
speculation or other risky investment activities. The format employed by the
Company is the seminar approach, which allows for the dissemination of
information and the opportunity to listen to the needs of members in order to
develop other financial education based seminars.
Limited Financial Resources and Need for Additional Financing
Other than the proceeds of this offering and possible future revenues from
sale of the Company's services, we do not at this time, and may not in the
future, have any additional sources of funds such as operating funds or
significant credit arrangements from which we can pay the costs of our
proposed operations. Although we believe the maximum funds raised in this
offering will be sufficient for our needs over the next twelve months we will
require additional funds. The Company expects capital and operating
expenditures to increase over the next several years as we increase our
marketing and other operations. We may seek additional funds through public
or private equity or debt offerings. There can be no assurance that capital
from private and public offerings will be available or, if available, can be
obtained on terms advantageous to us. If the Company is unable to raise
sufficient capital either externally or from operations, we will not be able to
sustain our operations.
Minimum Subscription
The instant offering requires us to sell at least 500,000 shares before we
can access any of the proceeds from the offering and failure to do so results in
all funds being returned to investors. If we only sell the minimum 500,000
shares and raise $500,000, all of the proceeds may be used to pay refunds to
members of the Maryland Predecessor pursuant to a rescission offering discussed
below. If all the proceeds are used to fund the offer of rescission, we will
not have any cash from the offering to use as working capital and our ability
to develop our business will depend solely on our ability to generate cash
from operations, which we have not yet done, or offer more debt or equity
securities in the future to raise additional capital.
Investigation by State of Maryland Securities Division
Covenant EcoNet is a holding company that owns and operates through its
wholly-owned subsidiary, Financial Warfare Club, a Nevada corporation. The
Company's business will consist primarily of running the business of
Financial Warfare Club. The predecessor of Financial Warfare Club had the
same name and was incorporated in Maryland. The Maryland corporation and
its officers and directors, Marcus Dukes, and Teresa Hodge are the subject of
an investigation by the Maryland Securities Commission. The Maryland
Securities Commission could, if it concluded that violations of Maryland
securities laws occurred or is continuing, in the exercise of its statutory
authority, impose fines of $5,000 per violation against our principals, Marcus
Dukes and Teresa Hodge. The Maryland Securities Commission has already
issued a cease and desist order in which it directed the Maryland Predecessor
and its officers to cease engaging in certain activities, but such cease and
desist order was issued without a hearing. In the spirit of cooperation and
dealing fairly with its members, contemporaneously with this offering, the
Company and its executive officers are offering members who joined
Financial Warfare Club between September 2000 and March 2001 ("the
Maryland predecessor") the opportunity to receive a full refund of their
membership fees they have paid or the opportunity to receive shares in
Covenant EcoNet pursuant to this Prospectus.
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Rescission Offering
In conjunction with resolving the investigation by the Maryland Securities
Commission, Covenant Econet will use a portion of the proceeds from this
offering to complete a rescission offering to return money to people in
Maryland who previously contributed funds to the Maryland Predecessor.
The rescission costs may range from $100,000 to $495,000. People from other
states who became members of the Maryland Predecessor may also have
rescission rights. If everyone exercises their rescission rights, all proceeds
from this offering could be used to satisfy the rescission offering.
Director's Bankruptcies
Ms. Teresa Hodge, one of the Company's directors and officers, has filed
for bankruptcy three times in the last five years. One of these bankruptcies
resulted from the overwhelming medical costs associated with treatment for
her late husband's illnesses. The other bankruptcies resulted from
investments in real estate ventures. All of her bankruptcies have been
dismissed or discharged. Covenant EcoNet believes Ms. Hodge is now
financially stable, but we can make no representations to investors regarding
her future finances, credit worthiness or solvency.
Dependence on our Principals
The Company's future prospects and financial condition depend in large
part on the continued services of Covenant EcoNet's founders, Marcus D.
Dukes, Chairman and Chief Executive Officer, Teresa Hodge, the vice president,
secretary, and treasurer and Curtis Pree the President of Covenant EcoNet and
its operating subsidiary, Financial Warfare Club. Substantially all of the
programs, products and services we provide are based on Mr. Dukes' and Ms.
Hodge's ideas. They have not entered into and do not intend to enter into a
noncompetition agreement with the Company. The loss of the services of Mr.
Dukes and Ms. Hodge could have a material and adverse effect on our business,
financial condition and results of operation. Neither Covenant EcoNet nor
Financial Warfare Club carries key man life insurance for Mr. Dukes or Ms.
Hodge.
We plan to hire other employees to handle many aspects of our business
including teaching courses to Financial Warfare Club members and running
Financial Warfare Club's operations. The process of locating personnel with
the skills required to carry out our strategies may be lengthy and costly. Our
success depends to a significant degree upon our ability to attract and retain
qualified management, technical, marketing and sales personnel as well as the
continued contributions of such people. We cannot assure that we will be
successful in attracting and retaining qualified executives and personnel. The
loss of the services of key persons, or the inability to attract additional
qualified personnel could have a material adverse effect on our business,
operating results and financial condition.
Control by Management
As of April 30, 2001, Covenant EcoNet's senior management collectively
owns approximately 100% of the outstanding shares of Common Stock.
Consequently, our senior management, and Mr. Dukes and Ms. Hodge in
particular, will continue to have a significant influence over the Company's
policies and affairs and will be in a position to determine the outcome of
corporate actions requiring stockholder approval, including the election of
directors, the adoption of amendments to the Company's corporate documents
and the approval of mergers and sales of the Company's assets. See "Security
Ownership of Certain Beneficial Owners and Management."
Competition
Covenant EcoNet plans to sell financial education courses, seminars, and
associated books, videotapes, and audiotapes, and we face substantial
competition. The highly competitive market in which we compete is
fragmented and decentralized, with low barriers to entry. Our competitors
include other financial education companies, stock market seminar groups,
online and televised financial courses, and adult education programs as well as
firms in the financial services industry that offer courses in personal wealth
building as a way of marketing their core financial services. We expect
competition to increase in the foreseeable future and such competition may or
may not impact our profitability. Competitors may develop financial
education tools and courses that are similar or superior to ours and may have a
better ability to market their products. There can be no assurance that the
products our competitors develop will not render the
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services and products we develop obsolete or uneconomical, or that customers
will prefer products we develop. Presently, Covenant EcoNet cannot assure
there is a market for our services sufficient for us to stay in business.
We believe that the principal competitive factors for companies seeking to
create and market products and services such as ours include achieving critical
mass, brand recognition and member affinity and loyalty. Competition could
reduce our revenue and earnings or otherwise adversely affect our operations.
No Public Market for Shares
Our Common Stock is not eligible for trading on any stock exchange and
there can be no guarantee that our common stock will achieve listing on any
such exchange. We intend to apply for listing on the OTC Bulletin Board
but we cannot guarantee we will obtain such a listing.
Once our Common Stock is listed, in a volatile market, you may
experience wide fluctuations in the market price of our securities. These
fluctuations may prevent you from obtaining a market price equal to your
purchase price when you attempt to sell your shares in the open market. In
these situations, you may be required to either sell your shares at a loss or
hold your shares for a longer period of time than you planned in the hopes of
one day selling at a profit.
"Pennystock" Risk
A "penny stock" is any stock that trades at a price below $5 that is not
on a national exchange. Because our common stock is likely to fall under the
definition of "penny stock," trading in our common stock, if any, is expected
to be limited because broker-dealers are required to provide their customers
with disclosure documents prior to allowing them to participate in transactions
involving "penny stocks." These disclosure requirements are burdensome to
broker-dealers and may discourage them from allowing their customers to
participate in transactions involving our common stock.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-
looking statements are not historical facts but rather are based on current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seek," and "estimates," and variations of these words and similar
expressions are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ materially from
those express, implied or forecasted in the forward-looking statements. In
addition, the forward-looking events discussed in this prospectus might not
occur. These risk and uncertainties include, among others, those described in
"Risk Factors" and elsewhere in this prospectus. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect our
management's view only as of the date of this prospectus.
DILUTION
As of April 30, 2001, Covenant EcoNet had a pro forma net tangible book
value of approximately $317,710 or $0.26 per share of Common Stock. "Pro
forma net tangible book value" represents the amount of total tangible assets
less total liabilities divided by the number of shares of Common Stock
outstanding. Without taking into account any other changes in the net tangible
book value after April 30, 2001, other than to give effect to the receipt by
the Company of the net proceeds from the sale of the 500,000 to 5,000,000
shares of Common Stock offered by us in this Prospectus at an assumed initial
public offering price of $1.00 per share, the pro forma net tangible book value
of Covenant EcoNet as of April 30, 2001, would have been approximately
$817,710 or $ 0.48 per share if the minimum is sold and $5,317,710 or $0.86
per share, if the maximum is sold. [SL1]This represents an immediate
increase in net tangible book value of $0.22 per share to existing shareholders
and an immediate dilution of $0.52 per share to new investors if the minimum
is sold and
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an immediate increase in net tangible book value of $0.60 per share to existing
shareholders and an immediate dilution of $0.14 per share to new investors if
the maximum is sold.
This means that if you buy stock in this offering at $1.00 per share, you
will pay substantially more than the current shareholders. The following
represent your dilution:
If the minimum of 500,000 shares are sold, there will occur an immediate
decrease in book value to our new shareholders from $1.00 to $0.48 per share
and an immediate increase in book value per common share to our current
stockholders.
If the maximum of 5,000,000 shares are sold, there will occur an
immediate decrease in book value to our new shareholders from $1.00 to
$0.86 per share and an immediate increase in book value per common share to
our current stockholders. The following table illustrates this per share
dilution:
[Download Table]
Minimum Maximum
Assumed initial public offering price per share $1.00 $1.00
Pro forma Net tangible book value
per share before the offering $0.26 $0.26
Increase per share attributable
to new investors $0.22 $0.60
Pro forma net tangible book value
per share after offering $0.48 $0.86
Dilution per share to new investors $0.52 $0.14
Percentage dilution to new shareholders 52% 14%
The following table summarizes on a pro forma basis, as of April 30, 2001,
the differences between existing shareholders and purchasers of shares in the
offering (at an assumed initial public offering price of $1.00 per share) with
respect to the number of shares of Common Stock purchased from Covenant
EcoNet, the total consideration paid and the average price per share paid.
[Enlarge/Download Table]
minimum
Shares Total Consideration
Purchased
Number Percent Amount Percent Average Price
per Share
Existing shareholders 1,200,000 71% 317,710 39% $0.26
New investors 500,000 29% 500,000 61% $1.00
Total 1,700,000 100% $817,000 100%
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SECOND TABLE
Shares
Purchased Total Consideration
(Maximum)
Number Percent Amount Percent Average Price per Share
Existing shareholders 1,200,000 19% 317,710 6% $0.26
New investors 5,000,000 71% 5,000,000 94% $1.00
Total 6,200,000 100% $5,317,710 100% $0.86
PLAN OF DISTRIBUTION
We are offering a minimum of 500,000 shares and a maximum of
5,000,000 shares on a best efforts basis directly to the public through our
officers and directors, who will not receive commission on such sales. The
sales will be made by personal contact by the Company's officers and
directors, Mr. Marcus Dukes and Ms. Teresa Hodge and through a NASD
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member, who will receive a commission of ten percent (10%). As of the date
of this prospectus, no broker dealer has agreed to participate in the offering.
We may provide NASD members who participate in the offering with a list
of persons compiled by our executive officers who we believe may be
interested in purchasing shares. These persons will primarily be individuals
who become aware of our offering as a result of our presentations in
predominantly African-American churches, our SEC filings, and individuals
referred to us by other individuals who are aware of our offering. NASD
members who do participate with us as selected dealers may sell shares to
such persons and to their own customers. No affiliated person will be allowed
to purchase shares to meet the minimum share requirement.
We intend to apply to list our Common Stock on the OTC Bulletin
Board. Unless and until the Common Stock is accepted for listing, no public
market will develop for the resale of the securities.
Prior to this offering, there has been no market for our securities.
Accordingly, the public offering price for the shares was determined solely by
us. Among the factors we considered in determining the public offering price
were the Maryland Predecessor's operations, our current financial condition,
our future prospects, our management's background, and the general
condition of the equity securities market.
Method of Subscribing
Persons may subscribe by completing and returning our subscription
agreement. The offering price of $1.00 per share must accompany the
subscription agreement. All checks must be made payable to "Covenant
EcoNet, Inc. Escrow Account." All checks received from subscribers will be
transmitted to the escrow account by noon of the next business day following
receipt. Certificates for the shares subscribed will be issued within three
business days following the closing of the offering, unless required to be held
in escrow by the certain state securities laws.
Selling Period
The selling period of the offering will terminate three months from the
date of this Prospectus unless extended for up to an additional 90 days.
Minimum-Maximum and Escrow
Until the minimum 500,000 shares are sold, all funds will be deposited in
a noninterest bearing escrow account at The Adams National Bank in
Washington, D.C. and such funds will only be invested in investments
permissible under SEC Rule 15c2-4. In the event that 500,000 shares are not
sold during the three-month selling period commencing on the date of this
prospectus, all funds will be promptly returned to investors without deduction
or interest. If 500,000 shares are sold, we may either continue the offering
for the remainder of the selling period or close the offering at any time.
Right to Reject
We reserve the right to reject any subscription, and to withdraw the
offering at any time prior to acceptance of the subscriptions received, if
acceptance of a subscription would result in the violation of any laws to which
we are subject.
USE OF PROCEEDS
The net proceeds of the Offering after payment of all expenses will be
$400,000 if the minimum 500,000 shares are sold, and $4,800,000 if all
5,000,000 shares are sold. (This assumes offering expenses of $100,000 for
minimum and
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$200,000 for maximum considering printing and "blue sky" costs.) We expect to
use the net proceeds over a twelve month period, approximately as follows:
[Download Table]
Purpose Minimum % Maximum %
------- ------- -- ------- --
Salaries $48,000 12 $600,000 12
Rescission liability 100,000 25 495,000 10
Travel & seminar expenses 42,000 11 920,000 19
Marketing expenses 35,000 8 640,000 13
Working Capital 20,000 5 1,387,000 29
------- ------- -------
Office Rental 42,000 11 81,000 2
General administrative expenses 25,000 6 325,000 7
Furniture 13,000 3 50,000 1
Equipment Lease 15,000 4 72,000 2
Donations to Churches $50,000 12 180,000 4
Purchase of equipment 10,000 2 50,000 1
------- ------- -------
Totals $400,000 100 $4,800,000 100
------- ------- -------
A portion of the proceeds from the offering will be used to satisfy a
liability created in connection with the contemporaneous rescission offer
pursuant to which the Company will offer previous purchasers of Financial
Warfare Club memberships the opportunity to receive a full refund. Covenant
EcoNet cannot anticipate the number of members that will accept the refund
offer, but if all members take their refunds, the aggregate total of the
refunds will not exceed $495,000. Proceeds not immediately needed will be
invested in bank certificates of deposit, treasury bills, insured bank deposits
or similar investments.
DESCRIPTION OF BUSINESS
Covenant EcoNet is a corporation organized under the laws of the State of
Nevada with its principal place of business in our nation's capitol,
Washington, D.C. We currently employ three people on a full time basis.
The Company's business focuses on selling memberships in Covenant
EcoNet's wholly-owned and operating subsidiary, Financial Warfare Club, a
Nevada corporation. The benefits of membership in Financial Warfare Club
include discounted access to educational programs designed to enhance the
financial literacy of our members. Financial Warfare Club is currently
developing course syllabi, textbooks and lecture materials, and is in the
process of identifying and qualifying teachers for its financial literacy
course offerings. We target faith-based organizations, typically churches and
other non-profit organizations.
Covenant EcoNet was incorporated on April 12, 2001, as the successor to
the District of Columbia limited liability company of the same name.
Financial Warfare Club was incorporated on April 12, 2001, as the successor
to the Maryland nonprofit, nonstock and District of Columbia corporations of
the same name.
The Company's wholly-owned subsidiary, Financial Warfare Club, is in
the early stages of operations. Over the past seven months, Financial Warfare
Club's Maryland Predecessor has been test-marketing its educational
workshops to churches and faith-based groups. Our principal products and
services will consist of Club memberships. Membership benefits include
access to discounted educational workshops on investing as well as audio and
videotapes of these workshops. Memberships are available at four levels. The
cost for Associate Memberships is $99 and includes newsletters and
communications of upcoming events, a Financial Warfare Membership Card,
and subsequent classes and seminars at a 10% discount. The cost for the
Executive Club Membership is $229 and includes all of the benefits provided
to the Associate Membership and one literacy course and choice seating at
future events. The costs for the Organizational Membership is $459 and is
similar to the Executive Club Membership and it allows up to five individuals
to attend a financial literacy course on behalf the applicant-member. This
membership level is designed for churches and nonprofit
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organizations. The cost for the Chairman Circle Membership is $649 and
includes all of the benefits of the Executive Level Membership plus one
additional financial literacy course.
We anticipate two streams of revenue for the Company: (1) memberships
and registration fees for seminars; and (2) the sale of educational materials
such as videotapes, audiotapes, and course books. Each member is also
required to pay an annual membership fee in the amount of $50.
Currently, we are still in the planning stage of designing new workshops,
conferences and seminars. While we have a basic outline of the topics we
intend to cover, we still have to plan our detailed curricula for our different
membership levels and hire teachers to teach the courses. We anticipate
hiring approximately five full-time staff teachers and outsourcing several of
the courses to independent teachers. In the meantime, we are organizing
several general investment seminars for our members to attend until we have
our core curricula and teachers in place. The Maryland Predecessor's past
speaking engagements serve as the preliminary prototype for our services.
Our presentations are grounded in biblical scriptures that relate to financial
responsibility and awareness. We then provide the nuts and bolts of investing
so Club members will have a basic fundamental core competence to evaluate
prospective investments.
Over the last seven months the Maryland Predecessor test marketed the
investment planning workshops. We visited thirty churches in ten different
states. In our test marketing, we informed people about the core products we
intend to offer. Even our research and development has been profitable.
Due to an investigation that culminated in the issuance of a cease and desist
order from the Maryland Securities Commission in March 2001, we stopped
our previous practices, revamped our workshop model, formed for-profit
corporations, and are in the process of winding up the operations of the
Maryland Predecessor. Thus, we cannot guarantee our workshops will be as
profitable as they were in the past. For more information on the cease and
desist order, see "Legal Proceedings" at page 26.
Traditionally, a lower percentage of the African-American community has
invested as compared to other ethnic groups in the United States.
Consequently, African-Americans have not enjoyed as much of an increase in
collective net worth relative to other groups. Financial Warfare Club's goal
is to increase the rate and quality of African-American participation in the
capital markets. The founders created Financial Warfare Club to serve as an
educational company to empower the community by increasing the level of
financial literacy throughout the community. Financial Warfare Club will
educate people on the do's and don'ts of creating wealth. Each member of the
Club will receive a primer on investment principles that will educate them,
and encourage their participation in the capital markets thereby transforming
people of modest means into capable investors.
While our efforts are targeted to underserved communities in general, we
are specifically targeting the church community. We have formed
relationships with several Pastors and Bishops who, in turn, are a part of a
larger network of churches. Through them, we are forming relationships with
ther Pastors, Bishops and church and community leaders throughout the
country. Since churches are organizations and organizations can become
members, we are developing a special curriculum for our member churches.
Although the minority community serves as our central target market, we will
not exclude any community.
Our observations lead us to conclude that churches have been trailblazers
in civil rights matters and political advancement via reciprocal support
between the African-American community and the church. We believe the
time is ripe for the church to be a leader in economic development. To
achieve this milestone, several churches are opening their doors to Financial
Warfare Club, so we can make presentations to their parishioners. Because
we focus our efforts on the church community, we depend on our
relationships with church leaders for access to church members. Thus, if a
relationship with a particular pastor deteriorates, we may suffer a decline in
access to potential members.
Competition
Financial Warfare Club will compete in a highly fragmented and
decentralized market with low barriers to entry. Our target market consists of
African-American churches and their members throughout the continental
United States. We will operate strictly from our headquarters in Washington,
D.C. In lieu of setting up offices in the cities in which our members reside,
our faculty will travel to different cities to teach courses. Additionally, we
will encourage members to
8
travel to church hubs in other cities for our programs. Having traveling
members will minimize our in-house expenditures and allow us to be profitable.
To our knowledge, no single company or group of companies has a
substantial share of the overall market for our products. We compete with
other companies that engage in the business of providing financial workshops
for fees as well as other companies and industry professionals such as
stockbrokers and tax advisers who provide workshops to promote their
businesses in the financial services industry. Most competitors are small
organizations that provide workshops, seminars and newsletters. We believe
our advantages lie in our specific target market which has already proven
receptive to our principals, Mr. Dukes and Ms. Hodge, who are promoting our
products throughout the country. However, some of our competitors offer
courses and products similar to ours at lower prices, or for free. Some
competitors have greater financial and other resources than Financial Warfare
Club. There can be no assurance that Financial Warfare Club will succeed in
gaining a viable share of the financial education market.
We intend to cultivate goodwill in the church community and such
goodwill will be our principal advantage over our competitors. We believe
that by nurturing the relationships with people with whom we already have
positive relationships, we will develop a loyal following of churches and
members such that Financial Warfare Club will be a valuable franchise. We
also believe our teaching methods, our ways of connecting with our members,
and the substance of our workshops will differentiate us from our competitors
and give us the aforementioned member loyalty.
We expect to maintain additional loyalty from Financial Warfare Club
members by allowing them to invest in Covenant EcoNet. Thus, if Covenant
EcoNet proves to be a profitable company, Financial Warfare Club members
will benefit from their stock ownership in Covenant EcoNet in addition to the
educational benefits they receive from their membership. We believe that as a
result of this Offering, many Financial Warfare Club members will be
Covenant EcoNet shareholders. We are offering members the opportunity to
buy Covenant EcoNet shares in this offering and as part of a rescission offer
discussed under "Legal Proceedings" at page 26.
Plan of Operation
Over the next twelve months, we intend to solidify our core curriculum,
hire five full-time staff members, enter into agreements with approximately
ten outside professionals to teach our courses, accept members into the
Financial Warfare Club and begin hosting workshops and seminars for
members across the country. Our core curriculum will entail different series
of classes to covering topics such as understanding the concept of money in a
society, an overview of the securities markets and an introductory course on
securities analysis for lay investors. We intend to hire five full-time people
to teach our courses across the country. Our full time staff will consist of
people who are licensed securities professionals and members of the clergy.
We will also enter into agreements with outside professionals such as
financial advisers and asset managers to contribute to our seminars and
workshops. We will record many of our workshops in audio and video
formats and sell reproductions of our seminars and workshops.
If we are successful in raising the full $5,000,000 we are attempting to
raise in this offering, we believe the proceeds and the cash we generate from
operations will suffice to meet our needs over the next twelve months. We
have already demonstrated an ability to generate sufficient cash to sustain our
operations. The proceeds from this offering will put us on firmer ground and
allow us to develop a critical mass of members and substantive programming
to build a company that creates growth in earnings.
DESCRIPTION OF PROPERTY
Covenant EcoNet has identified office space in Washington, D.C. This
space will serve as the headquarters for the company and allows room for
expansion as needed. The space is located in downtown Washington, D.C.
The company expects to take possession of this space not later than August
2001. The property is an office suite where we will plan our programs and
perform the administrative functions inherent in running a business. We will
have a five-year lease on the property, and the rent will be $6,800 per month.
9
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
Covenant EcoNet and Financial Warfare's directors, executive officers and
key employees are as follows:
Name Age Position Director Since
---- --- -------- --------------
Marcus Dukes 31 Director and April 2001
Chairman of the Board of Directors,
President
Teresa Hodge 38 Director, April 2001
Vice President, Secretary
Curtis Pree 40 President June 2001
Bishop
Ralph Dennis 52 Director June 2001
Dr. Ramona
Edelin 56 Director June 2001
Maurice Carney 36 Director June 2001
Each director serves for a term of three years and is elected at the annual
meeting of shareholders. Covenant EcoNet's and Financial Warfare Club's
officers are appointed by each company's Board of Directors and hold office
at the discretion of their respective Boards. Because the companies were
incorporated on April 12, 2001, neither has had an annual meeting. The
officers and directors were elected by the incorporators at a meeting on April
12, 2001.
There are no family relationships between any directors, executive
officers, persons nominated or chosen by the issuer to become directors or
executive officers or any significant employees.
Marcus Dukes Mr. Dukes is a co-founder of Covenant EcoNet and Financial
Warfare Club. From 1998 through 2000, he owned and managed International
Business Group, a multimedia, communications, and consulting firm that operated
in North America, Asia, Latin America and Europe. Mr. Dukes specialized in
helping companies with $10 million or less in annual revenues gain market
share via niche marketing and corporate branding. In addition, he analyzed
public and non-public companies for investment banking, mergers and strategic
partnership relationships. From November 1996 through August 1998, Mr. Dukes
worked at Airborne Express, a package delivery service company. Mr. Dukes
worked as a stockbroker from 1993 through 1994 for Tamaron Investments. Mr.
Dukes attended the U.S. Naval Academy in Annapolis, Maryland, and is a 1990
graduate of the Navy Nuclear Power School.
Teresa Hodge Ms. Hodge is a co-founder of Covenant EcoNet and Financial
Warfare Club. She was a licensed realtor in Maryland from 1995 through 2000
where she brokered transactions involving residential and commercial
properties. Ms. Hodge maintains a real estate license with the State of
Maryland. She worked for three small real estate firms during between 1995 and
2000. In addition, Ms. Hodge owned and operated Cornerstone Investments, a
real estate investment and business development firm, from 1994 to 1997. She
serviced start-up business owners providing resources and information.
Through Cornerstone, she organized several conferences for small business
owners and entrepreneurs, and assisted several churches with real estate needs
and loan packaging. From 1995 through 1998, Ms. Hodge was a budget analyst at
the United States Patent and Trademark Office. She worked at Adia Employment
Services as an account executive from 1993 through 1995. Ms. Hodge held
administrative positions of increasing responsibility from 1981 through 1987 in
the United States Department of the Navy. Ms. Hodge attended Northern Virginia
Community College from 1987 to 1988. Additionally, Ms. Hodge is a devout
Christian and served as a Steward of Union Bethel AME Church from 1996 - 2000.
Ms. Hodge was a debtor in three related bankruptcy filings between 1997
and 1999. Two of her cases, a chapter 11 bankruptcy and a chapter 13
bankruptcy, were dismissed. The third began as a chapter 11 bankruptcy and was
converted to a Chapter 7 bankruptcy and discharged. Ms. Hodge had entered into
a partnership with another individual, a partnership that bought residential
rental properties. Ms. Hodge and her partner personally guaranteed the loans
for the properties. Ms. Hodge's partner abandoned the partnership, and several
investors demanded repayment of promissory notes. Ms. Hodge attempted to
restructure the debt and ultimately she personally filed for bankruptcy and her
company, Cornerstone Investments filed for bankruptcy. Around the time she
began to rehabilitate her financial situation, a family member of Ms. Hodge
fell victim to a debilitating sickness. Ms. Hodge took care of this person and
went severely into
10
debt to pay for medical treatment such that she had to file for personal
bankruptcy again. The bankruptcy was ultimately discharged. Since her
bankruptcy cases concluded on October 30, 1998, Ms. Hodge has attempted to
overcome her previous setbacks and her financial position is stable.
Curtis L. Pree Mr. Pree is the President of the Company. The co-founders
employed Mr. Curtis L. Pree as Covenant's President because of his leadership
and networking abilities, as well as his business acumen. Mr. Pree has a
demonstrated interest in the growth and economic development of the
African-American community. From January 1996 to May 2001, Mr. Pree was a
government relations representative for American Public Power Association for
which he performed extensive congressional lobbying in the areas of grassroots
organizations, telecommunications, market power concerns, and energy. He has
also lobbied Congress on behalf of SJA International, which focused on the
defense, aviation, and technology industries. Mr. Pree is a former mayoral
candidate of Washington, D.C. and thus has a large number of political
contacts. In the past he has served as campaign manager for a congressional
candidate. We believe Covenant can benefit greatly from Mr. Pree's
experience, skill and expertise. Mr. Pree is a wealth of resources from which
Covenant EcoNet will benefit. Mr. Pree received a Bachelor of Arts degree
in Political Science and English from Howard University.
Bishop Ralph Dennis Bishop Dennis began pastoring in September 1978 while
still in the corporate work force, and now serves as the pastor of two churches
in Maryland. He is the presiding prelate and CEO and President of Kingdom
Fellowship Covenant Ministries, a synergistic network of over 100 churches in
the USA and internationally. He also serves as CEO and President of Kingdom
Community Development Corporation, and R.A.L.P., a limited partnership for
low-income housing. He also serves as a Regent for The National Center for
Faith Based Initiative based in West Palm Beach, Florida. Additionally, he
serves as a Director of the Joint College of African American Pentecostal
Bishops. Bishop Dennis had an accomplished corporate career for over 22 years
before dedicating himself to full-time ministry. His corporate positions
included various sales and management positions for Carnation Company, Exxon
Company, Frito-Lay, and L'Egg's Hosiery. He earned a Bachelor of Science degree
in Mathematics from Morgan State University. In 1983, he earned a Master of
Theology degree from International Bible College and Seminary.
Dr. Ramona H. Edelin, Dr. Edelin is a member of the Board of Directors of
the Congressional Black Caucus Foundation, Inc. since 1991, and was elected
Executive Director of the CBCF in February of 1999. Before assuming this
position, she had been President and CEO of the National Urban Coalition since
1988. Before joining the NUC in 1977, Dr. Edelin was founder and chair of the
Department of African American Studies at Northeastern University.
Dr. Edelin serves on the President's Advisory Board on Historically Black
Colleges and Universities, as treasurer of the Black Leadership Forum, as
Secretary of the Board of Trustees of the University of the District of
Columbia and as Chair of the District of Columbia Education Goals 2000 State
Panel, among other volunteer boards and memberships. A nationally respected
lecturer, her media presentations include network, public and cable television,
radio, print and published venues. A Phi Beta Kappa graduate of Fisk
University, Dr. Edelin earned a Master of Arts degree in philosophy from the
University of East Anglia in England and a doctorate from Boston University.
Maurice Carney Mr. Carney is the co-founder of Digital Freedom
enterprise, LLC, a company that provides technology consultation and online
audio and video webcasting. He also co-founded Digital Freedom Institute, a
non-profit company that provides Internet training and education. He is
currently a research and information technology consultant for the
Congressional Black Caucus Foundation and the Rainbow/PUSH Coalition. For five
years, Mr. Carney worked as a computer and research analyst for the nation's
leading African American think tank the Joint Center for Political and Economic
Studies. He has earned a masters degree and is in the process of completing a
Ph.D.
11
REMUNERATION OF DIRECTORS AND OFFICERS
Name of individual Capacities in which Aggregate
------------------ ------------------- ---------
or identity of group remuneration was received remuneration
-------------------- ------------------------- ------------
Marcus Dukes $200,000
Teresa Hodge $200,000
Curtis L. Pree $175,000
Mr. Dukes and Ms. Hodge will each receive salaries of $200,000 per year.
Mr. Pree will receive a salary of $175,000 per year. Ms. Hodge and Messrs.
Dukes and Pree's salaries will be paid in twenty-four equal installments.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS
The following table states the number of shares held by Covenant EcoNet's
directors, officers and 10% shareholders.
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------------------------
(1) (2) (3) (4) (5)
Title Name and Amount Amount Percent
Of Address owned before owned after Of Class
Class of owner the offering the offering
Minimum Maximum Minimum Maximum
---------------------------------------------------------------------------------------------------------------------------------
Common Marcus Dukes 600,000 600,000 600,000 35% 10%
15410 Rosemary Blvd
Oak Park, MI 48237
Common Teresa Hodge 600,000 600,000 600,000 35% 10%
13304 Keverton Drive
Upper Marlboro, MD 20774
Common All officers 1,200,000 1,200,000 1,200,000 70% 20%
and directors as a group
INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
On April 13, 2001, Mr. Dukes and Ms. Hodge, the sole directors and
president, vice president secretary and treasurer of the Company, each acquired
600,000 shares of Covenant EcoNet Common Stock pursuant to a promissory note
payable to the Company in the amount of $150,000 as follows:
Common stock issued to Marcus Dukes
Shares issued in exchange
for $150,000 Promissory note 600,000
Common Stock issued to Teresa Hodge
Shares issued in exchange
for $150,000 Promissory note 600,000
=========
Total shares issued in related-party transactions 1,200,000
Mr. Dukes' and Ms. Hodge's capital contributions were recorded at $0.25
per share, but the Company did not receive any cash in exchange for the shares
issued. Pursuant to the promissory notes, Mr. Dukes and Ms. Hodge each must
make ten bi-annual payments, the sum of which shall equal $150,000 per note
plus interest. The payments begin on October 11, 2001, and are payable each
October 11 and April 11 thereafter with the final payment being due on April
11, 2006. The
12
interest rate on the notes is 8% per annum. At the Company's option, the total
amount on each note can become due immediately upon the default of the
respective maker.
SECURITIES BEING OFFERED
Covenant EcoNet has 100,000,000 shares of Common Stock authorized, par
value $0.001 per share. At May 31, 2001, we had two shareholders, Marcus Dukes
and Teresa Hodge, each owning 600,000 shares for the sum of 1,200,000 shares of
the Common Stock issued and outstanding. The Common Stock offered hereby
will, upon payment therefore as contemplated hereby, be fully paid and
nonasessable. Each holder of our Common Shares is entitled to one vote for
each share held of record on each matter submitted to a vote of the
shareholders. Cumulative voting in the election of directors is not permitted.
As a result, the holders of more than 50% of the outstanding shares have the
power to elect all directors. The quorum required at a shareholders' meeting
for consideration of any matter is a majority of the shares entitled to vote on
that matter, represented in person or by proxy. If a quorum is present, the
affirmative vote of a majority of the shares voting on the matter at the
meetings is required for shareholder approval. However, approval is required
by the affirmative vote of more than two-thirds of all shares entitled to vote,
whether or not represented at the meeting, in the case of major corporate
actions, such as:
A merger
A share exchange
The dissolution of Covenant EcoNet
An amendment to our articles of incorporation
Or the sale of all or substantially all of our assets.
These provisions could be used to, or have the effect of, preventing or
deterring a party from gaining control of Covenant EcoNet, whether or not
beneficial to public shareholders, and could discourage tactics that involve an
actual or threatened change of control of the Company. The holders of Common
Shares enjoy no preemptive rights, but are entitled to receive ratably
dividends when, as, and if declared by the Board of Directors out of funds
legally available for that purpose. In the event of any voluntary or any
involuntary liquidation, dissolution, or winding-up of our affairs, the assets
of Covenant EcoNet available for distribution to its stockholders shall be
distributed pro rata to the holders of the Common stock. We intend to apply to
have the stock quoted on the OTC Bulletin Board(r). In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets available for distribution to
stockholders after payment of all liabilities.
We currently have outstanding promissory notes in the amount of $270,000
issued in denominations of $15,000. After the expiration of one year from the
date of issue, each note (carries an interest rate of 10% per annum) is
convertible into Covenant EcoNet's Common Stock at the rate of $0.25 per share
such that each note is convertible into 60,000 shares of Common Stock.
Significant Parties
The full names and business and residential addresses for the following persons
are set forth below:
directors
officers
record owners of five percent or more of the Company's Common Stock
beneficial owners of five percent or more of the Company's Common Stock
promoters
affiliates
counsel to Covenant EcoNet with respect to the proposed offering
Marcus Dukes, Director, Chairman of the Board of Directors, Chief Executive
Officer
Business Address: 58 Hawthorne Court, NE, Suite 1316, Washington, D.C. 20017
Residential Address: 15410 Rosemary Boulevard, Oak Park, MI 48237
13
Teresa Hodge, Director, Vice President, Treasurer, Secretary
Business Address: 58 Hawthorne Court, NE, Suite 1316, Washington, D.C. 20017
Residential Address: 13304 Keverton Drive, Upper Marlboro, MD 20774
Curtis Pree, Director, President
Business Address: 58 Hawthorne Court, N.E., Washington D.C. 20012
Residential Address: 7960 West Beach Drive, Washington, D.C. 20012
Maurice Carney, Director
Business Address: 58 Hawthorne Court, N.E. Suite 1316, Washington, D.C. 20017
Residential Address: 58 Hawthorne Court, N.E. Suite 1316, Washington, D.C.
20017
Bishop Ralph Dennis, Director
Business Address: 6419 York Road, Baltimore, MD 21212
Residential Address: 2018 Brigadier Boulevard, Odenton, Maryland 21113
Dr. Ramona Edelin, Director
Business Address: 1004 Pennsylvania Avenue, S.E. Washington, D.C. 20003
Residential Address: 8120 Eastern Avenue, N.W., Washington, D.C. 20012
Law Firm of Larson-Jackson, PC
Business Address: 1500 K Street, NW, Suite 900, Washington, D.C. 20005
RELATIONSHIP WITH COVENANT ECONET OF EXPERTS NAMED IN THE REGISTRATION
STATEMENT
No "expert" or "counsel" was hired on a contingent basis, will receive any
interest in Covenant EcoNet or is a promoter, underwriter, voting trustee,
director, officer or employee of Covenant EcoNet.
LEGAL PROCEEDINGS
Financial Warfare Club's Maryland Predecessor, Mr. Dukes and Ms. Hodge are
respondents in an administrative proceeding that is pending before the Maryland
Securities Commissioner ("MSC"). The MSC initiated the proceeding on March 5,
2001. No other parties are respondents in the action. The proceeding stems
from the Maryland Predecessor's activities in that Mr. Dukes and Ms. Hodge,
acting as control persons of the Maryland Predecessor, promoted Financial
Warfare Club to various churches. They offered people the opportunity to
become members of the Maryland Predecessor for a fee ranging from $100 to
$2,550 depending on the membership level the member chose. The Maryland
Predecessor generated approximately $428,805 in club memberships fees.
At the time, Financial Warfare Club was affiliated with three companies
referred to as "Infrastructure Companies," and included with members'
memberships were gifts of shares of each of these three companies. Mr.
Dukes, Ms. Hodge and Financial Warfare Club intended to capitalize these
infrastructure companies, then cause them to engage in the financial services
business with a view to financing African-American owned companies and
ultimately taking them public. Without a hearing, the MSC issued a cease and
desist order. The respondents filed an answer to the cease and desist order.
The MSC may or may not schedule a hearing on the matter. The Company
does not believe Mr. Dukes, Ms. Hodge or the Maryland Predecessor
intentionally violated any laws, but that any violations were technical
violations and the Company, Financial Warfare Club, Mr. Dukes and Ms.
Hodge have been cooperating and intend to continue to cooperate with the
Maryland Securities Commission. No assurance can be given
as to the outcome of this investigation. In the cease and desist order, the
MSC is seeking an order precluding Mr. Dukes, Ms. Hodge and the Maryland
Predecessor to stop engaging in the acts in which they were previously
engaging unless they comply with the law. While the MSC has not, to date,
requested that any fines be imposed, the statutes permit the State of Maryland
to impose fines of $5,000 per violation.
The Maryland Predecessor, Mr. Dukes and Ms. Hodge have retained counsel to
handle the proceeding and, through a rescission offering, they have decided to
offer people, businesses and churches who paid for memberships an opportunity
14
to receive full refunds. In the alternative, such members may forego a refund
and instead, receive shares in Covenant EcoNet at a price of $1 per share. For
example, a member who paid $2,550 for a membership in Financial Warfare Club's
Maryland Predecessor has the option to accept a $2,550 refund or 2,550 shares
of Covenant EcoNet. Those persons who accept the shares of Covenant EcoNet in
lieu of a refund will also receive a one-year club membership without any
additional costs. As part of accepting Covenant EcoNet shares in the rescission
offering, persons who accept Covenant EcoNet shares will waive their right to
pursue any action against Mr. Dukes, Ms. Hodge, Financial Warfare Club, or any
of their affiliates. Part of the proceeds from this offering will be used to
refund the membership dues of any person who chooses to accept a refund
pursuant to the rescission offering. If all the members choose to accept a
refund and we only raise the minimum amount of $500,000 in this offering, all
the proceeds could be used to satisfy the rescission offer and we will have to
either fund our operations through cash we generate from operations, or we may
have to effect another offering to raise sufficient working capital.
Following Maryland's initiation of an investigation, the Alabama
Securities Commission issued a cease and desist order against the Maryland
Predecessor and its officers. The cease and desist order issued by the Alabama
Securities Commission is virtually identical to that issued by the Maryland
Securities Commission. All of the respondents are the same as those in the
Maryland Securities Commission action. The Maryland Predecessor and its
officers and directors, Marcus Dukes and Teresa Hodge are cooperating with the
Alabama Securities Commission and plan to continue to cooperate with the
Alabama Securities Commission. The Company cannot assure investors that other
states will not initiate such proceedings in the future. The Company does
represent it is making every effort to conduct its business in accordance with
the applicable federal and state laws and regulations.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
We have had no changes in or disagreements with our accountants.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Covenant EcoNet may indemnify a person who is a party to an action, except
an action by or in the right of the Company, by reason of the fact that he is
or was a director, officer, employee or agent of Covenant EcoNet, or was
serving at our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. Such
indemnification covers expenses, judgments, fines and settlement payments
incurred by the indemnified person in connection with the action if the person
acted in good faith and in a manner believed to be in our best interests and
had no reasonable cause to believe the conduct was unlawful. We may indemnify a
person who was a party to an action in the right of the Company to procure a
judgment in its favor by reason of the fact that the person was a director,
officer, employee or agent of Covenant EcoNet, or was serving at our request as
a director, officer, employee or agent of another enterprise against the
aforementioned expenses and costs if the person acted in good faith and in a
manner the person reasonably believed to be in our best interest. However, we
cannot indemnify a person where the person has been adjudged by an appropriate
court to be liable to us unless the court determines that in view of all the
circumstances, the person is fairly and reasonably entitled to indemnity as the
court deems proper. To the extent one of our directors, officers, employees or
agents is successful on the merits of any of the aforementioned actions, we
must indemnify them against expenses incurred in connection with their defense.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions or
otherwise, the small business issuer has 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.
15
LEGAL MATTERS
Our legal counsel will pass upon the legality of the common stock issued
before this offering, the rescission offer and pass upon the common stock
offered for sale in this offering. Our attorney is the Law Firm of
Larson-Jackson, P.C., 1500 K Street, N.W. Suite 900, Washington, D.C.
20005 Telephone Number (202) 408-8180.
EXPERTS
The financial statements as of April 30, 2001, and for the period from
inception (April 12, 2001) to April 30, 2001 of the Company and its wholly
owned subsidiary included in this prospectus have been audited by Stokes &
Company, independent certified public accountant, as set forth in their report.
The financial statements have been included in reliance upon the authority of
the accounting firm as an authority and expert in accounting and auditing.
DIVIDEND POLICY
To date, we have not declared or paid any dividends on our common stock.
We do not intend to declare or pay any dividends on our common stock in the
foreseeable future, but rather to retain any earnings to finance the growth of
the company. Any future determinations to pay dividends will be at the
discretion of our Board of Directors and will depend our results of operations,
financial conditions, contractual and legal restrictions and other factors it
deems relevant.
TRANSFER AGENT
We will serve as our own transfer agent and registrar for the common stock
until such time as this registration is effective and sell the minimum
offering, then we intend to retain Atlas Stock, Inc. 5899 South State, Murray,
Utah 84107 or other suitable transfer agent.
16
COVENANT ECONET, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
Financial Statements
and
Independent Auditor's Report
April 30, 2001
1
CONTENTS
PAGE
----
INDEPENDENT AUDITOR'S REPORT 3
FINANCIAL STATEMENTS
Consolidated Balance Sheet 4
Consolidated Statement of Changes in Stockholders' Equity 5
Notes to Financial Statements 6 - 9
OTHER FINANCIAL INFORMATION
INDEPENDENT AUDITOR'S REPORT ON PRO FORMA STATEMENTS 11
Pro Forma Condensed Combined Balance Sheet 12
Pro Forma Condensed Combined Statement of Income 13
Notes to Pro Forma Condensed Combined Balance Sheet
and Statement of Income 14
2
INDEPENDENT AUDITOR'S REPORT ON CONDENSED COMBINED
PRO FORMA STATEMENTS
Board of Directors and Stockholders
Covenant EcoNet, Inc. and Subsidiary
We have examined the pro forma adjustments reflecting the acquisition of
Financial Warfare, Inc. (a District of Columbia Corporation) by Covenant
EcoNet, Inc. and Subsidiary described in Note 1 and the application of those
adjustments to the historical amounts in the accompanying pro forma condensed
combined balance sheet and statement of income of Covenant EcoNet, Inc. for the
periods ended April 30, 2001. The historical condensed financial statements
are derived from the financial statements of Covenant EcoNet, Inc. and
Subsidiary and Financial Warfare, Inc., both of which we audited. Such pro
forma adjustments are based on management's assumptions as described in Note 2.
Our examination was conducted in accordance with standards established by the
American Institute of Certified Public Accountants and, accordingly, included
such procedures as we considered necessary in the circumstances. We believe
that our examination provides a reasonable basis for our opinion.
The objective of this pro forma financial information is to show what the
significant effects on the historical financial information might have been had
the proposed acquisition occurred at an earlier date. However, the pro forma
condensed financial statements are not necessarily indicative of the results of
operations that would have been attained had the above-mentioned proposed
acquisition actually occurred earlier.
In our opinion, management's assumptions provide a reasonable basis for
presenting the significant effects directly attributable to the above-mentioned
acquisition described in Note 1, the related pro forma adjustments give
appropriate effect to those assumptions, and the pro forma column reflects the
proper application of those adjustments to the historical financial statement
amounts in the pro forma condensed combined balance sheet and statement of
income for the periods ending April 30, 2001.
/s/ Stokes & Company, P.C.
----------------------
STOKES & COMPANY, P.C.
Washington, D.C.
May 29, 2001
3
COVENANT ECONET, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
APRIL 30, 2001
ASSETS
CURRENT ASSETS
Notes receivable $ 60,000
--------------
Total current assets 60,000
OTHER ASSETS
Notes receivable, less current portion 240,000
--------------
Total assets $ 300,000
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES $ -
STOCKHOLDERS' EQUITY
Common stock, $.001 par value;100,000,000 shares authorized;
1,200,000 shares issued
and outstanding 1,200
Additional Paid in Capital 298,800
--------------
Total liabilities and stockholders' equity $ 300,000
==============
The accompanying notes are an integral part of this financial statement.
4
[Enlarge/Download Table]
COVENANT ECONET, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
APRIL 12, 2001 (INCEPTION) THROUGH APRIL 30, 2001
Additional Retained
Common Stock Paid-in Earnings
Shares Amount Capital (Deficit) Total
------------------ ------------------ ------------------ ------------------ -----------
Common Stock issued at formation 1,200,000 $ 1,200 $ 298,800 $ - $ 300,000
Net Income (Loss) - - - - -
------------------ ------------------ ------------------ ------------------ -----------
Balance, April 30, 2001 1,200,000 $ 1,200 $ 298,800 $ - $ 300,000
================== ================== ================== ================== ===========
.........................................................................5
COVENANT ECONET, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Financial Statements
April 30, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Organization
----------------------
Covenant EcoNet, Inc. (CEI) was incorporated in the State of Nevada on
April 12, 2001. The Company sold 1,200,000 shares of its Common Stock
for unsecured notes from the shareholders in the amount of $300,000.
For the period ending April 30, 2001, neither the Company nor its
subsidiary had conducted any actual operations. For that reason, the
Company is classified as a development stage enterprise. The purpose of
the Company is to acquire and manage the operations of entities that it
establishes to provide the members with information and resources to
undertake financial endeavors. Immediately after incorporation, the
Company acquired 100% of the common stock of Financial Warfare Club,
Inc, a newly formed Nevada corporation, which became a wholly owned
subsidiary. Financial Warfare Club, Inc. will be the operating company for
those it enrolls as members for its services. The initial service goals are to
provide education on the subject of financial literacy through the use of
seminars, conferences and other medium. The Company plans to use the
buying power of its membership group to obtain other benefits for its
members.
The Company's success will depend in part on its subsidiary's ability to
sell membership and educational services to individuals interested in
gaining financial literacy. The Company has targeted a specific segment of
the population and may be subject to risks of limited growth due to its
marketing approach.
The accompanying financial statements for the period ended April 30, 2001
have been prepared assuming the Company will continue as a going
concern. During the year 2001, management intends to raise additional
debt and/or equity financing to fund future operations and to provide
additional working capital. However, there is no assurance that such
financing will be consummated or obtained in sufficient amounts necessary
to meet the Company's needs.
The accompanying financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classifications of liabilities that may result from
the possible inability of the Company to continue as a going concern.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary. All material
intercompany accounts, transactions, and profits are eliminated in
consolidation.
Cash and cash equivalents
-------------------------
The Company considers deposits that can be redeemed on demand and
investments that have original maturities of less than three months, when
purchased, to be cash equivalents. As of April 30,2001, the Company had
no cash equivalents.
6
COVENANT ECONET, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements (Continued)
April 30, 2001
Use of estimates
----------------
Preparing the Company's financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Income taxes
------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets, including tax loss and credit carryforwards, 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 recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax expense represents the change during
the period in the deferred tax assets and deferred tax liabilities. The
components of the deferred tax assets and liabilities are individually
classified as current and non-current based on their characteristics.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
As of April 30, 2001 there were no deferred tax assets or liabilities.
Earnings Per Share
------------------
The Company and its subsidiary had no operations for the period presented
in the statements, therefore there is not an earnings per share computation.
General Policy for Accounting for Business Combinations, Allocation of
----------------------------------------------------------------------
Purchase Price, and Acquisition Contingencies
The Company assesses each business combination to determine whether
the pooling of interests or the purchase method of accounting is
appropriate. For those business combinations accounted for under the
pooling of interests method, the financial statements are combined with
those of the Company at their historical amounts, and, if material, all
periods presented are restated as if the combination occurred on the first
day of the earliest year presented. For those acquisitions accounted for
using the purchase method of accounting, the Company allocates the cost
of the acquired business to the assets acquired and the liabilities assumed
based on estimates of fair values thereof. These estimates are revised
during the allocation period as necessary when, and if, information
regarding contingencies becomes available to define and quantify assets
acquired and liabilities assumed. The allocation period varies but does not
exceed one year. To the extent contingencies such as preacquisition
environmental matters, litigation, and related legal fees are resolved or
settled during the allocation period, such items are included in the revised
allocation of the purchase price. After the allocation period, the effect of
changes in such contingencies is included in results of operations in the
periods in which the adjustments are determined.
7
COVENANT ECONET, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements (Continued)
April 30, 2001
NOTE B - MERGERS AND ACQUISITIONS
On April 12, 2001, the day of its incorporation, the Company acquired a
100% interest in Financial Warfare Club, Inc., a Nevada corporation, also
formed on April 12, 2001, in exchange for its note in the amount $5,000.
Financial Warfare Club, Inc. (Nevada) provides financial literacy training,
seminars and other educational and financial resources for its members.
This acquisition has been accounted for under the purchase method of
accounting and, accordingly, the results of operations have been accounted
for from the date of acquisition. The entire purchase price has been
allocated to the stock. During the period ending April 30, 2001 there were
no operations in the subsidiary.
NOTE C - NOTE RECEIVABLE
On April 12, 2001 the president and vice president of the Company, each
acquired 600,000 shares of Covenant EcoNet, Inc. Common Stock by
issuing promissory notes payable to the Company in the amounts of
$150,000 each. The notes bear interest at the rate of eight percent (8%) and
are payable in ten (10) semi-annual installments of $15,000 plus interest,
calculated as simple interest, beginning October 11, 2001. The notes are
unsecured promissory notes.
NOTE D - RELATED PARTY TRANSACTIONS
During the period ending April 30, 2001, the Company had the following
relationships with other non-subsidiary entities:
Financial Warfare Club, Inc. (Maryland) - Common Management
Control
Financial Warfare, Inc. (Washington, D.C.) - Common Management
Control
Covenant EcoNet, L.L.C. - Common Management Control
There were no actual transactions with any of the related parties during the
period. However, as part of its offering statement, the Company plans to
use a presently unknown amount of the proceeds, from the issuance of its
Common Stock, to refund members of Financial Warfare Club, Inc.
(Maryland) monies they previously paid to it. The potential amount of
repayment may range from $100,000 to $495,000. The repayment of these
fees may result in the creation of a non-deductible and non-amortizable
charge to the Company's capital accounts.
As an option, those persons who have paid monies to Financial Warfare
Club, Inc. (Maryland), will be eligible to transfer their membership and
have the services provided by the Company, without any further payment
being required. The cost of providing the future services has not been
determined and no liability has been accrued on the Company's books.
Another option available to the Members of Financial Warfare Club, Inc.
(Maryland) is to exchange their existing membership for stock in the
Company. Such an exchange will be made at the then current fair market
value of the Company's Common Stock.
The Company's founding shareholders have given their unsecured notes to
the Company in exchange for the initial shares of Common Stock. Their
relationship with Financial Warfare Club, Inc. (Maryland) may subject
them to certain risks in connection with that Company's operations. In the
event that the shareholders were to be subject to significant liability with
respect to their involvement with Financial Warfare Club, Inc. (Maryland),
it could impact on their ability to satisfy their obligation, under the notes.
8
COVENANT ECONET, INC. AND SUBSIDIARY
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements (Continued)
April 30, 2001
NOTE D - SUBSEQUENT EVENTS
On May 1, 2001, the Company entered into an agreement to acquire 100%
of the outstanding Common Stock of Financial Warfare, Inc., a District of
Columbia corporation formed on March 13, 2001. The existing
shareholders of Covenant EcoNet, Inc. own all of the outstanding Common
Stock of Financial Warfare, Inc. The Company will transfer 1,771,000
shares of its Common Stock in exchange for all of the outstanding shares of
Financial Warfare, Inc. Common Stock. The Company will account for
this acquisition using the pooling-of-interests method for combining the
entities. Accordingly, future presentations of the Company's historical
financial statements will be restated to include the accounts of Financial
Warfare, Inc. as if the companies had combined at the beginning of the first
period presented. As of the date of the agreement, Financial Warfare, Inc.
was obligated to Financial Warfare, Inc. (Maryland), a non-stock
corporation formed in August of 2000, for the amount of $81,082. The
shareholders of Financial Warfare, Inc. and the Company had operating
control of the Maryland Corporation, as discussed in the related party note
to these financial statements.
The company has circulated a private placement memorandum for the sale
of up to 33 convertible Promissory Notes for a total of $495,000. The
Notes will be issued in increments of $15,000 and will bear interest at the
rate of 10% per annum, payable semi-annually, and the principal will be
due in 12 months from the date of issue. The Notes contain a conversion
right to the holder, that after the expiration of one year from the date of
issuance the Payee may elect to convert any portion of the unpaid principal
balance of this Note into shares of CEI's Common Stock at the rate of
$0.25 per share. Investors in the Notes must meet certain suitability
requirements of CEI and until such requirements are met any monies paid
for the Note will be held in escrow by the Company's legal counsel. On
May 4, 2001 the company received $100,000 from the sale of the Notes.
These notes are unsecured.
9
OTHER FINANCIAL INFORMATION
10
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Covenant EcoNet, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of Covenant
EcoNet, Inc. and Subsidiary as of April 30, 2001, and the related statement of
changes in stockholders' equity for the period from April 12, 2001 (inception)
through April 30, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 our audit provides a reasonable basis for
our opinion.
In our opinion, based on our audit, the financial statements referred to
above present fairly, in all material respects, the financial position of
Covenant EcoNet, Inc. and Subsidiary as of April 30, 2001, in conformity
with generally accepted accounting principles.
/s/ Stokes & Company, P.C.
STOKES & COMPANY, P.C.
Washington, D.C.
May 25, 2001
11
PRO FORMA CONDENSED COMBINED BALANCE SHEET
APRIL 30, 2001
These pro forma statements should be read in conjunction with the historical
financial statements used in their preparation.
[Enlarge/Download Table]
Historical
----------
Covenant Financial
EcoNet, Inc. Warfare, Pro Forma Pro Forma
& Subsidiary Inc. Adjustments Combined
------------------ ------------------ ------------------ -----------------
ASSETS
CURRENT ASSETS
Cash $ - $ 102,834 $ - $ 102,834
Notes receivable 60,000 - - 60,000
Prepaid expenses - 5,768 - 5,768
------------------ ------------------ ------------------ -----------------
Total current assets 60,000 108,602 - 168,602
PROPERTY AND EQUIPMENT
Equipment net of accumulated
depreciation of $19 - 1,386 - 1,386
OTHER ASSETS
Notes receivable, less current portion 240,000 - - 240,000
------------------ ------------------ ------------------ -----------------
Total assets $ 300,000 $ 109,988 $ - $ 409,988
================== ================== ================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ - $ 15,214 $ - $ 15,214
Income taxes payable - 2,885 - 2,885
Notes payable - 81,082 - 81,028
Total current liabilities - 99,181 - 99,181
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 1,200 1,405 - 2,605
Additional paid-in capital 298,800 - - 298,800
Retained earnings - 9,402 - 9,402
------------------ ------------------ ------------------ -----------------
Total liabilities and stockholders' equity $ 300,000 $ 109,988 $ - $ 409,988
================== ================== ================== =================
12
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FROM DATES OF INCEPTION THROUGH APRIL 30, 2001
These pro forma statements should be read in conjunction with the historical
financial statements used in their preparation.
[Enlarge/Download Table]
Historical
----------
Covenant Financial
EcoNet, Inc. Warfare,
& Subsidiary Inc
April 12, 2001 March 13,2001. Pro Forma Pro Forma
(Inception) (Inception) Adjustments Combined
------------------ ------------------ ------------------ -----------------
REVENUE
Membership and educational fees $ - $ 218,359 $ - $ 218,359
EXPENSES
Depreciation - 19 - 19
Contributions - 5,000 - 5,000
Selling, general and administrative - 201,053 - 201,053
------------------ ------------------ ------------------ -----------------
- 206,072 - 206,072
------------------ ------------------ ------------------ -----------------
Net income from operations before income taxes - 12,287 - 12,287
Provision for income taxes - 2,885 - 2,885
------------------ ------------------ ------------------ -----------------
Net Income - 9,402 - 9,402
================== ================== ================== =================
BASIC EARNINGS PER COMMON SHARE $ - $ 0.005 $ - $ 0.003
================== ================== ================== =================
Weighted average number of shares 1,200,000 1,771,000 2,971,000
The accompanying notes and auditor's report on condensed combined pro forma
should be read with these statements.
13
Covenant EcoNet, Inc. and Subsidiary and Financial Warfare, Inc.
Notes to Pro Forma Condensed Combined Balance Sheet and Statement of Income
April 30, 2001
The pro forma condensed combined balance sheet and statement of income is
provided to show the potential effect on the financial statements of Covenant
EcoNet, Inc. and Subsidiary ("CEI") due to the acquisition of Financial
Warfare, Inc (a District of Columbia corporation). For purposes of these
statements it is assumed that the event occurs as of the first day of CEI's
year.
1. Acquisition of Financial Warfare, Inc.
--------------------------------------
On May 1, 2001, CEI agreed to acquire Financial Warfare, Inc. by issuing
shares of CEI and thereby making CEI the parent of the newly acquired
Financial Warfare, Inc. subsidiary. The transaction is structured as a
stock-for-stock exchange, which will be accounted for under the
pooling-of-interests method.
Under the terms of the agreement CEI will transfer 1,771,000 shares of its
Common Stock, $0.001 par value, to Financial Warfare, Inc. shareholders, in
exchange for their 1,000 shares of Financial Warfare, Inc. Common Stock.
2. Management Assumptions
----------------------
General provision - The financial statements used in the pro forma statements
are the audited statements of CEI and Financial Warfare, Inc. as of and for the
period from their respective dates of inception through April 30, 2001.
Income Taxes - For purposes of the pro forma statements, it has been
assumed that CEI and Financial Warfare, Inc. would file consolidated income
tax returns. Any calculation of income taxes will assume the use of one tier of
corporate income tax brackets.
Related Party Transactions - There are no related transactions between
Financial Warfare, Inc. and CEI that would require elimination for combining
the historical statements of operations.
3. Costs of Acquisition
-----------------------
The costs of the acquisition of Financial Warfare, Inc. by CEI will be
reflected in the financial statements of CEI for its year ending April 30,
2002. The expenses of this transaction total approximately $2,000.
4. Goodwill
---------
There will be no goodwill created as a result of this acquisition, and so none
is reflected on either the balance sheet or the income statement.
5. Salaries, taxes and benefits
-----------------------------
Upon acquisition, Financial Warfare, Inc. will pay a management fee to CEI
for administrative services. It is anticipated that the amounts paid will be
similar to the amounts reflected on Financial Warfare, Inc.'s books as of April
30, 2001; therefore, no adjustment has been made for any additional fees.
14
FINANCIAL WARFARE, INC.
Financial Statements
and
Independent Auditor's Report
April 30, 2001
15
CONTENTS
PAGE
1961:
INDEPENDENT AUDITOR'S REPORT 3
FINANCIAL STATEMENTS
Balance Sheet 4
Statement of Income 5
Statement of Changes in Stockholders' Equity 6
Statement of Cash Flows 7
Notes to Financial Statements 8-10
16
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Financial Warfare, Inc.
We have audited the accompanying balance sheet of Financial Warfare, Inc. as
of April 30, 2001 and the related statements of income and changes in
stockholders' equity and cash flows for the period March 13, 2001 (Inception)
through April 30, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 our audit provides a reasonable basis for
our opinion.
In our opinion, based on our audit, the financial statements referred to above
present fairly, in all material respects, the financial position of Financial
Warfare, Inc. as of April 30, 2001, the results of its operations and its cash
flows for the period March 13, 2001 (Inception) through April 30, 2001 in
conformity with generally accepted accounting principles.
/s/ Stokes & Company, P.C.
----------------------
STOKES & COMPANY, P.C.
Washington, D.C.
May 29, 2001
17
FINANCIAL WARFARE, INC.
BALANCE SHEET
APRIL 30, 2001
ASSETS
CURRENT ASSETS
Cash $ 102,834
Prepaid expenses 5,768
---------------
Total current assets 108,602
PROPERTY AND EQUIPMENT
Equipment, net of accumulated
depreciation of $19 1,386
---------------
Total assets $ 109,988
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 15,214
Income taxes payable 2,885
Notes payable 81,082
-------------
Total current liabilities 99,181
---------------
STOCKHOLDERS' EQUITY
Common stock, no par value; 1,000 shares
authorized; 1,000 shares issued and outstanding 1,405
Retained earnings 9,402
---------------
Total stockholders' equity 10,807
---------------
Total liabilities and stockholders' equity $ 109,988
===============
The accompanying notes are an integral part of this financial statement.
18
FINANCIAL WARFARE, INC.
STATEMENT OF INCOME
MARCH 13, 2001 (INCEPTION) THROUGH APRIL 30, 2001
REVENUE
Membership and educational fees $ 218,359
---------------
EXPENSES
Depreciation 19
Charitable contributions 5,000
Selling, general and administrative 201,053
--------------
206,072
--------------
Net income from operations before income taxes 12,287
Provision for income taxes 2,885
--------------
Net income $ 9,402
==============
The accompanying notes are an integral part of this financial statement.
19
FINANCIAL WARFARE, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
MARCH 13, 2001 (INCEPTION) THROUGH APRIL 30, 2001
[Enlarge/Download Table]
Common Stock Retained
Shares Amount Earnings Total
Common Stock issued at formation 1,000 $ 1,405 $ - $ 1,405
Net Income - - 9,402 9,402
Balance, April 30, 2001 1,000 $ 1,405 $ 9,402 $ 10,807
The accompanying notes are an integral part of this financial statement.
20
FINANCIAL WARFARE, INC.
STATEMENT OF CASH FLOWS
MARCH 13, 2001 (INCEPTION) THROUGH APRIL 30, 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from membership and educational fees $ 218,359
Payments to vendors, suppliers and employees (196,607)
----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,752
----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans 164,290
Loan repayments (83,208)
----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 81,082
----------
NET INCREASE IN CASH 102,834
CASH at beginning of period -
----------
CASH at end of period $ 102,834
==========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 9,402
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 19
Increase in assets:
Prepaid expenses (5,768)
Increase in liabilities:
Accounts payable 15,214
Income taxes payable 2,885
----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 21,752
==========
The accompanying notes are an integral part of this financial statement
21
Financial Warfare, Inc.
Notes to Financial Statements
April 30, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of organization
----------------------
Financial Warfare, Inc. was incorporated in the District of Columbia on
March 13, 2001. The Company was capitalized through the transfer of
property and equipment valued at $1,405 in exchange for all of its authorized
Common Stock.
The purpose of the Company is to provide education on the subjects of
financial literacy through the use of seminars, conferences and other medium
to individuals interested in learning about the capital markets.
The accompanying financial statements for the period March 13, 2001
(Inception) through April 30, 2001 have been prepared assuming the
Company will continue as a going concern. The accompanying financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts and
classifications of liabilities that may result from the possible inability of
the Company to continue as a going concern.
Cash and cash equivalents
-------------------------
The Company considers deposits that can be redeemed on demand and
investments that have original maturities of less than three months, when
purchased, to be cash equivalents. As of April 30, 2001 the Company had no
cash equivalents.
Property and equipment
----------------------
Property and equipment are recorded at cost. Expenditures for major
additions and improvements of $500 or more are capitalized and minor
replacements, maintenance, and repairs are charged to expense as incurred.
When property and equipment are retired or otherwise disposed of, the cost
and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations for the
respective period. Depreciation is provided over the estimated useful lives
of the related assets using the straight-line method for financial statement
purposes. The Company uses other depreciation methods (generally
accelerated) for tax purposes where appropriate. The estimated useful lives
for significant property and equipment categories are as follows:
Computers and Equipment 5 years
Furniture and Fixture 7 years
Use of estimates
----------------
Preparing the Company's financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
22
Financial Warfare, Inc.
Notes to Financial Statements (Continued)
April 30, 2001
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
------------
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets, including tax loss and credit carryforwards, 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 recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. Deferred income tax expense represents the change during
the period in the deferred tax assets and deferred tax liabilities. The
components of the deferred tax assets and liabilities are individually
classified as current and non-current based on their characteristics.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized.
As of April 30, 2001 no provision for deferred tax assets or liabilities has
been presented.
NOTE B - REVENUE RECOGNITION
Revenue from membership and educational fees is recognized when paid.
he Company's operating procedures provide for various trips to the
membership locations for the purpose of generating additional members.
During these times the Company will schedule the seminars or training that
is part of the membership fees. Because of this policy the Company does
not incur substantial additional costs with respect to the seminars.
Therefore, the Company has not deferred any revenue with respect to its
future performance obligations.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment are summarized by major classifications as follows:
Office Equipment $ 500
Furniture and Fixture 905
--------
1,405
Less accumulated
depreciation and amortization 19
--------
$ 1,386
========
Depreciation expense for the period from inception to April 30, 2001 was
$19.
NOTE D - CASH IN EXCESS OF FDIC INSURED LIMITS
The Company maintains its cash in bank deposit accounts which, at times,
may exceed federally insured limits. Accounts are guaranteed by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000. At April
30, 2001, the Company had approximately $3,700 in excess of FDIC
insured limits. The Company has not experienced any losses in such
accounts.
23
Financial Warfare, Inc.
Notes to Financial Statements (Continued)
April 30, 2001
NOTE E - PROVISION FOR INCOME TAXES
The federal and state income tax provision (benefit) is summarized as
follows:
Current: 2001
----
Federal $1,659
State 1,226
----------
$2,885
----------
NOTE F - RELATED PARTY TRANSACTIONS
During the period March 13, 2001 (Inception) through April 30, 2001,
Financial Warfare, Inc. had the following relationships with other entities:
Financial Warfare Club, Inc. (Maryland) - Common Management Control
Covenant EcoNet, L.L.C. - Common Management Control
During the period March 13, 2001 (Inception) through April 30, 2001, the
Company deposited in its bank account $164,290 in monies borrowed from
Financial Warfare Club, Inc. (Maryland). This amount has been recorded
as a liability in Financial Warfare, Inc's. books, and as of April 30, 2001,
$83,208 has been repaid. The outstanding balance at April 30, 2001 was
$81,082. The financial obligation is unsecured.
In addition, the Company has engaged the services of Covenant EcoNet,
L.L.C. and during the period March 13, 2001 (Inception) through April 30,
2001, it has paid $122,000 for the services. Covenant EcoNet, L.L.C. is
wholly owned by the Company's shareholders. The Company believes that
the amount paid represents the market price for such services.
NOTE G - SUBSEQUENT EVENTS
On May 1, 2001, the Company's shareholders entered into an agreement to
exchange 100% of the outstanding Common Stock of the Company for
1,771,000 shares of Covenant EconNet, Inc. of Nevada. Covenant EcoNet,
Inc., which was incorporated on April 12, 2001, is a holding company and
provides management consulting services and organizational expertise to
its subsidiary companies. Covenant EcoNet, Inc. currently owns one other
subsidiary, which is also in the business of providing financial literacy
education.
The business combination will be accounted for using the
pooling-of-interests method for combining the entities. Accordingly, future
financial statements will be consolidated with Covenant EcoNet, Inc.
Presentations of the consolidated statements will be restated as if the
companies had combined at the beginning of the first period presented.
NOTE H - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company is capitalized through the following non-cash activity:
Issuance of Common Stock for transfer-in of fixed assets $1,405
24
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Indemnification of Directors and Officers
Not applicable.
Other Expenses of Issuance and Distribution
All expenses, including all allocated general administrative and
overhead expenses, related to the offering or the organization of
the Company will be borne by the Company.
The following table sets forth a reasonable itemized statement of
all anticipated out-of-pocket and overhead expenses (subject to
future contingencies) to be incurred in connection with the
distribution of the securities being registered, reflecting the
minimum and maximum subscription amounts.
Minimum Maximum
SEC Registration Fee $1,000 $1,000
Printing Expense $2,000 $8,000
Legal Fees and Expense $60,000 $60,000
Edgar fees $1,000 $1,000
Accounting Fees
and Expenses $20,000 $20,000
Miscellaneous $7,000 $7,000
Total $94,000 $117,000
Recent Sales of Unregistered Securities
The Company sold promissory notes to investors in the amount of
$15,000 per unit for a total sum of $270,000. The promissory
notes were issued under an exemption pursuant to the Securities
Act of 1933, section 4(2); this section states that transactions by an
issuer not involving any public offering are an exempted transactions.
Exhibits
The following Exhibits are filed as part of the Registration Statement:
The following Exhibits are filed as part of the Registration Statement:
Exhibit No. Identification of Exhibit
1 3.1 Articles of Incorporation
2 3.2 Bylaws of Covenant EcoNet, Inc.
3Promissory Note of Marcus Dukes
4.1 Promissory Note of Teresa Hodge
4.2 Private Placement Promissory Note
10.1 Employment Agreement of Curtis Pree
10.2 Subscription Escrow Agreement
21 Subsidiaries of the registrant
23 Consent of Stokes & Company, Certified Public Accountants
99.1 Cease and Desist Order - Maryland Securities Commission
99.2 Cease and Desist Order - Alabama Securities Commission
99.3 Rescission Letter
Undertakings
The Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to: (i)
Include any prospectus required by section 10(a) (3) of the
Securities Act; and (ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamental change in
the information in the Registration Statement.
(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.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer
pursuant to the foregoing provisions, or otherwise, the small
business issuer has 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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets the requirements for filing on Form SB-1 and authorizes this
Registration Statement to be signed on its behalf by the
undersigned, being duly authorized, in Washington, D.C. on
the date indicated below.
Covenant EcoNet, Inc.
By: /s/ Marcus D. Dukes
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following
person in the capacity and on the date indicated:
Signature Title Date
--------- ---------- ----
_/s/
---------------------
Marcus Dukes Chairman and Chief Executive Officer
_/s/
Teresa Hodge Director & Vice President
_/s/
---------------------
Curtis Pree President
[Back cover]
DEALER PROSPECTUS DELIVERY OBLIGATION
Until the later of 90-days after the effective date or first bona fide offer,
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscription.
[SL1]
Dates Referenced Herein
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