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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
COMMISSION FILE NUMBER 000-28283
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DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
(Exact name of registrant as specified in charter)
UTAH 87-0392000
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12885 HWY 183, STE 108-A, AUSTIN, TEXAS 78750
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 335-1494
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Securities registered pursuant to section 12(b) of the Act:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
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(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part 10-KSB or any amendment to this
Form 10-KSB. {X}
State issuer's revenues for its most recent fiscal year: $21,906.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of a specified date within the past 60
days: As of September 18, 2000, the aggregate market price of the voting stock
held by non-affiliates was approximately $5,914,512.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of June 30, 2000, the Company had
outstanding 22,837,414 shares of its common stock, par value $0.001.
Transitional Small Business Disclosure
Format (Check one): Yes No X
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Page 1 of 21 consecutively numbered pages.
Exhibit index appears on page 21.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION PAGE
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<S> <C> <C>
PART I
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTY 6
ITEM 3. LEGAL PROCEEDINGS 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 7
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 7
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OR PLAN OF OPERATION 8
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 11
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 18
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS: COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT 18
ITEM 10. EXECUTIVE COMPENSATION 18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 19
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 19
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
The Company currently competes in two business segments: (1) the installation of
heating and cooling systems and (2) the installation of lighting systems using
new, more efficient, systems. Each of these products can be used to retrofit
less efficient systems. While each of these products can be and is marketed and
installed independently of each other, the Company has begun offering the
heating and cooling system and the lighting products as a comprehensive energy
services product.
Through June of 2000, the Company operated primarily as a research and
development entity. Its primary research activities centered around exploring
and investigating energy products and services, specifically within the heating
and cooling markets. The development of the Energy Miser system has produced
alternate mediums to which the system may operate from, forging new patent
opportunities. Previous sales conducted prior to June 30, 2000, were to
determine product viability, service requirements, liabilities, and costs
associated with installation and operation of the Energy Miser system. The
Company is formally prepared to release for commercial sale the Energy Miser
heating and cooling system in the third quarter of the calendar year 2000. In
August of 2000, the Company received the final version of the Engineering Manual
for the Energy Miser heating/cooling system. The Engineering Manual was the last
step before introducing the Energy Miser to the world's commercial heating and
cooling markets. FHP Manufacturing manufactures DeMarco's Energy Miser system.
Together they have developed a marketing and promotion program that introduces
the manual to FHP's sales representatives and nationwide distributor network.
The Company has prepared a nationwide presentation of the Energy Miser system,
which initially targets Energy Service Companies (ESCOs). ESCOs offer
performance contracting for projects greater than $50 million, most of which
require retrofitting heating and cooling systems. ESCOs implement systems that
provide the greatest percentage of energy reduction to maximize savings
benefits. Management can give no assurances that the marketing program will
produce the desired results of substantially increasing revenues or
profitability.
THE PRODUCTS
The DeMarco Energy Miser Heating and Cooling System
The Energy Miser is a patented earth-coupled heat pump utilizing the municipal
water main or any other underground piping loop to heat, cool and provide
domestic hot water for buildings. Earth-coupled heat pumps are from 50% to 70%
more efficient than other methods for heating and air conditioning. Monthly
operating costs are significantly lower than other methods.
In the cooling mode, heat pumps operate by removing heat from the inside of a
building to an exterior heat "sink." In the heating mode, the process is
reversed. Heat is moved from an exterior source to the inside of a building.
Earth-coupled heat pumps normally use the heat absorbing, or heat supplying,
capacity of large bodies of water such as lakes, ponds, water wells or specially
constructed networks of pipe called ground loops. The requirements for a "large
body of water" as the external source/sink or the costly excavating required for
the heat pump, imposes three constraints on anyone wanting to take advantage of
the system. The first is the need to be located near such a body of water if a
natural source/sink is going to be used. The second is the added expense of
drilling a water well. The third is the need for enough property to accommodate
the underground installation of several hundred feet of plastic pipe.
The Energy Miser removes those three constraints by utilizing the thermal
properties of public water supplies. Because the thermal properties of the water
in the underground piping infrastructure is used as a medium (and not for
consumption or re-distribution), the need for large external bodies of water and
expensive wells or land
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acquisitions for ground loops are eliminated. There is no cross flow between the
water supply and the heat pump. The integrity of the water is retained with any
application of the Energy Miser system.
Energy Efficient Lighting Systems
In 1999, the Company introduced a second product for their comprehensive Energy
Services program - lighting retrofit services. In commercial facilities,
lighting typically represents 30 to 40 percent of a commercial facility's energy
consumption. By reducing the kilowatts used for lighting, utility costs can be
reduced. Efficient lighting systems can reduce consumption by as much as 50
percent, without reducing lumens.
The lighting retrofit services are offered as a combined package with the
DeMarco Energy Miser system, creating a marketing/sales program based upon
return on investment time parameters. Sub-contractors generally located within
the geographic region of the project perform lighting retrofit installations.
These sub-contractors are identified, recruited and managed by internal Company
Project Managers for DeMarco. Typical installation time for a complete retrofit
is not more than one day. As of June 30, 2000, the Company has not initiated
sales efforts for this product.
The Company has signed a Strategic Partnership agreement with Lighting
Management Consultants (LMC) in Houston, Texas. The agreement provides for
forthcoming lighting projects awarded to DeMarco to be performed by LMC within
their geographic business environment. Additionally, the Company has entered
into a Strategic Partnership with Sli, Inc. (NYSE:SLI), where the relationship
provides for Sli to perform lighting retrofit and energy management services for
DeMarco awarded contracts outside the parameters, scope and geography of the LMC
partnership.
RECENT DEVELOPMENTS
DeMarco Energy Systems received notice in May, 2000 that the basis for claims
made within the second patent application have been found to be patentable by
the United States Patent office.
The second Patent is for an invention that relates to heat pumps, which are
automatically thermodynamically balanced to operate at optimum conditions using
water, and in this case reuse water systems. This patent was designed to utilize
reuse water from private, public or other types of managed secondary water lines
with the DeMarco Energy Miser heating and cooling system. Reuse water is defined
as treated sewer water that falls below the standards of drinking water. For
many years, reuse water has been used in secondary water systems for watering
lawns, charging fire hydrants, as well as other non-potable water applications.
It has only been in recent years that the secondary water systems have been
given greater consideration due to water shortages.
The DeMarco Energy Miser excels in any managed water system, saving consumers as
much as seventy percent off of their heating and cooling bill. The system is
available for both residential and commercial applications. The Energy Miser
system also thrives in potable water, reuse water, and other similar managed
water systems. Incorporating the FDA approved Alfa Laval heat exchanger within
the DeMarco Energy Miser system, the potential for cross-contamination is
eliminated in all potable water systems.
The Energy Miser system has only utilized potable water systems as demonstrated
within several military bases, as well as other commercial and institutional
applications nationwide. The Company has organized marketing efforts to launch
its sales program in cities using or proposing to implement gray water systems.
Although the Company anticipates a significant increase in revenue as a result
of this patent approval there can be no assurances that such marketing efforts
will have their intended effect of increasing such revenues or profitability.
The Counsel of Governments in Washington, D.C. has awarded a contract estimated
to be worth over $1 billion over the life of the program to PG&E Energy Services
an Energy Services Company, or ESCO (NYSE:PCG), whose bid included the DeMarco
Energy Miser as the first choice for heating and cooling systems for upgrades
and retrofits. Recent transactions with PG&E Energy Services included a sale of
their Energy Services division to
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Chevron Corporation Energy Services division (NYSE:CHV). PG&E Energy Services
has confirmed that the Company's contract was conveyed in the sale, however,
confirmation from Chevron is still pending.
The heating and cooling portion represents a major portion of the program's
total expected revenues. Work on the contract is expected to begin as early as
the summer of 2000.
The Counsel of Governments includes municipalities and local governments
surrounding Washington, D.C., which may include the public school systems in
several counties and municipalities as well as public housing authorities. Other
agencies that may become users of this program, greatly expanding the scope and
business potential, include agencies of the Federal Government and other
municipalities outside of the immediate Washington, D.C. metropolitan area.
DeMarco Energy has also been invited to bid lighting portions of the project
from the ESCO.
During the six-month period from January through June 2000, the Company issued a
series of convertible debentures bearing 8% interest. A total of $197,000 was
raised from this issuance. The debentures mature in 24 months from the time of
issue. Interest payments are to be made quarterly. The debentures carry various
conversion privileges ranging from $0.10 to $0.60 a share. The holders have the
right to convert any or all of the principal into common shares of the Company
at any time after the first 12 months from issuance. If all debenture holders
elect to convert, the Company will issue 856,572 shares of its common stock to
the holders and be relieved of the debt. The Company utilized the proceeds to
reduce accounts payable and for operating expenses.
CURRENT DEVELOPMENTS
On June 27, 2000, DeMarco Energy Systems signed a formal Letter of Intent to
acquire Lighting Management Consultants. Terms of the acquisition included cash
and stock for one hundred percent of the equity in LMC. The acquisition was
expected to complete within thirty days. Both parties to the Letter of Intent
have agreed to revisit the acquisition in 2001.
On July 10, 2000, the Company's Energy Miser heating and cooling system was
confirmed as an application for the new reclaim water system being installed
throughout the City of Austin, Texas. Austin is among 1,500 other cities
nationwide who have begun to implement a secondary water system which supplies
water for irrigation of golf courses, ball parks, schools, parks, industrial
centers, apartment complexes, commercial properties, home lawn watering and road
medians; cooling towers; fire fighting; industrial and manufacturing processes;
and road construction. Re-use water is defined as treated sewer water that falls
just below the standards of drinking water.
The Energy Miser will be the only water source heating and cooling system
available as a re-claim water system. The Company expects to launch sales
efforts for Austin plus other targeted cities during the first quarter of its
fiscal year 2001, which began July 1, 2000. There can be no assurances that this
acceptance by the city of Austin will result in increased revenues.
As previously mentioned, on August 10, 2000, the Company completed its
Engineering Manual for the Energy Miser heating/cooling system (see "DESCRIPTION
OF BUSINESS").
On August 31, 2000, DeMarco Energy reached a tentative agreement to the terms
for the financing of up to $8 million. The financing documents were signed on
September 19, 2000, with the first $500 thousand of funding to occur shortly
thereafter. An additional $1,000,000 will be funded upon the completion of an
SB-2 registration statement filing that must be completed within 45 days of the
initial funding. Utilization of the funds will be directed toward acquisitions,
marketing, internal corporate infrastructure development, and general
administrative expenses
MARKETING AND COMPETITION
The Company markets its Energy Miser system via a marketing agreement with
Florida Heat Pump Manufacturing Company, of Ft. Lauderdale, Florida. Florida
Heat Pump manufactures, distributes and markets the
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DeMarco Energy Miser as a private label through its dealer network. Florida Heat
Pump and the Company focus primarily on the commercial and institutional
markets. The Company displays the Energy Miser at trade shows in booths
sponsored by Florida Heat Pump. In addition to trade shows, the Company markets
the Energy Miser directly to end users, architects, designers and installers of
HVAC equipment. The market for HVAC equipment and installation exceeds
$30,000,000 annually. In this business segment, the Company is in competition
with all other producers of HVAC systems, some of which are more firmly
established in the marketplaces and have substantially greater financial
resources than the Company.
One significant obstacle confronted by the Company in the marketing of the
Energy Miser is governmental interpretation and regulation. The Energy Miser
requires a constant flow of water, the volume of which must increase as the
amount of space to be conditioned and as the size of the unit increases. For
many applications, this requires connecting into the public water supply to gain
access to "main" water lines. In some cases public officials in charge of
maintaining public water supplies challenge any such tapping into the public
potable water supply. The Energy Miser does not use water - it only uses the
thermal properties of the water, meaning that the water removed from the main is
returned at a slightly different temperature. The Company is not aware of any
proof to support water quality concerns of public officials. The Company can
offer no assurances that it will ever be able to overcome the concerns of public
water officials.
Notwithstanding governmental obstacles, the Company has experienced success in
two areas. When a given facility will be sufficiently large that it has a
significant demand for water, the "private" water pipes bringing the water in
from the public water supply may have the requisite volume. In addition, for
such sites, it is possible and cost effective to install a back-flow preventor,
which prevents the return of water from the site into the public water supply.
The back-flow prevention addresses concerns of public health officials. In
addition, some sites use enough water that the "gray" water in the sanitary
sewer would provide sufficient volume to utilize the Energy Miser. The Company
is attempting to maximize its marketing efforts in these areas.
A secondary water system has become the initiative of approximately 1,500
communities throughout the United States. This secondary water system contains
water treated less than that of potable water, and referred to as either reuse,
gray, or brown water. This water type is used for applications other than human
or animal consumption, such as cooling towers and boiler systems, lawn
sprinklers and fire prevention. Because it has equal thermal properties of
potable water, the DeMarco Energy Miser is being considered as a generally
acceptable application.
The Company's lighting retrofit business also focuses on the commercial and
institutional markets. The Company markets the products of other manufacturers
and manufactures no products itself. At some point in the future, the Company
will forge a strategic partnership relationship to audit and manage the
installation of the energy efficient lighting fixtures it markets, but for the
time being it will refrain from bidding lighting retrofit projects. The Company
recently signed a significant contract with Pacific Gas and Electric Service
Company to retrofit a large number of gasoline stations in the Eastern and
Southeastern portions of the United States. The Company has also agreed to a
strategic partnership arrangement with an existing lighting retrofit company.
The Company's lighting retrofit business competes with a very wide array of
businesses, some of which are quite substantial. Several of the Company's
competitors manufacture the lighting fixtures they market, which may offer them
a competitive advantage. Others are adversaries or affiliates of electric
utilities, which may afford them greater or more ready access to potential
customers.
ITEM 2. DESCRIPTION OF PROPERTY
The Company occupies approximately 1,200 square feet of office space at 12885
Hwy 183, Suite 108-A, Austin, Texas 78750. The Company owns no property other
than office furniture, equipment and software. The Company employs 2 people,
both of whom are full time and one independent contractor. It is anticipated
that up to 50 additional personnel will be required to meet the demands of the
projected market over the next five years. Included in these projections are
personnel that might be retained from any acquisitions if any acquisitions do
occur. Most of these positions will be in the areas of sales, marketing and
project management as the Company's projected volume increases. There can be no
assurances that such volume increases will occur.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, and no material
legal proceedings have been threatened by or, to the best of the Company's
knowledge, against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a shareholders meeting during the time period covered
by this report.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The Common Stock is traded in the over-the-counter market and quoted on OTC EBB
under the symbol "DMES" and quoted in the pink sheets published by the National
Quotations Bureau. Since 1984, from time to time, a very small number of
securities broker-dealers published only intermittent quotations for the Common
Stock, and there was no continuous, consistent trading market. The trading
volume in the Common Stock has been and is extremely limited. During the above
period, the limited nature of the trading market created the potential for
significant changes in the trading price for the Common Stock as a result of
relatively minor changes in the supply and demand for Common Stock and perhaps
without regard to the Company's business activities. Because of the lack of
specific transaction information and the Company's belief that quotations during
the period were particularly sensitive to actual or anticipated volume of supply
and demand, the Company does not believe that such quotations during this period
are reliable indicators of a trading market for the Common Stock.
Subject to the above limitations, the Company believes that during eight fiscal
quarters preceding the date of this filing, the high and low sales prices for
the Common Stock during each quarter are as set forth in the table below (such
prices are without retail mark-up, mark-down, or commissions).
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
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<S> <C> <C>
June 30, 2000 .875 .281
March 31, 2000 .531 .125
December 31, 1999 .25 125
September 30, 1999 .35 .125
June 30, 1999 .281 .125
March 31, 1999 .53 .125
December 31, 1998 .281 .094
September 30, 1998 .375 .125
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES
In September 1999, the Company completed a private placement (the "Placement")
of 696,852 shares of its common stock. The aggregate sales proceeds of the
Placement were $174,300. The Company believes that the issuance of shares of
common stock in the Placement was exempt from the registration requirements of
the Securities Act under Rule 504 under the Securities Act.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The financial information set forth in the following discussion should be read
in conjunction with, and qualified in its entirety by, the financial statements
of the Company included elsewhere herein.
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
The following analysis of historical financial condition and results of
operations are not necessarily reflective of the on-going operations of the
Company.
Overall Operating Results
Fiscal year ended June 30, 2000 compared to fiscal year ended June 30, 1999:
The Company had net sales of $22 thousand for the fiscal year ended June 30,
2000. Prior year net sales were $9 thousand. The Company anticipates that
increased marketing efforts in the future will generate the required revenues to
sustain the anticipated growth of the Company. There can be no assurances that
such sales will occur. Operating expenses and interest expenses increased $10
thousand or 4% to $292 thousand as compared to the prior year expenses of $282
thousand. The primary area where expenses increased was in professional fees as
they relate to fees incurred in receiving the recent patent approval as well as
expenses incurred in registering the Company's securities in connection with the
filing of SEC form 10SB12G.
The Company incurred a net loss for the current year of $271 thousand as
compared to a net loss of $217 thousand for the prior year. Management continues
to closely monitor expenses. The prior year loss includes a one-time gain of $66
thousand for the forgiveness of debt owed to the former majority shareholder,
Louis DeMarco. The loss for the fiscal year ended June 30, 1999 would have been
$283 thousand if that gain had been excluded.
Currently, the Company has more than $50 million in gross sales under bid. One
sale was completed during the first quarter of 2000. During the final quarter of
1999, the US Government authorized the Marine Air Station in Beaufort, South
Carolina to purchase the DeMarco Energy Miser heating and cooling system and
employ the base's water main. The gross sale for the system was $250,000, and
during the second quarter of calendar year 2000, the Company received its
royalty compensation of ten percent from the sale. The Company and FHP
Manufacturing have previously agreed to a standard royalty fee of twenty
percent, however, under certain circumstances, and with the prior approval of
the Company, this fee may be negotiated as part of the bidding process. The
Beaufort, South Carolina installation was subject to such negotiation. The sales
process for this installation site from bid notification until contract award
required approximately one year. The sales process for the Energy Miser systems
can range from as little as one month to as much as 2 years. The heating and
cooling systems require an average of 9-12 months per system. The lighting
systems retrofits have no historical sales data on which to base averages.
LIQUIDITY AND CAPITAL RESOURCES
The Company has been financed through a cumulative convertible debenture that
began in the first quarter of 2000, a private 504 offering which ended during
the third quarter of 1999, and is supported in interim by the President, Victor
DeMarco.
The Company completed a convertible debenture debt offering of $197 thousand
(see "RECENT DEVELOPMENTS") during the last six months of the fiscal year ended
June 30, 2000. The proceeds were utilized for repayment of accounts payable and
operating expenses.
The Company is currently finalizing a convertible debt offering of up to $8
million (see "CURRENT DEVELOPMENTS") that will be directed toward acquisitions,
marketing, internal corporate infrastructure development, and general
administrative expenses. There can be no assurances that the Company will be
successful in attracting investors for the full amount of this offering.
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The Company had negative working capital of $385 thousand at the end of the
current fiscal year as compared to a negative working capital of $87 thousand at
the end of the prior fiscal year end, June 30, 1999. This increase in negative
working capital is primarily the result of the funding of operations to date.
Variations in shareholder/insider debt (other than the issuance of the
convertible debentures) are attributed to the settlement of the estate of Louis
DeMarco, the prior majority shareholder, and the dissolution of Cyberlink
Systems, Inc.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted FASB Statement 128. It is not expected that the Company
will be impacted by other recently issued standards. FASB Statement 128 presents
new standards for computing and presenting earnings per share (EPS). The
Statement is effective for financial statements for both interim and annual
periods ending after December 15, 1997.
FASB Statement 131 presents news standards for disclosures about segment
reporting. The Company does not believe that this accounting standard applies to
the Company as all operations of the Company are integrated for financial
reporting and decision-making purposes.
YEAR 2000 PREPAREDNESS
The Company recognizes that computer systems and all forms of electronic
technologies, information technologies and non-information technologies, could
be adversely affected by the year 2000 date. This is because many systems and
technology components use a two-digit field to represent the year in dates
(e.g., "98" rather than "1998"). With the advent of year 2000, systems and
programs may fail or produce incorrect data believing it is the year 1900,
causing not just information technology problems but also business and
operations problems.
The Company continues to evaluate its information technology infrastructure for
Year 2000 compliance. The Company currently does not expect that the cost of its
Year 2000 compliance program will be material to its financial condition or
results of operations or that its business will be adversely affected by the
Year 2000 issue in any material respect. Nevertheless, achieving Year 2000
compliance is dependent on many factors, some of which are not completely within
the Company's control. Should either the Company's internal systems or the
internal systems of one or more significant vendors or suppliers fail to achieve
Year 2000 compliance, the Company's business and its results of operations could
be adversely affected.
The Company has not been materially affected with Y2K problems to date.
INFLATION
The Company's results of operations have not been affected by inflation and
management does not expect inflation to have a significant effect on its
operations in the future.
FORWARD-LOOKING INFORMATION
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange Commission.
Words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project or projected", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements, so as to maximize to the fullest extent possible the protections of
the safe harbor established in the Reform Act. Accordingly, such statements are
qualified in their entirety by reference to and are accompanied by
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the following discussion of certain important factors that could cause actual
results to differ materially from such forward-looking statements.
Management is currently unaware of any trends or conditions other than those
previously mentioned in this management's discussion and analysis that could
have a material adverse effect on the Company's consolidated financial position,
future results of operations, or liquidity. However, investors should also be
aware of factors that could have a negative impact on the Company's prospects
and the consistency of progress in the areas of revenue generation, liquidity,
and generation of capital resources. These include: (i) variations in revenue,
(ii) possible inability to attract investors for its equity securities or
otherwise raise adequate funds from any source should the Company seek to do so,
(iii) increased governmental regulation, (iv) increased competition, (v)
unfavorable outcomes to litigation involving the Company or to which the Company
may become a party in the future and, (vi) a very competitive and rapidly
changing operating environment.
The risks identified here are not all inclusive. New risk factors emerge from
time to time and it is not possible for management to predict all of such risk
factors, nor can it assess the impact of all such risk factors on the Company's
business or the extent to which any factor or combination of factors may cause
actual results to differ materially from those contained in any forward-looking
statements. Accordingly, forward-looking statements should not be relied upon as
a prediction of actual results.
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ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Report of Independent Auditors
To the Board of Directors of DeMarco Energy Systems, Inc.
We have audited the accompanying balance sheet of DeMarco Energy Systems, Inc.
as of June 30, 2000, and the related statements of income and retained earnings,
and cash flows for the year then ended. 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 that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DeMarco Energy Systems, Inc. as
of June 30, 2000, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Nathan M. Robnett, C. P. A.
September 5, 2000
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DEMARCO ENERGY SYSTEMS, INC.
COMPARATIVE BALANCE SHEET
AS OF JUNE 30, 1999 AND JUNE 30, 2000
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, 1999 JUNE 30, 2000
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<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,647 $ 23,213
Accounts Receivable 45,000
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Total Current Assets $ 47,647 $ 23,213
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Capital Assets:
Fixtures, Equipment and Other 149,045 171,049
Accumulated Depreciation and Amortization (92,712) (125,661)
------------ ------------
Total Fixed Assets $ 56,333 $ 45,388
------------ ------------
Other Assets: $ 10,664 $ 4,241
------------ ------------
TOTAL ASSETS $ 114,644 $ 72,842
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Accounts payable $ 46,108 $ 37,656
Promissory Note 57,898 34,833
Current Portion of Long-term Debt 26,852 29,954
Convertible Debentures 197,000
Other Current Liabilities 4,388 1,775
Note Payable to Shareholders 107,451
------------ ------------
Total Current Liabilities $ 135,246 $ 408,669
------------ ------------
Long-Term Notes Payable 52,541 22,586
Long-Term Notes Payable to Shareholders 55,420 20,000
------------ ------------
TOTAL LIABILITIES $ 243,207 $ 451,255
------------ ------------
SHAREHOLDERS' EQUITY
Common Stock, $0.001 par value,
100,000,000 shares authorized and
22,453,657 shares issued at 6/30/99 $ 22,454 $ 43,274
and 22,839,414 shares issued at 6/30/2000
Additional paid-in capital 2,223,892 2,223,892
Retained (deficit) (2,164,379) (2,435,049)
Subscriptions Receivable (210,530) (210,530)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY (128,563) (378,413)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 114,644 $ 72,842
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13
<PAGE> 14
DEMARCO ENERGY SYSTEMS, INC.
COMPARATIVE STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED JUNE 30, 1999 AND JUNE 30, 2000
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
JUNE 30, 1999 JUNE 30, 2000
------------- -------------
<S> <C> <C>
Revenues
Net Sales $ 14,761 $ 21,906
Other Income 76,356
------------ ------------
Total Revenues $ 91,117 $ 21,906
------------ ------------
Costs and expenses
Cost of Merchandise Sold $ 5,545
Selling and Administrative 217,178 $ 230,410
Depreciation and Amortization 37,084 32,949
Interest 28,284 29,217
------------ ------------
Total Costs and Expenses $ 288,091 $ 292,576
------------ ------------
Other Income and Expense
Loss on Equipment Sales $ 19,866
Net Loss $ (216,840) $ (270,670)
Retained deficit at beginning of year (1,947,539) (2,164,379)
------------ ------------
Retained deficit at the end of year $ (2,164,379) $ (2,435,049)
============ ============
Loss per Common Share $ (0.007) $ 0.012
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
14
<PAGE> 15
DEMARCO ENERGY SYSTEMS, INC.
COMPARATIVE STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1999 AND JUNE 30, 2000
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
JUNE 30, 1999 JUNE 30, 2000
------------------------------ --------------------------------
<S> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (216,840) $ (270,670)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and Amortization 37,084 32,701
Changes in operating assets and liabilities:
Prepaid Expenses $ 10,157
Due From Shareholders 115,843
Accounts Receivable (45,000) $ 45,000
Inventories 5,545
Other Assets (1,000) (3,240)
Accounts Payable (3,350) (8,452)
Promissory Note (23,065)
Current Portion of Long Term Debt 3,665 3,102
Other Current Liabilities 3,634 (2,615)
---------- ----------
Net Cash Used by Operating Activities $ 89,494 10,730
Cash flows used in investing Activities
Long term Assets 9,176 (12,092)
Net cash provided (used) by financing activities
Line of Credit $ (43,141)
Convertible Debentures $ 197,000
Long Term Notes Payable (25,873) (29,954)
Notes to Shareholders 41,035 72,031
Common Stock 104,310 20,820
---------- ----------
Net Cash provided by financing Activities $ 76,331 $ 259,897
Net increase in Cash and Cash Equivalents $ (4,755) $ 20,566
Cash and Cash Equivalents at Beginning of Year 7,402 2,647
---------- ----------
Cash and Cash Equivalents at End of Year $ 2,647 $ 23,212
========== ==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
<PAGE> 16
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
DeMarco Energy Systems, Inc. (the Company) was organized under the laws of the
State of Utah in 1983. The Company is primarily engaged in the process of
investigating business opportunities that appear to have profit potential for
the Company. Primary emphasis is being placed on the DeMarco Energy System
water-air heating/cooling systems, energy audits and energy related equipment
such as lighting and electrical fixture retro-fittings.
During 1989, the Company exchanged 10,396,790 shares of its stock for exclusive
rights to a United States patent. The patent was granted for a unique
water-source heat pump system that both heats and cools buildings and provides
domestic hot water at an extremely low cost to install and operate. The heat
pump is specifically designed to utilize municipal water systems as a heat
source/sink. Florida Heat Pump Manufacturing Co. manufactures the DeMarco Energy
Miser System under a patent licensing agreement.
During the fiscal year ending June 30, 1999, the Company filed an application
with the United States Patent Office for a patent covering a heat pump system
using gray water sources, reclaimed water sources and other non-potable water
sources. Costs of approximately $20,000 related to the patent application have
been capitalized. The eventual approval or denial of this patent application is
indeterminable at this time.
DeMarco Energy Systems, Inc. currently has installations in Oregon,
Pennsylvania, Washington, Montana, South Dakota, Mississippi, and California.
Furniture and Equipment
Furniture and equipment and other long term assets are recorded at historical
cost less depreciation and amortization. Depreciation and amortization are
accounted for on the straight-line method based on estimated useful lives.
Betterments and large renewals that extend the life of assets are capitalized
whereas maintenance and repairs and small renewals are expensed as incurred.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
16
<PAGE> 17
Note B - Long Term Debt
Long-term debt consists of $52,540 in notes to financing companies
collateralized by computer systems that have a net book value of $19525.13. The
amount due within one year is $29,954.
The maturities of long-term debt for each of the succeeding five fiscal years
subsequent to June 30, 2000, are as follows:
<TABLE>
<S> <C>
Year ending June 30, 2001 29,954
Year ending June 30, 2002 22,586
--------
Total $ 52,540
========
</TABLE>
NOTE C - COMMITMENTS AND CONTINGENCIES
The company has entered into an office facility lease calling for the following
future rents:
<TABLE>
<S> <C>
Year ending June 30, 2001 13,061
Year ending June 30, 2002 6,683
-------
Total $19,744
=======
</TABLE>
The company has had, and renewed, a short term promissory note payable. At June
30, 2000, the balance was $34,833. That amount has been paid off in full after
fiscal year end and prior to the report date. The note was secured by shares in
the company owned by the company's president, Mr. Victor DeMarco. The president
has also guaranteed payments called for under the long term debt above and the
office facility lease payments.
NOTE D - EARNINGS (LOSS) PER COMMON SHARE
Earnings (Loss) per common share are computed by dividing net losses by the
average number of common share outstanding during the year. The average number
of common shares outstanding during the year ended June 30, 2000 was
approximately 22,645,000 shares.
NOTE E - INCOME TAXES
As of June 30, 2000, DeMarco Energy Systems, Inc. had an operating loss carry
forwards of approximately $2,203,778 that expire between 2005 and 2014 and are
available to offset future taxable income to the extent permitted under the
Internal Revenue Code.
NOTE F - RELATED PARTY TRANSACTIONS
Mr. Victor DeMarco, president of the company has advanced sums of approximately
$99,000 as at June 30, 2000 and are included in Notes Payable to Shareholders
(current) in the financial statements.
17
<PAGE> 18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes or disagreements with the Company's independent
accountant during the last 2 fiscal years.
No consultations occurred between the Company and Nathan M. Robnett, C.P.A.'s
appointment regarding the application of accounting principles to a specific
completed or contemplated transaction, the type of audit opinion, or other
information considered by the Company in reaching a decision as to an
accounting, auditing, or financial reporting issue.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
The Company's Chief Executive Officer, President and sole director is Victor M.
DeMarco. Mr. DeMarco is 36 years old and has served as the Company's President
and Chief Executive Officer since 1992.
ITEM 10. EXECUTIVE COMPENSATION
The following table reflects compensation paid to the mostly highly compensated
executive officer of the Company.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------
AWARDS
---------------------- PAYOUTS
ANNUAL COMPENSATION -------
--------------------------------- RESTRICTED SECURITIES
STOCK UNDERLYING LTIP ALL OTHER
SALARY BONUS OTHER AWARD OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) SARS(#) ($) ($)
------------------------------------ ------- ---------- --------- -------- ---------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Victor DeMarco...................... 2000 $45,600 $ 0 $ 0 $ 0 0 0 $ 0
President & Chief Executive Officer
</TABLE>
COMPENSATION OF DIRECTORS
The Company does not currently compensate directors in cash for any
services provided as a director.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of June 30, 2000, the name and shareholdings,
including options to acquire Common Stock, of each person who owns of record, or
was known by the Company to own beneficially, 5% or more of the shares of the
Common Stock currently issued and outstanding; the name and shareholdings,
including options to acquire the Common Stock, of each director; and the
shareholdings of all executive officers and directors as a group. The address of
each of the individuals listed below is the address of the Company.
<TABLE>
<CAPTION>
NATURE OF NUMBER OF PERCENTAGE OF
NAME OF PERSON OR GROUP OWNERSHIP SHARES OWNED OWNERSHIP
----------------------- --------- ------------ -------------
<S> <C> <C> <C>
Victor DeMarco.................. Direct/Indirect 7,605,609 33.3%
All executive officers and
directors as a Direct/Indirect 7,605,609 33.3%
group (one person)............
Total................. 7,605,609 33.3%
</TABLE>
18
<PAGE> 19
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Victor DeMarco, the Company's controlling shareholder and sole officer and
director has personally guaranteed indebtedness of the Company totaling
approximately $80,000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a) 1. Financial Statements
The following financial statements are filed as a part of this Form 10-KSB:
The Index to Consolidated Financial Statements is set out in Item 7 herein.
Exhibit 27.01 Financial Data Schedule
b) Reports on Form 8-K
None
19
<PAGE> 20
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
(Registrant) DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
By /s/ Victor M. DeMarco
Victor M. DeMarco, President/Chief Operating Officer
Date September 26, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ Victor M. DeMarco
Victor M. DeMarco, President/Chief Financial Officer,
Sole Director
Date September 26, 2000
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
21
