AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 2001
REGISTRATION NO. 333-69876
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NUMBER 2 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
(Exact name of registrant as specified in charter)
UTAH 3585 87-0392000
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(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
12885 HWY 183, STE 108-A, AUSTIN, TEXAS 78750
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(512) 335-1494
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(Address and telephone number of principal executive offices)
12885 HWY 183, STE 108-A, AUSTIN, TEXAS 78750
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(512) 335-1494
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(Address of principal place of business or intended principal place of business)
VICTOR DEMARCO, PRESIDENT AND CHIEF EXECUTIVE OFFICER
12885 HWY 183, STE 108-A
AUSTIN, TEXAS 78750
(512) 335-1494
(Name, Address and Telephone Number of Agent for Service)
Copy to:
CURTIS R. ASHMOS
LOCKE LIDDELL & SAPP LLP
100 CONGRESS, SUITE 300
AUSTIN, TEXAS 78701
(512) 305-4716
Approximate date of proposed sale to the public: From time to time after this
Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [ X ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462 (d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434 check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Each Proposed Proposed
Class of Maximum Maximum Amount of
Securities to Amount to be Offering Price Aggregate Registration
be Registered Registered Per Share Offering Price Fee
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Common Stock, 22,826,086 $0.09 (1) $2,054,348 (1) $ 513.59
$.0001 shares
par value
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(1) Estimated in accordance with Rule 457(c) of the Securities Act of 1933
solely for the purpose of calculating the registration fee based upon the last
sale reported for the Common Stock on the OTC EBB on October 4, 2001. Pursuant
to Rule 457, we hereby request that the fees paid in connection with File
333-49758 be applied toward this filing.
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.
DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
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CROSS-REFERENCE SHEET
(BETWEEN ITEMS OF FORM SB-2 AND PROSPECTUS)
FORM SB-2 ITEM NO. AND CAPTION PROSPECTUS CAPTIONS
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1. Front of Registration Statement and
Outside Front Cover of Prospectus Front Cover Page
2. Inside Front and Outside Back Cover Pages
Of Prospectus Inside Front Cover Page
3. Summary Information and Risk Factors Prospectus Summary; The
Company; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Front Cover Page; Plan of
Distribution
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters Management; Selling
and Control Persons Stockholders
11. Security Ownership of Certain Beneficial Security Ownership of Certain
Owners and Management Beneficial Owners and
Management
12. Description of Securities Description of Capital Stock
13. Interest of Named Experts and Counsel Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities Description of Capital Stock
15. Organization Within Last Five Years The Company; Business
16. Description of Business Business
17. Management's Discussion and Analysis or Management's Discussion and
Plan of Operation Analysis Results of Operations
18. Description of Property Business
19. Certain Relationships and Related
Transactions Certain Transactions
20. Market for Common Equity and Related Front Cover Page; Description
Stockholder Matters of CapitalStock; Selling
Stockholders
21. Executive Compensation Management
22. Financial Statements Index to Financial Statements
23. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure Not Applicable
2
PROSPECTUS
22,826,086 Shares
DEMARCO ENERGY SYSTEMS OF AMERICA, INC.
Common Stock
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This Prospectus relates to the offering for resale of 22,826,086 shares of
Common Stock, par value $.0001 per share (the "Common Stock"), of DeMarco Energy
Systems of America, Inc. (the "Company"). All of the Common Stock being
registered may be offered and sold from time to time by certain selling
stockholders of the Company. See "Selling Stockholders" and "Plan of
Distribution". The Company will not receive any proceeds from the sale of the
Common Stock by the Selling Stockholders.
The Common Stock is traded in the over-the-counter market and quoted on the OTC
EBB under the symbol "DMES" and quoted in the pink sheets published by the
National Quotations Bureau. On October 4, 2001, the last reported sale price for
the Company's Common Stock on the OTC EBB was $0.09 per share.
---------------------------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
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Neither the Securities and Exchange
Commission nor any state securities commission has approved
or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
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The Company has not authorized any person, agent or entity to give any
information or make any representation other than those contained in this
Prospectus (including material incorporated by reference herein). You should not
rely on any such information or representation as having been authorized by the
Company. This Prospectus is not an offer to sell the securities and it is not
soliciting an offer to buy the securities in any state where offers or sales are
not permitted.
The issuance of the shares being offered hereby, which are issuable upon
conversion of certain debentures, could result in substantial dilution to
shareholders of the Company.
The information in this prospectus is not complete and may be changed. The
Selling Stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective.
The date of this Prospectus is October 15, 2001.
3
TABLE OF CONTENTS
PAGE
Prospectus Summary 5
Risk Factors 6
Use of Proceeds 8
Management's Discussion and Analysis of Results of Operations 8
Business 10
Management 17
Security Ownership of Certain Beneficial Owners and Management 18
Selling Stockholders 18
Certain Transactions 20
Description of Capital Stock 20
Market for Common Stock 21
Plan of Distribution 22
Legal Matters 23
Experts 23
Additional Information 23
Index to Financial Statements F-1
4
PROSPECTUS SUMMARY
THE COMPANY
DeMarco Energy Systems of America, Inc. (or, "DeMarco Energy "), provides energy
solutions for commercial and residential applications. We sell a highly
efficient heating/cooling system called the "Energy Miser". The Energy Miser is
a patented geothermal heat pump system utilizing the municipal water main or any
other underground piping loop to heat, cool and provide domestic hot water for
buildings. Based on the results from our limited prototype installations and a
Department of Energy study, we believe these heat pumps are from 30% to 70% more
efficient than other methods for heating and air conditioning (See "Business").
In two of our initial prototype installations in South Dakota, the Energy Miser
reduced the annual energy cost to air condition and heat a facility by 36% at
one location and 72% at the other site. Since our inception we have installed
eleven of our Energy Miser systems in five states (See "Business"). We do not
have baseline information from the other installations from which we can measure
reductions in energy consumption because they are new installations. We cannot
assure you that a specific percentage savings will occur in future installations
of our system.
We derive our revenue in the form of royalties from sales of the Energy Miser
system. We have an exclusive brand name agreement with Florida Heat Pump
Manufacturing Inc. ("FHP") located in Florida. FHP manufactures the units,
labels them with the DeMarco Energy Miser name and sells them through their
existing dealer/distributor network. On February 7, 2001, we signed an amended
agreement with FHP which also allows us to purchase the Energy Miser system
directly from FHP and sell our product to consumers without going through a FHP
representative. Since the origination of this agreement (September 14, 1990) to
date there have been a minimal number of units sold. We believe this lack of
sales was partially due to distributors and dealers not having adequate
engineering instruction manuals in order to demonstrate or promote the system to
prospective customers. In August of 2000, we completed the engineering manual
and have developed a marketing and promotion program that introduced the manual
to FHP's sales representatives and distribution network (See "BUSINESS"). In
August 2001, we mailed our engineering manuals to 82 FHP sales representatives
in the United States and to 18 FHP sales representatives in foreign countries.
We also believe our sales have been hampered by the reluctance of various
government agencies to allow us to tap into municipal water mains and our lack
of sufficient operating capital (See " BUSINESS" and "Government Regulations").
The mailing address of our principal executive office is P.O. Box 201057,
Austin, Texas 78720-1057 and the telephone number is (512) 335-1494.
5
RISK FACTORS
An investment in our Common Stock is speculative and involves a substantial
degree of risk. Investors should carefully consider, along with other
information in this Prospectus, the following considerations and risks in
evaluating an investment in our Common Stock. You should not purchase any Common
Stock unless you can afford to lose your entire investment.
WE HAVE A LIMITED OPERATING HISTORY AND HAVE NEVER BEEN PROFITABLE.
Since our inception in 1983 up to the date of this Prospectus our revenues have
been almost non-existent. We own a patent for our Energy Miser cooling/heating
system and we anticipate generating revenue in the form of royalty fees from the
sale of these systems. If future sales do not occur, investors in our common
stock will likely lose their entire investment.
WE HAVE ACCUMULATED A DEFICIT AND ANTICIPATE FUTURE LOSSES.
From inception through June 30, 2001, we had generated immaterial revenues and
had an accumulated deficit in the amount of $3,521,964. The products scheduled
for manufacturing and distribution will require significant marketing
expenditures that, together with projected general and administrative expenses,
may cause operating losses for the near future. If operating losses continue,
shareholders could lose their entire investment.
WE WILL NEED ADDITIONAL FUNDING AND TO DATE WE HAVE NOT BEEN ABLE TO RAISE
SIGNIFICANT FUNDS THROUGH TRADITIONAL CAPITAL MARKETS.
We are in the process of issuing a series of convertible debentures because we
have found it difficult to sell our common stock as a means to raise funds for
expansion (See "Liquidity and Capital Resources"). However, we will need to seek
additional capital through public or private sales of our securities, including
equity or debt securities, in order to fund our activities on a long-term basis.
We may not be able to obtain adequate funds, whether through financial markets
or collaborative arrangements with strategic partners or from other sources, on
acceptable terms when needed. If we are successful in raising additional
capital, investors and shareholders could face substantial dilution of their
investments.
OUR DEBT-HOLDERS HAVE A SECURITY INTEREST IN ALL OF OUR ASSETS.
In September 2000 we agreed to issue $1,500,000 in 10% Secured Convertible
Debentures. These Debentures are secured by virtually all of the Company's
assets and intellectual property. If we default upon the repayment terms of
these debentures, our assets would become subject to foreclosure and it would be
very difficult to remain a going concern.
OUR BUSINESS IS DEPENDENT ON ACCEPTANCE BY GOVERNMENT REGULATORS.
A significant obstacle confronted by DeMarco Energy in the marketing of the
Energy Miser has been governmental interpretation and regulation. In most
instances, we need to be able to interface with public water supplies in order
for our customers to receive the benefits of our system. Some government
regulators have been resistant in allowing us to tap into public water mains for
fear of contamination of the water. If government constraints continue it will
limit the markets we can compete in and our shareholders would be adversely
affected (See "Government Regulation").
OUR ENERGY MISER SYSTEM PATENT, WHICH IS THE BASIS OF OUR BUSINESS, COULD EXPIRE
BEFORE WE COULD GAIN MARKET ACCEPTANCE.
We only have approximately four years remaining on our patent for our Energy
Miser system. Our patent expires in September 2005. In addition, the technology
involved under this patent for the Energy Miser system could become obsolete due
to government regulations, manufacturing cost constraints, new innovations
created by competitors or any other reason. Should this technology become
unmarketable, our operations and financial condition will be adversely affected.
WE FACE STRONG COMPETITION THAT WE MAY NOT BE ABLE TO OVERCOME.
Our Energy Miser system has many competitors, many of whom are large with
well-known brands and manufacture their own systems. Some of our larger
competitors include Trane, Carrier, York and Dunn & Bush. These competitors use
cooling tower boiler applications that we believe are inferior to our municipal
water geothermal applications, but because of the relative financial strength of
these competitors, we may not be afforded the opportunity to demonstrate the
advantages of our system over competitors' systems and as such, sales will not
materialize and shareholder investments could be lost.
6
WE ARE DEPENDENT ON OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER AND NEED TO HIRE
ADDITIONAL KEY EMPLOYEES.
Our operations are dependent on Victor DeMarco, President, Chief Executive
Officer and a significant shareholder. We have no Chief Financial Officer or
other executive officers. If Mr. DeMarco were to expire or become incapacitated,
there is currently no successor who could execute our business plan.
WE DO NOT HAVE ADEQUATE MARKETING AND SALES EXPERIENCE AND OUR FUTURE SUCCESS
WILL IN PART BE BASED ON OUR ABILITY TO HIRE EMPLOYEES WITH ADEQUATE BACKGROUNDS
IN THESE AREAS.
We will need to recruit qualified personnel and representatives for the purpose
of marketing our Energy Miser system. If we are unsuccessful in attracting
qualified personnel we will not be able to increase sales significantly and we
will remain unprofitable.
IF OUR PRODUCTS FAIL WE COULD BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS, FOR
WHICH WE ARE NOT ADEQUATELY INSURED.
If we develop and install our products, we may be exposed to product liability
claims. We might also be required to indemnify manufacturing affiliates against
any product liability claims incurred by them as a result of products developed
by us under agreements with these affiliates. We currently do not carry adequate
product liability insurance. If we experience an uninsured or inadequately
insured product liability claim, our business and financial condition as well as
investor value would be materially adversely affected.
OUR COMMON STOCK PRICE COULD BE ADVERSELY AFFECTED UPON CONVERSION OF THE
CONVERTIBLE DEBENTURES AND COULD RESULT IN A SUBSTANTIAL INCREASE IN THE NUMBER
OF OUTSTANDING SHARES AND THE AMOUNT OF DILUTION TO CURRENT SHAREHOLDERS.
If our debenture holders elect to convert their debt into shares of our common
stock at a substantial discount to the market price at the time of conversion,
which they are entitled to do, the market price of our stock could decrease
dramatically and adversely affect the value of our current and future
shareholders' investments. If due to decreases in our stock price our debenture
holders are able to convert their debentures into the number of shares
registered pursuant to this registration statement, our outstanding shares would
more than double. If our stock price continues to decline, our current
shareholders will incur even more substantial dilution upon the conversion of
the debentures. The following table illustrates the number of shares of Common
Stock that would be issuable if the Selling Stockholders convert their
debentures while the Company's Common Stock is trading at various prices:
Price Per Share $.10 $.06 $.02
Conversion price $.06 $.036 $.012
(60% of price per share)
Number of conversion 25,000,000 41,666,667 125,000,000
shares issued
THE SELLING STOCKHOLDERS MAY ENGAGE IN SHORT SALES OF OUR STOCK, WHICH COULD
HAVE THE EFFECT OF DRIVING DOWN OUR STOCK PRICE.
Short sales are sales of a security not owned by the seller and is a technique
used to take advantage of an anticipated decline in the price of a security.
Because the Selling Stockholders can convert their debentures into common stock
at a price that is less than the then current market price, they will be able to
sell our stock short and then convert their debentures and cover their short
sales with stock purchased at a price that is lower than their sales price with
little or no risk. Repeated short sales could place downward pressure on our
stock price and result in a loss to persons who purchase shares from the Selling
Stockholders pursuant to this prospectus. In addition, our current stockholders
may also engage in short sales of our stock, which could put additional downward
pressure on our stock price.
FORWARD-LOOKING INFORMATION
From time to time, we or our 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 us 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". Such statements are qualified
in their entirety by reference to and are accompanied by the above discussion of
certain important factors that could cause actual results to differ materially
from such forward-looking statements.
7
USE OF PROCEEDS
We will not receive any proceeds from the sale of Common Stock by the Selling
Stockholders.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
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 DeMarco Energy included elsewhere herein.
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
OVERALL OPERATING RESULTS:
Fiscal year ended June 30, 2001 compared to fiscal year ended June 30, 2000:
We had net royalty revenues of $5,100 for the fiscal year ended June 30, 2001.
Prior year royalty revenues were $22,000. Our total expenses for the current
year were $1,092,000 versus $292,600 for last year. The expenses with the
largest increases during the current year as compared to the prior year were as
follows:
o Marketing and advertising was $55,900 versus $39,000 for the prior year
period. This increase was part of our plan to increase our product
exposure.
o Travel expenses were $28,900 as compared to $27,200 as we attended more
industry trade shows in each of the last 2 fiscal years to increase our
exposure to the market.
o Interest expense was $410,800 for the current year as compared to $29,200
for the prior year period. Of these expenses $77,500 was incurred in
connection with the convertible debentures we issued throughout calendar
year 2000 (See "Liquidity and Capital Resources"). In addition, we incurred
$333,300 in non-cash interest charges to reflect the beneficial conversion
features associated with the convertible debentures we issued to the
Selling Shareholders in September 2000.
o Legal and professional fees increased $116,300 to a total of $201,900.
These fees were incurred in connection with the current SB-2 filing, our
annual audit, legal work performed for the debenture offerings, our
quarterly and annual filings with the Securities and Exchange Commission as
well as for general corporate matters.
o Our payroll for the year was $246,100, which represents an increase of
$173,600 over the prior year payroll of $72,500. We also added a vice
president of sales in November 2000.
We incurred a net loss for the 2001 fiscal year of $1,086,900 as compared to a
net loss of $270,700 from continuing operations for the prior fiscal year. We
plan to continue to focus our expenditures on marketing efforts for the
foreseeable future. These losses were incurred primarily because of the costs
and expenses cited above.
Our inception to date income statement includes the sales and expenses related
to Cyberlink Systems, Inc., a former wholly-owned subsidiary. Cyberlink
refurbished and marketed used computer components such as computer monitors and
printers (See"BUSINESS" and "FINANCIAL STATEMENTS"). Cyberlink ceased doing
business in 1998 and all business activities regarding this subsidiary were
dissolved in June 2000. In addition, since inception we had a one-time gain of
$66,000, included in extraordinary items, for the forgiveness of debt owed to
the former majority shareholder, Louis DeMarco.
LIQUIDITY AND CAPITAL RESOURCES:
We have recently been financed through a private equity offering that ended
during the third quarter of 1999 and a convertible debenture offering that began
in the first quarter of 2000, and have been supported in the interim by loans
from our President and Chief Executive Officer, Victor DeMarco.
On August 25th and August 28th 2000, we issued the last of the series of
convertible debentures bearing 8% interest. These two debentures totaled $57,500
and $26,180 respectively, and were part of a total of $229,380 raised from
January through August 2000 (see "BUSINESS"). The proceeds were utilized for
repayment of accounts payable and operating expenses.
8
On September 26, 2000, we entered into an agreement with AJW Partners, LLC and
New Millennium Capital Partners II, LLC (the "Debenture Holders") for the
private placement of $1,500,000 of our 10% Secured Convertible Debentures. These
debentures are convertible into shares of the Common Stock of DeMarco Energy
based on the terms listed below. The funding of the debentures will occur in two
phases. The first $500,000 (less legal expenses of $25,000 and consulting fees
of $20,000) was received by us on September 27, 2000. The remaining $1,000,000
will be funded within 5 days following the effective registration with the
Securities and Exchange Commission of the underlying shares of our common stock.
We anticipate utilizing the funds as follows:
o Legal fees incurred with the private placement $ 25,000
o Consulting incurred with the private placement 20,000
o Paying outstanding accounts payable 50,000
o New Company video for advertising 19,000
o New Company brochure and logo 10,000
o Updating supplies with new logo 5,000
o New engineering manual 10,000
o Updating the Company website 25,000
o Ongoing attorney's fees 25,000
o 3 months operating expenses 61,000
o Marketing efforts 450,000
o Set aside for potential acquisitions 800,000
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Total $1,500,000
The aforementioned $1,500,000 of convertible debentures is a part of a term
sheet agreement with AJW Partners, LLC and New Millennium Capital Partners II,
LLC which calls for up to a total of $8,000,000 of convertible debentures to be
issued over time as warranted. The term sheet agreement is not binding on either
party and additional purchases of our convertible debentures will be based on a
mutually agreeable use of proceeds from the sale of these debentures.
The primary terms of the September 2000 Convertible Debentures are as follows:
- Entire principal amount of the first $500,000 of debentures issued in
September 2000 matured on September 26, 2001. The debenture holders do not
intend to demand payment for these debentures or exercise their conversion
privileges until all the shares associated with this Prospectus are
registered. The remaining $1,000,000 of convertible debentures to be issued
upon the effective registration of the underlying shares of Common Stock
will mature in one year from the date of funding.
- Debentures bear 10% interest per annum with interest payments due
quarterly. Interest to be paid in cash or shares of Common Stock solely at
the option of the Company.
- The debenture holders have the option to convert any unpaid principal into
shares of our Common Stock at any time after the original issue date
(subject to certain limitations).
- The conversion price per share in effect on any conversion date shall be
the lesser of (1) $0.34 per share or (2) 60% of the average of the lowest
three inter-day trading prices during the ten trading days immediately
preceding the applicable conversion date.
- The debentures bear a mandatory prepayment penalty of 130% of the principal
and all accrued interest being prepaid.
- The debentures are secured by all unpledged assets of DeMarco Energy,
including our current and pending patents.
- DeMarco Energy is required to file a SB-2 Registration Statement with the
Securities and Exchange registering 200% of the Common Stock underlying the
debentures.
The Secured Convertible Debenture Purchase Agreement, the DeMarco Energy Systems
of America, Inc., 10% Secured Convertible Debenture, the Security Agreement, the
Intellectual Property Security Agreement, the Registration Rights Agreement, and
the Escrow Agreement were all filed electronically as Exhibits to the Securities
and Exchange Commission Form 8-K filed with the Commission on October 11, 2000.
We are exploring the possibility of acquiring a company that would be
complementary to our current operations. We believe that the acquisition of a
small energy design engineer firm would be very beneficial to our operations. We
are currently looking for such a company in the Washington, D.C. area which
would complement our involvement with the PG&E Energy Services contract (See:
"Recent Developments"). Another potential area for acquisitions would be small
lighting retrofit organizations. Most projects on which we have bid in the past
and plan on bidding in the future usually encompass both lighting retrofit and
air conditioning and heating components in order to maximize the reduction in
energy consumption. However, at this point we have not identified or contacted
any one specific company regarding acquisition possibilities other than the
contact with Lighting Management Consultants (See: "Recent Developments").
We had negative working capital of $7,600 at June 30, 2001 as compared to
negative working capital of $77,800 at the end of the prior fiscal year end June
30, 2000. This decrease in negative working capital is primarily the result of
the funding of the convertible debentures.
9
We had an unrestricted cash balance of $300 at June 30, 2001 as compared to a
cash balance of $23,200 at June 30, 2000. We also had $250,000 of cash being
held in escrow pending a successful registration of the aforementioned common
stock. Subsequent to June 30, 2001, this restricted cash was released to the
Company for use in operations. The decrease in unrestricted cash balances was
caused by our funding of operations for the current year out of the partial
proceeds we received from the convertible debenture offering as well as
additional funding in the amount of $250,400 from our current Chairman,
President and Chief Executive Officer. We anticipate that with the complete
funding of the debentures we will be able to substantially increase our
marketing presence for the foreseeable future. We cannot assure you that these
efforts will have the desired effect of increasing sales or profitability.
Variations in shareholder/insider debt (other than the issuance of the
convertible debentures) are attributable to the settlement of the estate of
Louis DeMarco, the prior majority shareholder, and the dissolution of Cyberlink
Systems, Inc., a former subsidiary of DeMarco Energy (See:"BUSINESS"). Cyberlink
ceased doing business in March, 1998 and was officially dissolved in June, 2000.
DeMarco Energy continues to honor the outstanding obligations of Cyberlink which
consisted of a $100,000 line of credit and 4 leases on various computer
equipment. At this point, we have paid off the line of credit but still have
approximately $50,000 remaining on the computer equipment leases. We continue to
utilize the computer equipment under these leases. There have not been any
defaults on these obligations to date.
NEW ACCOUNTING PRONOUNCEMENTS
We have adopted FASB Statement 128. It is not expected that we 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. We do not believe that this accounting standard applies to us as all
of our operations are integrated for financial reporting and decision-making
purposes.
INFLATION
Our results of operations have not been affected by inflation and we do not
expect inflation to have a significant effect on its operations in the future.
BUSINESS
GENERAL
DeMarco Energy Systems, Inc., a Texas corporation, was founded by Mr. Louis
DeMarco, father of Victor DeMarco, our current Chairman, President and Chief
Executive Officer, and began operations in June 1983. On November 17, 1989 Mr.
DeMarco, as an individual, acquired a majority interest in Fountain Head, Inc.,
a public shell corporation with shareholders but no operations. We completed a
reverse merger with this shell on December 1, 1989, thereby becoming a publicly
traded corporation, and changed the name of our company to DeMarco Energy
Systems of America Inc., a Utah corporation.
From 1978 to 1982 (prior to the formation of DeMarco Energy Systems, Inc.) Louis
DeMarco designed and sold solar energy panels to the commercial and residential
markets. The panels were manufactured by Glasstron Boat Manufacturing. This
phase of the business was discontinued and sold to a third party in 1982, prior
to the formation of our company, when the Federal Government ceased the tax
credits that were allowed for this type of energy conservation. Mr. DeMarco and
two engineers, who became employees of DeMarco Energy, then began working on the
concept of an energy efficient geothermal heat pump. They received a systems
patent on September 3, 1985 that was later assigned to DeMarco Energy Systems,
Inc. in December 1989 in exchange for 10,396,790 shares of our common stock. Of
these issued shares, Mr. Victor DeMarco, received 4,900,000 shares from his
father. The remaining shares were issued to Mr. Louis DeMarco for the rights to
the patent. The patent revolves around the interface with a municipal water main
and has three basic components. The first is taking water out of the municipal
water main and running it through a heat exchanger and returning the water to
the municipal water main. Secondly, the water running through a heat exchange
device; and third that heat exchange device being an integral part of a
geothermal heat pump. Our patent consists of all three of these components
connected together in a specific series. The patent is, therefore, primarily an
installation technology. This patent will expire on September 3, 2005.
From 1986 to 1990, we had an exclusive licensing agreement with an Oklahoma
manufacturer that resulted in very few sales. That agreement was terminated in
1990 due to lack of marketing activity from that entity.
10
On September 14, 1990 we entered into an exclusive brand name licensing
agreement with FHP. This agreement gives FHP the exclusive rights to
manufacture, distribute, market and sell the Energy Miser system with the
DeMarco Energy Miser label on the products. This agreement is still in force but
can be terminated at any time by either party with 60 days notice. We have had
minimal success under this agreement from inception to date. We believe there
are at least three (3) reasons for this lack of sales. The primary reason has
been the reluctance of various government agencies to allow us to tap into
municipal water mains for fear of contamination of the potable water (public
drinking water) (See "Government Regulation"). Another has been our lack of
sufficient operating capital to properly develop a solid marketing campaign to
promote our systems and gain exposure to potential customers. And the last
reason has been the need for an adequate engineering manual to assist sales
representatives and dealers to understand the intricacies of the system and give
them a visual method to promote our products to potential consumers. We now have
that manual completed and distributed to FHP sales representatives (See "The
Company" and "Recent Developments").
On February 5, 2001, we signed an amended agreement with FHP which will now
allow us to also sell the Energy Miser system directly to end users without
going through a FHP representative.
We have filed a second patent application with the United States Patent office.
This patent is for an invention that relates to heat pumps that are
automatically thermodynamically balanced to operate at optimum conditions using
water, and in this case reuse water systems. This patent, while similar to our
current 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 and 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. If this patent is granted we believe that
government agencies will be much less reluctant to allow us to tap into reuse
water mains, although we can give no assurances that they will be receptive. We
have received initial comments from the Patent Office and have replied to those
comments. We are currently waiting for any further responses from that office
regarding this patent application. Over the last two years we have spent
approximately $15,000 for research and development costs as it relates to this
patent.
In July 1996, we founded Cyberlink Systems, Inc. ("Cyberlink"), a wholly-owned
subsidiary. Cyberlink was organized to refurbish and market used computer
components such as computer monitors and printers. Due to the continued decline
in costs of new computer equipment our profit margins eroded and continuing to
operate became unfeasible. Cyberlink ceased doing business in 1998. All
activities regarding Cyberlink were wound down over the next year and it was
dissolved in June 2000. (See "Liquidity and Capital Resources").
We currently compete in the heating and cooling market, and primarily in the
geothermal heat pump segment. Within this business segment we market, sell and
(1) install heating and cooling systems during construction of new facilities,
and (2) install heating and cooling systems in existing facilities replacing
less efficient, antiquated, or inoperable systems.
We have prepared a marketing presentation of the Energy Miser system, which
targets energy service companies. These companies are subsidiaries of large
power companies that market their power services to large energy usage clients
such as federal buildings. Some of the power companies that have these energy
service company subsidiaries include Reliant, Northern States Power, Duke and
Southern California Edison. Some other corporations that also have energy
service companies include Johnson Controls, Honeywell and Chevron. The creation
of these type of companies stemmed from a federal mandate signed in 1993 by
President Clinton called the Climate Change Action Plan. It basically mandates
that all federally owned facilities save 30% of their total energy consumption
by the year 2010. Energy service companies offer performance contracting for
projects generally greater than $10 million, most of which require retrofitting
heating and cooling systems. They implement systems that provide the greatest
percentage of energy reduction to maximize savings benefits and focus on the
shortest return on investment cycle. We cannot assure you that the marketing
program will produce the desired results of substantially increasing revenues or
profitability.
From inception to date we have had a total of eleven installations of our Energy
Miser system in five states. A summary of these installations follows:
o Beaufort Marine Air Station
Beaufort, SC
378 Tons
Currently under construction
This installation was designed by the Corp of Engineers as a DeMarco
Energy Miser system. An FHP representative sold the product and we were
paid a royalty of 11% of the sales price of the system.
11
o Belle Fouche Area Community Center
Belle Fouche, SD
135 Tons
Currently under construction and we will receive a royalty of 20% of
the sales price of the system.
o Winner Elementary School
Winner, SD
40 Tons
Installed 1997
This installation was designed by a private mechanical engineering firm
as a DeMarco Energy Miser System. A FHP representative sold the system
and we were paid a royalty of 20%. The expansion was funded through a
performance contact by Northern States Power. This was an energy
services company project.
o Winner Middle School
Winner, SD
42 Tons
Installed 1997
This installation was designed as a DeMarco Energy Miser System. A FHP
representative sold the system and we were paid a royalty of 20%. The
expansion was funded through a performance contact by Northern States
Power. This was an energy services company project.
o Ft. Irwin Army Tank Training Base
Barstow, CA
790 Tons
Installed 1996
This installation was designed through a grant from Southern California
Edison, for $800,000. We donated the patent to this project because of
its designation of Show Case Facility. This was also an energy services
company project.
o Rosebud Electric
Gregory, SD
12.5 Tons
Installed 1995
This installation was donated and we received no royalty. The local
utility installed the DeMarco Energy Miser system in their
administrative office as a show case installation.
o Winner Clinic
Winner, SD
7.5 Tons
Installed 1994
This system was installed by a private owner with our assistance. We
received no royalty for the installation.
o South Dakota Discovery Center and Aquarium
Pierre, SD
150 Tons
Installed 1992
We donated the patent for this installation. It came about through
donations from the state of South Dakota, the city of Pierre, as well
as several private groups. We were in return granted the right to
showcase this installation. We used this installation in one of our
first advertising videos.
o Hermiston Movie Theater
Hermiston, OR
55 Tons
Installed 1987
This system was installed during the time we were under the patent
license agreement with Climatemaster. We receive payment through that
agreement of a 1% royalty.
o Hermiston Library
Hermiston, OR
100 Tons
Installed 1987
This system was installed under the same terms as the Hermiston Movie
theater listed above.
o Monroeville Water Authority
Monroeville, PA
10 Tons
Installed 1984
This was our first municipal water heat pump installation. This system,
including the unit was donated by DeMarco Energy.
12
We have faced government agency constraints in the past in allowing us access to
public water mains. We have spent an inordinate amount of time and effort over
the past years in lobbying state and local government agencies to enact
legislation to change water codes and rules to allow access to that market. We
believe our product does not impose a health or any other risk on the potable
water supply. The United States Department of Energy ("DOE") completed a study
of the effects of geothermal water pumps connected to potable water mains and
released the results in April 1998. The title of their report is "Municipal
Water-Based Heat Pump Heating and/or Cooling Systems". Their findings on the
water quality tests included the following: "From the limited number of
installations that were sampled in the two states, it appears from the data that
such systems have limited detectable impact on water quality, biological growth,
metal concentration, and residual chlorine." The DOE study also concluded that
geothermal heat pumps were 50% to 70% more energy efficient than other types of
systems.
Despite our lobbying efforts and the DOE study, to date there has been very
little done by government agencies to enact the above described legislation. As
a result, we have refocused our marketing efforts toward entities that either
own or control their own water systems. Entities and institutions where we are
concentrating our efforts include military bases, school systems, state or city
owned buildings, federal facilities, and large campus type facilities, such as
colleges. These types of facilities utilize large quantities of water and in
several instances control their own water system. We have had prior successes,
though limited in scope, with military installations. We also believe smaller
communities with less stringent government bodies and regulations will be good
prospects for our energy saving products.
We have had inadequate capital in the past in order to mount a viable marketing
plan for our product. Through past sales of our convertible debentures we have
been able to produce updated brochures, an engineering manual, and have updated
our website. The engineering manual and the brochures have been completed. In
August 2001, we mailed the manuals and brochures to 100 FHP sales
representatives in the United States and foreign countries (See "Company"). We
initially intend to hire internally up to three national sales representatives
to call on all members of the FHP sales force to educate them as to the benefits
offered by the Energy Miser system.
PRODUCTS
The DeMarco Energy Miser Heating and Cooling System
The Energy Miser is a patented geothermal heat pump system utilizing the
municipal water main or any other underground piping loop to heat, cool and
provide domestic hot water for buildings. Based on the results from our limited
prototype installations and a DOE study, we believe these heat pumps are from
30% to 70% more efficient than other methods for heating and air conditioning
(See "Business"). A traditional heat pump system transfers energy to and from
outside air. Geothermal 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 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 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 system is a geothermal heat pump system that uses water to
provide the thermal energy needed to heat and cool. Our system is different in
that it utilizes municipal water mains, reused water or any other managed water
supply. There is no need for ground loops, wells, chillers, cooling towers or
boilers. We believe this makes the Energy Miser system much more viable for the
consumer market. Although some government regulators and others have expressed
concerns about the integrity of the water, we believe the concerns are unfounded
because the water simply passes through a double walled plate heat exchanger
with no chance of contamination and is returned to the water source with only a
slight temperature change.
The Energy Miser system has to date (pending the outcome of the second patent
application for the utilization of reuse water sources) only utilized potable
water systems as demonstrated within several military bases, as well as other
commercial and institutional applications nationwide. If the patent for the
utilization of reuse water is approved we believe we will have greater success
in gaining acceptance from government regulators as their concerns over
contamination of the potable water supply will be lessened. These reuse water
sources are controlled at the municipal level and we intend to launch marketing
efforts in cities using or proposing to implement reuse water systems. Although
we anticipate an increase in revenues if the reuse water patent is approved
there can be no assurances that such marketing efforts will have their intended
effect of increasing revenues or profitability.
13
Energy Efficient Lighting Systems
We have not been involved in energy efficient lighting systems in the past,
however, we have recognized the need to either acquire an entity that is or
joint venture with such an entity. We have found that most projects that we are
bidding on for our air conditioning and heating systems also require the
installation of energy efficient lighting. We believe that by combining the
bidding process for both types of energy saving services we can generate
additional sales revenues. However, we cannot assure you that such additional
sales will occur.
We have 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. This agreement was signed on December 20, 1999
and will continue in force until terminated by either party with 60 days written
notice. All projects that are in place at the time of termination will be
completed by LMC. LMC will be responsible for all aspects of the lighting
project including performing energy audits, preparing the lighting bids and
completing the installation per the terms of the project requirements. We will
receive 5% of the revenue generated from all accepted bid contracts.
Additionally, we have entered into a Strategic Partnership with SLi, Inc.
(NYSE:SLI), which 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. This agreement was signed May 19, 2000 and
contains the same termination and responsibility provisions as the LMC
agreement. As of the date of this prospectus there have been no sales generated
from these agreements.
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 may be 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 DeMarco's
partners. As of the date of this prospectus, we have not initiated sales efforts
for lighting products.
On June 27, 2000, we signed a 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. Because of the results of financing and certain
conditions arising from the negotiations of the acquisition, both parties to the
letter of intent have agreed to cancel this potential acquisition arrangement.
MARKETING AND COMPETITION
We market and sell our Energy Miser system through a brand name partnership
agreement with FHP, of Ft. Lauderdale, Florida, and via exposure through the
Geothermal Heat Pump Consortium. The Geothermal Heat Pump Consortium is a
consortium of over 80 of the largest utilities in the United States. A majority
of the heat pump manufacturers deal with the Environmental Protection Agency
("EPA"). These utilities and manufacturers have formed what is called the
Geothermal Heat Pump Consortium or Geo Exchange based in Washington, D.C. This
is our industry association. It provides a constant source of leads and
technical papers and research materials. DeMarco and FHP focus primarily on the
commercial and institutional markets. We display the Energy Miser at trade shows
in booths for public exhibition and education. In addition to trade shows, we
market the Energy Miser directly to end users, architects, designers and
installers of HVAC (Heating, Ventilation and Air Conditioning) equipment. In
this business segment, we are in competition with all other producers of HVAC
systems, most of which are more firmly established in the marketplaces and have
substantially greater financial resources than us.
A commercial job will typically start at the AE (Architectural Engineering)
design level. They will design a certain type of system requirement for the
project. Once this has been accomplished the mechanical engineers will actually
do the computer design and draw blueprints. Then the General Contractor will
request three (3) different bids on the equipment. If our system technology fits
within the requirements of the job, FHP's sales representatives will be
contacted and asked to bid the equipment portion of the project. We have a
standardized price for the equipment although in certain cases, especially in
military projects, it may be necessary to negotiate the price to be competitive.
In those instances we will negotiate the royalty fees and cut the cost of the
equipment slightly to aid us in getting the project.
14
On October 10, 2000, we retained the services of Marschall Design, a
fifteen-year-old corporate image consulting company. Marschall will assist us in
our marketing efforts. The new media materials became available for release in
February of 2001. Marschall assisted us with brochures, tradeshow display,
stationery, web design plus any other areas requiring image design and
enhancements.
PWG Media of Austin, Texas has been retained by us to build an effective
corporate visual program. An eight-minute video describing the Energy Miser
system became available in December of 2000. Marschall and PWG have worked
together in the past to assist each other and their clients with image design
and image conveyance measures.
We have budgeted approximately $400,000 for marketing efforts for the next 12
months. The areas we have targeted for these expenses are as follows:
o Brochures, letterhead and new logo $10,000
o Media 19,000
o Marketing Vice-President 83,000
o Sales engineer 75,000
o Public relations 65,000
o Trade shows 60,000
o Printing and direct mail 40,000
o Advertising and video 48,000
------
Total $400,000
GOVERNMENT REGULATION
A significant obstacle we have confronted in the marketing of the Energy Miser
is local governmental interpretation and regulation. Local water regulations
vary from one local government agency to the next but most are centered around
concern over contamination of the local potable water supply. The Energy Miser
requires a constant flow of water, the volume of which must increase as the
amount of space to be air conditioned and or heated 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. We contend that 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. We are not aware
of any proof to support water quality concerns of public officials (See the DOE
report under "Business"). However, we can offer no assurances that we will ever
be able to overcome the concerns of public water officials.
At the federal level there has been some positive impact from government
relations. President Clinton signed the Climate Change Action Plan in 1993. This
required all federally owned facilities to save 20% of their total energy
consumption by 2005. That act has been revised twice, and, as of 1999, federal
facilities were required to save 35% of their total energy consumption by 2010.
This is a federal mandate. Most of the military and federal buildings have not
met this goal. We believe most of the military and federal facilities are
continuing to attempt to find ways to save energy. We further believe our
technology has the ability to save the government facility that energy
percentage requirement just by changing to our air conditioning and heating
system technology. On the negative side, the federal government does not have
any regulations (i.e. the EPA or federal plumbing codes). There are no federal
codes drawn around the use of municipal water for this purpose, which means we
are subject to the varying local laws.
According to information obtained from the City of Austin, Texas web site
(http://www.ci.austin.tx.us/wri/reusefaq.htm) secondary water systems have
become the initiative of approximately 1,900 communities in the United States.
Secondary water systems provide water treated to a standard 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.
RECENT DEVELOPMENTS
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 (NYSE:PCG)), whose bid included the DeMarco Energy
Miser for geothermal heating and cooling systems for upgrades and retrofits.
PG&E Energy Services division was recently acquired by Chevron Energy Solutions
division (NYSE:CHV). PG&E Energy Services management confirmed that our contract
was conveyed in the sale and we have received an executed master agreement dated
February 1, 2001 from Chevron of their acceptance of this conveyance. The
billion dollar estimate was calculated from retrofitting 154 public schools,
4000 HUD homes, plus government owned facilities throughout the jurisdiction of
the Counsel of Governments.
We have estimated that the heating and cooling portion of this contract could
represent up to $50,000,000 in sales of our systems for FHP (the manufacturer of
the Energy Miser) if our bids are accepted, with our portion of the royalties
ranging from $5,000,000 to $10,000,000. On March 19, 2001, we announced that we
had received confirmation from Chevron that they want to use our technology at
the water treatment facility in Washington D.C. and we made a presentation in
the first quarter of calendar year 2001 to the Counsel of Governments to give
them a better understanding of the benefits of our Energy Miser system.
15
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 eight-month period from January through August 2000, we issued a
series of convertible debentures bearing 8% interest. A total of $229,000 was
raised from this issuance. The debentures mature in 24 months from the time of
issue. Interest payments are calculated quarterly and totaled upon conversion
and included in the stock distribution. The debentures carry various conversion
rights ranging from $0.10 to $0.45 a share. The holders have the right to
convert any or all of the principal into our common stock at any time after the
first 12 months from issuance. If all debenture holders elect to convert, we
will issue approximately 1.2 million shares of our common stock to the holders
and be relieved of the debt. We utilized the proceeds of these convertible
debentures to reduce accounts payable and for operating expenses.
We are currently finalizing a convertible debt offering of $1,500,000 (see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS") that will be
directed toward acquisitions, marketing, internal corporate infrastructure
development, and/or general administrative expenses. We received the first
$500,000 from this debt offering on September 27, 2000.
On November 28, 2000, we in conjunction with the O'Connor Company of Rapid City,
South Dakota were issued the design-win for the DeMarco Energy Miser heating and
cooling system. The system is currently being installed in the Community Center
in Belle Fourche, South Dakota. This is a community center that includes an
olympic size pool, a basketball court, locker rooms, meeting rooms, and a 200
seat auditorium.
The 67,000 square foot facility has an estimated heating and cooling equipment
sales price of $106,000, which does not reflect installation costs. We received
our standard royalty payment of 20% of the sales price in March 2001. The
purchase order for 18 units has been issued and all of the units were delivered
by August 18, 2001. FHP manufactured the units.
In February 2001, Supermarket Environment Services Company notified us that the
Energy Miser system is being considered for an energy savings pilot program for
a regional grocery store chain located in the southwestern part of the United
States. We cannot assure you that we will be successful in securing this
project.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings, and no material legal
proceedings have been threatened by or, to the best of our knowledge, against
us.
DESCRIPTION OF PROPERTY
We occupy approximately 1,200 square feet of office space at 12885 Hwy 183,
Suite 108-A, Austin, Texas 78750. We own no property other than office
furniture, equipment, software and the patent for the Energy Miser System.
EMPLOYEES
We currently employ 3 full time people. It is anticipated that up to 20
additional personnel will be required to meet the demands of the projected
market over the next five years. Most of these positions will be added in the
areas of sales, marketing and project management as our projected volume
increases. We cannot assure you that such volume increases will occur.
16
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning the directors and
executive officers of DeMarco Energy and their ages and positions. Each director
holds office until the next annual stockholders' meeting and thereafter until
the individual's successor is elected and qualified. Officers serve at the
pleasure of the board of directors.
NAME AGE POSITION
---- --- --------
Victor M. DeMarco 38 Chairman, President and CEO
John W. Adams 50 Director, Vice-President of Sales
Mary L. DeMarco 36 Director
Victor M. DeMarco, President/CEO. Mr. DeMarco served as Executive Vice President
of DeMarco Energy Systems from 1990 to 1992. He was appointed President and
Chief Executive Officer in 1992. He became Chairman of the Board in 1999 upon
the death of the then Chairman Louis DeMarco. He has been employed by DeMarco
Energy Systems of America, Inc. for more than 15 years. During that time, Mr.
DeMarco has been involved with research of geothermal heat pumps and related
technology, resulting in an experienced working knowledge of geothermal heat
pump applications ranging from manufacturing and installation to sales and
marketing of the Energy Miser systems. Mr. DeMarco has been cited in numerous
industry trade publications, television interviews, news papers, as well as
serving as an advisor for the Geothermal Heat Pump Consortium. Mr. DeMarco
majored in marketing and finance at Texas Technological University in Lubbock,
Texas.
John W. Adams, Vice President of Sales and a Director. Mr. Adams joined our
operation in November 2000 and was appointed to the Board of Directors in April
2001. From 1994 to November 2000 he was Vice President-Lighting for Sempra
Energy Solutions where he directed and managed the lighting division. His
responsibilities included analyzing and developing strategic plans for lighting
energy savings for clients. He directed the business development unit and the
engineering and administrative managers. Mr. Adams has experience in technology
based sales, marketing, engineering, energy audits and construction as it
relates to energy savings performance contracting. He has been in the lighting
business since 1985 and has earned a certification for LC (Lighting Certified)
by the National Council on Qualifications for the Lighting Professional and a
CLMC (Certified Lighting Management Consultant) by the International Association
of Lighting Management Companies. He attended the University of Houston in
Houston, Texas.
Mary L. DeMarco, wife of Victor DeMarco, was appointed to the Board of Directors
in April 2001. Ms. DeMarco attended Northwood Institute in Cedar Hill, Texas and
received an Associates Degree in Fashion Marketing/Merchandising. Since 1998 Ms.
DeMarco has been assisting DeMarco Energy on a part-time basis in various
capacities. From 1995 to 1998, Ms. DeMarco was a Merchandiser for Lange
Marketing in Springfield, Illinois where she was responsible for maintaining 11
specialty/gourmet markets. Ms. DeMarco was a travel representative for Travel
Center in Austin, Texas from 1992 to 1995. From 1985 to 1992 as Vice President
of Sales she managed and trained employees for Trophies, Inc., in Dallas, Texas,
an awards and incentive business.
All officers and directors devote 100% of their professional time to our
business operations.
During the last five years, no officers or directors have been involved in any
legal proceedings, bankruptcy proceedings, criminal proceedings or violated any
federal or state securities or commodities laws or engaged in any activity that
would limit their involvement in any type of business, securities or banking
activities.
No person who, at any time during our past fiscal year, was a director, officer,
or beneficial owner of more than 10% of any class of equity securities failed to
file, on a timely basis, any report required by Section 16(a) of the Exchange
Act during the most recent fiscal year.
EXECUTIVE COMPENSATION
The following table reflects compensation paid to our chief executive officer.
LONG TERM COMPENSATION
--------------------------------------------------------
AWARDS
ANNUAL COMPENSATION ----------------------- PAYOUTS
----------------------- RESTRICTED SECURITIES -------
STOCK UNDERLYING LTIP ALL OTHER
SALARY BONUS OTHER AWARD OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) SARS(#) ($) ($)
------------------------------------ ------ ------ ----- ----- ---------- ---------- ------- -------------
Victor DeMarco...................... 2001 $175,000 $ 0 $ 0 $ 0 0 0 $ 0
President & Chief Executive Officer 2000 45,600 0 0 0 0 0 0
1999 45,600 0 0 0 0 0 0
No other person makes over $100,000 per year. Of the 2001 salary, approximately
$100,000 has been deferred until such time as it can be funded out of future
operations.
COMPENSATION OF DIRECTORS
We do not currently compensate directors in cash for any services provided as a
director.
17
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 2001, the name and shareholdings,
including options to acquire Common Stock, of each person who owns of record, or
was known by us 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.
NAME AND ADDRESS AMOUNT AND NATURE
TITLE OF CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP (2) PERCENT OF CLASS
------------------------------------------------------------------------------------------------------------------------------------
Common Stock Victor DeMarco 7,938,937 Direct/Indirect(3) 22.2%
12885 HWY 183, Ste 108A, Austin, Texas 78750
Common Stock Mary L. DeMarco 7,938,937 Direct/Indirect(3) 22.2%
12885 HWY 183, Ste 108A, Austin, Texas 78750
Common Stock John W. Adams 38,500 Direct 0.1%
12885 HWY 183, Ste 108A, Austin, Texas 78750
Common Stock AJW Partners, LLC 5,434,782 Direct (1) 15.2%
155 First Street, Ste B, Mineola, New York 11501
Common Stock New Millennium Capital Partners II, LLC 5,434,782 Direct (1) 15.2%
155 First Street, Ste B, Mineola, New York 11501
Common Stock Executive Officers and Directors as a Group (3 persons) 7,977,437 Direct/Indirect 22.3%
12885 HWY 183, Ste 108A, Austin, Texas 78750
There are currently no outstanding options or warrants to purchase shares of our
stock.
<FN>
(1) Shares issuable upon conversion of 10% Secured Convertible Debentures
assuming a conversion price of $0.138 per share. (See "Selling
Stockholders").
AJW Partners, LLC is a private investment fund that is owned by all of its
investors and managed by SMS Group, LLC. SMS Group, LLC, of which Mr. Corey
S. Ribotsky is the fund manager, has voting and investment control over the
shares listed above owned by AJW Partners, LLC.
New Millennium Capital Partners II, LLC is a private investment fund that
is owned by all of its investors and managed by First Street Manager II,
LLC. First Street Manager II, LLC, of which Mr. Glenn A. Arbeitman and Mr.
Corey S. Ribotsky are the fund managers, have voting and investment control
over the shares listed above owned by New Millennium Capital Partners II,
LLC.
(2) Direct ownership indicates shares held in the name of the listed
shareholder. Indirect ownership indicates shares held indirectly (i.e. in a
trust, by a spouse, etc.).
(3) Victor Demarco personally controls 7,828,937 shares and Mary Demarco, his
spouse, controls 110,000 shares.
</FN>
SELLING STOCKHOLDERS
On September 26, 2000, AJW Partners, LLC and New Millennium Capital Partners II,
LLC purchased an aggregate of $1,500,000 of 10% Convertible Debentures to
purchase, respectively, a total of 5,434,782 and 5,434,782 shares of common
stock from us in a private placement transaction. Of the $1,500,000 invested,
$1,000,000 will be received upon effectiveness of this registration statement
and satisfaction of certain conditions.
We determined the number of shares to be offered for resale by this prospectus
by agreement with the selling security holders, and in order to adequately cover
a reasonable increase in the number of shares required. In accordance with the
agreement, we included 200% of the number of shares of common stock which would
be issuable upon conversion in full of the debentures, assuming (i) the
debentures were converted at a price equal to the lesser of (a) $0.34 and (b)
60% of the average of the lowest three inter-day prices (which need not occur on
consecutive trading days) during the ten trading days immediately preceding the
closing date and (ii) the debentures remained outstanding for one year and all
interest was paid in shares of common stock. Since the number of shares of our
common stock issuable upon conversion of the debentures will change based upon
fluctuations of the market price of our common stock prior to a conversion, the
actual number of shares of our common stock that will be issued under the
debentures, and consequently the number of shares of our common stock that will
be beneficially owned by AJW Partners and New Millennium Capital Partners cannot
be determined with certainty at this time. Because of this fluctuating
characteristic, we agreed to register a number of shares of our common stock
that exceeds the number of our shares of common stock currently beneficially
owned by AJW Partners and New Millennium Capital Partners.
18
Each holder of the debenture may not convert its securities into shares of our
common stock if after the conversion, such holders together with any of its
affiliates, would beneficially own over 4.999% of the outstanding shares of our
common stock. This restriction may be waived by each holder on not less than 61
days notice to us. The number of shares of our common stock listed in the table
below as being beneficially owned by AJW Partners and New Millennium Capital
Partners includes the shares of our common stock that are issuable to each of
them, subject to the 4.999% limitation, upon conversion of their debentures. The
4.999% limitation may, however, be waived by AJW Partners or New Millennium
Capital Partners (but only as to themselves) upon a 61 days prior notice to us
and as a such, they each may acquire and sell in excess of 4.999% of our common
stock through a series of conversions and sales under the debentures.
Each of the selling security holders has represented to us that it did or will
with respect to the common stock issuable upon conversion of its debentures,
acquire the securities listed opposite its name in the selling security holders
table, in the ordinary course of business, and that it does not have any
agreement or understanding, directly or indirectly, with any person to
distribute those securities. None of the selling security holders are
broker/dealers or affiliates of broker/dealers.
The following table sets forth the name of each person who is offering shares of
common stock by this prospectus, the number of shares of common stock
beneficially owned by each person, the number of shares of common stock that may
be sold in this offering and the number of shares of common stock each person
will own after the offering, assuming they sell all of the shares offered.
Beneficial ownership is determined in accordance with SEC rules and generally
includes voting or investment power with respect to securities. Common shares
that are issuable upon the exercise of outstanding options, warrants,
convertible Preferred Stock or other purchase rights, to the extent exercisable
within 60 days of the date of this Prospectus, are treated as outstanding for
purposes of computing each Selling Shockholder's percentage ownership of
outstanding common shares.
Shares Beneficially Owned
Shares Beneficially Owned After Offering
before Offering Number of Shares -------------------------
Selling Stockholders Number (1) Percent (2) Being Offered (3) Number (4) Percent
-------------------- ---------- ----------- ----------------- ---------- -------
AJW Partners, LLC 5,706,522 18.63% 5,706,522 0 *
New Millennium Capital Partners II, LLC 5,706,522 18.63% 5,706,522 0 *
* Less than 1%
<FN>
(1) The number of shares of our common stock beneficially owned by AJW Partners
and New Millennium Capital Partners, respectively, represent the number of
shares of common stock underlying their debentures. AJW Partners and New
Millennium Capital Partners, however, may not convert their debentures if
doing so would cause them to beneficially own more than 4.999% (or 1,817,208
shares) of the outstanding shares of common stock on a fully converted
basis.
(2) Percentages are based on 24,931,847 shares of our common stock outstanding
as of June 30, 2001.
(3) Please see the text of the Selling Stockholders section above for a
discussion regarding the determination of the number of shares to be
registered for the selling stock holders. The number of shares being
registered in this Prospectus is equal to 200% of these amounts or
11,413,043 for each of the 2 Selling Stockholders.
(4) Assumes the sale by the selling stockholders of all of the shares of common
stock available for resale under this prospectus.
</FN>
All unsold securities being registered in this Registration Statement will be
removed from registration by means of a post-effective amendment.
19
CERTAIN TRANSACTIONS
Mr. Victor DeMarco, our controlling shareholder and Chief Executive Officer and
Chairman of the Board had loaned us approximately $99,000 to cover certain
indebtedness of ours, which he had personally guaranteed. We recorded a note
payable to him for that amount. On September 29, 2000, Mr. DeMarco converted
this debt into 1,650,000 shares of the Company's Common Stock at a conversion
price of $0.06 per share. As of June 30, 2001 Mr. DeMarco has loaned us
additional monies in the amount of $250,400 in order to fund our operations.
Mr. Peter Des Camps, the former Senior Vice President of Corporate Development
also serves as President and Chief Executive Officer for Lead Capital Ventures
("LCV"), a private investment company formed in 1999. LCV paid a debt of DeMarco
Energy in the amount of $20,000 and acquired the Common Stock conversion rights
associated with that debt. The conversion rights were at $0.15625 per share
which resulted in 133,333 shares of Common Stock being issued to LCV. This
transaction occurred on September 29, 2000. This debt was originally in the form
of a $50,000 convertible debenture issued to a current shareholder on March 10,
1999. We had paid the debt down to the $20,000 balance via 2 cash payments
totaling $16,719 in May and August 1999 and the issuance of 85,000 shares of our
Common Stock in April 1999 at a conversion price of $0.15625 per share (a value
of $13,281 per the terms of the debenture). The debenture holder individually
contacted Lead Capital Ventures and Mr. Des Camps to purchase the remaining
$20,000 balance of the debenture. LCV agreed to purchase this debt for $20,000
in cash and we agreed to the transfer. We did not participate in or encourage
this transaction. To our knowledge, no other individuals were contacted or had
an offer presented to purchase this debt.
Mr. DeMarco's conversion price of $0.06 was based on the lowest market offer
price for shares of the Common Stock during the prior year and was more
favorable to Mr. DeMarco than could have been obtained from unaffiliated third
parties. LCV's conversion price of $0.15625 was based on the conversion terms of
the debenture.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
We are authorized to issue 100,000,000 shares of Common Stock, of which
24,931,847 shares are issued and outstanding as of June 30, 2001. Holders of
shares of Common Stock are entitled to receive such dividends as may be declared
by the Board of Directors from assets legally available for that purpose and are
entitled at all meetings of stockholders to one vote for each share held by
them. The shares of Common Stock are not redeemable and do not have any
preemptive or conversion rights. All of the outstanding shares of Common Stock
are fully paid and non-assessable. In the event of a voluntary or involuntary
winding up or dissolution, liquidation, or partial liquidation of DeMarco
Energy, holders of Common Stock shall participate, pro rata, in any distribution
of our assets remaining after payment of liabilities.
Our capital stock is subject to the "penny stock" rules as defined in Rule
3a51-1 of the Securities and Exchange Act of 1934. The penny stock disclosure
requirements may have the effect of reducing the level of trading activity of
our common stock in the secondary market.
Pursuant to the Penny Stock Reform Act of 1990 ("PSRA"), prior to effecting any
transaction in any penny stock, a broker or dealer is required to give the
customer a risk disclosure statement the content of which is to include the
following:
a. A description of the nature and level of risk for the
market.
b. A description of the nature and level of the risk in the
market for penny stocks.
c. A brief, clear, narrative description of a dealer market,
including bid and ask prices for penny stocks and the
significance of a spread between bid and ask prices.
d. A toll free telephone number for inquiries on disciplinary
actions relating to security violators.
e. A definition of significant terms used in the Risk
Disclosure Document or in the Conduct of Trading in Penny
Stock.
f. Such other information as the SEC shall require by rule or
regulation.
The Penny Stock Reform Act also directed the SEC to adopt rules requiring
broker/dealers, prior to effecting any transaction in a penny stock, to disclose
in connection with the transaction the following:
a. The bid and ask prices for the penny stock.
b. The number of shares to which such bid and ask prices apply,
or other comparable information relating to the depth and
liquidity of the market for such stocks.
c. The amount and a description of any compensation the
broker/dealer and associated persons will receive in
connection with the transaction.
d. Such other information as the SEC by rule determines to be
useful and reliable information relating to the price of
such stock.
20
The disclosure scheme under the PSRA has three related layers designed to inform
investors of the extraordinary risk associated with investments in the penny
stock market. The first layer requires a broker/dealer prior to the initial
transaction in a penny stock with the customer to furnish the customer with a
Risk Disclosure Document including, among other things, a description of the
penny stock market and how it functions, its inadequacies and shortcomings, and
the risk associated with investments in the penny stock market. The second layer
consists of transaction related documents that the broker/dealer must make
available prior to effecting a transaction in penny stocks, including quotation
information, the dealer's and salesperson's compensation in connection with the
transaction. Finally, the customer must be furnished with a monthly statement
including prescribed information relating to market and price information
concerning the penny stocks held in the customer's account.
The Risk Disclosure Document (RDD) is a generic disclosure document that must be
given to the customer by a broker/dealer before the initial transaction with the
customer of a penny stock whether the transaction is in connection with the
distribution of a security or a trading transaction. The broker/dealer must
receive, and preserve as part of his records a written acknowledgment of receipt
of the document from the customer prior to effecting a transaction in a penny
stock.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The articles of incorporation of DeMarco Energy limit the personal monetary
liability of our directors to the fullest extent permissible under the
corporation laws of Utah. In general, Section 16-10a-841 of the Utah Revised
Business Corporation Act (the URBCA"), permits the elimination of personal
monetary liability in all cases except liability for: (a) the amount of a
financial benefit received by a director to which he is not entitled; (b) an
intentional infliction of harm on the corporation or the shareholders; (c) a
violation of Section 16-10a-842 of the Utah Revised Business Corporation Act
(relative to distribution of assets in violation of the URBCA or of our articles
of incorporation); or (d) an intentional violation of criminal law.
Except as set forth in the articles of incorporation and under the provisions of
the URBCA, no statute, charter provision, bylaw, contract or other arrangement,
which indemnifies any controlling person, officer or director of DeMarco Energy,
affects or limits their liability.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of a small business issuer pursuant to the foregoing provisions, or otherwise,
we have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable.
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 1990, 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 our business activities. Because of the lack of specific
transaction information and our belief that quotations during the period were
particularly sensitive to actual or anticipated volume of supply and demand, we
do not believe that such quotations during this period are reliable indicators
of a trading market for the Common Stock.
As of June 30, 2001, there were approximately 1,500 holders of record of our
Common Stock including stock held in street name.
TRANSFER AGENT
The transfer agent for our Common Stock is Fidelity Transfer Company, 1800 South
West Temple, Salt Lake City, Utah 84115.
Subject to the above limitations, we believe that during the ten 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). The sales prices were
obtained from the stock sales history charts from the on-line stock quote site
quicken.com. Quicken quotes are provided by S&P Comstock Historical information
supplied by Iverson Financial Systems.
QUARTER ENDED HIGH LOW
June 30, 2001 .28 .09
March 31, 2001 .22 .09
December 31, 2000 .43 .13
September 30, 2000 .76 .31
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
We have not paid any dividends to date. We can make no assurance that our
proposed operations will result in sufficient revenues to enable profitable
operations or to generate positive cash flow. For the foreseeable future, we
anticipate that we will use any funds available to finance the growth of our
operations and that we will not pay cash dividends to stockholders. The payment
of dividends, if any, in the future is within the discretion of the Board of
Directors and will depend on our earnings, capital requirements, restrictions
imposed by lenders and financial condition and other relevant factors.
21
PLAN OF DISTRIBUTION
Rule 102 of Regulation M of the Securities Exchange Act of 1934, as amended,
imposes certain trading restrictions on the selling security holders and any
affiliated purchasers in connection with the distribution of securities
registered under this prospectus. Specifically, Rule 102 prohibits the selling
stockholders or any affiliated purchasers from bidding for, purchasing or
attempting to induce any person to bid for or purchase any security that is the
subject of a distribution. Under Regulation M, this restriction commences one or
five business days before the pricing of the offered security. The one-day
restricted period is available for a security that has an average daily trading
volume of $100,000 and is issued by a company with a public float of a at least
$425 million. Regarding the securities offered under this prospectus and in all
other cases, the five prior business day approach applies.
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. Our Common Stock is currently
traded on the Over The Counter Bulletin Board. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the Selling Stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
Short Sales are sales of a security not owned by the seller; a technique used to
take advantage of an anticipated decline in the price of a security. An investor
borrows stock certificates for delivery at the time of short sale. Covered short
sales are to buy back securities previously sold; said of an investor who has
sold stock short. The selling security holders may close out any covered short
sale position by either converting their debentures into shares of the Company's
common stock or purchasing shares of the Company's common stock in the open
market. In determining the source of shares to close out the covered short
position, the selling security holders will consider, among other things, the
price of the Company's common stock on the open market as compared to the price
per share at which they may convert their debentures. For a discussion regarding
the potential effects of short sales and transactions to cover short sales, see
the risk factors section of this prospectus. Naked short sales are a securities
position that is not hedged from the market risk. The potential risk or reward
of naked positions is greater than that of covered positions. Naked short sale
positions are closed when the short position held by the investor is sold and
the investor no longer holds a short position.
The Selling Stockholders may also engage in short sales against the box, puts
and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades. The
Box is the physical location of securities or other documents held in
safekeeping. The term derives from the large metal tin, or tray, in which
brokerage firms and banks actually place such valuables. A Put is a type of
option that grants the right to sell at a specified price a specific number of
shares by a certain date. The put option buyer gains this right in return for
payment of an option premium. A put option buyer hopes the stock will drop in
price, while the put option seller hopes the stock will remain stable, rise, or
drop by an amount less than his or her profit on the premium. A Call is a type
of option that grants the right to buy 100 shares of a particular stock or stock
index at a predetermined price before a preset deadline, in exchange for a
premium.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
22
The Selling Stockholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a Selling Stockholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares. The Selling Stockholders have advised us that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares other than ordinary course
brokerage arrangements, nor is there an underwriter or coordinating broker
acting in connection with the proposed sale of shares by the Selling
Stockholders.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The Selling Stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares, including fees and disbursements of counsel to the Selling Stockholders.
We have agreed to indemnify the Selling Stockholders against certain losses,
claims, damages and liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby has
been passed upon for us by Locke Liddell & Sapp LLP, Austin, Texas.
EXPERTS
The consolidated financial statements of DeMarco Energy for the years ended June
30, 2001, and 2000, appearing in this Prospectus and Registration Statement have
been audited by Nathan M. Robnett, CPA, Austin, Texas, independent auditors, as
set forth in their report thereon appearing elsewhere herein.
ADDITIONAL INFORMATION
As permitted by the rules and regulations of the Commission, this Prospectus
does not contain all of the information set forth in the Registration Statement
and in the exhibits and schedules thereto. For further information with respect
to DeMarco Energy and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits thereto. Statements contained in this
Prospectus concerning the provisions of documents filed with the Registration
Statement as exhibits and schedules are necessarily summaries of such documents,
and each such statement is qualified in its entirety by reference to the copy of
the applicable document filed with the Commission. The Registration Statement,
including the exhibits and schedules thereto, may be obtained at the address
noted below.
We are publicly held and traded and file annual and other periodic reports
pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
and such reports and other information filed by us may be inspected and copied
at the public reference facilities of the Commission in Washington, D.C., and
can be read or obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The Commission maintains a website that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission at http://www.sec.gov.
23
INDEX TO FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
Independent Auditor's Report (Nathan M. Robnett, CPA) F-2
Balance Sheets at June 30, 2001 and June 30, 2000 F-3
Statements of Operations for the F-4
Years ended June 30, 2001 and June 30, 2000
Statements of Changes in Stockholders' Capital for F-5
Years ended June 30, 2001 and June 30, 2000
Statements of Cash Flows for the Years ended F-7
June 30, 2001 and June 30, 2000
Notes to Financial Statements F-8
F-1
24
Independent Auditor's Report
To the Board of Directors of DeMarco Energy Systems of America, Inc. (A
Development Stage Company)
We have audited the accompanying balance sheets of DeMarco Energy Systems of
America, Inc. as of June 30, 2001 and 2000 and the related statements of income,
changes in stockholders' capital, and cash flows for the years then ended and
cumulative from inception. 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 of
America, Inc. as of June 30, 2001 and 2000, and the results of its operations
and its cash flows for the years then ended and cumulative from inception in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Corporation will continue as a going concern. As discussed in Note I to the
financial statements, the Corporation has suffered losses from operations and
has a net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note I. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note J to the financial statements, certain errors resulting in
an understatement of previously reported interest expense for the year ended
June 30, 2001 were discovered after the issuance of the financial statements.
Accordingly, the 2001 financial statements have been restated and an adjustment
has been made to additional paid-in capital and interest expense as of and for
the year ended June 30, 2001 to correct the errors.
Robnett & Company, P.C.
Austin, Texas
August 22, 2001
F-2
25
DEMARCO ENERGY SYSTEMS of AMERICA, INC.
(A Development Stage Company)
BALANCE SHEETS
AS OF JUNE 30, 2001 and JUNE 30, 2000
ASSETS As of As of
June 30, 2001 June 30, 2000
Restated
------------- -------------
Current Assets:
Cash and Equivalents $ 261 $ 23,213
Restricted Escrow 250,000 -
Accounts Receivable 240 3,240
------------- -------------
Total Current Assets 250,501 26,453
------------- -------------
Capital Assets:
Fixtures, Fixtures and Equipment 165,335 151,137
Less: Accumulated Depreciation (150,134) (124,331)
------------- -------------
Total Fixed Assets 15,201 26,806
------------- -------------
Other Assets:
Patent, net of Accumulated Amortization of $991 8,921 9,582
and $330 at June 30, 2001 and 2000
Manuals, net of Accumulated Amortization of 7,000 9,000
$3,000 and $1,000 at June 30, 2001 and 2000
Deposits 1,000 1,000
------------- -------------
Total Other Assets 16,921 19,582
------------- -------------
TOTAL ASSETS $ 282,623 $ 72,841
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Current Liabilities:
Accounts Payable $ 159,299 $ 37,656
Cash Overdraft 4,284 -
Current Portion of Notes Payable 21,935 64,787
Other Accrued 72,566 1,773
------------- -------------
Total Current Liabilities 258,084 104,216
------------- -------------
Long-Term Debt:
Convertible Debentures 700,680 197,000
Notes Payable - 22,586
Due to Shareholders 354,035 127,451
------------- -------------
TOTAL LIABILITIES 1,312,799 451,253
------------- -------------
SHAREHOLDERS' EQUITY
Common Stock, 100,000,000 Shares Authorized, Par $0.001,
and 24,931,847 and 22,837,414 shares issued at
June 30, 2001 and 2000 24,932 22,837
Additional Paid-In-Capital 2,520,006 2,244,329
Retained Deficit Accumulated (3,521,964) (2,435,048)
Subscriptions Receivable (53,150) (210,530)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY (1,030,176) (378,412)
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 282,623 $ 72,841
============= =============
See Notes to the Financial Statements.
F-3
26
DEMARCO ENERGY SYSTEMS of AMERICA, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2001 and JUNE 30, 2000
Restated
Year Ended Year Ended Cumulative
June 30, 2001 June 30, 2000 From Inception
------------- ------------- --------------
Revenues
Royalty Fees $ 5,051 $ 21,906 $ 71,040
Sales - - 760,691
Other Income - - 76,506
------------- ------------- --------------
Total Revenue 5,051 21,906 908,237
------------- ------------- --------------
Costs and Expenses
Selling and Administrative 652,712 230,409 3,766,608
Depreciation and Amortization 28,464 32,949 154,125
Interest 410,791 29,217 545,926
------------- ------------- --------------
Total Costs and Expenses 1,091,967 292,575 4,466,659
------------- ------------- --------------
Loss Before Extraordinary Item (1,086,916) (270,669) (3,558,422)
Extraordinary Items
Foregiveness of Debt - - 66,356
------------- ------------- --------------
Loss from Continuing Operations (1,086,916) (270,669) (3,492,066)
Discontinued Operations
Loss from Operations of Discontinued
Subsidiary (Cyberlink) - - (10,032)
Loss on Disposal of Assets of Subsidiary
(Cyberlink) - - (19,866)
Net Loss $(1,086,916) $ (270,669) $ (3,521,964)
============= ============= ==============
Earnings Per Share - Basic $ (0.045) $ (0.012)
============= =============
Earnings Per Share - Fully Diluted $ (0.036) $ (0.012)
============= =============
See Notes to the Financial Statements.
F-4
27
DEMARCO ENERGY SYSTEMS of AMERICA, INC.
(A Development Stage Company)
STATEMENTS OF CHANGES in STOCKHOLDERS' CAPITAL
FOR THE YEARS ENDED JUNE 30, 2001 and JUNE 30, 2000
Retained
Deficit
Accumulated
Common Stock Shares of Additional During the
at Par Common Stock Paid - In Subscriptions Development
$(0.001) Outstanding Capital Receivable Stage Total
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1988 - - - - - -
------------ ------------ ---------- ------------- ------------ -----------
Issuance of 38,000,000 Shares 38,000 38,000,000 111,306 - - 149,306
of Common Stock at Acquisition
of Corporate Shell
Reduction of 37,050,000 Shares (37,050) (37,050,000) - - - (37,050)
of Common Stock in 40 to 1
reverse stock split
Issuance of 12,092,105 12,092 12,092,105 68,625 - - 80,717
Shares of Common Stock
Net Loss - - - - (150,093) (150,093)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1989 13,042 13,042,105 179,931 - (150,093) 42,880
Net Loss - - - - (39,703) (39,703)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1990 13,042 13,042,105 179,931 - (189,796) 3,177
Net Loss - - - - (98,180) (98,180)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1991 13,042 13,042,105 179,931 - (287,976) (95,003)
Issuance of 3,863,849 3,865 3,864,849 459,298 - - 463,163
Shares of Common Stock
Net Loss - - - - (200,779) (200,779)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1992 16,907 16,906,954 639,229 - (488,755) 167,381
Issuance of 1,886,884 1,887 1,886,884 96,031 - - 97,918
Shares of Common Stock
Net Loss - - - - (150,068) 150,068)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1993 18,794 18,793,838 735,260 - (638,823) 115,231
Issuance of 1,424,752 1,425 1,424,752 451,143 - - 452,568
Shares Common Stock
Net Loss - - - - (250,529) (250,529)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1994 20,219 20,218,590 1,186,403 - (889,352) 317,270
Issuance of 246,400 246 246,400 234,633 - - 234,879
Shares of Common Stock
Net Loss - - - - (253,198) (253,198)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1995 20,465 20,464,990 1,421,036 - (1,142,550) 298,951
See Notes to Financial Statements.
F-5
28
DEMARCO ENERGY SYSTEMS of AMERICA, INC.
(A Development Stage Company)
STATEMENTS OF CHANGES in STOCKHOLDERS' CAPITAL
FOR THE YEARS ENDED JUNE 30, 2001 and JUNE 30, 2000
Retained
Deficit
Accumulated
Common Stock Shares of Additional During the
at Par Common Stock Paid - In Subscriptions Development
$(0.001) Outstanding Capital Receivable Stage Total
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1995 20,465 20,464,990 1,421,036 - (1,142,550) 298,951
Issuance of 393,590 394 393,590 212,639 - - 213,033
Shares of Common Stock
Net Loss - - - - (214,625) (214,625)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1996 20,858 20,858,580 1,633,676 - (1,357,175) 297,359
Issuance of 10,315,560 10,316 10,315,560 329,298 - - 339,614
Shares of Common Stock
Subscriptions Receivable - - - (189,080) - (189,080)
Net Loss - - - - (150,866) (150,866)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1997 31,174 31,174,140 1,962,974 (189,080) (1,508,041) 297,027
Issuance of 446,000 446 446,000 141,792 (15,800) - 142,238
Shares of Common Stock
Net Loss - - - - (439,498) (439,498)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1998 31,620 31,620,140 2,104,766 (204,880) (1,947,539) (16,033)
Redemption of 9,166,483 (9,166) (9,166,483) 119,126 (5,650) - 109,960
Shares of Common Stock
Net Loss - - - - (216,840) (216,840)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 1999 22,454 22,453,657 2,223,892 (210,530) (2,164,379) (122,913)
Issuance of 383,757 384 383,757 20,436 - - 20,820
Shares of Common Stock
Net Loss - - - - (270,669) (270,669)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 2000 22,838 22,837,414 2,244,328 (210,530) (2,435,048) (378,412)
Issuance of 2,094,433 2,094 2,094,433 (57,589) 157,380 - 101,885
Shares of Common Stock
Beneficial Conversion Feature - - 333,267 - - 333,267
of Convertible Debt (Notes B and J)
Net Loss - Restated (Note J) - - - - (1,086,916) (1,086,916)
------------ ------------ ---------- ------------- ------------ -----------
Balance at June 30, 2001 $ 24,932 24,931,847 $2,520,006 $ (53,150) $(3,521,964) $(1,030,176)
Restated (Note J)
See Notes to the Financial Statements.
F-6
29
DEMARCO ENERGY SYSTEMS of AMERICA, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2001 and JUNE 30, 2000
Restated
For the Year For the Year
Ended Ended Cumulative
June 30, 2001 June 30, 2000 From Inception
------------- ------------- --------------
Cash flows from operating activities:
Net Loss $(1,086,916) $ (270,699) $(3,521,964)
Adjutments to reconcile net loss to net cash
Provided (used) by operating activities:
Depreciation and Amortization $ 28,464 $ 32,949 $ 154,125
Changes in operating assets and liabilities:
(Increase) Decrease in Accounts Receivable 3,000 45,000 (241)
Increase in Other Assets - (3,240) (1,000)
Increase (Decease) in Accounts Payable 121,643 (8,452) 159,299
Increase (Decrease) in Accrued Liabilities 75,077 (2,615) 76,850
Non-Cash Interest from Issuance of Debenture Bonds 333,267 333,267
Loss on Disposal of Assets of Subsidiary's Assets - - 19,867
-------------- ------------- --------------
Total Adjustments 561,451 63,642 742,167
-------------- ------------- --------------
Net Cash Used by Operating Activities (525,465) (207,057) (2,779,797)
-------------- ------------- --------------
Cash flows from investing activities:
Patent - - (9,912)
Manuals Development - (10,000) (10,000)
Property and Equipment Additions (14,198) (2,311) (185,201)
Increase in Restricted Cash (250,000) - (250,000)
-------------- ------------- --------------
Net Cash Provided (Used) by Investing Activities (264,198) (12,311) (455,113)
-------------- ------------- --------------
Cash flows from financing activities:
Proceeds (Repayments) from Long - Term Debt (65,438) (49,917) 21,935
Proceeds from Notes to Shareholders 226,584 72,031 354,035
Proceeds from Convertible Debentures 503,680 197,000 700,680
Proceeds from Issuance of Common Stock 101,885 20,820 2,158,521
-------------- ------------- --------------
Net Cash Provided by Financing Activities 766,711 239,934 3,235,171
-------------- ------------- --------------
Net increase (decrease) in Cash and Cash Equivalents $ (22,952) $ 20,566 $ 261
Cash and Cash Equivalents at the Beginning of the Year 23,213 2,647 -
-------------- ------------- --------------
Cash and Cash Equivalents at the End of the Year $ 261 $ 23,213 $ 261
============== ============= ==============
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for Interest Expense $ 15,382 $ 10,696 $ 145,985
See Notes to the Financial Statements.
F-7
30
DEMARCO ENERGY SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2001 and JUNE 30, 2000
Note A - Summary of Significant Accounting Policies
Nature of Operations
DeMarco Energy Systems of America, Inc. (the Company) was organized under the
laws of the State of Utah in 1983. The Company is engaged in the marketing of
the DeMarco Energy Systems 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. At June 30, 2001, the patent had not been granted and the
eventual approval or denial of this patent application is indeterminable at this
time.
DeMarco Energy Systems of America, Inc. currently has installations in Oregon,
Pennsylvania, Washington, Montana, South Dakota, Mississippi, and California.
In July 1996, the Company organized Cyberlink Systems, Inc. (Cyberlink), a
wholly owned subsidiary. Cyberlink was organized to refurbish and market
after-market computer components. During March of 1998, Cyberlink ceased
operations. All components of Cyberlink were disposed of during the fiscal year
ended June 30, 1999 and the related results from discontinued operations are
reported on the income statements under loss from discontinued operations.
Basis of Financial Statements Presentation
The consolidated financial statements include the accounts of the Company and
its subsidiary (Cyberlink). Inter-company transactions and accounts have been
eliminated.
Furniture and Equipment
Furniture, 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. Purchases and
improvements that extend the life of assets are capitalized whereas maintenance,
repairs and immaterial purchases 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.
Cash and Cash Equivalents
Holdings of highly liquid investments with maturities of three months or less
when purchased are considered to be cash equivalents. The carrying amount
reported in the balance sheet for cash and cash equivalents approximates its
fair value.
Royalty Fee Arrangements
The Company has contracted with Florida Heat Pump Manufacturing, Inc. of Fort
Lauderdale, Florida for the manufacture and distribution of a water source heat
pump. The Company receives a 20% royalty fee, calculated from the base
production price for manufacture of each unit. The base production price may
vary. Through the agreement with Florida Heat Pump Manufacturing, Inc., the
Company has net royalties of $5,051 and $21,906 at June 30, 2001 and 2000. The
company recognizes royalty revenues when invoiced.
The Company has no obligation under the agreement with Florida Heat Pump
Manufacturing, Inc. to provide warranty or servicing services either financially
or otherwise for the equipment sold.
Advertising
The Company's policy is to expense advertising costs as the costs are incurred.
Advertising costs of $55,941 and $27,961 have been expensed for the years ended
June 30, 2001 and 2000, respectively.
Development Stage Company
The Company is in the "development stage" and as such is required to present the
financial statements from inception. The Company is involved in obtaining a
patent and developing a market for that patent. The Company is considered to be
in the development stage until substantial revenues are produced in regard to
the operations of the organization.
31
Note B - Convertible Debt Issuance
The company has outstanding, $700,680 and $197,000 in convertible debentures
bonds at June 30, 2001 and 2000, respectively.
Bonds with principal value of $200,680 bear interest at 8% per year payable
after being held for two years, and are convertible into the Company's common
stock at fixed conversion rates ranging from $0.10 to $0.45 per share of common
stock, which at date of issuance, approximated the fair value of the common
stock. There is not a beneficial conversion feature associated with these bonds.
Bonds with principal value of $500,000 bear interest at 10% and contain a
beneficial conversion feature which allows the holder to convert the bond's
principal value plus accrued interest into shares of common stock at the lesser
of $0.34 per share and the average of the lowest three days in the last ten
trading days preceding the conversion at a forty (40) percent discount and are
convertible at the date of issuance (September 26, 2000). Interest of $333,267
was calculated as a function of the excess of market value over the discounted
conversion rate of common stock at the date of issuance and was expensed on that
date.
At June 30, 2001 and 2000, $55,146 and $2,262 of interest was accrued in
relation to the debentures bonds payable. The debenture bonds mature during the
fiscal year ended June 30, 2002 and are expected to be converted into shares of
common stock. The debenture bonds are not classified as current debt.
Note C - Notes Payable
Notes payable, relating to long-term leasing contracts and collateralized by
computer systems and other leased equipment, were originally capitalized at
$128,384 and have been fully depreciated. The notes bear interest at rates
ranging from 12-18.55% and mature in the year ended June 30, 2002. Outstanding
principal at June 30, 2001 and 2000 is $21,935 and $52,540, respectively.
During the year ended June 30, 2001, the Company paid off a note payable held by
a bank. Shares in the company owned by the company's president secured the note.
Outstanding principal of $0 and $34,833 was payable at June 30, 2001 and 2000,
respectively and interest accrued at a rate of 11.5%.
Note D - Commitments and Contingencies
Office Facility Lease
The Company has entered into an office facility lease, guaranteed by the
Company's president, calling for the following future rents:
Year ending June 30, 2002 $ 24,808
Year ending June 30, 2003 25,906
Year ending June 30, 2004 26,364
Year ending June 30, 2005 10,527
-----------
Total $ 87,605
==========
Escrowed Cash
Pursuant to the Escrow Agreement dated September 26, 2000, $250,000 of the cash
proceeds from the issuance of $1,500,000 of debenture bonds payable is to be
withheld and maintained in an escrow account to cover contingencies should they
arise. At the date of report, the escrowed funds have been released to the
company and no contingencies related to the funds exist.
Note E - Earnings (Loss) per Common Share
Earnings (Loss) per common share are computed by dividing net losses by the
weighted average number of common share outstanding during the year. The
weighted average number of common shares outstanding during the years ended June
30, 2001 and 2000 was approximately 24,347,464 and 22,645,000 shares,
respectively. The fully diluted number of shares outstanding for the years ended
June 30, 2001 and 2000 was 29,945,014 and 23,301,018, respectively.
32
Note F - Income Taxes
As of June 30, 2001, DeMarco Energy Systems, Inc. had net operating loss carry
forwards of approximately $2,250,000 that expire between 2010 and 2021 and are
available to offset future taxable income to the extent permitted under the
Internal Revenue Code. The Company's management estimates that the likelihood of
utilizing the deferred tax asset associated with the net operating loss
carry-forwards is less than fifty percent (50 %). For this reason, Management
does not feel the recognition of a deferred tax asset would be appropriate at
the date of report.
Note G - Related Party Transactions
The president of the company has advanced sums of $250,351 and $99,651 at June
30, 2001 and 2000. Additional advancements totaling $3,000 and $7,800 at June
30, 2001 and 2000 were received from a former affiliate of the Company. The
loans bear interest at 8% and $11,528 of interest has been accrued at June 30,
2001.
An additional loan from a shareholder is recorded as having a balance of $20,000
at June 30, 2000. During the year ended June 30, 2001, this note was converted
into 133,333 shares of common stock and is considered settled.
During the year ending June 30, 1999, the chairman of the board passed away. His
estate forgave $66,356 owed by the company to him. The resultant gain from the
forgiveness of debt is included as an extraordinary gain on the cumulative
income statement.
Note H - Fair Values of Financial Instruments
The Company's financial instruments consist of cash and notes payable. The
Company estimates the fair values of all financial instruments does not differ
materially from the aggregate carrying values of its financial instruments
recorded on the accompanying balance sheets. The estimated fair value amounts
have been determined by the Company using available market information and
appropriate valuation methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the estimates of fair value, and
accordingly, the estimates are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. None of the financial
instruments are held for trading purposes.
Note I - Going Concern
As shown in the accompanying financial statements, the Company incurred net
operating losses of ($1,086,916) and ($270,669) and had current liabilities in
excess of current assets of $7,583 and $ 424,800, for the years ended June 30,
2001 and 2000, respectively, which raise substantial doubt about the Company's
ability to continue as a going concern.. The Company's management intends to
raise capital through equity offerings and expects that $700,680 of convertible
debenture bonds payable will be converted to common stock. The Company's
management has also increased their marketing efforts to raise revenues. The
financial statements do not include any adjustments that might be necessary if
the Corporation is unable to continue as a going concern.
Note J - Restated Financial Statements
The interest expense as reported in the previously issued June 30, 2001
financial statements did not include $333,267 of interest expense related to the
issuance of the convertible debenture bonds. The restated financial statements
include $333,267 of interest expense calculated as a function of the beneficial
conversion feature of the convertible debentures bonds (Note B).
33
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our articles of incorporation limit the personal monetary liability of our
directors to the fullest extent permissible under the corporation laws of Utah.
In general, Section 16-10a-841 of the Utah Revised Business Corporation Act (the
URBCA"), permits the elimination of personal monetary liability in all cases
except liability for: (a) the amount of a financial benefit received by a
director to which he is not entitled; (b) an intentional infliction of harm on
the corporation or the shareholders; (c) a violation of Section 16-10a-842 of
the Utah Revised Business Corporation Act (relative to distribution of assets in
violation of the URBCA or our articles of incorporation); or (d) an intentional
violation of criminal law.
Except as set forth in the articles of incorporation and under the provisions of
the URBCA, no statute, charter provision, bylaw, contract or other arrangement
which indemnifies any controlling person, officer or director of our Company,
affects or limits their liability.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
All costs, expenses and fees in connection with the registration of the shares
of Common Stock offered hereby shall be borne by us. Commissions and discounts,
if any, attributable to the sales of shares of Common Stock hereunder will be
borne by the Selling Stockholders. The Selling Stockholders may agree to
indemnify any broker-dealer or agent that participates in a transaction
involving sales of shares of Common Stock against certain liabilities, including
liabilities arising under the Securities Act. We have agreed to indemnify the
Selling Stockholders against certain liabilities in connection with the offering
of the shares of Common Stock hereunder, including liabilities arising under the
Securities Act.
We anticipate incurring the following expenses in connection with the
registration of these shares of Common Stock:
1. Legal expenses $50,000
2. Consulting fees 20,000
3. Registrations fees 1,400
-------
Total $71,400
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On September 13,1999, we completed a private placement (the "Placement") of
696,852 shares of our Common Stock to 33 individual and institutional investors.
The aggregate sales proceeds of the Placement were $174,300. We believe that the
issuance of shares of Common Stock in the Placement was exempt from the
registration requirements of the Securities Act under Rule 506 under the
Securities Act. There was no underwriter involved and all persons acquiring the
stock were accredited investors.
During the eight-month period from January through August 2000, we issued a
series of convertible debentures bearing 8% interest. A total of $229,380 was
raised from this issuance. The debentures mature in 24 months from the time of
issue. Interest payments are calculated quarterly and totaled upon conversion
and included in the stock distribution. The debentures carry various conversion
privileges ranging from $0.10 to $0.45 a share. The debenture holders have the
right to convert any or all of the principal into our Common Shares at any time
after the first 12 months from issuance. If all debenture holders elect to
convert, we will issue approximately 1,200,000 shares of our Common Stock to the
holders and be relieved of the debt. We believe that the issuance of shares of
Common Stock in the Placement was exempt from the registration requirements of
the Securities Act under Rule 506 adopted thereunder. There was no underwriter
involved and all persons offered and acquiring the debentures were accredited
investors. The following table lists the amount of debentures issued and the
date of issuance:
DEBENTURE AMOUNT ISSUE DATE
---------------- ---------------
$ 2,500 January 20, 2000
10,000 January 20, 2000
3,000 January 20, 2000
1,000 January 20, 2000
3,000 January 20, 2000
200 January 22, 2000
2,000 January 26, 2000
2,500 January 26, 2000
1,000 January 26, 2000
2,000 January 26, 2000
3,000 January 26, 2000
2,500 January 26, 2000
1,000 January 26, 2000
500 January 26, 2000
2,500 January 26, 2000
500 January 26, 2000
1,000 January 26, 2000
500 January 26, 2000
2,000 January 26, 2000
1,000 January 26, 2000
500 January 26, 2000
1,000 January 26, 2000
7,000 January 30, 2000
1,000 February 15, 2000
1,000 February 16, 2000
4,000 February 17, 2000
1,000 February 29, 2000
1,000 April 11, 2000
22,500 April 13, 2000
3,000 April 19, 2000
3,000 May 11, 2000
5,000 May 12, 2000
3,000 May 25, 2000
5,000 May 26, 2000
6,000 June 5, 2000
35,000 June 9, 2000
2,500 June 9, 2000
2,500 June 13, 2000
57,500 August 25, 2000
26,180 August 28, 2000
--------------
$ 229,380
34
On September 26, 2000, we entered into an agreement with AJW Partners, LLC and
New Millennium Capital Partners II, LLC for the private placement of $1,500,000
of our Secured Convertible Debentures. These debentures are convertible into
shares of our Common Stock. The funding of the debentures will occur in two
phases with the first $500,000 (less legal and consulting fees of $45,000) being
received by us on September 27, 2000. The remaining $1,000,000 will be funded
within 5 days following the effective registration with the Securities and
Exchange Commission of the underlying securities of DeMarco Energy. If all
debenture holders elect to convert, we will issue approximately 10,869,564
shares of our Common Stock to the holders and will be relieved of the debt.
Since the debentures were sold in a private transaction, solely to accredited
institutional investors, we believe that the issuance of the debentures was
exempt from registration requirements of the Securities Act under Rule 506 of
Regulation D and Section 4(2) of the Securities Act.
Mr. Victor DeMarco, the Company's controlling shareholder and Chief Executive
Officer and director had personally loaned us approximately $99,000 through the
period ended June 30, 2000. On September 29, 2000, Mr. DeMarco converted this
entire debt into 1,650,000 shares of our Common Stock at a conversion price of
$0.06 per share. Because Mr. DeMarco is an officer and director of DeMarco
Energy, we believe the issuance of shares to Mr. DeMarco was exempt from the
registration requirements of the Securities Act under Rule 506 of Regulation D
and Section 4(2) of the Securities Act.
Mr. Peter Des Camps, formerly our Senior Vice President of Corporate Development
also serves as President and Chief Executive Officer for Lead Capital Ventures
("LCV"), a private investment company formed in 1999. LCV paid a debt of DeMarco
Energy in the amount of $20,000 and acquired the Common Stock conversion rights
associated with that debt. The conversion rights were at $0.156 per share which
resulted in 133,333 shares of Common Stock being issued to LCV. This transaction
occurred on September 29, 2000. Because LCV is an accredited institutional
investor and Mr. Descamps was an officer of DeMarco Energy, we believe this
transaction was exempt from registration requirements of the Securities Act
under Rule 506 of Regulation D and Section 4(2) of the Securities Act.
35
ITEM 27. EXHIBITS
Exhibit
Number Name of Exhibit
------- ---------------
3.01 DeMarco Energy Systems of America, Inc. Articles of
Incorporation (1)
3.02 DeMarco Energy Systems of America, Inc. By-Laws (1)
4.01 Secured Convertible Debenture Purchase Agreement (2)
4.02 DeMarco Energy Systems of America, Inc. 10% Secured
Convertible Debenture (2)
4.03 Security Agreement (2)
4.04 Intellectual Property Security Agreement (2)
4.05 Registration Rights Agreement (2)
4.06 Escrow Agreement (2)
4.07 Amended Terms Agreement with AJW Partners, LLC. And New
Millennium Capital Partners II, LLC. (1)
5.01 Opinion of Locke Liddell & Sapp LLP with respect to the
legality of the securities being offered hereby (1)
10.01 PG&E Energy Services Master Agreement (1)
10.02 Lighting Management Consultants Strategic Partnership
Agreement (1)
10.03 SLi Strategic Partnership Agreement (1)
10.04 Florida Heat Pump OEM Agreement (1)
10.05 Amended Florida Heat Pump Agreement (1)
10.06 Chevron Energy Solutions, L.P. Master Agreement (1)
13.01 Annual Report Form 10KSB for June 30, 2001 (3)
23.01 Consent of Locke Liddell & Sapp LLP (included as part of its
opinion)
23.02 Consent of Nathan M. Robnett, CPA (1)
------------------------
(1) Filed herewith.
(2) Incorporated by reference from Form 8-K filed on October 11, 2000. SEC
file number 000-28283.
(3) Incorporated by reference from Form 10KSB filed on September 28, 2001.
SEC file number 000-28283.
36
ITEM 28. UNDERTAKINGS
The Company will:
(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;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" Table in the effective registration
statement.
(iii)Include any additional or changed material information
on the Plan of Distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new Registration Statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company under Rule 424(b)(1) or (4), or 497(h) under the
Securities Act as part of this registration statement as of the time the
Commission declared it effective.
(5) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that the offering of the securities at that time as the initial bona fide
offering of those securities.
The undersigned Registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Exchange Act that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under Securities Act may be
permitted to directors, officers and controlling persons of Registrant pursuant
to the provisions of its Articles of Incorporation, its By-Laws, or otherwise,
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against liabilities (other than the payment by Registrant for
expenses incurred or paid by an officer, director or controlling person of
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
37
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Austin,
State of Texas, on the 15th day of October, 2001.
DEMARCO ENERGY SYSTEMS OF AMERICA, INC,
By: /s/ Victor M. DeMarco
----------------------------------------
Victor M. DeMarco, President/ Chief Operating
Officer, Chief Accounting Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
/s/ Victor M. DeMarco President, Chief Operating October 15, 2001
----------------- Officer Chief Accounting
Victor M. DeMarco Officer
/s/ John W. Adams Director, Vice-President October 15, 2001
-------------- of Sales
John W. Adams
/s/ Mary L. DeMarco Director October 15, 2001
----------------
Mary L. DeMarco
38
TABLE OF EXHIBITS
Exhibit
Number Name of Exhibit
------- ---------------
3.01 DeMarco Energy Systems of America, Inc. Articles of
Incorporation (1)
3.02 DeMarco Energy Systems of America, Inc. By-Laws (1)
4.01 Secured Convertible Debenture Purchase Agreement (2)
4.02 DeMarco Energy Systems of America, Inc. 10% Secured
Convertible Debenture (2)
4.03 Security Agreement (2)
4.04 Intellectual Property Security Agreement (2)
4.05 Registration Rights Agreement (2)
4.06 Escrow Agreement (2)
4.07 Amended Terms Agreement with AJW Partners, LLC. And New
Millennium Capital Partners II, LLC. (1)
5.01 Opinion of Locke Liddell & Sapp LLP with respect to the
legality of the securities being offered hereby (1)
10.01 PG&E Energy Services Master Agreement (1)
10.02 Lighting Management Consultants Strategic Partnership
Agreement (1)
10.03 SLi Strategic Partnership Agreement (1)
10.04 Florida Heat Pump OEM Agreement (1)
10.05 Amended Florida Heat Pump Agreement (1)
10.06 Chevron Energy Solutions, L.P. Master Agreement (1)
13.01 Annual Report Form 10KSB for June 30, 2001 (3)
23.01 Consent of Locke Liddell & Sapp LLP (included as part of its
opinion)
23.02 Consent of Nathan M. Robnett, CPA (1)
------------------------
(1) Filed herewith.
(2) Incorporated by reference from Form 8-K filed on October 11, 2000. SEC
file number 000-28283.
(3) Incorporated by reference from Form 10KSB filed on September 28, 2001.
SEC file number 000-28283.
39