U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Commission File No. 333-41092
MIRENCO, INC.
(Name of small business issuer in its charter)
IOWA 39-1878581
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
206 MAY STREET, RADCLIFFE, IOWA 50230
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (515) 899-2164
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- ------------------------------------------
Common Stock, no par value NONE
Securities registered under Section 12(g) of the Exchange Act:
NONE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this Form 10-KSB, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
The issuer's revenues for the most recent fiscal year were $77,795.
The aggregate market value of the voting stock held by non-affiliates, based on
the closing sale price of the over-the-counter market on March 15, 2002, was
$4,725,500. As of March 15, 2002, there were 13,274,687 shares of Common Stock,
no par value, outstanding.
1
MIRENCO, INC.
FORM 10-KSB
Fiscal Year Ended December 31, 2001
TABLE OF CONTENTS
PART I
Item 1. Description of Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis or Plan of Operation
Item 7. Financial Statements and Supplementary Data
Item 8. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons, Compliance With Section 16(a) of the
Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
SIGNATURES
2
Cautionary Statement on Forward-Looking Statements.
The discussion in this Report on Form 10-KSB, including the discussion
in Item 1 and Item 6, contain forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are based on current expectations,
estimates and projections about the Company's business, based on management's
current beliefs and assumptions made by management. Words such as "expects",
"anticipates", "intends", believes", "plans", "seeks", "estimates", and similar
expressions or variations of these words are intended to identify such
forward-looking statements. Additionally, statements that refer to the Company's
estimated or anticipated future results, sales or marketing strategies, new
product development or performance or other non-historical future results, sale
or marketing strategies, new product development or performance or other
non-historical facts are forward-looking and reflect the Company's current
perspective based on existing information. These statements are not guarantees
of future performance and are subject to certain risks, uncertainties and
assumptions that are difficult to predict. Therefore, actual results and
outcomes may differ materially from what is expressed or forecasted in any such
forward-looking statements. Such risks, and uncertainties include those set
forth below in Item 1 as well as previous public filings with the Securities and
Exchange Commission. The discussion of the Company's financial condition and
results of operations included in Item 6 should also be read in conjunction with
the financial statements and related notes included in Item 7 of this annual
report. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
PART I
ITEM 1. Description of Business
(a) Development
Mirenco, Inc., a development stage company, was organized and
incorporated in the State of Iowa on February 21, 1997. We develop and market
technologically advanced products for throttle control of internal combustion
vehicles to reduce environmental emissions, reduce vehicle maintenance costs,
and improve fuel efficiency.
From July 30, 1999 to July 30, 2000, we raised $7,806,240 in the sale
of 1,561,248 shares of common stock at $5.00 per share to Iowa-only residents in
a self underwritten, intrastate direct public offering. We claimed the exemption
from registration in this intrastate offering provided by Section 3(a)(11) of
the Securities Act of 1933. We noted that the shares were part of an issue
registered, offered and sold only to residents of Iowa; we are incorporated in
Iowa; and we do business within Iowa. Nonetheless, certain of our "Iowa-Only
Offering Shares" were resold by Iowa residents to non-Iowa residents before
"coming to rest" under ss.3(a)(11) and/or Rule 147's nine-month standard. As a
result, we voluntarily elected to rescind the Iowa-Only Offering, which resulted
in the refund of $261,700 for 52,340 shares returned and cancelled, incurring
total interest expense of $14,990. The rescission offer was available only to
Iowa-Only Offering Stockholders. As of February 26, 2001, the termination date
of the rescission offer, the Iowa-Only Offering net investment was $7,544,540,
or 1,508,908 shares.
During 2001, Mirenco, Inc. completed the construction of a 21,600
square foot warehouse and distribution center in Radcliffe, Iowa, which also
serves as the corporate headquarters. The cost of the construction was
$1,226,292 and the cost of new furnishings was $36,852.
(b) Business
Our primary products are derived from technology patented in the U.S.,
Mexico and Canada. These products are DriverMax(R), DriverMax(R) Software,
HydroFire(R) Injection, HydroFire(R) Fluid, HydroFire(R) Lubricant and
EconoCruise(R).
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Our newest product offering, EconoCruise(R), is a new and improved
version of our product line utilizing other input sensors including Global
Positioning System technology and ambient sensor features. We believe we are the
first to provide a product incorporating Global Positioning System technology
into a throttle-control application using "Satellite-to-Throttle" technology.
(1) Products and services
DriverMax(R) is a device that improves engine exhaust emissions and
fuel mileage while it reduces vehicle maintenance costs using
precise programmable computer management of the vehicle's
throttle position. This product is designed primarily for
heavy start-stop vehicles such as buses, garbage trucks and
construction vehicles.
Recently we completed the development of a new DriverMax(R)
product, which operates an electronically digitally controlled
engine, thus opening up a completely new market relative to
the extra heavy-duty diesel engine. The application for this
technology is the reduction of black smoke (opacity) in
off-road construction equipment as well as heavy-duty
underground equipment used in mining, gravel, and sandpit
operations.
Another new product we have completed is a version of the
DriverMax(R) which can operate on mechanical engines. Prior to
introducing this new product, DriverMax(R) was operable only
on electronic engines. Again, we are now opening up a new
application of our technology for older diesel engines found
primarily in South America and particularly in Mexico where
the air pollution problem in Mexico City and the other major
metropolis is significant. We firmly believe this product will
find market acceptance in other major polluted cities of the
world such as Athens, Cairo, Hong Kong, Bombay, and Moscow.
The HydroFire(R) System is a sophisticated superset of the DriverMax(R)
technology, providing all the benefits of the DriverMax(R) plus the
additional benefit of cutting oxides of nitrogen (NOx) emissions
under performance conditions where NOx is produced. Specifically, NOx
is produced under heavy loads and high engine temperatures. When
these conditions occur, HydroFire(R) Injection injects a patented
fluid, HydroFire(R) Fluid, into the engine to combat the NOx
production by approximately 50%. The HydroFire(R) Fluid is a
patented water-alcohol-lubricant mixture for which we have
patented the blending process. Specifically, water cuts the
NOx production, alcohol serves as an antifreeze for the water,
and HydroFire(R) Lubricant serves to thwart the potentially
solvent and/or corrosive characteristics of the alcohol in the
engine and/or storage containers. HydroFire(R) Systems are
designed primarily for heavy transport vehicles such as buses
and over-the-road trucks.
EconoCruise(R), currently in development, is a highly sophisticated
throttle control system which provides advanced levels of
"intelligence" to common cruise control technology.
EconoCruise(R) utilizes Global Positioning System signals to
"know" the topography of the road ahead, thereby allowing the
vehicle to best manage throttle and emissions. In connection
with the development of this product, we have executed a
"Funds-in Work for Others Agreement" with the United States
Department of Energy's Kansas City plant, operated by
Honeywell, Inc., whereby industry procures unique services
from government laboratories to build the product. We
anticipate that this product will be marketable to the
population of existing vehicles as an "add-on" and that the
rights to the patented technology and proprietary design work
will be marketable to automakers.
We provide our customers with post-sale services
where they are desired. However, most of our customers employ
in-house maintenance personnel, who are trained by our
employees to install and maintain our products. We are still
in the development stage, with low sales volume at this point.
Approximately 88% of 2001 sales and 100% of 2000 sales were
concentrated among just four
4
customers. Our intention is to use testimonials and real-world
performance data from these customers to generate awareness of
our products and services. Our plan is to sell both the licensing
rights to the patented technology as well as the products which
are based on the patents.
Our continued relationship with the Transit Authority
of River City (TARC) in Louisville, Kentucky, has yielded a
dramatic reduction in opacity for their fleet. We have reduced
the number of pounds of soot by 70% and saved the city tens of
thousands of dollars in fuel costs. We have developed an
emissions testing program under a service agreement whereby we
are paid for each individual bus we test three times per year.
This contractual model is the forerunner of our continuing
effort to assist our customers in further emissions
reductions. By reporting the individual opacity of each
vehicle we are able to identify which vehicles require
maintenance and/or settings adjustments on DriverMax(R) units
already installed on several vehicles.
Our latest marketing program is aimed at cleaning up
the diesel school bus fleet in the United States, which was
recently highlighted by a Connecticut study showing that
children with any type of breathing problem are at risk when
they ride the country's school buses. Basically, we intend to
have our first marketing model in the state of Iowa, where we
hope to be testing approximately 6,000 school buses twice each
year to identify the acuteness of Iowa's school bus
particulate (black smoke) problem. Once the initial baseline
testing has been completed, we will be using our DriverMax(R)
technology plus our knowledge of engine combustion to advise
maintenance personnel in each school district in maintaining
their diesel engines more effectively.
We believe that results similar to those achieved by
our customers can be achieved by other fleet managers
throughout the country. Our sales efforts in 2002 will
continue to address the emissions control and fuel savings
needs of transit authorities and school districts.
(2) Distribution methods
We currently use independent representatives and
organizations for the delivery of our products as well as for
direct sales and marketing services. We believe that various
methods will be employed for varying markets, and we will use
the most economical means available as our development
continues. As mentioned above, we recently completed the
construction of a distribution and warehousing facility which
includes sufficient space to accommodate future growth in
staff, and we have received approval for economic development
assistance from the state and county for this facility.
Our overall marketing strategy continues to focus on
selling our patent rights for EconoCruise(R), our
Satellite-to-Throttle technology, to a major auto producer and
finding marketing partners for the DriverMax(R) aftermarket
diesel engine sector. To date we have identified several large
auto companies that have shown some interest in our
EconoCruise(R) technology and we have signed distributor
agreements with a number of regional distributors. These
distributors will market our services and offer emissions
testing services to the heavy-duty diesel engine market.
(3) Competition
The market for our products and services is
characterized by rapid technological developments, frequent
new product introductions and evolving, varying industry and
regulatory standards. We believe there is no known automotive
retrofit device that can compete with our current or
contemplated spectrum of products. Mirenco Inc.'s technologies
and solutions are aimed at reducing wasted fuel and excess
emissions produced as a result of continuous, unrecognized
over throttling of vehicles under varying conditions.
Alternate (i.e. "competitive") solutions generally work either
to filter emissions and/or to assist the engine in burning
more of the excess fuel directed to the engine as a result of
over throttling. With this distinction, we intend to make the
industry aware that our products are not competitive to, but
cooperative with other solutions. Other developmental products
which could be
5
considered as competitive include: portable fuel cells which
combine oxygen from the air with hydrogen, obtained from methanol,
natural gas, or petroleum to generate electricity without the use of
combustion; biofuels developed from plants to make cleaner renewable
fuels for cars and buildings; cleaner burning gasoline engine
automobiles; hybrid electric/gasoline motors; and electric vehicles.
(4) Production suppliers
We currently outsource the production of DriverMax(R)
according to our specifications to I.C.E. Corp., an FAA
certified electronic manufacturing company located in
Manhattan, Kansas. Generally all materials required to
manufacture and assemble our product line are readily
available shelf items. Orders are typically manufactured and
delivered within, at most, a ten week time frame. Payment
terms are standard for the industry. We are not required to
order or accept delivery of any product based on a
predetermined time schedule, and production unit costs
decrease with increasing quantities.
At the present time, we intend to continue
outsourcing production to companies which can meet our
specifications for high quality and reliability. Management
has contacted other companies capable of producing our
products at the desired levels should the need arise.
(5) Patents and trademarks
Mirenco, Inc. owns the following patents purchased from American
Technologies on April 30, 1999:
1. United States Patent Number 4,958,598, issued September 25, 1990,
entitled "Engine Emissions Control Apparatus Method."
2. United States Patent Number 5315977, "Fuel Limiting Method and
Apparatus for an Internal Combustion Vehicle" issued May 31, 1994.
3. Canadian Patent Number 1,289,430, issued September 24, 1991,
entitled "Engine Modification Apparatus Fuel."
4. Mexican Patent Number 180658, "Fuel Limiting Method and Apparatus
(Staged Fueling). Registration date January 17, 1996.
5. Canadian Patent Number 2,065,912, issued June 1, 1999, entitled
"Fuel Limiting Method and Apparatus for an Internal Combustion
Vehicle." Application date April 13, 1992.
As part of the purchase agreement for the above patents, Mirenco, Inc. will
pay American Technologies a 3% royalty of annual gross sales for a period of
twenty years, which began November 1, 1999. In addition, we have filed for and
obtained the following Registered Trademarks:
1. HydroFire(R)Fluid 5. EconoCruise(R)
2. HydroFire(R)Injection 6. "SmartFoot(TM)
3. HydroFire(R)Lubricant 7. "Satellite-to-Throttle"(TM)
4. DriverMax(R)
(6) Government regulation
Currently, all conventional vehicles, as well as most
alternate fuel vehicles and certain retrofit technologies
legally sold in the United States, must be "certified" by the
Environmental Protection Agency (EPA) to qualify for the "Low
Emission Vehicle" ("LEV") classification necessary to meet
federal fleet vehicle conversion requirements. Our products
have met, and management believes the products will continue
to meet, these certification requirements. However, since this
is an area in which the government is continually updating and
legislating or mandating new requirements, we are uncertain
whether our products will continue to be certified. Whenever
possible, we intend to maintain our certification. In
addition, to improve the marketability of our products in
countries outside the United States, we will conform our
products to foreign regulations if it is economically feasible
to do so.
We believe our products to be "retrofit devices" as
defined under EPA regulations. We are, however, subject to the
regulatory risk that the EPA may construe distribution of the
products to be also
6
governed by "fuel additive" regulations. These more stringent
regulations sometimes require scientific testing for both acute and
chronic toxicity, which is not required for approval of pollution
control products deemed as "retrofit devices". Such additional
compliance procedures could substantially delay the wide
commercialization of HydroFire(R) products. We believe the EPA "fuel
additive" regulations do not apply to our DriverMax(R) products,
since our product does not involve the introduction of additives into
the engine air intake system, as those terms are defined in EPA
regulations and generally understood in the automotive engineering
community.
We are not aware of any proposed regulatory changes
that could have a material adverse effect on our operations
and/or sales efforts. Further, we have not been required to
pay any fines for, and are not aware of any issues of,
noncompliance with environmental laws.
(7) Research and development
The Company expenses research and development costs
as incurred, classifying them as operating expenses. Such
costs include certain prototype products, test parts,
consulting fees, and costs incurred with third parties to
determine feasibility of products. Costs incurred for research
and development were $96,820 and $48,253 in 2001 and 2000,
respectively.
(8) Employees
As of December 31, 2001 we had 15 full-time
employees, with no part-time employees. As of the date of this
filing, we now have 12 full-time and two part-time employees.
There have been no management-labor disputes, and we are not a
party to any collective bargaining agreement.
7
ITEM 2. Properties
Mirenco, Inc. owns a 21,600 square foot office, warehouse and distribution
facility located in Radcliffe, Iowa. The building is located on 1.2 acres of
land leased from Dwayne Fosseen, principal stockholder of Mirenco, Inc., for a
perpetual term at zero monthly rent. Prior to the completion of this new
facility in 2001, Mirenco, Inc. owned no property and leased all business
facilities.
ITEM 3. Legal Proceedings
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
8
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
(a) Market Information
Effective June 15, 2001, Mirenco, Inc. common stock began initial trading
on the over-the-counter "bulletin board" market under the symbol "MREO".
Price Range of Common Stock
---------------------------
The following table sets forth the high and low sales prices of the
Company's common stock as obtained from the Quotes tab at the Internet site
www.nasdaq.com. These prices reflect inter-dealer prices, without retail
--------------
mark-up, mark-down or commission and may not represent actual transactions. No
reference is made to fiscal year 2000 since the stock did not begin trading
until the second quarter of 2001.
Fiscal Period 2001
------------- ------
High Low
--- ---
First Quarter N/A N/A
Second Quarter 10.50 1.90
Third Quarter 3.20 1.50
Fourth Quarter 2.17 .70
(b) Approximate Number of Equity Security Holders
Approximate Number of
Record Holders
Title of Class as of December 31, 2001
---------------------- --------------------------
Common Stock, no par value 3,600(1)
(1) Included in the number of stockholders of record are shares
held in "nominee"or "street" name.
(c) Dividend History and Restrictions
The Company has never paid a cash dividend on its common stock and has no
present intention of paying cash dividends in the foreseeable future. Future
dividends, if any, will be determined by the Board of Directors in light of the
circumstances then existing, including the Company's earnings, financial
requirements, general business conditions and any future possible credit
agreement restrictions.
9
(d) Securities Authorized for Issuance Under Equity Compensation Plans
Name of Plan Number of securities Number of securities Number of securities to Number of securities
authorized for issuance awarded plus number of be issued upon exercise remaining available
under the plan securities to be issued of outstanding options, future issuance
upon exercise of warrants or rights
options, warrants or
rights granted during
last fiscal year
1998 Common
Stock
Compensation
Plan 1,200,000 shares 367,400 shares 367,400 shares 832,600 shares
1999 Common
Stock
Compensation
Plan 750,000 shares 660,000 shares 660,000 shares 90,000 shares
2001 Common
Stock
Compensation
Plan 250,000 shares 3,560 shares 3,560 shares 246,440 shares
There were no individual stock compensation arrangements outside of the formal
plans indicated in the table above.
ITEM 6. Management's Discussion and Analysis or Plan of Operation
General and Background
We have incurred annual losses since inception while developing and
introducing our original products and focusing management and other resources on
capitalizing the Company to support future growth. DriverMax(R) accounts for
approximately 73% of our product sales during our development stage, being the
most readily marketable of our fully developed products. HydroFire(R) accounts
for the remainder. No sales have been conditioned on other performance or
approval. The losses incurred to date are considered normal for a development
stage company. Relatively high management, personnel, consulting and marketing
expenditures were incurred during the past three years in preparation for the
commercialization of our products. Recent management and personnel changes are
expected to decrease some or all of those expenses somewhat. We expect
distribution, selling, general and administrative expenses to increase directly
with sales increases, however, as a percentage of sales, these expenses should
decline.
From July 30, 1999 through July 30, 2000, we raised $7,806,240 from our
Iowa-Only Offering. On August 12, 2000, we determined that resales of Iowa-Only
shares by Iowa residents to non-Iowa residents violated certain provisions of
the Securities Act of 1933. In response, we undertook an offering to rescind the
earlier Iowa-Only Offering in an offering effective January 26, 2001. The
Rescission Offer terminated on February 26, 2001 with the result that we
refunded 52,340 shares or $261,700, incurring interest expense of $14,990. As a
result, at December 31, 2001, the 1,508,908 Iowa-Only Offering Shares, in the
amount of $7,544,540, are classified as temporary equity. These shares will
remain in temporary equity until such time as the violations under the
securities laws have been cured. Subsequent to the close of the Rescission
Offer, we believe that Iowa-Only Offering Stockholders are estopped from
alleging injury. However, we will continue to be contingently liable to such
stockholders during the statute of limitations, a period of three years from the
date of the Rescission Offer. We are unable to quantify the amount of any such
contingent liability because the claim must be brought through individual
lawsuit, which we would vigorously defend with valid defenses, and we consider
the probability of any obligation under such contingent liability to be remote.
We will continue to assess the effect of this contingent liability on our
financial statements during the statute of limitations.
10
Results of Operations
Sales decreased $32,333 or 29%, for the year ended December 31, 2001
compared to the same period at 2000. During our development stage, we have
continued to focus management and other resources on raising equity capital and
developing our products. This was again true during the early part of 2001 as we
worked through the Rescission Offer and became listed on the OTC Bulletin Board.
During 2001, we began developing a new sales strategy founded upon collecting
emissions data before and after the use of our products and providing continuing
emission testing services of our installed products. This strategy has proven to
be successful in that we have discovered new industry markets for both our
services and our products. Service revenue accounted for approximately 46% of
total revenue in 2001 compared to 24% in 2000. This trend is expected to
continue and possibly surpass product sales percentages in the future. Sales
have occurred sporadically during the development stage creating differences
between comparative periods. No trends or seasonality have yet been identified.
Total cost of sales was approximately 77% of total revenue in 2001 compared
to 158% in 2000. This decrease is related to the shift in management focus
during the year from a production mindset to more of a research and development
or information gathering mode. Production overhead was further reduced because
the 2001 sales mix was more service related and most of the product sales were
made to existing customers who required no installation assistance from us.
Management believes cost of sales will range between 40% and 60% of sales as
increased unit sales levels cover production overhead and unit costs.
Operating expenses increased approximately $864,000, or 87%, from 2000 to
2001. The increase is primarily attributable to our second quarter marketing
plan to launch awareness of our patents and products. Cost of the launch in two
major national print publications was approximately $210,000. We also incurred
$20,000 more advertising expenses in 2001 than the comparable period in 2000
based on recording stockholder newsletter mailings as advertising expense
instead of a cost of fund raising. Throughout our self-underwritten Iowa-Only
Offering, we updated stockholders and potential stockholders regarding Company
developments as a means to raise awareness and increase sales of the offer. Such
costs were recorded as offering costs, a decrement to stockholders' equity. Upon
completion of the Iowa-Only Offering, we continued to incur similar costs;
however, these costs were expensed as incurred. Another $57,000 of the increase
in operating expenses was related to radio and other media advertising of
DriverMax(R) products. Approximately $276,000 of the operating expense increase
in 2001 was due to a 45% net increase in the number of employees at the end of
2001, and the shift from production payroll (cost of sales) in 2000 to research
and development payroll (operating expenses) in 2001. Legal costs increased
approximately $90,000 as we incurred the expense of a prepaid expense paid to
our securities counsel in stock. The stock was granted for work to complete
registration of our Iowa-Only Offering shares, which was completed on May 14,
2001 on Form SB-2. Accounting services required to complete the Rescission Offer
prospectus and registration resulted in an additional $19,000 in 2001 compared
to 2000. Another $107,000 increase in operating expenses occurred as a result of
new research and development efforts including payments to U.S. DOE Kansas City
Plant operated by Honeywell and purchasing engine components for testing with
our products. We incurred an additional $39,000 in postage expense in 2001,
partly related to mailing the Rescission Offer to Iowa-Only Stockholders and in
charges to deliver our patent announcement directly to many individuals we
determined could be interested in our products and patents. Approximately
$44,000 of the increase was incurred from depreciation on the headquarters
facility and new equipment. The remaining $2,000 increase was due to small net
changes in various expense categories.
Royalty expense for the years ended December 31, 2001 and 2000 was 3% of
sales calculated per the patent purchase agreement with American Technologies.
Our net loss increased from $846,143 in 2000 to $1,619,442 in 2001
primarily as a result of increased costs to complete the Rescission Offer, low
sales, and increased research and development and marketing efforts in 2001 to
collect emissions data from existing customers.
11
Liquidity and Capital Resources
We have not yet commenced generating substantial revenue. We expect to fund
development expenditures and incur losses until we are able to generate
sufficient income and cash flows to meet these expenditures and other
requirements. Having closed our Rescission Offer refunding $261,700, or 3.4% of
the original $7,806,240, we believe we currently have adequate cash reserves to
continue to cover anticipated expenditures and cash requirements.
Since our inception in 1997, we have primarily relied on the sources of
funds discussed in "Cash Flows" below to finance our testing and operations. We
believe that the proceeds raised from the Iowa-Only Offering, net of the
Rescission Offer, will be adequate to continue our operations, including the
contemplated expansion of sales efforts, inventories, and accounts receivable
through the next twelve months.
Since acceptance or the affirmative rejection or failure to respond to the
Rescission Offer does not act as a release of claims, eligible Iowa-Only
Offering Stockholders who have accepted, rejected, or failed to respond to the
Rescission Offer would retain any rights of claim they may have under federal
securities laws. Any subsequent claims by an Iowa-Only Offering Stockholder
would be subject to any defenses we may have, including the running of the
statute of limitations and/or estoppel. In general, to sustain a claim based on
violations of the registration provisions of federal securities laws, the claim
must be brought within one year after discovery of the violation upon which the
claim is based, in this case, based on the date of the sale (or three years from
the date of the original sale of Iowa-only offering shares). Under the principle
of estoppel, the person bringing a claim must carry the burden of proof of why
he or she took no action under the Rescission Offer and/or how he or she may
have been injured.
We have been evaluating financing and capitalization alternatives as part
of our long-term business plans. These alternatives include the sale of
preferred stock and warrants. To preserve operating funds, we have also
developed a strategic plan that provides for reductions of expenditures and a
prioritization of sales development options.
According to the terms of our purchase agreement with American Technologies
to acquire the patents and trademarks, we will pay a 3% royalty of annual gross
sales for a period of 20 years, which began November 1, 1999.
Cash Flows for the Years Ended December 31, 2001 and 2000
Since our inception, February 21, 1997, through December 31, 2001, our
activities have been organizational, devoted to developing a business plan and
raising capital. Indirect and administrative costs, such as management salaries,
have been expensed in the accompanying statements of operations during the
period in which they were incurred. Capital fund raising costs, which are both
directly attributable to our offerings and incremental, have been treated as
offering costs in the accompanying balance sheets.
Net cash used in operating activities for the years ended December 31, 2001
and 2000 was $1,487,526 and $974,492, respectively. The use of cash in operating
activities was primarily related to our net losses and significant changes in
working capital components, including payables and receivables.
Net cash used in investing activities for the years ended December 31, 2001
and 2000 was $760,758 and $649,709, respectively. The use of cash in investing
activities in 2001 was primarily attributed to approximately $761,000
construction and furnishing costs for our new headquarters facility.
Net cash used by financing activities for the year ended December 31, 2001
was $241,980 compared to net cash provided by financing activities of $6,604,652
for the year ended December 31, 2000. The source of financing in 2000 was
proceeds from the issuance of shares of common stock in our Iowa-Only Offering,
while in 2001 we refunded $261,700 as a result of the Rescission Offer. Some
option holders exercised options during May and early June 2001 accounting for
$19,720 of new common stock issued, representing 68,000 shares.
Recent Accounting Pronouncements
We do not believe any recently issued accounting standards will have an
impact on our financial statements.
12
ITEM 7. Financial Statements and Supplementary Data
Financial Statements and Report of Independent Certified Public Accountants
Mirenco, Inc. (a development stage company)
December 31, 2001 and 2000
13
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 15
FINANCIAL STATEMENTS
BALANCE SHEETS 17
STATEMENTS OF OPERATIONS 18
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) 19
STATEMENTS OF CASH FLOWS 20
NOTES TO FINANCIAL STATEMENTS 21
14
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
MIRENCO, Inc.
We have audited the accompanying balance sheets of MIRENCO, Inc. (a development
stage company) as of December 31, 2001 and 2000, and the related statements of
operations, changes in stockholders' equity (deficit), and cash flows for the
years ended December 31, 2001 and 2000 and for the period from February 21, 1997
(inception) to December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MIRENCO, Inc. as of December
31, 2001 and 2000, and the results of its operations and its cash flows for the
years ended December 31, 2001 and 2000 and for the period from February 21, 1997
(inception) to December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/ GRANT THORNTON L.L.P.
Kansas City, Missouri
February 7, 2002
15
FINANCIAL STATEMENTS
16
MIRENCO, Inc.
(a development stage company)
BALANCE SHEETS
December 31,
2001 2000
------------------- -------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,201,799 $ 5,692,063
Accounts receivable 11,855 40,367
Inventories 164,530 92,501
Other 45,267 170,352
------------------- -------------------
Total current assets 3,423,451 5,995,283
PROPERTY AND EQUIPMENT, net 1,350,831 651,463
PATENTS AND TRADEMARKS, net of accumulated amortization
of $2,695 and $1,864 in 2001 and 2000, respectively 7,105 7,936
OTHER ASSETS 12,358 9,766
------------------- -------------------
$ 4,793,745 $ 6,664,448
=================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 47,463 $ 19,359
Accrued liabilities 13,166 50,551
------------------- -------------------
Total current liabilities 60,629 69,910
COMMITMENTS AND CONTINGENCIES
- -
STOCK SUBJECT TO RESCISSION OFFER
Common stock, no par value; 1,508,908 and 1,561,248 shares
issued and outstanding at December 31, 2001
and 2000, respectively 7,544,540 7,806,240
STOCKHOLDERS' DEFICIT
Common stock, no par value; 30,000,000 shares authorized,
11,765,779 and 11,697,779 shares issued and outstanding
at December 31, 2001 and 2000, respectively
751,010 731,290
Additional paid-in capital 1,714,954 1,714,954
Deficit accumulated during development stage (5,277,388) (3,657,946)
------------------- -------------------
(2,811,424) (1,211,702)
------------------- -------------------
$ 4,793,745 $ 6,664,448
=================== ===================
The accompanying notes are an integral part of these statements.
17
MIRENCO, Inc.
(a development stage company)
STATEMENTS OF OPERATIONS
Period from
February 21,
1997
Year ended Year ended (inception) to
December 31, December 31, December 31,
2001 2000 2001
---------------- ----------------- ------------------
Sales $ 77,795 $ 110,128 $ 435,368
Cost of sales 60,223 174,289 447,381
---------------- ----------------- ------------------
Gross profit (loss) 17,572 (64,161) (12,013)
Salaries and wages 753,170 515,705 1,465,897
Stock-based compensation - - 1,933,054
Royalty expenses 2,334 3,304 24,167
Marketing and advertising 329,733 70,768 459,611
Other general and administrative expenses 772,192 403,390 1,840,877
---------------- ----------------- ------------------
1,857,429 993,167 5,723,606
---------------- ----------------- ------------------
Loss from operations (1,839,857) (1,057,328) (5,735,619)
Other income (expense)
Interest income 220,455 226,175 473,261
Interest expense (40) (14,990) (15,030)
---------------- ----------------- -------------------
220,415 211,185 458,231
---------------- ----------------- -------------------
NET LOSS $ (1,619,442) $ (846,143) $ (5,277,388)
================ ================= ===================
Net loss per share available for common
stockholders - basic and diluted $ (0.12) $ (0.07)
================ =================
Weighted-average shares outstanding -
basic and diluted 13,254,605 12,721,769
================ =================
The accompanying notes are an integral part of these statements.
18
MIRENCO, Inc.
(a development stage company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
Deficit
Common stock Additional accumulated
---------------------------------- paid-in during
Shares Amount capital development stage Total
------------ ------------ ---------- ------------------- ------------
Balance, February 21, 1997 (inception) 9,000,000 $ 500 $ - $ - $ 500
Issuance of stock 749,550 249,850 - - 249,850
Net loss - - - (94,762) (94,762)
------------ ------------ ---------- ------------------- ------------
Balance, December 31, 1997 9,749,550 250,350 - (94,762) 155,588
Issuance of stock 1,065,525 355,175 - - 355,175
Issuance of stock for services rendered 90,000 30,000 - - 30,000
Issuance of stock 550,125 183,375 - - 183,375
Issuance of stock for services rendered 117,000 39,000 - - 39,000
Issuance of stock for services rendered 58,600 58,600 - - 58,600
Issuance of stock options - - 1,730,454 - 1,730,454
Net loss - - - (2,192,542) (2,192,542)
------------ ------------ ---------- ------------------- ------------
Balance, December 31, 1998 11,630,800 916,500 1,730,454 (2,287,304) 359,650
Distribution to stockholders - - (15,200) - (15,200)
Issuance of stock 66,979 334,895 - - 334,895
Offering costs - (374,617) - - (374,617)
Issuance of warrants for
services rendered - - 149,700 - 149,700
Issuance of stock options - - 75,000 - 75,000
Net loss - - - (524,499) (524,499)
------------ ------------ ---------- ------------------- ------------
Balance, December 31, 1999 11,697,779 876,778 1,939,954 (2,811,803) 4,929
Offering costs - (145,488) - - (145,488)
Distribution to stockholders - - (225,000) - (225,000)
Net loss - - - (846,143) (846,143)
------------ ------------ ---------- ------------------- ------------
Balance, December 31, 2000 11,697,779 731,290 1,714,954 (3,657,946) (1,211,702)
Issuance of stock 68,000 19,720 - - 19,720
Net loss - - - (1,619,442) (1,619,442)
------------ ------------ ---------- ------------------- ------------
Balance, December 31, 2001 11,765,779 $ 751,010 $ 1,714,954 $(5,277,388) $(2,811,424)
============ ============ ============ =================== =============
The accompanying notes are an integral part of this statement.
19
MIRENCO, Inc.
(a development stage company)
STATEMENTS OF CASH FLOWS
Period from
February 21,
1997
Year ended Year ended (inception) to
December 31, December 31, December 31,
2001 2000 2001
------------------ ------------------ ------------------
Cash flows from operating activities
Net loss $ (1,619,442) $ (846,143) $ (5,277,388)
Adjustments to reconcile net loss to net cash
and cash equivalents used in operating activities
Stock-based compensation - - 1,933,054
Depreciation and amortization 62,221 18,783 82,233
(Increase) decrease in assets
Accounts receivable 28,512 68,342 (11,855)
Inventories (72,029) (55,451) (164,530)
Other 122,493 (103,084) 17,225
Increase (decrease) in liabilities
Accounts payable 28,104 (63,699) 47,463
Accrued liabilities
(37,385) 6,760 13,166
------------------ ------------------ ------------------
Net cash used in operating activities (1,487,526) (974,492) (3,360,632)
Cash flows from investing activities
Purchase of property and equipment (760,758) (649,709) (1,430,369)
Purchase of patents and trademarks - - (9,800)
------------------ ------------------ ------------------
Net cash used in investing activities (760,758) (649,709) (1,440,169)
Cash flows from financing activities
Proceeds from sale of stock, net
of offering costs and exercised stock options 19,720 6,829,652 8,504,500
Distribution to stockholders - (225,000) (240,200)
Refund of rescinded stock
(261,700) - (261,700)
------------------ ------------------ ------------------
Net cash provided by (used in) financing activities (241,980) 6,604,652 8,002,600
------------------ ------------------ ------------------
Increase (decrease) in cash and cash equivalents (2,490,264) 4,980,451 3,201,799
Cash and cash equivalents, beginning of period 5,692,063 711,612 -
------------------ ------------------ ------------------
Cash and cash equivalents, end of period $ 3,201,799 $ 5,692,063 $ 3,201,799
================== ================== ==================
Supplementary disclosure of cash flow information:
Cash paid during the year for:
Interest $ 14,990 $ - $ 14,990
The accompanying notes are an integral part of these statements.
20
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. Nature of Business
MIRENCO, Inc. (the Company) was incorporated as an Iowa corporation in 1997.
The Company is a marketing company that distributes a variety of automotive
and aftermarket products for which they have exclusive licensing rights. The
products primarily reduce emissions and increase vehicle performance. The
Company's products are sold primarily in the domestic market.
2. Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Interest
income is generated from cash invested in these short-term financial
instruments.
3. Revenue Recognition
Revenue is recognized from sales when a product is shipped and from services
when they are performed.
4. Inventories
Inventories, consisting of purchased finished goods ready for sale, are
stated at the lower of cost (as determined by the first-in, first-out
method) or market.
5. Income Taxes
The Company accounts for income taxes under the asset and liability method
where deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. Deferred tax assets are
recognized to the extent management believes that it is more likely than not
that they will be realized.
21
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Patents and Trademarks
Patents and trademarks will be amortized on the straight-line method over
their remaining legal lives of 8 years as of December 31, 2001. The Company
recorded amortization expense of $831 and $1,536 in 2001 and 2000,
respectively.
7. Property and Equipment
Property and equipment are stated at cost. The Company provides for
depreciation on the straight-line method over the estimated useful lives of
three years for computer equipment, five years for manufacturing and test
equipment and other equipment, and 39 years for building.
8. Impairment of Long-Lived Assets
Impairment losses are recognized for long-lived assets when indicators of
impairment are present and the undiscounted cash flows are not sufficient to
recover their carrying amounts. The impairment loss is measured by comparing
the fair value of each asset to its carrying amount.
9. Stock-Based Compensation
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based
Compensation, and has elected to continue the accounting set forth in
Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for
Stock Issued to Employees. This opinion requires that for options granted at
less than fair market value, a compensation charge must be recognized for
the difference between the exercise price and fair market value.
10. Net Loss Per Share
Basic net loss per share is calculated on the basis of the weighted-average
number of common shares outstanding during the periods, which includes the
effects of all stock splits. Net loss per share, assuming dilution, is
calculated on the basis of the weighted-average number of common shares
outstanding and the dilutive effect of all potential common stock
equivalents. Net loss per share assumes dilution for the year ended December
31, 2001 and 2000 is equal to basic net loss per share, since the effect of
common stock equivalents outstanding during the years is antidilutive.
22
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
11. Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, and accrued expenses. The carrying amounts of financial
instruments approximate fair value due to their short maturities.
12. Royalty Expense
Royalty expense is recorded and paid based upon the sale of products,
services, and rights related to patents according to a contractual agreement
(see Note I.)
13. Advertising
Advertising costs are charged to expense as incurred and were $329,733 and
$70,768 for the years ended December 31, 2001 and 2000, respectively.
14. Offering Costs
Specific incremental costs directly attributable to the Company's equity
offerings, including advertisements in newspaper, radio and direct mail,
letters, printing costs and certain identifiable legal fees, are charged
against the gross proceeds of the offerings.
15. Software Development Costs
The Company capitalizes software development costs when project
technological feasibility is established and concludes when the product is
ready for release. To date, no amounts have been capitalized. Research and
development costs related to software development are expensed as incurred.
16. Research and Development
The Company expenses research and development costs as incurred. Such costs
include certain prototype products, test parts, consulting fees, and costs
incurred with third parties to determine feasibility of products. Costs
incurred for research and development were $96,820 and $48,253 in 2001 and
2000, respectively.
23
MIRENCO,Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2001 and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
17. Accounts Receivable
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts
become uncollectible, they will be charged to operations when that
determination is made.
18. Use of Estimates
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE B - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. During the
Company's development stage, management and other personnel have been
focused on fund raising in lieu of product sales. In an effort to make the
transition from a development stage company to a viable business entity, the
Company's management team has diligently explored several market segments
relative to the Company's product and service lines over the past three
years. From that exploration the Company has decided it is in its best
interests to explore the use of existing well-established distribution
channels for marketing and selling the DriverMax(R) product line. Management
also believes a large untapped market exists for the Company's testing
services and the information provided by those services. Those two main
themes were used in preparing a 3-year business plan, which will focus the
Company's efforts on the sale of products and services with sensible
controls over expenses. Management believes these steps and the funds to be
raised will be sufficient to provide the Company with the ability to
continue in existence.
24
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2001 and 2000
NOTE C - OTHER CURRENT ASSETS
Other assets consisted of the following at December 31,
2001 2000
------------- --------------
Prepaid legal, stock-based (note K) $ - $ 74,850
Other prepaid expenses 6,414 -
Interest receivable 38,853 91,966
Nontrade receivables - 3,536
------------- --------------
$ 45,267 $ 170,352
============= ==============
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31,
2001 2000
------------------ ------------------
Building $ 1,226,292 $ -
Computer equipment 77,644 35,199
Manufacturing and test equipment 61,022 45,811
Other equipment 65,411 27,499
------------------ ------------------
1,430,369 108,509
Less accumulated depreciation (79,538) (18,148)
Building-in-progress construction - 561,102
------------------ ------------------
$ 1,350,831 $ 651,463
================== ==================
The Company recorded $61,390 and $17,247, respectively, of depreciation
expense for the years ended December 31, 2001 and 2000.
25
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2001 and 2000
NOTE E - ACCRUED LIABILITIES
Accrued expenses consisted of the following at December 31,
2001 2000
-------------- --------------
Royalty $ 458 $ 920
Payroll and payroll taxes 11,283 15,060
Other 1,425 19,581
Interest - 14,990
-------------- --------------
$ 13,166 $ 50,551
============== ==============
NOTE F - CONCENTRATION OF CUSTOMERS
The Company had four customers that accounted for 88% of 2001 sales and 100%
of 2000 sales. A major customer is considered to be any customer that
accounts for 10% or more of the Company's total sales.
NOTE G - LEASES
The Company leased office space and equipment from a related party under an
operating lease, which expired in December 2001. Total rental expense for
this operating lease was $14,400 for each of the years ended December 31,
2001 and 2000.
The Company entered into a lease agreement with its majority stockholder for
the land on which the Company constructed a new facility. The lease
establishes a perpetual term commencing October 1, 2000 at zero rental cost
to the Company (see Note I).
26
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
NOTE H - INCOME TAXES
Deferred taxes relate to amounts recognized for financial reporting which
have not yet been recognized for income tax reporting. The tax effects of
temporary differences related to assets and liabilities were as follows at
December 31,
2001 2000
------------------ ---------------
Deferred tax assets
Net operating loss carryforward $ (1,260,000) $ (990,000)
Stock-based compensation (613,900) (613,900)
------------------ ---------------
(1,873,900) (1,603,900)
Deferred tax liability
Accelerated depreciation 6,181 2,780
Amortization 2,690 2,010
------------------ ---------------
8,871 4,790
------------------ ---------------
(1,865,029) (1,599,110)
Less valuation allowance 1,865,029 1,599,110
------------------ ---------------
Net deferred tax $ - $ -
================== ===============
The valuation allowance was established to reduce the deferred tax asset to
an amount that will more likely than not be realized. The reduction is
necessary given the Company's development stage, inability to generate
profitable operations, and uncertainty about its ability to utilize net
operating loss carryforwards before they expire starting in 2007. The
valuation allowance was increased by $265,919 and $675,310 in fiscal years
2001 and 2000, respectively.
The income tax benefit reflected in the statements of operations differs
from the amounts computed at federal statutory income tax rates. The
principal differences are as follows:
2001 2000
------------------ ------------------
Federal and state income tax benefit computed at
statutory rate $ (550,610) $ (277,800)
NOL carryforward adjustment 284,691 (397,510)
Increase in valuation allowance 265,919 675,310
------------------ ------------------
Net deferred tax $ - $ -
================== ==================
27
MIRENCO,Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS-CONTINUED
December 31, 2001 and 2000
NOTE I - RELATED PARTY TRANSACTIONS
The Company purchased services from several entities with direct
relationships to the majority stockholder of the Company. Such payments
totaled $49,885 and $32,260 for the years ended December 31, 2001 and 2000,
respectively.
The Company entered into a lease with its majority stockholder for the land
on which the Company constructed a new facility. The lease provides the
Company with a buyout option upon the death of the majority stockholder at
the then unimproved fair market value. In the event the Company defaults on
the payment of any taxes or insurance or to perform any other obligation
under the lease, or voluntarily declares bankruptcy, any of which are not
cured within ten days or other reasonable time, the majority stockholder, as
landlord, may terminate the lease, requiring the Company to vacate.
On April 30, 1999, the Company entered into an agreement to acquire patents
and trademarks from a company whose stockholders have controlling ownership
in the Company for an initial price of $25,000. The patents and trademarks
were recorded as a lump-sum purchase at the affiliate's carrying value,
$9,800, at the date of purchase. The remaining $15,200 was recorded as a
distribution to stockholders. Another payment per terms of the patent
purchase agreement, $225,000, was paid in July 2000 and accounted for as a
distribution to stockholders upon the completed sale of 1,000,000 shares of
stock offered to the public. Also, the agreement provides for royalty
payments in the amount of 3% of gross sales (including product sales,
service revenues, and all revenues from sales of patent rights) for 20
years, which began November 1, 1999. This agreement can be terminated by the
seller if the Company fails to make the above payments or becomes insolvent.
From January 1 to October 31, 1999, the Company paid royalties for the use
and potential marketing of the patents to the company that owned the patents
based on 3% of sales calculated at an established unit price ($495) and
minimum quantities (40 to 80 units per month), with payments generally made
quarterly. The Company paid royalty fees to a company partially owned by the
majority stockholder of the Company for the years ended December 31, 2001
and 2000 in the amounts of $2,334 and $3,304, respectively.
28
MIRENCO,Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS-CONTINUED
December 31, 2001 and 2000
NOTE J - COMMON STOCK OPTIONS
During 1998, the Company established a nonqualified stock option plan (the
1998 Plan) pursuant to which options for up to 1,200,000 shares of the
Company's authorized but unissued common stock may be granted to employees
and certain nonemployees. During 1999, the Company adopted the 1999 Stock
Option Plan (the 1999 Plan), which provides for granting of options to
officers, employees, advisors and consultants of the Company, for the
purchase of up to a total of 750,000 shares of the Company's authorized but
unissued common stock. At December 31, 2000, options for an aggregate of
1,027,400 shares had been granted as shown below. The Company accounts for
stock options in accordance with APB Opinion No. 25 and related
interpretations, and compensation expense has been recorded in the amount of
$75,000 for the year ended December 31, 1999, related to stock options
granted for services rendered prior to the grant date.
On December 31, 1998, the Company granted 367,400 options to employees
pursuant to the 1998 Plan. The options are fully vested. The option price is
$0.29. Compensation expense of $1,730,454 was recorded related to these
options for the year ended December 31, 1998. The options expire December
31, 2008.
On June 15, 1999, the Company granted 100,000 options to an employee for
past service pursuant to the 1998 Plan. The options vested 50,000 shares at
January 1, 2000, and the remaining shares vested and were exercisable at
January 1, 2001. Compensation expense of $75,000 was recorded related to
these options. The option price is $4.25 and expires June 15, 2009.
On December 31, 1999, the Company granted 560,000 options to two key
employees pursuant to the 1999 Plan. The options vest quarterly, starting
January 1, 2000, through September 30, 2003. The option price is $5.00 and
expires September 30, 2008. No compensation expense was recorded related to
these options.
29
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December31, 2001 and 2000
NOTE J - COMMON STOCK OPTIONS - Continued
Effective March 31, 2001, the Company established a nonqualified stock
option plan (the 2001 Plan) pursuant to which options for up to 250,000
shares of the Company's authorized but unissued common stock may be granted
to employees and certain nonemployees. At December 31, 2001, options for an
aggregate of 3,560 shares had been granted as shown below. The options are
fully vested. The option price is $5.00. No compensation expense was
recorded related to the options as the exercise price exceeded the trading
value at the date of grant. The options expire March 31, 2010.
Number of shares
--------------------------------
Price
Outstanding Exercisable per share
-------------- -------------- ---------------
Outstanding, January 1, 2000 367,400 367,400 $ 0.29
Granted 660,000 - 4.88
-------------- -------------- ---------------
Outstanding, December 31, 2000 1,027,400 367,400 3.24
Granted 3,560 3,560 5.00
Exercised (68,000) - 0.29
-------------- -------------- ---------------
Outstanding, December 31, 2001 962,960 790,960 $ 3.25
============== ============== ===============
Had compensation cost for the 2001 Plan been determined based on the fair
value of the options at the grant date, the Company's net loss would have
increased by $106,217 in 2001 and $156,000 in 2000, resulting in a net loss
for the years ended December 31, 2001 and 2000 in the amounts of $1,725,659
and $1,002,943, respectively. Net loss per share would have been $0.13 and
$(0.08) for the years ended December 31, 2001 and 2000, respectively.
30
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2001 and 2000
NOTE J - COMMON STOCK OPTIONS - Continued
The following table summarizes information about options outstanding at
December 31, 2001 and 2000 under the Compensatory Stock Option Plans:
2001 Compensatory Stock Options and Warrants
--------------------------------------------
Options outstanding Options exercisable
------------------------------------------------------------------------------ ----------------------------------------
Weighted average
Range of Number Remaining Weighted average Number Weighted-average
exercise prices outstanding contractual life exercise price exercisable exercisable price
----------------- --------------- -------------------- ------------------- ---------------- ---------------------
$0.29-$5.00 962,960 6.92 $ 3.25 790,960 $ 2.72
2000 Compensatory Stock Options and Warrants
Options outstanding Options exercisable
------------------------------------------------------------------------------ ----------------------------------------
Weighted average
Range of Number Remaining Weighted average Number Weighted-average
exercise prices outstanding contractual life exercise price exercisable exercisable price
----------------- --------------- -------------------- ------------------- ---------------- ---------------------
$0.29 to $5.00 1,027,400 7.91 years $ 3.24 577,400 $ 1.94
The fair value of the options granted was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 2001 and 2000: dividend yield of zero
percent; risk-free interest rate of 6%; assumed forfeiture of zero percent;
and expected lives of 8-10 years. All stock splits have been reflected in
the number of issued options.
NOTE K - STOCKHOLDERS' EQUITY
In May 1997, the Company's Board of Directors authorized the Company to sell
up to 200,000 shares of common stock at $5 per share in a Small Company
Offering Registration in the State of Iowa. Total shares issued were
156,680, which resulted in proceeds of $788,400.
In 1998, the Company issued 6,000 shares of common stock at $5 per share for
legal fees incurred.
In 1998, the Company's Board of Directors authorized the issuance of 19,520
shares of common stock to key employees for services rendered in 1998 and
1999. In conjunction with the issuance of the shares, the Company recorded
compensation expense of $97,600, which approximated the fair market value of
the shares at the time of issuance.
31
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2001 and 2000
NOTE K - STOCKHOLDERS' EQUITY - Continued
The Company's common stock was split three-for-one in June 1998 and
five-for-one in April 1999.
On May 15, 1999, the Company's stockholders authorized the Company to sell
up to 150,000 shares of the Company's common stock at $5 per share. These
shares will also require the Company to issue four stock warrants for each
share of common stock purchased. The exercise price for these warrants
totals $5 per share and may be exercised at any time prior to June 15, 2002.
Total shares issued were 66,979, which resulted in proceeds of $334,895. At
December 31, 2001 and 2000, the Company had 267,916 outstanding warrants.
The Company's stockholders authorized the Company to sell up to 2,000,000
shares of common stock at $5 per share in a direct public offering in the
State of Iowa (the Iowa-Only Offering). The proceeds from the Iowa-Only
Offering are being used to fund additional sales and marketing activities,
research and development efforts for new products, working capital, and
operational costs. (See Note L.) Some of the funds were used to construct a
state-of-the-art warehouse and distribution center, which now houses the
corporate offices of the Company. As of December 31, 2001 and 2000,
1,561,248 shares had been sold.
In 1999, the Company issued 30,000 warrants at an exercise price of $0.01
for legal fees. As of December 31, 2000, $74,850 had been accounted for as
offering costs. The remaining $74,850 was recognized as legal expense upon
the completion of the Company's registration under the Securities Act of
1933, which was May 14, 2001.
NOTE L - STOCK SUBJECT TO RESCISSION OFFER
On August 12, 2000, the Company determined that resales of Iowa-Only shares
by Iowa residents to non-Iowa residents violated certain provisions of the
Securities Act of 1933. In response, the Company undertook an offering to
rescind the earlier Iowa-Only Offering. As a result, the Iowa-Only Offering
Shares, 1,561,248 shares, in the amount of $7,806,240, were classified as
temporary equity.
32
MIRENCO, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 31, 2001 and 2000
NOTE L - STOCK SUBJECT TO RESCISSION OFFER - Continued
Once approved for distribution, the Rescission Offer was outstanding from
January 26, 2001 to February 26, 2001. During this period Iowa-Only Offering
Stockholders had the option to reject the Rescission Offer formally in
writing, to take no action within the thirty days, thereby retaining their
outstanding Iowa-Only Offering Shares, or to accept the Rescission Offer
formally in writing. Seventy-one formal rescission acceptances representing
52,340 shares were received from Iowa-Only Offering Stockholders, resulting
in a total of $276,690 being paid in cash to these stockholders for the
return of their original investment plus interest at 8% annually. The
maximum obligation under this offer is estimated at $8,100,000, including
the original investment plus interest at approximately 8% per year. As a
result of the recession, the Company paid interest in the amount of $14,990.
As a result of the Rescission Offer, the Company has classified the
Iowa-Only Offering Shares and proceeds as temporary equity. These shares
will remain in temporary equity until such time as the violations under the
securities laws have been cured. Subsequent to the close of the original
sale of Iowa-only offering shares, the Company believes that Iowa-Only
Offering Stockholders are estopped from arguing injury. However, the Company
will continue to be contingently liable to such stockholders during the
statute of limitations, a period of three years from the date of the
Rescission Offer. The Company is unable to quantify the amount of such
contingent liability, the claim must be brought through individual lawsuit,
the Company intends to vigorously defend any such lawsuit believing it has
valid defenses, and, finally, management considers the probability that it
will incur any obligation under such contingent liability to be remote. The
Company will continue to assess the effect of this contingent liability on
its financial statements during the one-year period.
If all of the Iowa-Only Offering Stockholders elect to rescind their
investment, these elections will materially affect the Company's financial
position, results of operations, and cash flows. If, during the subsequent
year that the Company continues to be contingently liable, to the extent
that any of the Iowa-Only Offering Stockholders obtain a judgment for
damages against the Company, if material, the judgment could impact the
Company's liquidity and its ability to implement its business plan and
continue as a going concern.
33
ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
34
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance With Section 16(a) of the Exchange Act
As of the date of this Annual Report, based solely upon a review of copies
of Forms 3, 4 and 5 and amendments thereto furnished to the Company during its
most recent fiscal year, management believes that all directors and officers,
both past and present, are in compliance with the reporting requirements of
Section 16(a) of the Securities Exchange Act of 1934. Biographical summaries
concerning individuals serving on the Board of Directors, the Company's
executive officers and significant employees, are shown below.
Dwayne L. Fosseen, age 56, is founder, Chief Executive Officer, Chairman of
the Board of Directors, and Principal (controlling) Stockholder of Mirenco, Inc.
Mr. Fosseen has personally been involved in major projects with the U.S.
Department of Agriculture, the U.S. Department of Energy, the Iowa Corn Growers
Board, the National BioDiesel Board and the Iowa Soybean Promotions Board. Mr.
Fosseen has over 15 years' experience in the field of heavy-duty engines and has
directed major EPA testing efforts at Ortech Corporation, an international
emissions testing company.
J. Richard Relick, age 72, Chief Operating Officer, graduated from
Dickinson College, Carlisle, Pennsylvania, in 1951 with a degree in economics
and has a 1963 associate's degree in management from Northeastern University,
Boston, Massachusetts. Mr. Relick has extensive management background in the
introduction of new technology, having launched two new companies, one in the
environmental area and another in biotechnology. Mr. Relick was a Group Vice
President of Eco-Labs, a Fortune 500 company, and as President of Ventron
Europe, formed a new company in Brussels, Belgium, to serve the world chemical
and pharmaceutical markets. Mr. Relick served as a captain in the Marine Corps.
He currently serves as director of Certech Corporation, a manufacturer of
reusable oil filters, and Northern Probiotics, a producer of Antibiotic
Replacement Therapy for humans and animals.
Wayne Allison, age 41, served as President of Mirenco, Inc. from November
1999 to January 2002. From 1994 to 1999, Mr. Allison served as President of an
international technology firm publicly traded in Israel, as CEO of a publicly
traded business consolidation holding company, as well as a director and officer
of other public companies. He has operated in a variety of roles in growth
companies. Mr. Allison holds a bachelor's degree in Behavioral Psychology and
Computer Science Engineering from the University of Texas at Arlington, and
received a Masters Degree in Managerial Economics/Finance from Oklahoma
University.
Darrell R. Jolley, age 39, served as Mirenco, Inc.'s Chief Financial
Officer from November, 1999 to January 2002. From 1996 to 1999 Mr. Jolley held a
variety of positions in public reporting companies including Chief Financial
Officer, Secretary, Treasurer and Director. Earlier in his career, Mr. Jolley
was employed by Deloitte and Touche, an international CPA firm. He graduated
from the University of Texas at Austin, majoring in the Business Honors Program
with a specialization in Accounting. He obtained his CPA certification in
January, 1989.
Debbie L. Pickard, age 39, became employed as Chief Financial Officer of
Mirenco, Inc. in January, 2002, after serving as an independent self-employed
consultant to the Company's accounting
department for nearly two years. Prior to 1999, Ms. Pickard served in the role
of controller for two separate Midwest companies, and as the Business Office
Manager in charge of Patient Accounts in a small Iowa hospital. She was employed
by KPMG Peat Marwick, an international CPA firm, as a staff accountant from 1984
to 1987. In 1984, she received a Bachelor of Science Degree with a major in
Accounting from the University of Nebraska at Omaha, and she obtained her CPA
certification in the same year.
Jerrold Handsaker, age 52, has been a Director of Mirenco, Inc. since June
1, 1998. He practiced general business law in Iowa for 22 years and was admitted
to practice in all Iowa Courts, U.S. District Courts in Northern and Southern
Iowa, the U.S. Tax Court and the U.S. Supreme Court. He holds two U.S. patents
and is presently President and CEO of Innovative Lighting, Inc., a Roland, Iowa,
manufacturing company, which manufactures and markets products to the worldwide
marine and RV industries. He is a member of the Iowa State Bar Association, the
National Marine Manufacturer's Association, and the American Boat and Yacht
Council. Mr. Handsaker received his undergraduate degree from Iowa State
University in 1972 and his juris doctorate degree from Drake University in 1975.
Don D. Williams, age 68, a lifelong resident of Williams, Iowa, has been
involved in the grain business and is a major producer of livestock. Mr.
Williams has also been associated with real estate as a licensed associate. Mr.
Williams has served as an officer of the County Farm Bureau Board, Heart of Iowa
Realtors Board, and the County Compensation and Extension Board. A director of
Mirenco, Inc. since June 1, 1998, Mr. Williams is also a veteran of the Korean
War.
Greg DeJong, age 48, joined Mirenco, Inc.'s board of directors in
September, 2001. As former vice-president and current president/owner of DeJong
Manufacturing, Inc. in New Sharon, Iowa, he has spent the last 6 years in this
sheet metal fabricating business, which provides finished assemblies for
original equipment manufacturers. During the 20 years prior, Mr. DeJong owned
and operated an agricultural fertilizer/chemical business in the New Sharon
area, and earlier in his career, Mr. DeJong operated a family farming/livestock
operation.
ITEM 10. Executive Compensation
The following table sets forth the compensation of the named executive
officers for each of the Company's last three completed fiscal years.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
---------------------------------- ---------------
Name and Options All Other
Principal Position Year Salary Bonus Awarded Compensation
---------------------------- ------ --------- -------- --------------- ------------
Dwayne Fosseen, CEO 2001 $ 79,375 $ -0- -0- $ -0-
2000 $ 75,000 $ -0- -0- $ -0-
1999 $ 35,596 $ -0- -0- $ -0-
Option Grants
There were no grants of stock options made to any executive officers during
the Company's latest completed fiscal year.
Aggregate Option Exercises and Fiscal Year-End Option Value
There were no stock option exercises made by executive officers during the
year ended December 31, 2001.
Compensation of Directors
There was no compensation to directors during the year ended December 31,
2001.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the individuals serving on the Board of
Directors, the Company's executive officers and significant employees, and
information with respect to the number of shares of the Company's common stock
beneficially owned by each of them directly or indirectly, as of March 31, 2002.
The number of shares beneficially owned includes shares, if any, held in the
name of the spouse, minor children, or other relatives of the individual living
in his home, as well as shares, if any, held in the name of another person under
an arrangement whereby the individual enjoys the right to vote or the use of the
income, or whereby the individual can vest or revest title in himself or herself
at once or at some future time.
Name, Position and Address Amount Beneficially Percent
of Beneficial Owner Owned of Class
------------------- ------------------- ---------
Dwayne Fosseen, Director, Chairman 9,047,900 (a) 68.5%
Of the Board and Chief Executive Officer
206 May Street
Radcliffe, IA 50230
Don Williams, Director 342,800 2.6%
206 May Street
Radcliffe, IA 50230
Jerrold Handsaker, Director 38,030 .3%
206 May Street
Radcliffe, IA 50230
J Richard Relick, Director and Chief 100,400 (b) .8%
Operating Officer
206 May Street
Radcliffe, IA 50230
Wayne Allison, Former President 175,000 (c) 1.3%
12910 Cottonwood Ln
Springfield, NE 68059
Darrell R. Jolley, Former Chief 175,000 (d) 1.3%
Financial Officer
4224 Fair Oaks
Grapevine, TX 76051
Greg DeJong, Director 20,000 .2%
206 May Street
Radcliffe, IA 50230
Debbie L. Pickard, Chief Financial 200 0.0%
Officer
206 May Street
Radcliffe, IA 50230
All Directors and Officers as a Group 9,899,330 (e) 74.9%
(8 persons)
(a) Dwayne Fosseen's beneficial ownership includes 3,200 shares owned by
family members in his household and 36,000 shares, which are acquirable
within 60 days pursuant to the exercise of outstanding stock options
owned by his spouse.
(b) J. Richard Relick's beneficial ownership includes 100,000 shares,
which are acquirable within 60 days pursuant to the exercise of out-
standing stock options.
(c) Wayne Allison's beneficial ownership includes 175,000 shares, which are
acquirable within 60 days pursuant to the exercise of outstanding stock
options.
(d) Darrell R. Jolley's beneficial ownership includes 175,000 shares, which
are acquirable within 60 days pursuant to the exercise of outstanding
stock options.
(e) The beneficial ownership of all directors and executive officers as a
group includes 453,200 shares which are acquirable within 60 days
pursuant to the exercise of outstanding stock options.
ITEM 12. Certain Relationships and Related Transactions
The Company purchased services from several entities with direct
relationships to the majority stockholder of the Company. Such payments totaled
$49,885 and $32,260 for the years ended December 31, 2001 and 2000,
respectively.
The Company entered into a lease with its majority stockholder for the
land on which the Company constructed a new facility. The lease provides the
Company with a buyout option upon the death of the majority stockholder at the
then unimproved fair market value. In the event the Company defaults on the
payment of any taxes or insurance or to perform any other obligation under the
lease, or voluntarily declares bankruptcy, any of which are not cured within ten
days or other reasonable time, the majority stockholder, as landlord, may
terminate the lease, requiring the Company to vacate.
On April 30, 1999, the Company entered into an agreement to acquire
patents and trademarks from a company whose stockholders have controlling
ownership in the Company for an initial price of $25,000. The patents and
trademarks were recorded as a lump-sum purchase at the affiliate's carrying
value, $9,800, at the date of purchase. The remaining $15,200 was recorded as a
distribution to stockholders. Another payment per terms of the patent purchase
agreement, $225,000, was paid in July 2000 and accounted for as a distribution
to stockholders upon the completed sale of 1,000,000 shares of stock offered to
the public. Also, the agreement provides for royalty payments in the amount of
3% of gross sales (including product sales, service revenues, and all revenues
from sales of patent rights) for 20 years, which began November 1, 1999. This
agreement can be terminated by the seller if the Company fails to make the above
payments or becomes insolvent. From January 1 to October 31, 1999, the Company
paid royalties for the use and potential marketing of the patents to the company
that owned the patents based on 3% of sales calculated at an established unit
price ($495) and minimum quantities (40 to 80 units per month), with payments
generally made quarterly. The Company paid royalty fees to a company partially
owned by the majority stockholder of the Company for the years ended December
31, 2001 and 2000 in the amounts of $2,334 and $3,304, respectively.
ITEM 13. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
There were no reports filed on Form 8-K during the fourth quarter of the year
ended December 31, 2001.
(b) Exhibits
The following are the exhibits to this annual report.
3.1 Certificate of Incorporation of Registrant.
3.2 Certificates of Amendment to the Certification of Incorporation.
3.3 Bylaws of Registrant
3.4 Form of Stock Certificate
5.1 Opinion of Counsel as to the Legality of the Shares.
10.1(a) Employment Agreement between Registrant and Dwayne L. Fosseen.
10.1(b) Employment Agreement between Registrant and J. Rickard Relick.
10.1 (c) Employment Agreement between Registrant and Wayne Allison.
10.1(d) Employment Agreement between Registrant and Darrell Jolley.
10.2(a) Stock Option Agreement between Registrant and Wayne Allison.
10.2(b) Stock Option Agreement between Registrant and Bruce Bergeron.
10.2(c) Stock Option Agreement between Registrant and Richard Evans.
10.2(d) Stock Option Agreement between Registrant and Betty Fosseen.
10.2(e) Stock Option Agreement between Registrant and Darrell Jolley.
10.2(f) Stock Option Agreement between Registrant and J. Richard Relick.
10.2(g) Stock Option Agreement between Registrant and Dave Stone.
10.3 American Technologies LLC, Fosseen Manufacturing & Development, Mirenco, Inc.,
Ethaco Agreements to Terminate Prior Agreements and Transfer License,
respectively.
10.4 Purchase Agreement Between Registrant and American Technologies, LLC.
10.5 Environmental Regulatory Approvals with the U.S. Environment Protection Agency and
California Air Resources Board.
10.6 Summary of Patents and Associated Service Marks.
10.7 Copies of U.S. and Canadian Patents Issued to Dwayne L. Fosseen.
10.8 Summary of Mexican Patents and Associated Protections Issued to Dwayne L. Fosseen.
10.9 Rental Agreement Between Registrant and Fosseen Manufacturing & Development, Inc.
10.10 March 31, 2000 Warrant Agreement between Registrant and Duncan, Blum &
Associates.
10.11 Registrant's 1999 Stock Compensation Plan.
10.12 Registrant's 1998 Stock Compensation Plan.
10.13(a) Lease for Land.
10.13(b) Stock Option Agreement between Registrant and Betty Fosseen.
10.13(c) Stock Option Agreement between Registrant and Paul Fornier.
10.13(d) Stock Option Agreement between Registrant and Frank Annett.
10.13(e) Stock Option Agreement between Registrant and Duane Talbot.
10.13(f) Stock Option Agreement between Registrant and Norma Fiddelke.
10.13(g) Stock Option Agreement between Registrant and Richard Moffitt.
* 10.14 2001 Common Stock Compensation Plan.
Except as noted, these exhibits were filed in the July 10,
2000 and March 4, 2001 Registration Statements. Since no
changes to such filings have occurred and/or are not material,
these exhibits are not filed herewith and are hereby
incorporated by reference.
* Filed herewith
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Mirenco, Inc.
(Registrant)
By: /s/ Debbie L. Pickard
--------------------------------------
Debbie L. Pickard
Chief Financial Officer
Date: April 1, 2002
-------------
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
By: /s/ Dwayne Fosseen
-------------------------------------
Dwayne Fosseen
Chairman of the Board,
Chief Executive Officer
and Director
Date: April 1, 2002
--------------
By:: /s/ Don Williams
-----------------------------------
Don Williams
Director
Date: April 1, 2002
-------------
By:: /s/ J. Richard Relick
--------------------------------------------
J. Richard Relick
Director, Chief Operating Officer,
and Secretary
Date: April 1, 2002
-------------