SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to .
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Commission file number 000-25727
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IKONICS CORPORATION
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(Exact name of registrant as specified in its charter)
Minnesota 41-0730027
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4832 Grand Avenue
Duluth, Minnesota 55807
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (218) 628-2217
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act: Common Stock,
par value $.10 per share
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 disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were: $11,797,279
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 26, 2003 was $3,769,159.50, based on the
closing price for the issuer's Common Stock on such date as reported on the
Nasdaq SmallCap Market. For purposes of determining this number, all officers
and directors of the issuer are considered to be affiliates of the issuer, as
well as individual stockholders holding more than 10% of the issuer's
outstanding Common Stock. This number is provided only for the purpose of this
report on Form 10-KSB and does not represent an admission by either the issuer
or any such person as to the status of such person.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practical date: Common Stock, $.10 par value
-- 1,248,127 issued and outstanding as of February 26, 2003.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of the safe harbor provisions of Section 21E of the
Securities Exchange Act of 1934, as amended, relating to future events or the
future financial performance of the Company. Forward-looking statements are only
predictions or statements of intention subject to risks and uncertainties and
actual events or results could differ materially from those projected. Factors
that could cause actual results to differ include the risks, uncertainties and
other matters set forth below under the caption "Factors that May Affect Future
Results" and the matters set forth under the captions "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as those discussed elsewhere in this Annual Report on Form
10-KSB.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for its 2003
Annual Meeting of Shareholders are incorporated by reference in Part III.
PART I
ITEM 1. BUSINESS
GENERAL
IKONICS Corporation ("IKONICS" or the "Company") was incorporated in
Minnesota as Chroma-Glo, Inc. in 1952 and changed its name to The Chromaline
Corporation in 1982. In December 2002, the Company changed its name to IKONICS
Corporation. The Company develops, manufactures and sells light sensitive liquid
coatings ("emulsions") and films, as well as ink jet receptive films for
commercial and industrial applications in the United States and abroad. The
Company also markets ancillary chemicals, equipment and other consumables to
provide a full line of products and services to its customers. The Company's
products serve the screen printing and abrasive etching markets. The screen
printing products represent the Company's largest product line. These products
are used by screen printers to create stencil images. These images produce basic
designs for fabric decoration and product identification, as well as complex
designs for compact discs and electronic circuits. The abrasive etching products
are used by consumers to create architectural glass, art pieces and awards and
in various industrial applications. The Company also sells a line of ink jet
receptive films used for the creation of photopositives and photonegatives. Over
90% of the Company's products are consumables.
Over the past five years, IKONICS has completed building additions
which added additional manufacturing and warehouse space and has installed
equipment which doubled the Company's coated film production capacity and
improved its converting operations. During this period, the Company has grown by
introducing new products, including:
- Chroma/Tech SR -- a new solvent resistant pure photopolymer emulsion.
- Magna/Cure UDC 2 and 3 -- universal dual cure emulsions.
- Chroma/Tech PL-2 -- pure photopolymer emulsion for use with plastisol
inks.
- Magna/Cure UDC-HV -- universal dual cure with high viscosity.
- MAX-R emulsion -- for maximum resistance to water or solvent base
inks.
- PHAT film -- for screen printing images that require 100 microns to
700 microns of new high density plastisol inks.
- DuraMask -- an additional improved photoresist film for the abrasive
etching industry.
- UDC-ACE emulsion -- screen emulsion for use in automatic coating
machines.
- Reflex gelatin film -- image transfer film for use in electronic and
circuit board printing.
- Spike 420 CT -- pure photopolymer emulsion for use with plastisol
inks.
- Spike 420 UDC -- universal dual cure emulsion.
- ImagePro Red -- improved photoresist film for the abrasive etching
industry.
- UltraPro -- self-adhesive film for the abrasive etching industry.
- BAT -- blastable, water-soluble adhesive tape for the abrasive
etching industry.
- RapidMask -- a quicker-drying photoresist film for the abrasive
etching industry.
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- AccuArt, AccuBlack and Accumark -- waterproof ink jet printer films
used for the creation of film positives in the printing industry.
- U.V. Minder -- a radiometer/dosimeter for measuring and testing U.V.
exposure units.
- UltraPro Blue -- an improved self-adhesive film for the abrasive
etching industry.
- P.B. Vinyl -- photoresist film for monuments and other deep-etch
sandblasting applications.
PRODUCTS
IKONICS' core technology is the use of photochemicals to create and
transfer images. This technology is similar to photographic film technology
except that the Company uses organic polymers or natural protein rather than
silver to make the product photo-reactive ("light sensitive"). The products
IKONICS targets at the screen printing industry are light sensitive films and
light sensitive liquid coatings ("emulsions") used by customers to create an
image on a printing screen; the equivalent of a printing plate in other types of
printing processes. In the abrasive etching market, the Company's products are
also films and emulsions. These products are used to create a stencil by
decorators of glass and other hard surfaces, including crystal, marble, metals,
wood, stone and plastics. The stencil is applied directly to the article to be
decorated by the sand blasting process through a self-adhesive feature or with a
separate adhesive. The open areas of the stencil permit the sand blast grit to
erode the surface while the closed areas of the stencil repel the sand blast
grit, protecting areas of the surface being decorated.
All of IKONICS' light sensitive products are sensitive to ultraviolet
radiation. The Company uses different chemicals to create sensitivity to light,
including a molecule which it developed internally and patented.
The Company has also recently introduced the AccuArt family of ink jet
receptive films for the creation of photopositives and photonegatives.
DISTRIBUTION
The Company currently has approximately 140 domestic and international
distributors. IKONICS sells its products through non-exclusive distributors in
competitive markets, such as the United States, Canada, Mexico and Europe. The
Company has exclusive distribution arrangements in markets such as South and
Central America, Australia, South Africa, Canada, India and other Asian
countries. The Company also sells its products through direct sales to certain
end users who do not require the services of a distributor or dealer to service
their account. In addition, IKONICS markets and sells its products through
magazine advertising, trade shows and the internet.
IKONICS has a diverse customer base both domestically and abroad and
does not depend on one or a few customers for a material portion of its
revenues.
QUALITY CONTROL IN MANUFACTURING
In March 1994, IKONICS became the first firm in northern Minnesota to
receive ISO 9001 certification. ISO 9000 is a series of worldwide standards
issued by the International Organization for Standardization that provide a
framework for quality assurance. ISO 9001 is the most comprehensive standard of
the ISO 9000 series. The Company was recertified in 1997, 1999 and 2002.
IKONICS' quality function goal is to train all employees properly in both their
work and in the importance of their work. Internal records of quality-related
graphs and tables are reviewed regularly and discussions are held among
management and employees regarding how improvements might be realized. The
Company has rigorous materials selection procedures and also uses environmental
testing and screen print equipment tailored to fit customers' needs.
RESEARCH AND DEVELOPMENT/INTELLECTUAL PROPERTY
IKONICS spent 6.0% of sales ($706,000) on research and development in
2002 and 7.4% ($793,000) in 2001. In its research program, IKONICS has developed
unique light sensitive molecules which have received two U.S. patents. These
patents expire in 2011 and 2014, respectively. In addition, the Company holds a
number of other patents related to its photopolymer chemistry that expire
between 2003 and 2017. The Company also has six United States patent
applications pending. There can be no assurance that any patent granted to the
Company will provide adequate protection to the Company's intellectual property.
Within IKONICS, steps are taken to protect the
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Company's trade secrets, including physical security, confidentiality and
non-competition agreements with employees and confidentiality agreements with
vendors. In its product development program, IKONICS is fully equipped to
simulate customer uses of its products. The Company's facilities include a
walk-in environmental chamber which simulates customer uses and storage
conditions of IKONICS products for different climatic zones.
In addition to its patents, the Company has various trademarks
including the "Chromaline," "PhotoBrasive" and "Nichols" trademarks.
RAW MATERIALS
The primary raw materials used by IKONICS in its production are
photopolymers, polyester films, polyvinylacetates, polyvinylalcohols and water.
The Company purchases raw materials from a variety of domestic and foreign
sources with no one supplier being material to the Company. The purchasing staff
at the Company's headquarters leads in the identification of both domestic and
foreign sources for raw materials and negotiates price and terms for all
domestic and foreign markets. IKONICS' involvement in foreign markets has given
it the opportunity to become a global buyer of raw materials at lower overall
cost than it had previously enjoyed. The Company has a number of suppliers and
no one supplier is essential to the Company's operations. To date, there have
been no significant shortages of raw materials and alternative sources are
available. The Company believes it has good supplier relations.
COMPETITION
The Company competes in its markets based on product development
capability, quality, reliability, availability, technical support and price. The
screen printing market is much larger than the decorative sand blasting market,
however, the abrasive etching market is currently experiencing faster growth.
IKONICS has two primary competitors in its screen printing film business, both
of which are foreign-owned entities. They are larger than IKONICS and possess
greater resources than the Company in many areas. The Company has numerous
competitors in the market for screen print emulsions many of whom are larger
than IKONICS and possess greater resources. The market for the Company's
abrasive etching products has one significant competitor. IKONICS considers
itself to the leader in this market.
GOVERNMENT REGULATION
The Company is subject to a variety of federal, state and local
industrial laws and regulations, including those relating to the discharge of
material into the environment and protection of the environment. The
governmental authorities primarily responsible for regulating the Company's
environmental compliance are the Environmental Protection Agency, the Minnesota
Pollution Control Agency and the Western Lake Superior Sanitary District.
Failure to comply with the laws promulgated by these authorities may result in
monetary sanctions, liability for environmental clean-up and other equitable
remedies. To maintain compliance, the Company may make occasional changes in its
waste generation and disposal procedures.
These laws and regulations have not had a material effect upon the
capital expenditures or competitive position of the Company. The Company
believes that it complies in all material respects with the various federal,
state and local regulations that apply to its current operations. Failure to
comply with these regulations could have a negative impact on the Company's
operations and capital expenditures and such negative impact could be
significant.
EMPLOYEES
As of February 4, 2003, the Company had approximately 70 full-time
employees, 66 of whom are located at the Company's headquarters in Duluth,
Minnesota and four of whom are outside technical sales representatives in
various locations around the United States. None of the Company's employees are
subject to a collective bargaining agreement and the Company believes that its
employee relations are good.
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ITEM 2. PROPERTY
The Company primarily conducts its operations in Duluth, Minnesota. The
administrative, sales, research and development, quality and manufacturing
activities are housed in a 60,000 square-foot, four-story building, including a
basement level. The building is approximately seventy years old and has been
maintained in good condition. Shipping and distribution for the Company operates
from a 5,625 square-foot warehouse adjacent to the existing plant building that
was constructed in 1997. These facilities are owned by the Company with no
existing liens or leases. The Company also leases warehouse space at two
locations in Superior, Wisconsin.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders by the
registrant during the fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap Market
under the symbol IKNX. The following table sets forth, for the fiscal quarters
indicated, the high and low bid prices for the Company's Common Stock as
reported on both markets for the periods indicated. The quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission, and may not
represent actual transactions.
HIGH LOW
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FISCAL YEAR ENDED DECEMBER 31, 2002:
First Quarter............................................................ $3.25 $2.95
Second Quarter........................................................... 3.27 3.00
Third Quarter............................................................ 3.49 2.85
Fourth Quarter........................................................... 5.10 3.25
FISCAL YEAR ENDED DECEMBER 31, 2001:
First Quarter............................................................ $5.25 $4.63
Second Quarter........................................................... 5.00 3.25
Third Quarter............................................................ 4.20 3.20
Fourth Quarter........................................................... 3.80 2.62
As of February 26, 2003, the Company had approximately 450 shareholders
of record. The Company has never declared or paid any dividends on its Common
Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management discussion and analysis focuses on those
factors that had a material effect on the Company's financial results of
operations and financial condition during 2002 and 2001 and should be read in
connection with the Company's audited financial statements and notes thereto for
the years ended December 31, 2002 and 2001.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements made in this Annual Report on Form 10-KSB, including
those summarized below, are forward-looking statements within the meaning of the
safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended, that involve risks and uncertainties, and actual results may differ.
Factors that could cause actual results to differ include those identified
below.
- The belief that the Company's current financial resources, cash
generated from operations and the Company's capacity for debt
and/or equity financing will be sufficient to fund current and
anticipated business operations and capital expenditures. The
belief that the Company's low debt levels and available line of
credit make it unlikely that a decrease in product demand would
impair the Company's ability to fund operations--Changes in
anticipated operating results, credit availability, equity market
conditions or the Company's debt levels may further enhance or
inhibit the Company's ability to maintain or raise appropriate
levels of cash.
- The Company's expectation that capital expenditures in 2003 will
be funded with cash generated from operating activities--This
expectation may be affected by changes in the Company's
anticipated capital expenditure requirements resulting from
unforeseen required maintenance or repairs. The funding of planned
or unforeseen expenditures may also be affected by changes in
anticipated operating results resulting from decreased sales or
increased operating expenses.
- The Company's belief that its vulnerability to foreign currency
fluctuations and general economic conditions in foreign countries
is not significant--This belief may be impacted by economic,
political and social conditions in foreign markets and changes in
regulatory and competitive conditions or a change in the amount or
geographic focus of the Company's international sales.
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- The Company's plans to continue to invest in research and
development efforts, expedite internal product development and
invest in technological alliances, as well as the expected focus
and results of such investments--These plans and expectations may
be impacted by general market conditions, unanticipated changes in
expenses or sales, delays in the development of new products,
technological advances, the ability to find suitable and willing
technology partners or other changes in competitive or market
conditions.
- The Company's efforts to grow its international business--These
efforts may be impacted by economic, political and social
conditions in current and anticipated foreign markets, regulatory
conditions in such markets, unanticipated changes in expenses or
sales, changes in competitive conditions or other barriers to
entry or expansion.
- The Company's belief as to future activities that may be
undertaken to expand the Company's business--Actual activities
undertaken may be impacted by general market conditions,
competitive conditions in the Company's industry, unanticipated
changes in the Company's financial position or the inability to
identify attractive acquisition targets or other business
opportunities.
CRITICAL ACCOUNTING POLICIES
The Company prepares the financial statements in conformity with
accounting principles generally accepted in the United States of America.
Therefore, the Company is required to make certain estimates, judgments and
assumptions that the Company believes are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. The accounting policies,
which IKONICS believes are the most critical to aid in fully understanding and
evaluating its reported financial results, include the following:
Accounts Receivable. The Company performs ongoing credit evaluations of
its customers and adjusts credit limits based upon payment history and the
customer's current credit worthiness, as determined by review of the current
credit information. The Company continuously monitors collections and payments
from its customers and maintains a provision for estimated credit losses based
upon historical experience and any specific customer collection issues that have
been identified. While such credit losses have historically been within
expectations and the provisions established, the Company cannot guarantee that
it will continue to experience the same collection history that has occurred in
the past. The general payment terms are net 30-45 days for domestic customers
and net 60-90 days for foreign customers. The concentration of credit risk is
not significant except for a receivable from one of the Company's larger
customers, which accounted for 17.6% of total receivables as of December 31,
2002.
Inventory. Inventories are valued at the lower rate of cost or market
value. The Company monitors its inventory for obsolescence and records
reductions in cost when required.
Deferred Tax Assets. At December 31, 2002, the Company had
approximately $200,000 of deferred tax assets. The deferred tax assets result
primarily due to timing differences in intangible assets and property and
equipment. The Company has recorded a $20,000 valuation allowance to reserve for
items that will more likely than not be realized. The Company has determined
that it is more likely than not that the remaining deferred tax assets will be
realized and that an additional valuation allowance for such assets is not
currently required.
Revenue Recognition - The Company recognizes revenue on products when
title passes, which is usually upon shipment. Freight billed to customers is
included in sales. Shipping costs are included in cost of goods sold.
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Sales. The Company's net sales increased 9.7% to $11.8 million in 2002,
compared to net sales of $10.8 million in 2001. Sales in the United States
increased 6.7% to $8.0 million in 2002, from $7.5 million in 2001. Sales in the
United States improved somewhat from the weakness in 2001 that reflected the
continuing domestic economic recession. International sales increased 15.2% to
$3.8 million from $3.3 million in 2001. Sales to India and China increased in
2002 as compared to 2001.
Cost of Goods Sold. Cost of goods sold was $6.8 million, or 57.7% of
sales, in 2002 and $6.2 million, or 57.8% of sales, in 2001. The increase in
cost of goods sold was due to a shift in the Company's product mix related to
equipment and glass sales. The increase in cost of goods sold also reflects
higher raw material costs, specifically for mylar and resins, as a result of
volatile world petroleum prices.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to $3.8 million, or 32.5% of sales, in 2002
from $4.1 million, or 38.0% of sales, in 2001. The reduction was due in part to
the December 2001 expensing of the remaining $197,000 of goodwill associated
with the June 2000 acquisition of Nichols & Associates, due to its impairment.
In addition, expenses were lower in 2002 due to headcount reductions and lower
legal fees.
Research and Development Expenses. Research and development expenses
were $706,000, or 6.0% of sales, in 2002 compared to $793,000, or 7.4% of sales,
in 2001. The reduction was due to lower production trial costs and lower costs
for lab supplies partially offset by higher payroll related costs as headcount
remained steady.
Interest Expense. The Company incurred minimal interest expense on a
$150,000 loan drawn from its revolving credit facility on June 20, 2002. This
draw funded a $125,000 royalty payment to The Aicello Corporation, which was the
second of two royalty payments required under a license agreement entered into
with Aicello in January 2001. This loan draw was completely repaid in July 2002.
Interest Income. Interest income decreased to $13,000 in 2002, compared
to $35,000 for 2001. The decrease was due to the sale, in late 2001, of higher
income, higher risk preferred corporate bonds and the purchase of certain
general revenue obligation bonds of a number of Minnesota municipalities
Income Taxes. An income tax expense of $101,000 was recorded for 2002,
for an effective rate of 21.9%, compared to an income tax benefit of $92,000,
for an effective rate of 30.9%, for 2001. The difference in the effective rate
is due to permanent differences for allowable tax deductions, including an
extraterritorial income exclusion.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds
generated from operations. These funds have been sufficient to cover the
Company's normal operating expenditures, annual capital requirements and
research and development expenditures.
Cash and cash equivalents were $384,000 and $544,000 at December 31,
2002 and December 31, 2001, respectively. The Company generated $249,000 in cash
from operating activities during 2002 and $356,000 during 2001. Cash generated
from operating activities is primarily provided by net income or loss, as
adjusted for various non-cash items including deferred taxes and depreciation.
Trade receivables in 2002 increased $461,000, net of the allowance for doubtful
accounts, reflecting substantially higher domestic sales to the abrasive etching
market and higher sales to India and China, which carry longer terms of sale.
Prepaid expenses decreased $28,000 in 2002. Inventories increased $166,000
during 2002, reflecting higher raw material levels and increased inventories of
AccuArt film. Income tax refund receivable decreased $11,000 in 2002. Accounts
payable increased $20,000 during 2002. Accrued expenses increased $57,000 in
2002, reflecting payroll related obligations. During 2001, the Company had a
non-cash charge of $197,000 for the write-off of goodwill associated with the
Nichols acquisition that was deemed to be impaired. During 2001, trade
receivables decreased by $166,000, reflecting an increased effort to reduce the
number of days that sales are outstanding. Prepaid expenses in 2001 decreased by
a moderate $10,000. Inventories increased by $80,000 during 2001 reflecting new
product launches for the AccuArt film line and the U.V. Minder measuring
devices. For 2001, the Company experienced an income tax benefit reflecting its
operating loss for the year. While the Company received an income tax refund for
2001, it was lower than the refund
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received in 2000, as reflected in the $98,000 decrease in the Company's income
tax receivable. Accounts payable decreased by $62,000 in 2001, reflecting normal
variations in spending patterns. Accrued expenses decreased by $23,000 in 2001,
reflecting lower payroll and fringe benefit requirements and legal fees.
The Company used $336,000 and provided $116,000 in cash from investing
activities during 2002 and 2001, respectively. Net cash used for investing
activities was utilized, in part, for plant and equipment. In addition, the
Company replaced its business software in 2002. These expenditures amounted to
$250,000 and $259,000 in 2002 and 2001, respectively. In addition, the Company
sold a number of its vehicles to reduce operating costs and generated $47,000 in
proceeds from such sales. During 2002, the Company purchased a license to film
technology applicable to its abrasive etching business for $50,000. In addition,
the Company purchased, for $50,000, a license to produce, market and sell
RapidMask film, also for the abrasive etching market. The Company also incurred
costs of $23,000 related to the patent applications covering a number of its
technologies. During the first quarter of 2001, the Company sold a portion of
its securities holdings to fund the $150,000 royalty payment to Aicello and an
additional investment of $75,000 in Apprise Technologies. Among other
activities, Apprise is conducting research in ultraviolet light technology that
complements the markets served by the Company. The Company's total interest in
Apprise would amount to approximately 6.4% equity ownership of that company if
all warrants were exercised. During the fourth quarter of 2001, the Company sold
its preferred security stock holdings and purchased general revenue obligation
bonds in certain municipalities and school districts. During 2001, the Company
used $609,000 in cash for the purchase of marketable securities and generated
$1.0 million in cash from the sale of marketable securities. Any unrealized
gains or losses are included in other comprehensive income.
The Company used $73,000 in cash during 2002 for the repurchase of
23,500 shares of its outstanding common stock under its stock repurchase
program. No shares were repurchased during 2001.
A bank line of credit exists providing for borrowings of up to
$1,250,000. Outstanding debt under this line of credit is collateralized by
accounts receivable and inventory and bears interest at 2.25 percentage points
over the 30-day LIBOR rate. The Company has not utilized this line of credit to
a material extent and there was no debt outstanding under this line as of
December 31, 2002 or 2001.
The Company believes that current financial resources, cash generated
from operations and the Company's capacity for debt and/or equity financing will
be sufficient to fund current and anticipated business operations. The Company
also believes that its low debt levels and available line of credit make it
unlikely that a decrease in demand for the Company's products would impair the
Company's ability to fund operations.
CAPITAL EXPENDITURES
The Company spent $250,000 on capital expenditures during 2002. This
spending included manufacturing equipment upgrades to improve efficiency and
reduce operating costs, and new vehicles under its rotating replacement policy.
The Company also replaced its business software in order to improve internal
reporting for decision-making purposes and improve the efficiency of
administrative and manufacturing operations.
Commitments for capital expenditures include ongoing manufacturing
equipment upgrades, development equipment to modernize the capabilities and
processes of IKONICS' laboratory, and research and development to improve
measurement and quality control processes. These commitments are expected to be
funded with cash generated from operating activities.
INTERNATIONAL ACTIVITY
The Company markets its products to over 60 countries in North America,
Europe, Latin America, Asia and other parts of the world. Foreign sales were
approximately 31% and 30% of total sales during 2002 and 2001, respectively.
Foreign sales in 2002 reflected higher sales to India and China. Fluctuations of
certain foreign currencies have not significantly impacted the Company's
operations because the Company's foreign sales are not concentrated in any one
region of the world. The Company believes its vulnerability to uncertainties due
to foreign currency fluctuations and general economic conditions in foreign
countries is not significant.
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Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars. A portion of the Company's foreign sales are
invoiced and paid in Eurodollars. IKONICS has not implemented a hedging strategy
to reduce the risk of foreign currency translation exposures, which management
does not believe to be significant based on the scope and geographic diversity
of the Company's foreign operations as of December 31, 2002.
FUTURE OUTLOOK
IKONICS has invested over 6% of its sales dollars for the past several
years in research and development. The Company plans to maintain its efforts in
this area and expedite internal product development as well as form
technological alliances with outside experts to ensure commercialization of new
product opportunities.
In addition to its traditional emphasis on domestic markets, the
Company will continue efforts to grow its business internationally by attempting
to develop new markets and expanding market share where it has already
established a presence.
Other future activities undertaken to expand the Company's business may
include acquisitions, building expansion and additions, equipment additions, new
product development and marketing opportunities.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations." The provisions of SFAS 143 apply to all entities
that incur obligations associated with the retirement of tangible long-lived
assets. This statement is effective for financial statements issued for fiscal
years beginning after June 15, 2002 and will become effective for the Company
commencing with our 2003 fiscal year. This accounting pronouncement is not
expected to have a significant impact on our financial position or results of
operations.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections." SFAS 145 rescinds and amends
certain previous standards related primarily to debt and leases. The most
substantive amendment requires sale-leaseback accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The provisions of SFAS 145 related to the rescission of SFAS 4 are
effective for financial statements issued for fiscal years beginning after May
15, 2002 and will become effective for the Company commencing with our 2003
fiscal year. The provisions of SFAS 145 related to the rescission of SFAS 13
became effective for transactions occurring after May 15, 2002. All other
provisions of SFAS 145 are effective for financial statements issued on or after
May 15, 2002. This accounting pronouncement is not expected to have a
significant impact on our financial position or results of operations.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No. 94-3.
This SFAS requires that a liability for a cost associated with an exit or
disposal activity be recorded at fair value when the liability is incurred. SFAS
146 is effective for exit or disposal activities that are initiated after
December 31, 2002. This accounting pronouncement is not expected to have a
significant impact on our financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure." SFAS 148 amends SFAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
compensation. It also amends the disclosure provisions of that statement. The
disclosure provisions of this statement are effective for the December 31, 2002
financial statements.
10
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
IKONICS Corporation
We have audited the accompanying balance sheet of IKONICS Corporation (the
Company), formerly The Chromaline Corporation, as of December 31, 2001 and the
related statements of operations, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance that the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provides a reasonable basis for our
opinion.
In our opinion, the 2001 financial statements referred to above present fairly,
in all material respects, the financial position of IKONICS Corporation as of
December 31, 2001 and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
February 6, 2002
11
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
IKONICS Corporation
We have audited the accompanying balance sheet of IKONICS Corporation (formerly
The Chromaline Corporation) as of December 31, 2002, and the related statements
of operations, stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with 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 audit provides a
reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present fairly,
in all material respects, the financial position of IKONICS Corporation as of
December 31, 2002, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ McGladrey & Pullen LLP
Duluth, Minnesota
January 30, 2003
12
IKONICS CORPORATION
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 384,107 $ 543,679
Marketable securities 246,094 237,154
Trade receivables, less allowance for doubtful accounts of $100,000 1,933,769 1,472,982
in 2002 and 2001
Inventories 1,771,905 1,605,670
Prepaid expenses and other assets 89,937 118,178
Income tax refund receivable 122,469 133,030
Deferred taxes (Note 3) 82,000 68,000
----------- -----------
Total current assets 4,630,281 4,178,693
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and building 1,355,588 1,355,588
Machinery and equipment 2,231,478 2,189,159
Office equipment 1,144,564 1,036,077
Vehicles 167,102 223,265
----------- -----------
4,898,732 4,804,089
Less accumulated depreciation 3,694,105 3,501,330
----------- -----------
1,204,627 1,302,759
INTANGIBLE ASSETS (Note 4) 271,751 166,490
DEFERRED TAXES (Note 3) 118,000 213,000
OTHER ASSETS (Note 1) 187,500 187,500
----------- -----------
$ 6,412,159 $ 6,048,442
=========== ===========
13
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 317,229 $ 297,556
Accrued compensation 204,624 143,338
Other accrued expenses 23,643 27,508
----------- -----------
Total current liabilities 545,496 468,402
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.10 per share; authorized 250,000 shares;
issued none
Common stock, par value $.10 per share; authorized 4,750,000 shares;
issued and outstanding 1,248,127 shares-2002, 1,271,627 shares-2001 124,813 127,163
Additional paid-in capital 1,269,489 1,293,460
Retained earnings 4,483,895 4,170,246
Accumulated other comprehensive loss (11,534) (10,829)
----------- -----------
Total stockholders' equity 5,866,663 5,580,040
----------- -----------
$ 6,412,159 $ 6,048,442
=========== ===========
See notes to financial statements.
14
IKONICS CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
NET SALES $ 11,797,279 $ 10,752,133
COSTS AND EXPENSES:
Cost of goods sold 6,808,130 6,209,505
Selling, general and administrative 3,835,097 4,081,635
Research and development 706,343 793,484
-------------- ---------------
11,349,570 11,084,624
-------------- ---------------
INCOME (LOSS) FROM OPERATIONS 447,709 (332,491)
-------------- ---------------
INTEREST INCOME 13,108 34,590
-------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES 460,817 (297,901)
FEDERAL AND STATE INCOME TAXES (BENEFIT) (Note 3) 101,000 (92,000)
-------------- ---------------
NET INCOME (LOSS) $ 359,817 $ (205,901)
============== ===============
EARNINGS (LOSS) PER SHARE:
Basic $ 0.29 $ (0.16)
============== ===============
Diluted $ 0.29 $ (0.16)
============== ===============
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic 1,252,020 1,271,627
============== ===============
Diluted 1,252,809 1,271,627
============== ===============
See notes to financial statements.
15
IKONICS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE
--------------------- PAID-IN RETAINED INCOME TOTAL
SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY
BALANCE AT DECEMBER 31, 2000 1,271,627 $ 127,163 $1,293,460 $4,376,147 $ (10,833) $5,785,937
Net loss (205,901) (205,901)
Unrealized gains on available-for-sale
investments 4 4
----------
Total comprehensive income (205,897)
--------- ---------- ---------- ---------- --------- ----------
BALANCE AT DECEMBER 31, 2001 1,271,627 127,163 1,293,460 4,170,246 (10,829) 5,580,040
Net income 359,817 359,817
Unrealized loss on available-for-sale
investments (705) (705)
----------
Total comprehensive income 359,112
Purchase and retirement of 23,500 shares
of common stock (23,500) (2,350) (23,971) (46,168) (72,489)
--------- ---------- ---------- ---------- --------- ----------
BALANCE AT DECEMBER 31, 2002 1,248,127 $ 124,813 $1,269,489 $4,483,895 $ (11,534) $5,866,663
========= ========== ========== ========== ========= ==========
See notes to financial statements.
16
IKONICS CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 359,817 $ (205,901)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 314,364 366,367
Amortization 18,178 15,678
Write-off of goodwill 196,647
Gain on sale of property and equipment (13,116) (10,172)
Provision for doubtful accounts 60,183 121,690
Deferred income taxes 81,000 (117,000)
Changes in working capital components:
(Increase) decrease in:
Trade receivables (520,970) 44,374
Inventories (166,235) (79,677)
Prepaid expenses and other assets 28,241 10,191
Income taxes refund receivable 10,561 98,080
(Decrease) increase in:
Accounts payable 19,673 (61,525)
Accrued expenses 57,421 (22,717)
------------- --------------
Net cash provided by operating activities 249,117 356,035
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (250,366) (259,230)
Proceeds on sale of property and equipment 47,250 23,375
Purchase of intangibles (123,439)
Purchases of marketable securities (9,645) (609,386)
Proceeds from sale of marketable securities 1,036,392
Purchase of investments (75,000)
------------- ---------------
Net cash (used in)/provided by investing activities (336,200) 116,151
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of company stock (72,489)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (159,572) 472,186
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 543,679 71,493
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 384,107 $ 543,679
============= ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -
Cash paid (refunded) for income taxes $ (5,472) $ 57,133
============= ==============
Cash paid for interest $ 503 $ 0
============= ==============
See notes to financial statements.
17
IKONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002 AND 2001
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - IKONICS Corporation (the Company), formerly
The Chromaline Corporation, develops and manufactures high-quality
photochemical imaging systems for sale primarily to a wide range of
printers and decorators of surfaces. Customers' applications include
textiles, billboards, electronics, glassware, fine china, and many other
industrial and commercial applications. The Company's principal markets
are throughout the United States. In addition, the Company sells to
Western Europe, Latin America, Asia, and other parts of the world. The
Company extends credit to its customers, all on an unsecured basis, on
terms that it establishes for individual customers.
Forty-four percent and forty percent, respectively, of the Company's
accounts receivable at December 31, 2002 and 2001 are due from foreign
customers. The foreign receivables are composed primarily of open credit
arrangements with terms ranging from 45 to 90 days. One customer
accounted for 17.6% of total receivables at December 31, 2002. No
receivable from a single customer exceeded 10% of total receivables at
December 31, 2001. No single customer represented greater than 10% of
total revenue in 2002 or 2001.
A summary of the Company's significant accounting policies follows:
Cash Equivalents - The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Cash equivalents consist of money market funds in which
carrying value approximates market value because of the short maturity
of these instruments.
Marketable Securities - Marketable securities are classified as
available-for-sale securities and consist primarily of municipal revenue
bonds that will be held for indefinite periods of time, including
securities that may be sold in response to changes in market interest or
prepayment rates, needs for liquidity, or changes in the availability or
yield of alternative investments. These securities are carried at fair
market value with changes in fair value recorded in comprehensive
income.
Trade Receivables -- Trade receivables are carried at original invoice
amount less an estimate made for doubtful receivables based on a review
of all outstanding amounts on a monthly basis. Management determines the
allowance for doubtful accounts by regularly evaluating individual
customer receivables and considering a customer's financial condition,
credit history, and current economic conditions. Trade receivables are
written off when deemed uncollectible. Recoveries of trade receivables
previously written off are recorded when received. Accounts are
considered past due if payment is not received according to agreed-upon
terms.
Inventories - Inventories are stated at the lower of cost or market
using the last-in, first-out (LIFO) method. If the first-in, first-out
cost method had been used, inventories would have been approximately
$224,000 and $212,000 higher than reported at December 31, 2002 and
2001, respectively. The major components of inventory are as follows:
2002 2001
Raw materials $ 735,006 $ 638,424
Work-in-progress 257,813 236,493
Finished goods 1,003,342 942,301
Reduction to LIFO cost (224,256) (211,548)
------------- -------------
Total inventory $ 1,771,905 $ 1,605,670
============= =============
18
Depreciation - Depreciation of property and equipment is computed using
the straight-line method over the following estimated useful lives:
Years
-----
Building 25
Machinery and equipment 5
Office equipment 5
Vehicles 3
Intangibles Assets-- Intangible assets consist primarily of patents,
licenses and covenants not to compete arising from business
combinations. Intangible assets are amortized on a straight-line basis
over their estimated useful lives or terms of their agreement.
Other Assets -- Other assets consist of a $187,500 equity investment in
Apprise Technologies, Inc. This investment is accounted for on the cost
method. One of the Company's directors is the CEO of Apprise
Technologies, Inc.
Impairment of Long-Lived Assets - Management periodically reviews the
carrying value of long-term assets for potential impairment by comparing
the carrying value of these assets to the estimated undiscounted future
cash flows expected to result from the use of these assets. Should the
sum of the related, expected future net cash flows be less than the
carrying value, an impairment loss would be measured. An impairment loss
would be measured by the amount by which the carrying value of the asset
exceeds the fair value of the asset with fair value being determined
using discounted cash flows. To date, other than the goodwill impairment
discussed in Note 4, management has determined that no other impairment
of these assets exists.
Revenue Recognition - The Company recognizes revenue on products when
title passes, which is usually upon shipment. Freight billed to
customers is included in sales. Shipping costs are included in cost of
goods sold.
Deferred Taxes - Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary
differences. Operating loss and tax credit carryforwards and deferred
tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts
of assets and liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Comprehensive Income - The Company's comprehensive income consists of
net income and unrealized holding gains and losses on marketable
securities.
Earnings Per Common Share (EPS) - Basic EPS is calculated using net
income divided by the weighted average of common shares outstanding
during the year. Diluted EPS is similar to Basic except that the
weighted average of common shares outstanding is increased to include
the number of additional common shares that would have been outstanding
if the dilutive potential common shares, such as options, had been
issued.
19
Shares used in the calculation of diluted EPS are summarized below:
2002 2001
Weighted average common shares outstanding 1,252,020 1,271,627
Dilutive effect of stock options 789 0
------------ ------------
Weighted average common and common equivalent shares outstanding 1,252,809 1,271,627
============ ============
Options to purchase 150,029 and 144,075 shares of common stock were
outstanding during the years ended December 31, 2002 and 2001,
respectively. The options to purchase were excluded from the computation
of common stock equivalents because they were anti-dilutive for the year
ended December 31, 2001.
Employee Stock Plans - The Company has a stock-based compensation plan,
which is described more fully in Note 7. The Company accounts for those
plans under the recognition and measurement principles of APB Opinion No.
25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no stock-based employee compensation cost
has been recognized, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock
on the date of grant. The following table illustrates the effect on net
income and earnings per share had compensation cost for all of the
stock-based compensation plans been determined based on the grant date
fair values of awards (the method described in FASB Statement No. 123,
Accounting for Stock-Based Compensation):
Years Ended December 31,
------------------------------
2002 2001
Net income (loss):
As reported $ 359,817 $ (205,901)
Deduct total stock-based employee compensation
expense determined under fair value based method
for all awards 110,365 119,050
------- --------
Pro forma $ 249,452 $ (324,959)
------- --------
Basic earnings (loss) per share:
As reported $ 0.29 $ (0.16)
Pro forma $ 0.20 $ (0.26)
Diluted earnings (loss) per share:
As reported $ 0.29 $ (0.16)
Pro forma $ 0.20 $ (0.26)
Use of Estimates - The preparation of the financial statements in
conformity with accounting principles generally accepted in the United
States of America 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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Foreign Operations - The Company markets in Europe, Latin America, Asia,
and other parts of the world. Foreign sales approximated 31% and 30% of
total sales in 2002 and 2001, respectively.
Line of Credit - The Company has a $1,250,000 bank line of credit that
provides for working capital financing. This line of credit is subject
to annual renewal on each May 1, is collateralized by trade receivables
and inventory, and bears interest at 2.25% points over 30-day LIBOR.
There was no outstanding balance at December 31, 2002 and 2001.
20
Reclassification - Certain reclassifications were made to the 2001
financial statements to conform to the 2002 presentation. These
reclassifications had no impact on net income or stockholders' equity as
previously reported.
Accounting Pronouncements - In August 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations."
The provisions of SFAS 143 apply to all entities that incur obligations
associated with the retirement of tangible long-lived assets. This
statement is effective for financial statements issued for fiscal years
beginning after June 15, 2002 and will become effective for the Company
commencing with our 2003 fiscal year. This accounting pronouncement is
not expected to have a significant impact on our financial position or
results of operations.
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145
rescinds and amends certain previous standards related primarily to debt
and leases. The most substantive amendment requires sale-leaseback
accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. The provisions of SFAS
145 related to the rescission of SFAS 4 are effective for financial
statements issued for fiscal years beginning after May 15, 2002 and will
become effective for the Company commencing with our 2003 fiscal year.
The provisions of SFAS 145 related to the rescission of SFAS 13 became
effective for transactions occurring after May 15, 2002. All other
provisions of SFAS 145 are effective for financial statements issued on
or after May 15, 2002. This accounting pronouncement is not expected to
have a significant impact on our financial position or results of
operations.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities." SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3. This SFAS requires that a liability for a
cost associated with an exit or disposal activity be recorded at fair
value when the liability is incurred. SFAS 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. This
accounting pronouncement is not expected to have a significant impact on
our financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition
for an entity that voluntarily changes to the fair value based method of
accounting for stock-based compensation. It also amends the disclosure
provisions of SFAS 123. The disclosure provisions of SFAS 148 are
effective for the December 31, 2002 financial statements.
2. STOCKHOLDERS' EQUITY
During the year ended December 31, 2002, the Company repurchased 23,500
shares of its common stock for $72,489, which shares now constitute
authorized but unissued shares. The Company did not repurchase any
shares during the year ended December 31, 2001.
3. INCOME TAXES
Income tax (benefit) expense for the years ended December 31, 2002 and
2001 consists of the following:
2002 2001
Current:
Federal $ 10,000 $ 26,600
State 10,000 (1,600)
----------- -----------
20,000 25,000
Deferred 81,000 (117,000)
----------- -----------
$ 101,000 $ (92,000)
=========== ===========
21
The expected provision for income taxes, computed by applying the U.S.
federal income tax rate of 34% to income before taxes, is reconciled to
income tax (benefit) expense as follows:
2002 2001
Expected provision for federal income taxes $ 161,200 $ (101,000)
State income taxes, net of federal benefit 10,100 (1,600)
Extraterritorial income exclusion (78,800) 5,300
Meals and entertainment 13,600 11,600
Other (5,100) (6,300)
----------- -----------
$ 101,000 $ (92,000)
=========== ===========
Deferred tax assets consist of the following as of December 31, 2002 and
2001:
2002 2001
Property and equipment and other assets $ 61,000 $ 86,000
Accrued vacation 27,000 24,000
Inventory 12,000 49,000
Allowance for doubtful accounts 36,000 37,000
Allowance for sales returns 7,000 7,000
Intangible assets 57,000 73,000
Capital loss carryforward 20,000 20,000
Other 0 5,000
Valuation allowance (20,000) (20,000)
----------- -----------
$ 200,000 $ 281,000
=========== ===========
4. INTANGIBLE ASSETS
In June 2000, the Company acquired certain assets and assumed certain
liabilities of Nichols & Associates. In accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, the Company evaluated the net book value of
the recorded goodwill against the estimated future cash flows and
determined the goodwill was impaired and thus written off during the
year ended December 31, 2001. The Company expensed $197,000 under
selling, general and administrative expense in 2001 as a result of
goodwill impairment.
Intangible assets at December 31, 2002 consist of the following:
As of December 31, 2002
------------------------------
Gross Carrying Accumulated
Amount Amortization
Amortized intangible assets:
Patents $ 132,717 $ (41,800)
Licenses 100,000 (2,500)
Non-compete agreement 100,000 (16,666)
----------- -----------
$ 332,717 $ (60,966)
=========== ===========
Amortized intangible assets:
For the year ended December 31, 2002 $ 18,178
Estimated amortization expense:
For the year ended December 31, 2003 $ 23,600
For the year ended December 31, 2004 23,600
For the year ended December 31, 2005 23,600
For the year ended December 31, 2006 23,600
For the year ended December 31, 2007 23,600
In connection with the license agreements, the Company has agreed to pay
royalties ranging from 3% to 5% on the future sales of products subject
to the agreements.
22
5. PENSION PLAN
The Company has established a salary deferral plan under Section 401(k)
of the Internal Revenue Code. The plan allows eligible employees to
defer up to 15% of their compensation. Such deferrals accumulate on a
tax-deferred basis until the employee withdraws the funds. The Company
contributes 5% of each eligible employee's compensation. Total pension
expense for the years ended December 31, 2002 and 2001 was approximately
$145,000 and $138,000, respectively.
6. GEOGRAPHIC INFORMATION
The Company manages and operates its business on the basis of one
reportable segment. See Note 1 for a brief description of the Company's
business. As of December 31, 2002, the Company had operations
established in various countries throughout the world. The Company is
exposed to the risk of changes in social, political, and economic
conditions inherent in foreign operations, and the Company's results of
operations are affected by fluctuations in foreign currency exchange
rates. No single foreign country accounted for more than 10% of the
Company's net sales for 2002 and 2001. Net sales by geographic area are
presented by attributing revenues from external customers on the basis
of where the products are sold.
2002 2001
Net sales by geographic area:
United States $ 8,045,967 $ 7,526,493
International 3,751,312 3,225,640
-------------- ---------------
$ 11,797,279 $ 10,752,133
============== ===============
7. STOCK OPTIONS
During 1995, the Company adopted a stock incentive plan for the issuance
of up to 38,500 shares of common stock. In 1999, the Company increased
the number of shares reserved for issuance under this plan to 203,500
shares. The plan provides for granting eligible participants stock
options or other stock awards, as described by the plan, at option
prices ranging from 85% to 110% of fair market value at date of grant.
Options granted expire up to seven years after the date of grant. Such
options generally become exercisable over a one- to three-year period.
2002 2001
Dividend yield 0.0% 0.0%
Expected volatility 72.5% 74.4%
Expected life of option five years five years
Risk-free interest rate 4.4% 4.7%
Fair value of each option on grant date $ 2.00 $ 2.91
A summary of the status of the Company's stock option plan as of
December 31, 2002 and 2001 and changes during the years ending on those
dates is presented below:
2002 2001
---------------------------- --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
Outstanding at beginning of year 142,920 $6.20 89,450 $7.13
Granted 26,079 3.17 55,125 4.66
Exercised
Expired (18,970) 4.14 (1,655) 5.45
--------- ----------
Outstanding at end of year 150,029 5.93 142,920 6.20
========= ==========
23
The following table summarizes information about stock options
outstanding at December 31, 2002:
Options Outstanding Options Exercisable
------------------------------- ------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 2002 Life Price 2002 Price
$3.13 - 3.44 26,079 4.42 $3.17
4.60 44,625 3.31 4.60 22,105 $4.60
5.06 - 5.25 9,475 3.49 5.10 8,808 5.10
6.56 28,000 2.32 6.56 21,324 6.56
7.22 - 7.84 8,300 2.78 7.47 8,300 7.47
8.18 20,350 3.32 8.18 20,350 8.18
9.00 - 9.20 13,200 3.96 9.15 13,200 9.15
------- ---------
150,029 3.36 5.93 94,087 6.75
======= =========
8. CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances primarily in one financial
institution. As of December 31, 2002, the balance exceeded the Federal
Deposit Insurance Corporation coverage. The Company reduces its exposure
to credit risk by maintaining such balances with financial institutions
that have high credit ratings.
Accounts receivable are financial instruments that also expose the
Company to concentration of credit risk. The large number of customers
comprising the Company's customer base and their dispersion across
different geographic areas limits such exposure. In addition, the
Company routinely assesses the financial strength of its customers and
maintains an allowance for doubtful accounts that management believes
will adequately provide for credit losses.
Concentration of credit risk with respect to trade receivables is not
significant except for a receivable from one of its largest customers,
which accounted for 17.6% of total receivables as of December 31, 2002.
9. LEASE COMMITMENTS
As of December 31, 2002, the Company was obligated under non-cancelable
operating lease agreements for certain equipment. Future minimum lease
payments for non-cancelable operating leases with initial or remaining
terms in excess of one year are as follows:
2003 $26,112
2004 $19,661
2005 $ 4,989
The Company also leases buildings on a month-to-month basis. Total
rental expense for all equipment and building operating leases was
$77,040 in 2002 and $80,512 in 2001.
10. CONTINGENCIES
The Company has entered into licensing agreements which require them to
make royalty payments on sales of certain products. Royalty payments
range from 3% to 5% of net sales on these products. The Company incurred
$119,792 of expense under these agreements during 2002, as compared to
$103,125 during 2001.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
24
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information included in the Company's definitive proxy statement
for the 2003 Annual Meeting of Shareholders under the captions "Election of
Directors", "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" is incorporated by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information included in the Company's definitive proxy statement
for the 2003 Annual Meeting of Shareholders under the captions "Election of
Directors--Director Compensation", "Summary Compensation Table", "Option Grants
in Last Fiscal Year", "Aggregate Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values" and "Employment Contracts; Termination of Employment and
Change-In-Control Arrangements" is incorporated by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information included in the Company's definitive proxy statement
for the 2003 Annual Meeting of Shareholders under the caption "Security
Ownership of Principal Shareholders and Management" is incorporated by reference
in partial response to this Item 11. The following information completes the
Company's response to this Item 11.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information with respect to the
Company's Common Stock that may be issued under its 1995 Stock Incentive Plan,
as amended, as of December 31, 2002. The 1995 Stock Incentive Plan is the only
equity compensation plan of the Company in existence as of December 31, 2002 and
has been approved by the Company's shareholders.
Number of securities
remaining available for
Number of securities to be future issuance under equity
issued upon exercise of Weighted-average exercise compensation plans
outstanding options, price of outstanding (excluding securities
Plan Category warrants and rights options, warrants and rights reflected in column 1)
------------- ------------------- ---------------------------- ----------------------
Equity compensation plans
approved by shareholders 150,029 $5.93 53,471
Equity compensation plans not
approved by shareholders - - -
------- ----- ------
Total 150,029 $5.93 53,471
======= ===== ======
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included in the Company's definitive proxy statement
for the 2003 Annual Meeting of Shareholders under the caption "Certain
Relationships and Related Transactions" is incorporated by reference.
25
ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this Annual Report on
Form 10-KSB for the fiscal year ended December 31, 2002:
Exhibit Description
------- -----------
3.1 Restated Articles of Incorporation of Company, as amended.
(Incorporated by reference to the like numbered Exhibit to the
Company's Registration Statement on Form 10-SB filed with the
Commission on April 7, 1999 (Registration No. 000-25727).)
3.2 By-Laws of the Company, as amended. (Incorporated by reference to the like
numbered Exhibit to the Company's Registration Statement on Form 10-SB
filed with the Commission on April 7, 1999 (Registration No. 000-25727).)
4 Specimen of Common Stock Certificate. (Incorporated by reference to the
like numbered Exhibit to Amendment No. 1 to the Company's Registration
Statement on Form 10-SB filed with the Commission on May 26, 1999
(Registration No. 000-25727).)
10.1 IKONICS Corporation 1995 Stock Incentive Plan, as amended. (Incorporated
by reference to the like numbered Exhibit to the Company's Registration
Statement on Form 10-SB filed with the Commission on April 7, 1999
(Registration No. 000-25727).)
10.5 Revolving Credit Agreement dated April 30, 1999 between the Company and
M&I Bank. (Incorporated by reference to the like numbered Exhibit to
Amendment No. 1 to the Company's Registration Statement on Form 10-SB
filed with the Commission on May 26, 1999 (Registration No. 000-25727).)
23.1 Consent of McGladrey & Pullen LLP.
23.2 Consent of Deloitte & Touche LLP.
24 Powers of Attorney.
99 Certification under Section 906 of the Sarbanes-Oxley Act.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the quarter ended
December 31, 2002:
On November 19, 2002, the Company filed a Form 8-K reporting the
dismissal of Deloitte & Touche LLP as the Company's independent auditors and
engaging McGladrey & Pullen LLP as the Company's independent auditors for the
fiscal year ending December 31, 2002.
On December 16, 2002, the Company filed a Form 8-K reporting that it
had changed its corporate name to IKONICS Corporation from The Chromaline
Corporation. No other changes to the Company's structure were reported. The
Company's new ticker symbol is IKNX.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's
Chief Executive Officer and its Chief Financial Officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14(c) and 15d-14(c)) on a date within 90 days before the
filing date of this annual report, have concluded that, as of such date, the
Company's disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company would be made known to
them by others within the Company.
(b) Changes in internal controls. There were no significant changes in
the Company's internal controls or in other factors that could significantly
affect the Company's internal controls subsequent to the date of their
evaluation, nor were there any significant deficiencies or material weaknesses
in the Company's internal controls. As a result, no corrective actions were
required or undertaken.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 21, 2003.
IKONICS CORPORATION
By /s/ William C. Ulland
--------------------------------------------------------
William C. Ulland, Chairman, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 21, 2003.
/s/ William C. Ulland
-----------------------------------------------------
William C. Ulland, Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
/s/ Jeffery A. Laabs
-----------------------------------------------------
Jeffery A. Laabs, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
Charles H. Andresen* Director
Rondi Erickson* Director
H. Leigh Severance* Director
Gerald W. Simonson* Director
David O. Harris* Director
----------
* William C. Ulland, by signing his name hereto, does hereby sign this
document on behalf of each of the above named Directors of the registrant
pursuant to powers of attorney duly executed by such persons.
/s/ William C. Ulland
----------------------------------------------------------
William C. Ulland, Attorney-in-Fact
27
CERTIFICATIONS PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, William C. Ulland, certify that:
1. I have reviewed this annual report on Form 10-KSB of IKONICS
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 21, 2003
/s/ William C. Ulland
--------------------------------------------
William C. Ulland
Chairman, Chief Executive Officer
and President
28
CERTIFICATIONS PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffery A. Laabs, certify that:
1. I have reviewed this annual report on Form 10-KSB of IKONICS
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 21, 2003
/s/ Jeffery A. Laabs
------------------------------------------
Jeffery A. Laabs
Chief Financial Officer, Treasurer
and Secretary
29
INDEX TO EXHIBITS
Exhibit Description Page
------- ----------- ----
3.1 Restated Articles of Incorporation of Company, as amended................. Incorporated by Reference
3.2 By-Laws of the Company, as amended........................................ Incorporated by Reference
4 Specimen of Common Stock Certificate...................................... Incorporated by Reference
10.1 IKONICS Corporation 1995 Stock Incentive Plan, as amended................. Incorporated by Reference
10.5 Revolving Credit Agreement dated April 30, 1999
between the Company and M&I Bank.......................................... Incorporated by Reference
23.1 Consent of McGladrey & Pullen LLP........................................ Filed Electronically
23.2 Consent of Deloitte & Touche LLP.......................................... Filed Electronically
24 Powers of Attorney........................................................ Filed Electronically
99 Certification under Section 906 of the Sarbanes-Oxley Act................. Filed Electronically