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, 2007
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From _______________ to ________________.
Commission file number 000-25727
IKONICS CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-0730027
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4832 Grand Avenue
Duluth, Minnesota 55807
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (218) 628-2217
Securities registered under Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class On Which Registered
-------------------------------------- ---------------------
Common Stock, par value $.10 per share Nasdaq Capital Market
Securities registered under Section 12(g) of the Act: None
Check whether the issuer is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act. [ ]
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 there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The issuer's revenues for its most recent fiscal year were: $15,824,725
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 26, 2008 was $9,900,780, based on the closing
price for the issuer's Common Stock on such date as reported on the Nasdaq
Capital 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 -
2,051,311 issued and outstanding as of February 26, 2008.
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 2008 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, and proprietary substrates for abrasive,
rotary and laser etching. The Company also markets inkjet receptive films and
ancillary chemicals. The Company resells equipment and other consumables to
provide a full line of products and services to its customers. In 2006, the
Company began to offer custom etching services for silicon wafers, glass wafers
and industrial ceramics based on proprietary technology, and also began a
research program with imaging Technology international to develop digital
imaging technologies for niche industrial markets. Both of these programs
achieved commercial sales in 2007. The Company's products serve the screen
printing, awards and recognition, signage, electronics, and industrial ceramics
and industrial digital inkjet markets, as well as other industrial markets. On
December 29, 2006, the Company acquired the image mate(R) line of screen print
photochemical products and adhesives from Franklin International. These products
continue to be sold under the image mate(R) brand, primarily through established
image mate(R) distribution, although some cross fertilization between the image
mate(R) and Chromaline brands may occur. In 2006, the Company established the
IKONICS Imaging business unit, which comprises PhotoBrasive Systems, serving the
awards and recognition, and monument markets; IKONSign Systems, serving the
signage market; and Industrial Solutions, serving industrial markets for glass,
silicon, and ceramic etching, as well as providing industrial digital inkjet
technology.
PRODUCTS
IKONICS' traditional core technology is the use of photochemicals to create
masks or stencils for the transfer of images. These images may be transferred
using the mask or stencil by ink through screen printing or by abrasive etching
onto various substrates. The Company has recently entered markets for electronic
wafers and industrial ceramic etching and digital image transfer technologies.
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DISTRIBUTION
The Company currently has approximately 180 domestic and international
distributors. The Company also sells its products through direct sales to
certain end users who do not require the services of a distributor. 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. In
2007 and 2006, no one customer accounted for more than 10% of 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, 2000, 2003 and 2006.
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, including
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 4.9% of sales ($775,000) on research and development in 2007
and 5.0% ($742,000) in 2006. 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 2008 and 2020. The Company also has seventeen United States patent
applications pending including two covering digital image transfer technology.
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 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. Over the past year, the Company has directed a larger portion of it
research and development resources towards industrial inkjettable fluids and
substrates and in 2007 constructed an 800 square foot state of the art inkjet
laboratory.
In addition to its patents, the Company has various trademarks including
the "IKONICS," "Chromaline," "PhotoBrasive," "AccuArt," "Nichols" and "image
mate" trademarks. The "image mate" trademark was acquired as part of an asset
purchase from Franklin International during December 2006.
RAW MATERIALS
The primary raw materials used by IKONICS in its production are
photopolymers, polyester films, polyvinylacetates, polyvinylalcohols and water.
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. The Company has a number of suppliers for its operations.
Some suppliers provide a significant amount of key raw materials to the Company,
but the Company believes alternative sources are available for most materials.
For those raw materials where an alternative source is not readily available,
the Company is developing contingency raw material replacement plans. To date,
there have been no significant shortages of raw materials. The Company believes
it has good supplier relations.
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COMPETITION
The Company competes in its markets based on product development
capability, quality, reliability, availability, technical support and price.
Though the screen printing market is much larger than the awards and recognition
market, IKONICS commands significantly more market share in the latter. The
Company is actively pursuing other markets where its image-transfer technology
may offer significant value. 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 be the leader in this market. There are
significant competitors, using different technologies in new markets being
entered by the Company.
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 26, 2008, the Company had approximately 74 full-time
employees, 69 of whom are located at the Company's headquarters in Duluth,
Minnesota and five 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.
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. The Company also utilizes 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.
Shipping and distribution operates from a leased warehouse in Duluth, Minnesota.
The Company also leases warehouse space at two locations in Superior, Wisconsin.
The Company has acquired an option to purchase a 15-acre brownfield site from
the City of Duluth and is considering the construction of a 35,000 square-foot
manufacturing and warehouse facility on the site.
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 COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock is traded on the Nasdaq Capital 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 the
Nasdaq Capital Market 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, 2007:
First Quarter.................... $10.30 $7.22
Second Quarter................... 10.45 8.83
Third Quarter.................... 9.60 8.76
Fourth Quarter................... 9.99 8.86
FISCAL YEAR ENDED DECEMBER 31, 2006:
First Quarter.................... $ 8.33 $6.26
Second Quarter................... 10.47 7.06
Third Quarter.................... 8.97 7.15
Fourth Quarter................... 8.60 7.02
As of February 26, 2008, the Company had approximately 667 shareholders.
The Company has never declared or paid any dividends on its Common Stock.
The Company did not purchase shares of its equity securities during 2007 or
2006. A total of 50,007 shares of Common Stock may yet be purchased under the
repurchase program approved by the Company's Board of Directors in August 2007.
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 2007 and 2006 and should be read in connection with
the Company's audited financial statements and notes thereto for the years ended
December 31, 2007 and 2006, included herein.
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 Company's belief that additional proceeds will be received from
the sale of Apprise common and preferred stock that occurred in
2007--Actual additional proceeds received may be impacted by
unanticipated expenses related to indemnification clauses as part of
the agreement between Apprise and its purchaser.
- The Company's belief that its effective tax rate will increase by 5%
in 2008--The actual tax rate in 2008 may be affected by changes in
federal and state tax law, unanticipated changes in the Company's
financial position or the Company's actions which could increase or
decrease its effective tax rate.
- The Company's belief that the quality of its receivables is high and
that strong internal controls are in place to maintain proper
collections--This belief may be impacted by domestic economic
conditions, by economic, political, regulatory or social conditions in
foreign markets, or by the failure of the Company to properly
implement or maintain internal controls.
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- 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 expectations as to the level and use of planned capital
expenditures and that capital expenditures 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, repairs
or capital asset additions. The funding of planned or unforeseen
expenditures may also be affected by changes in anticipated operating
results resulting from decreased sales, lack of acceptance of new
products or increased operating expenses or by other unexpected events
affecting the Company's financial position.
- 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, changes in regulatory and
competitive conditions, a change in the amount or geographic focus of
the Company's international sales, or changes in purchase or sales
terms.
- 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, lack of acceptance of new products or the inability to
identify attractive acquisition targets or other business
opportunities.
CRITICAL ACCOUNTING POLICIES
The Company prepares its 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
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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 30-90
days for foreign customers.
Inventory. Inventories are valued at the lower of cost or market value
using the last in, first out (LIFO) method. The Company monitors its inventory
for obsolescence and records reductions in cost when required.
Income Taxes. At December 31, 2007, the Company had approximately $35,000
of net deferred tax assets. The deferred tax assets result primarily from
temporary differences in accrued expenses, inventory reserves, intangible assets
and property and equipment. The Company has determined that it is more likely
than not that the deferred tax assets will be realized and that a valuation
allowance for such assets is not currently required. The Company accounts for
its uncertain tax positions under FIN 48 and the related reserve of $92,000 as
of December 31, 2007 will be adjusted as the statute of limitations expires or
these positions are reassessed.
Investments in Non-Marketable Equity Securities. Investments in
non-marketable equity securities consist of a $855,201 investment in imaging
Technology international ("iTi"). The Company accounts for this investment by
the cost method because iTi's common stock is unlisted and the criteria for
using the equity method of accounting are not satisfied. Under the cost method,
the investment is assessed for other-than-temporary impairment and recorded at
the lower of cost or market value which requires significant judgment since
there are no readily available market values for this investment. In assessing
the fair value of this investment we consider recent equity transactions that
iTi has entered into, the status of iTi's technology and strategies in place to
achieve its objectives, as well as iTi's financial condition and results of
operations. To the extent there are changes in the assessment, an adjustment may
need to be recorded.
Revenue Recognition. The Company recognizes revenue on sales of products
when title passes which can occur at the time of shipment or when the goods
arrive at the customer location. Freight billed to customers is included in
sales. Shipping costs are included in cost of goods sold.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006
Sales. The Company's net sales increased 6.3% to $15.8 million in 2007,
compared to net sales of $14.9 million in 2006. Sales increases were realized in
both international and domestic markets. Sales growth in 2007 was mainly due to
sales related to the image mate(R) line of screen printing products. The image
mate(R) brand was acquired in December 2006.
Cost of Goods Sold. Cost of goods sold was $8.9 million, or 56.2% of sales,
in 2007 and $8.2 million, or 55.0% of sales, in 2006. The increase in the cost
of sales in 2007 as a percentage of sales reflects a less favorable product mix,
rising raw material costs and additional manufacturing overhead related to the
image mate(R) transition.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4.7 million, or 29.9% of sales, in 2007
from $4.5 million, or 30.2% of sales, in 2006. The 2007 increase was due to
$140,000 for additional sales personnel compared to 2006. Sarbanes-Oxley
compliance and audit related fees also increased $96,000 in 2007 compared to
2006. The Company also incurred an additional $43,000 expense for an
international trade show which the Company attends every other year.
Research and Development Expenses. Research and development expenses were
$775,000, or 4.9% of sales, in 2007 compared to $742,000, or 5.0% of sales, in
2006. The increase is due to higher depreciation expense related to equipment
purchases and production trial expenses to support the Company's efforts in the
industrial digital inkjet market and increased personnel costs.
Gain on Sale of Non-Marketable Equity Securities. The Company realized a
gain of $55,000 on the sale of its investment in the common and preferred stock
of Apprise Technologies, Inc. during the first quarter of 2007. In addition to
the initial proceeds, the Company anticipates receiving additional proceeds in
2008 from the portion of the total sale price that was placed in escrow at the
time of the sale related to potential indemnification obligations
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as part of the agreement between Apprise and its purchaser. The additional
proceeds and gain recognition is expected to be approximately $40,000, however
there can be no assurance given that this will occur.
Interest Income. Interest income increased to $154,000 in 2007 from
$115,000 in 2006. The interest income increase is due to an increase in interest
rates and a larger balance of interest earning assets.
Income Taxes. The Company incurred income tax expense of $466,000 for both
2007 and 2006, or an effective rate of 28.5% during 2007 compared to 29.3% for
2006. The lower effective income tax rate in 2007 primarily relates to
derecognizing a liability of $45,000 for unrecognized tax benefits relating to a
tax year where the statute of limitations expired. The remaining income tax
provision differs from the expected tax expense primarily due to the benefits of
the domestic manufacturing deduction, tax exempt interest, state income taxes,
federal credits for research and development and adjustments from the 2006 tax
accrual estimate. The Company expects its effective income tax rate to increase
by approximately 5% in 2008 compared to 2007, as a result of a reduction in the
amount of tax exempt interest that will be recognized from short-term
investments in 2008 and because of the non-recurring 2007 tax benefit from the
reversal of a valuation allowance maintained against a capital loss carry
forward deferred tax asset.
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 $1,230,000 and $253,000 at December 31, 2007
and 2006, respectively. The Company generated $1,698,000 in cash from operating
activities during 2007 compared to $1,076,000 of cash generated from operating
activities during 2006. Cash provided by operating activities is primarily the
result of net income adjusted for non-cash depreciation, amortization, stock
based compensation, deferred taxes, and certain changes in working capital
components discussed in the following paragraph.
During 2007, trade receivables increased by $48,000. The increase in
receivables is primarily related to higher sales. The Company believes that the
quality of its receivables is high and that strong internal controls are in
place to maintain proper collections. Inventory levels decreased by $139,000 due
to lower raw material film levels. Inventory levels at the end of 2006 were
higher than historical levels due to the Company purchasing large amounts of
film to obtain volume pricing discounts. Accounts payable increased by $147,000,
reflecting the timing of payments to suppliers. Accrued liabilities decreased
$138,000 primarily due to the reversal of a tax related contingent liability of
$108,000. Income taxes payable decreased $57,000 and the Company's income tax
receivable increased $3,000 due to timing of estimated 2007 tax payments
compared to the calculated 2007 tax liability.
The Company used $833,000 and $1,848,000 in cash for investing activities
during 2007 and 2006, respectively. In 2007, the Company purchased $610,000 of
plant equipment. Over one-half of the plant and equipment purchases were related
to the Company's efforts in industrial digital inkjet and photo-machining
markets. Purchases were also made to improve facilities, update systems and
replace vehicles.
The Company also purchased $375,000 of short-term investments comprised of
auction rate securities during 2007. Auction rate securities (ARS) are highly
liquid investments that are reset through a "dutch auction" process that occurs
every 7 to 49 days, depending on the terms of the individual security. At
December 31, 2007, the Company had $3,550,000 of ARS which were comprised
entirely of AAA municipal bonds which are classified as short term investments
and recorded at cost which equaled fair market value. Because of the current
volatility in the ARS market, subsequent to the end of the year, the Company
sold approximately $1,900,000 of ARS for its cost, which equaled market value,
and placed the proceeds in a money market account. The Company continues to
closely monitor its remaining ARS investments of $1,650,000 for indications of
illiquidity or impairment. Management believes that the value of its remaining
ARS portfolio has not declined.
During 2007, the Company reclassified $3,175,000 of investments in ARS from
cash and cash equivalents to short term investments. Given the liquid nature of
ARS, they had previously been classified as cash equivalents on both the balance
sheets and in the statements of cash flows. However, given that ARS have
long-term stated
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maturities and that the issuers of such ARS are under no obligation to redeem
them prior to their stated maturities, the Company has determined that its
investments in such securities should be classified as short-term
available-for-sale investments, rather than as cash equivalents. Accordingly,
the 2006 statement of cash flows presents the gross purchases and sales of these
short term investment as investing activities. This reclassification had no
impact on results of operations, cash flows from operations, total current
assets, total assets, or stockholders' equity.
During the second quarter of 2007, the Company exercised a warrant for
7,500 shares at a price of $8.50 per share to purchase an additional $63,750 of
iTi stock. The Company owns approximately 8% of the total outstanding common
shares of iTi. iTi is a leader in the development of industrial production
systems based on inkjet technology, and the Company believes iTi's expertise
fits strategically with the Company's expertise in developing substrates for
inkjet printing and the Company's plans to develop proprietary industrial inkjet
technologies. The Company also incurred $48,000 in patent application costs
during 2007 that the Company records as an asset and amortizes upon successful
completion of the application process. These cash outlays were partially offset
by receipt of $253,000 from the sale of the Company's Apprise investment and
$11,500 from the sale of two vehicles.
During 2006, the Company invested $538,000 in iTi to acquire 69,166 common
shares. On December 29, 2006, the Company acquired the image mate(R) line of
screen printing products from Franklin International for $533,000. The Company
made $274,000 of property and equipment purchases during 2006. The purchases
were comprised of plant and research equipment to improve efficiency and safety,
reduce operating costs and update facilities, and two automobiles. During 2006,
the Company purchased $3,200,000 of short term investments and sold $2,635,000
of short term investments comprised of ARS which are AAA rated municipal bonds.
The Company also incurred $28,000 in patent application costs during 2006 that
it recorded as an asset and amortizes upon successful completion of the
application process. The Company received $84,000 during 2006 from the sale of
marketable securities other than ARS and $6,000 from the sale of an automobile.
The Company realized $112,000 in cash from financing activities during 2007
compared to $223,000 received in 2006. During 2007, the Company received $80,000
for the issuance of 35,100 shares of common stock issued upon the exercise of
stock options compared to $186,000 received during 2006 for 48,324 shares of
common stock issued upon the exercise of stock options. The Company also
realized a $32,000 cash benefit during 2007 related to the excess tax benefit
from the exercise of stock options compared to a $37,000 cash benefit received
in 2006.
A bank line of credit provides for borrowings of up to $1,250,000.
Borrowings under this line of credit are collateralized by accounts receivable
and inventory and bear interest at 2.00 percentage points over the 30-day LIBOR
rate. The Company did not utilize this line of credit during 2007 or 2006 and
there were no borrowings outstanding as of December 31, 2007 and 2006.
The Company believes that current financial resources, its line of credit,
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
During 2007, the Company spent $610,000 on capital expenditures. This
spending primarily consists of supporting the Company's efforts in industrial
digital inkjet and photo-machining markets, plant equipment upgrades and
building improvements to improve efficiency and reduce operating costs and
vehicles.
During the first quarter of 2008, the Company acquired an option to
purchase a 15-acre brownfield site from the City of Duluth for approximately
$500,000. The Company is considering the construction of a manufacturing and
warehouse facility on the site. Construction is expected to begin during the
second quarter of 2008. Cost estimates for the expansion have not been
finalized.
Plans for capital expenditures include ongoing manufacturing equipment
upgrades, development equipment to modernize the capabilities and processes of
IKONICS' laboratory, research and development to
9
improve measurement and quality control processes and vehicles. These
commitments are expected to be funded with cash generated from operating
activities.
INTERNATIONAL ACTIVITY
The Company markets its products to numerous countries in all regions of
the world including North America, Europe, Latin America, and Asia. The
Company's 2007 foreign sales of $4,678,000 were approximately 29.6% of total
sales during 2007 compared to the 2006 foreign sales of $4,532,000 which were
30.4% of total sales. Foreign sales growth in 2007 was mainly due to sales
related to the image mate(R) line of screen printing products. The image mate(R)
brand was acquired in December 2006. Fluctuations in 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.
The Company's foreign transactions are primarily negotiated, invoiced and
paid in U.S. dollars while a portion is transacted in Euros. IKONICS has not
implemented an economic 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, 2007. Furthermore, the impact of foreign exchange on the Company's
balance sheet and operating results was not material in either 2007 or 2006.
FUTURE OUTLOOK
IKONICS has spent on average over 4% of its sales dollars for the past few
years in research and development and in addition has made capital expenditures
related to its digital technology program. 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. 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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48").
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attributes for the financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 was effective
for the Company as of January 1, 2007. The impact of the adoption on the
Financial Statements as of January 1, 2007, was an increase in total liabilities
of $137,000 and a decrease in retained earnings of $137,000.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting
10
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements. In
February 2008, the FASB issued FASB Staff Position FAS 157-2, "Effective Date of
FASB Statement No. 157" (the FSP). The FSP delayed, for one year, the effective
date of SFAS 157 for all nonfinancial assets and liabilities, except those that
are recognized or disclosed in the financial statements on at least an annual
basis. This statement is effective for the Company beginning January 1, 2008.
The deferred provisions of SFAS 157 will be effective for the Company's fiscal
year 2009. Because SFAS No. 157 does not require any new fair value measurements
or remeasurements of previously computed fair values, we do not believe the
adoption of SFAS No. 157 will have a material effect on our results of
operations or financial condition.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159"). SFAS 159 allows
entities to measure at fair value many financial instruments and certain other
assets and liabilities that are not otherwise required to be measured at fair
value. SFAS 159 is effective for fiscal years beginning after November 15, 2007.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements" ("SFAS 160"). SFAS 160 requires all
entities to report minority interests in subsidiaries as equity in the
consolidated financial statements, and requires that transactions between
entities and noncontrolling interests be treated as equity. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008, with early
adoption prohibited. The Company does not expect the adoption of this statement
will have a material impact on its financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised) Business
Combinations ("SFAS 141(R)"). SFAS 141 (R) establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141(R) is effective for the fiscal year beginning
after December 15, 2008 with early adoption prohibited. The standard will change
the Company's accounting treatment for business combinations on a prospective
basis.
11
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
IKONICS Corporation
We have audited the balance sheets of IKONICS Corporation as of December 31,
2007 and 2006, and the related statements of operations, stockholders' equity
and comprehensive income and cash flows for the years 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 IKONICS Corporation as of
December 31, 2007 and 2006, and the results of its operations and its cash flows
for the years then ended in conformity with U.S. generally accepted accounting
principles.
We were not engaged to examine management's assertion about the effectiveness of
IKONICS Corporation's internal control over financial reporting as of December
31, 2007 included in this Annual Report and titled "Management's Annual Report
on Internal Control over Financial Reporting", and accordingly, we do not
express an opinion thereon.
As discussed in Note 2 to the financial statements, effective January 1, 2007
the Company adopted Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes.
/s/ McGladrey & Pullen, LLP
Duluth, Minnesota
March 20, 2008
12
IKONICS CORPORATION
BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
2007 2006
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,230,020 $ 253,186
Short-term investments 3,550,000 3,175,000
Trade receivables, less allowance of $45,000 in 2007 and
$70,000 in 2006 (Notes 6 and 10) 2,025,257 1,976,893
Inventories (Notes 1 and 10) 2,355,864 2,494,876
Deposits, prepaid expenses and other assets (Note 3) 130,596 232,255
Deferred income taxes (Note 2) 24,000 97,000
----------- -----------
Total current assets 9,315,737 8,229,210
----------- -----------
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and building 1,631,142 1,500,271
Machinery and equipment 2,700,816 2,396,867
Office equipment 812,120 817,406
Vehicles 219,964 203,816
----------- -----------
5,364,042 4,918,360
Less accumulated depreciation 4,043,451 3,926,440
----------- -----------
1,320,591 991,920
----------- -----------
INTANGIBLE ASSETS, less accumulated amortization of $213,061 in
2007 and $159,352 in 2006 (Notes 3 and 4) 479,888 485,421
DEFERRED INCOME TAXES (Note 2) 11,000 48,000
INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES (Note 1) 855,201 988,910
----------- -----------
$11,982,417 $10,743,461
=========== ===========
13
IKONICS CORPORATION
BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
2007 2006
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 435,572 $ 288,449
Accrued compensation 347,691 324,082
Other accrued expenses (Note 2) 148,149 172,381
Income taxes payable 5,291 94,450
----------- -----------
Total current liabilities 936,703 879,362
----------- -----------
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 2,045,961 shares in 2007
and 2,010,861 shares in 2006 (Note 7) 204,596 201,086
Additional paid-in capital 2,124,342 1,979,012
Retained earnings 8,716,776 7,684,001
----------- -----------
Total stockholders' equity 11,045,714 9,864,099
----------- -----------
$11,982,417 $10,743,461
=========== ===========
See notes to financial statements.
14
IKONICS CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2007 AND 2006
2007 2006
----------- -----------
NET SALES $15,824,725 $14,888,912
COSTS AND EXPENSES:
Cost of goods sold 8,887,612 8,181,814
Selling, general and administrative 4,735,419 4,490,381
Research and development 775,049 742,406
----------- -----------
14,398,080 13,414,601
----------- -----------
INCOME FROM OPERATIONS 1,426,645 1,474,311
GAIN ON SALE OF NON-MARKETABLE EQUITY SECURITIES 55,159 --
INTEREST INCOME 153,971 115,454
----------- -----------
INCOME BEFORE INCOME TAXES 1,635,775 1,589,765
FEDERAL AND STATE INCOME TAXES (Note 2) 466,000 466,000
----------- -----------
NET INCOME $ 1,169,775 $ 1,123,765
=========== ===========
EARNINGS PER COMMON SHARE:
Basic $ 0.58 $ 0.56
=========== ===========
Diluted $ 0.57 $ 0.55
=========== ===========
WEIGHTED AVERAGE COMMON SHARES:
Basic 2,033,045 2,000,017
=========== ===========
Diluted 2,063,380 2,027,916
=========== ===========
See notes to financial statements.
15
IKONICS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2007 AND 2006
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL OTHER STOCK-
-------------------- PAID-IN RETAINED COMPREHENSIVE HOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME EQUITY
--------- -------- ----------- ----------- ------------- -----------
BALANCE AT DECEMBER 31, 2005 1,962,537 $196,254 $ 1,721,119 $6,560,236 $ 896 $ 8,478,505
Net income -- -- -- 1,123,765 -- 1,123,765
Unrealized loss on available-for
-sale securities -- -- -- -- (896) (896)
-----------
Total comprehensive income -- -- -- -- -- 1,122,869
Exercise of stock options 48,324 4,832 181,503 -- -- 186,335
Tax benefit resulting from stock
option exercises -- -- 14,055 -- -- 14,055
Stock based compensation and
related tax benefit -- -- 62,335 -- -- 62,335
--------- -------- ----------- ---------- ----- -----------
BALANCE AT DECEMBER 31, 2006 2,010,861 201,086 1,979,012 7,684,001 -- 9,864,099
Cumulative effect to prior year
retained earnings related to
the adoption of FIN 48 (Note 2) -- -- -- (137,000) -- (137,000)
Net income and comprehensive
income -- -- -- 1,169,775 -- 1,169,775
Exercise of stock options 35,100 3,510 76,212 -- -- 79,722
Tax benefit resulting from stock
option exercises -- -- 18,208 -- -- 18,208
Stock based compensation and
related tax benefit -- -- 50,910 -- -- 50,910
--------- -------- ----------- ---------- ----- -----------
BALANCE AT DECEMBER 31, 2007 2,045,961 $204,596 $ 2,124,342 $8,716,776 $ -- $11,045,714
========= ======== =========== ========== ===== ===========
See notes to financial statements.
16
IKONICS CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007 AND 2006
2007 2006
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,169,775 $ 1,123,765
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 276,942 242,833
Amortization 53,709 24,710
Excess tax benefit from share-based payment arrangement (31,997) (36,712)
Tax benefit from stock option exercise 18,208 14,055
Stock based compensation 18,913 25,623
Gain on sale of vehicles (7,341) (640)
Gain on sale of non-marketable equity securities (55,159) --
Deferred income taxes 110,000 15,000
Changes in working capital components, net of effects of
business acquisition:
Trade receivables (48,364) (274,285)
Inventories 139,012 34,101
Prepaid expenses and other assets 101,659 (16,508)
Accounts payable 147,123 (150,148)
Accrued liabilities (137,623) (491)
Income taxes payable (57,162) 74,419
---------- -----------
Net cash provided by operating activities 1,697,695 1,075,722
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (609,772) (273,548)
Proceeds from sale of vehicles 11,500 6,000
Business acquisition (Note 3) -- (532,921)
Purchase of intangibles (48,176) (28,045)
Purchase of short-term investments (375,000) (3,200,000)
Proceeds from sale of short-term investments -- 2,635,000
Purchase of non-marketable equity securities (63,750) (538,120)
Proceeds from sale of non-marketable equity securities 252,618 --
Proceeds from sale of marketable equity securities -- 83,979
---------- -----------
Net cash used in investing activities (832,580) (1,847,655)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Excess tax benefit from share-based payment arrangement 31,997 36,712
Proceeds from exercise of stock options 79,722 186,335
---------- -----------
Net cash provided by financing activities 111,719 223,047
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 976,834 (548,886)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 253,186 802,072
---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,230,020 $ 253,186
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes $ 433,953 $ 362,526
========== ===========
See notes to financial statements.
17
IKONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Foreign Export Sales - IKONICS Corporation (the
Company) develops and manufactures high-quality photochemical imaging
systems for sale primarily to a wide range of printers and decorators of
surfaces. Customers' applications are primarily screen printing and
abrasive etching. 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.
Foreign export sales approximated 29.6% of net sales in 2007 and 30.4% of
net sales in 2006. The Company's accounts receivable at December 31, 2007
and 2006 due from foreign customers were 35.2% and 39.5%, respectively. The
foreign export receivables are composed primarily of open credit
arrangements with terms ranging from 30 to 90 days. No single customer
represented greater than 10% of net sales in 2007 or in 2006.
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 the carrying value
approximates market value because of the short maturity of these
instruments.
Short-Term Investments - Short-term investments consist of auction rate
securities that are comprised of AAA rated government municipal variable
rate bonds. We consider our short-term investments to be
"available-for-sale" securities. At December 31, 2007 and 2006, cost was
equal to fair value and no amount of unrealized gain or loss was included
as a separate component of shareholders' equity.
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 an on-going 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 $624,000
and $535,000 higher than reported at December 31, 2007 and 2006,
respectively. The major components of inventories are as follows:
2007 2006
---------- ----------
Raw materials $1,373,835 $1,577,165
Work-in-progress 296,998 225,033
Finished goods 1,308,917 1,227,806
Reduction to LIFO cost (623,886) (535,128)
---------- ----------
Total inventories $2,355,864 $2,494,876
========== ==========
18
Depreciation - Depreciation of property, plant and equipment is computed
using the straight-line method over the following estimated useful lives:
Years
-----
Building 15-40
Machinery and equipment 5-10
Office equipment 3-10
Vehicles 3
Intangible 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 agreement terms. Intangible assets with finite lives are assessed
for impairment whenever events or circumstances indicate the carrying value
may not be fully recoverable by comparing the carrying value of the
intangibles to their future undiscounted cash flows. To the extent there is
impairment, analysis is performed based on several criteria, including, but
not limited to, revenue trends, discounted operating cash flows and other
operating factors to determine the impairment amount.
As of December 31, 2007 the remaining estimated weighted average useful
lives of intangible assets are as follows:
Years
-----
Patents 4.0
Licenses 7.5
Non-compete agreements 6.5
Investments in non-marketable equity securities consist of an $855,201
investment in imaging Technology international ("iTi"). The Company
accounts for this investment by the cost method because the common stock of
the corporation is unlisted and the criteria for using the equity method of
accounting are not satisfied. Under the cost method, the investment is
assessed for other-than-temporary impairment and recorded at the lower of
cost or market value which requires significant judgment since there are no
readily available market values for this investment. In assessing the fair
value of this investment the Company considers recent equity transactions
that iTi has entered into, the status of iTi's technology and strategies in
place to achieve its objectives, as well as iTi's financial condition and
results of operations. To the extent there are changes in the assessment,
an adjustment may need to be recorded. As of December 31, 2006 investments
in non-marketable equity securities consisted of a $791,450 investment in
imaging Technology international ("iTi") and a $197,460 equity investment
in Apprise Technologies, Inc (Apprise). During February 2007, Apprise was
acquired by Eco Lab Incorporated for cash. The Company realized a gain of
approximately $55,000 on the $253,000 cash payment received in 2007 related
to the Apprise sale. The Company may recover an additional payment in 2008
from the Apprise sale as defined in the sales agreement.
Fair Value of Financial Instruments - The carrying amounts of financial
instruments, including cash, cash equivalents, short-term investments,
accounts receivable, accounts payable, and accrued liabilities approximate
fair value due to the short maturity of these instruments. The carrying
value of the non-marketable equity securities approximated their estimated
fair value based on management's knowledge of recent sales prices of the
non-marketable equity securities.
Revenue Recognition - The Company recognizes revenue on sales of products
when title passes which can occur at the time of shipment or when the goods
arrive at the customer location. 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 and
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
19
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 net unrealized holding gains and losses on marketable
securities, net of taxes. There were no net unrealized holding gains and
losses on marketable securities available for sale at December 31, 2007 and
2006. Total comprehensive income was $1,169,775 and $1,122,869 for years
ended December 31, 2007 and 2006 respectively. There are no amounts in
comprehensive income related to foreign exchange activity, since such
amounts were not significant for either 2007 or 2006.
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 EPS except that weighted average of
common shares outstanding are increased to include the number of additional
common shares that would have been outstanding if all dilutive potential
common shares, such as options, had been issued.
Shares used in the calculation of diluted EPS are summarized below:
2007 2006
--------- ---------
Weighted average common shares
outstanding 2,033,045 2,000,017
Dilutive effect of stock options 30,335 27,899
--------- ---------
Weighted average common and common
equivalent shares outstanding 2,063,380 2,027,916
========= =========
Options to purchase 52,622 and 88,222 shares of common stock were
outstanding as of December 31, 2007 and 2006, respectively.
Employee Stock Plan - Effective January 1, 2006, the Company adopted
Financial Accounting Standards Board Statement No. 123 (revised 2004),
"Share-Based Payment," (FAS 123(R)) using the
modified-prospective-transition method. Prior to the adoption of FAS
123(R), the Company accounted for stock option grants under APB Opinion No.
25, "Accounting for Stock Issued to Employees" (the intrinsic value
method), and accordingly recognized no compensation expense for stock
option grants.
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 Currency Translation - Foreign currency transactions and
translation adjustments did not have a significant effect on the Balance
Sheet or the Statements of Stockholders' Equity and Comprehensive Income
and Cash Flows for 2007 and 2006.
Reclassification - The Company has reclassed certain investments in auction
rate securities (ARS) in 2006 to conform with the 2007 presentation of cash
and cash equivalents and short term investments. As a result of this
reclassification, cash and cash equivalents was reduced by and short term
investments were increased by $3,175,000 at December 31, 2006. The gross
purchases and sales of these short term investments have been included in
the investing activities on the statement of cash flows. This
reclassification had no impact on results of operations, cash flows from
operations, total current assets, total assets, or stockholders' equity.
20
2. INCOME TAXES
Income tax expense for the years ended December 31, 2007 and 2006 consists
of the following:
2007 2006
-------- --------
Current:
Federal $317,000 $401,000
State 39,000 50,000
-------- --------
356,000 451,000
Deferred 110,000 15,000
-------- --------
$466,000 $466,000
======== ========
The expected provision for income taxes, computed by applying the U.S.
federal income tax rate of 35% in 2007 and 2006 to income before taxes, is
reconciled to income tax expense as follows:
2007 2006
-------- --------
Expected provision for federal income taxes $572,500 $556,400
State income taxes, net of federal benefit 32,800 36,300
Reversal of valuation allowance (27,000) --
Reversal of uncertain tax positions (45,000) --
Extraterritorial income exclusion -- (49,400)
Domestic manufacturers deduction (10,500) (11,100)
Non-deductible meals and entertainment 15,000 16,400
Tax-exempt interest (43,400) (39,000)
R&D Credit (14,700) (13,600)
Other (13,700) (30,000)
-------- --------
$466,000 $466,000
======== ========
Deferred tax assets consist of the following as of December 31, 2007 and
2006:
2007 2006
------- --------
Property and equipment and other assets $13,000 $ 38,000
Accrued vacation 18,000 19,000
Other accrued expenses -- 49,000
Inventories -- 12,000
Allowance for doubtful accounts 5,000 18,000
Allowance for sales returns 11,000 7,000
Intangible assets -- 10,000
Capital loss carryforward 14,000 27,000
------- --------
61,000 180,000
Less valuation allowance -- (27,000)
------- --------
61,000 153,000
Deferred tax liabilities:
Inventories 9,000 --
Intangible assets 15,000 --
Prepaid expenses 2,000 8,000
------- --------
$35,000 $145,000
======= ========
The deferred tax amounts described above have been included in the
accompanying balance sheet as of December 31, 2007 and 2006 as follows:
2007 2006
------- --------
Current assets $24,000 $ 97,000
Noncurrent assets 11,000 48,000
------- --------
$35,000 $145,000
======= ========
21
On January 1, 2007, the Company adopted the provisions of Financial
Standards Accounting Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). As a result of the implementation
of FIN 48, the Company recorded a liability for unrecognized tax benefits
of $137,000, which was accounted for as a reduction in retained earnings as
of January 1, 2007 for the cumulative effect of a change in accounting
principle as provided for by FIN 48. The balance of the unrecognized tax
benefits at adoption, exclusive of interest, was $122,000. During the first
quarter of 2007, the statute of limitations for the relevant taxing
authority to examine and challenge the tax position for an open year
expired, resulting in a decrease in income tax expense of $45,000 for 2007.
As of December 31, 2007, the liability for unrecognized tax benefits
totaled $92,000 and is included in other accrued expenses.
Prior to 2007 the Company determined its tax contingencies in accordance
with SFAS No. 5, Accounting for Contingencies, or SFAS 5. The Company
recorded estimated tax liabilities to the extent the contingencies were
probable and could be reasonably estimated.
The Company is subject to taxation in the United States and various states.
The material jurisdictions that are subject to examination by tax
authorities primarily include Minnesota and the United States, for tax
years 2004, 2005, 2006, and 2007.
It is the Company's policy beginning in 2007 to recognize interest and
penalties related to uncertain tax positions in income tax expense. The
Company had accrued approximately $14,000 of interest related to uncertain
tax positions at December 31, 2007. The unrecognized tax benefits at
December 31, 2007 relate to taxation of foreign export sales.
A reconciliation of the beginning and ending amounts of unrecognized tax
benefit is as follows:
Balance at January 1, 2007 $137,000
Expiration of the statute of limitations for the
assessment of taxes (45,000)
--------
Balance at December 31, 2007 $ 92,000
========
The balance of unrecognized tax benefits totaling $92,000 at December 31,
2007, if reversed, would decrease the provision for income taxes and
increase net income by the same amount and reduce the Company's effective
tax rate. The Company also accrued potential interest of $6,000 related to
these unrecognized tax benefits during 2007, and in total, as of December
31, 2007, the Company recorded a liability for potential interest of
$13,700. We expect our unrecognized tax benefit to be reduced by
approximately $42,000 during the next twelve months as a result of the
expiration of the statute of limitations for the assessment of taxes.
22
3. BUSINESS COMBINATION
On December 29, 2006, the Company acquired certain assets of Franklin
International Inc. (Franklin) related to the image mate(R) line of screen
printing products. The acquisition was accounted for under the purchase
method of accounting. Accordingly, the assets acquired were recorded at
their fair market value. The assets acquired included lab equipment, raw
materials and finished goods inventory, and a non-compete agreement with
Franklin. The costs allocated to the non-compete agreement are amortized on
a straight-line basis over its seven year term. In connection with the
acquisition, the Company entered into an agreement to prepay for inventory
purchases from Franklin, which are expected to be utilized over three
years.
The fair market value of the assets acquired resulted in the following
purchase price allocation:
Cash price paid for assets $528,921
Acquisition costs incurred 4,000
--------
Total purchase price $532,921
========
Purchase Price Allocation
-------------------------
Inventory $164,921
Deposit for inventory purchases 150,000
Equipment 15,000
Non-compete agreement 203,000
--------
$532,921
========
If the acquisition had occurred on January 1, 2006, the unaudited pro forma
impact on revenues would have been to increase revenues by approximately
$600,000 for the year ended December 31, 2006. The unaudited proforma net
income and earnings per common share would not have been significantly
different than to the amounts reported in the Company's financial
statements for 2006.
4. INTANGIBLE 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, whichever is shorter. No impairment adjustments
to intangible assets were made during the year ended December 31, 2007 or
2006.
Intangible assets at December 31, 2007 and 2006 consist of the following:
December 31, 2007 December 31, 2006
----------------------------- -----------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets:
Patents $289,949 $ (90,939) $241,773 $ (81,022)
Licenses 100,000 (43,126) 100,000 (35,000)
Non-compete agreements 303,000 (78,996) 303,000 (43,330)
-------- --------- -------- ---------
$692,949 $(213,061) $644,773 $(159,352)
======== ========= ======== =========
Aggregate amortization expense:
2007 2006
------- -------
For the years ended December 31 $53,709 $24,710
Estimated amortization expense for the years ended December 31:
2008 $54,000
2009 54,000
2010 52,000
2011 45,000
2012 45,000
23
In connection with the license agreements, the Company has agreed to pay
royalties ranging from 3% to 5% on the sales of products subject to the
agreements. The Company incurred $101,000 of expense under these agreements
during 2007, and $119,000 during 2006.
5. RETIREMENT PLAN
The Company has established a salary deferral plan under Section 401(k) of
the Internal Revenue Code. 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 retirement expense for the
years ended December 31, 2007 and 2006 was approximately $176,000 and
$163,000, respectively.
6. SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer
different products and have a varied customer base. There are three
reportable segments: Domestic, Export, and IKONICS Imaging. Domestic sells
screen printing film, emulsions, and inkjet receptive film which is sold to
distributors located in the United States. IKONICS Imaging sells photo
resistant film, art supplies, glass, metal medium and related abrasive
etching equipment to end user customers located in the United States. It is
also entering the market for etched ceramics, glass and silicon wafers; and
is developing and selling proprietary inkjet technology. Export sells
primarily the same products as Domestic and IKONICS Imaging to foreign
customers. The accounting policies applied to determine the segment
information are the same as those described in the summary of significant
accounting policies.
Management evaluates the performance of each segment based on the
components of divisional income, and with the exception for accounts
receivable, does not allocate assets and liabilities to segments. Financial
information with respect to the reportable segments follows:
For the year ended December 31, 2007
IKONICS
DOMESTIC EXPORT* IMAGING OTHER TOTAL
---------- ---------- ---------- ----------- -----------
Net sales $6,680,384 $4,677,898 $4,466,443 $ -- $15,824,725
Cost of good sold 3,700,504 3,142,597 2,044,511 -- 8,887,612
Selling, general and
administrative 1,129,823 433,966 1,403,092 1,768,538 4,735,419
Research and
development -- -- -- 775,049 775,049
---------- ---------- ---------- ----------- -----------
Income from
operations $1,850,057 $1,101,335 $1,018,840 $(2,543,587) $ 1,426,645
========== ========== ========== =========== ===========
For the year ended December 31, 2006
IKONICS
DOMESTIC EXPORT* IMAGING OTHER TOTAL
---------- ---------- ---------- ----------- -----------
Net sales $5,777,987 $4,531,605 $4,579,320 $ -- $14,888,912
Cost of good sold 3,083,598 2,955,011 2,143,205 -- 8,181,814
Selling, general and
Administrative 965,695 395,619 1,479,464 1,649,603 4,490,381
Research and
development -- -- -- 742,406 742,406
---------- ---------- ---------- ----------- -----------
Income from
operations $1,728,694 $1,180,975 $ 956,651 $(2,392,009) $ 1,474,311
========== ========== ========== =========== ===========
24
Accounts receivable as of December 31, 2007 and December 31, 2006:
Dec 31, 2007 Dec 31, 2006
------------ ------------
Domestic $ 980,906 $ 842,144
Export 712,936 780,599
IKONICS Imaging 356,272 384,748
Other (24,857) (30,598)
---------- ----------
Total $2,025,257 $1,976,893
========== ==========
* In 2007 and 2006, the Company marketed its products 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 2007 and 2006.
Sales to foreign customers were 29.6% and 30.4% of the Company's net sales
for 2007 and 2006, respectively.
7. STOCK OPTIONS
The Company has stock incentive plan for the issuance of up to 342,750
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. A total of 56,173
shares of common stock are reserved for additional future grants of options
under the plan at December 31, 2007.
Under the plan, the Company charged compensation cost of $18,913 and
$25,623 against income and recognized a total income tax benefit in the
income statement of $8,963 and $26,482 in 2007 and 2006, respectively.
As of December 31, 2007, there was approximately $16,000 of unrecognized
compensation cost related to unvested share-based compensation awards
granted which is expected to be recognized over the next two years.
The Company receives a tax deduction for certain stock option exercises
during the period in which the options are exercised, generally for the
excess of the prices at which the option shares are sold over the exercise
price of the options. In accordance with FAS 123(R), the excess tax
benefits from the exercise of stock options is reported as a reduction of
operating and an increase in financing cash flows. For the year ended
December 31, 2007 and 2006, $31,997 and $36,712 of excess tax benefits was
reported in the statement of cash flows, respectively.
There were no options granted during 2007. The fair value of share-based
payment awards granted in 2006 was estimated using the Black-Scholes option
pricing model with the following assumptions:
2006
------------
Dividend yield 0.0%
Expected volatility 60.6 - 63.0%
Expected life of option Five years
Risk-free interest rate 4.8-5.0%
SFAS 123R specifies that initial accruals be based on the estimated number
of instruments for which the requisite service is expected to be rendered.
Therefore, the Company is required to incorporate a preexisting forfeiture
rate based on the historical forfeiture expense and prospective actuarial
analysis, estimated at 2%.
25
A summary of the status of the Company's stock option plan as of December
31, 2007 and changes during the year then ended is presented below:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Shares Price Term (years) Value
------- ------- -------- ------------ ---------
Outstanding at January 1, 2007 88,222 $3.33
Granted -- --
Exercised (35,100) 2.27
Expired and forfeited (500) 4.32
------- -----
Outstanding at December 31, 2007 52,622 4.03 1.13 $264,728
======= ===== ==== ========
Vested or expected to vest at December 31, 2007 52,622 4.03 1.13 $264,728
======= ===== ==== ========
Exercisable at December 31, 2007 44,871 $3.58 0.83 $245,921
======= ===== ==== ========
The weighted-average grant-date fair value of options granted was $4.58 for
the year ended December 31, 2006. The total intrinsic value of options
exercised was $237,949 and $227,175 for the years ended December 31, 2007
and 2006, respectively.
The following table summarizes information about stock options outstanding
at December 31, 2007:
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 2007 Life (years) Price 2007 Price
-------- -------------- ------------ --------- -------------- ---------
$2.00 - 2.99 23,622 0.31 $2.73 23,622 $2.73
3.00 - 3.99 11,250 0.59 3.36 11,250 3.36
4.00 - 4.99 8,250 2.32 4.32 5,333 4.32
7.00 - 7.99 9,500 2.79 7.79 4,666 7.54
------ ---- ----- ------ -----
52,622 1.13 $4.03 44,871 $3.58
====== ==== ===== ====== =====
8. CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances primarily in two financial
institutions. As of December 31, 2007, the balances 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. No one customer accounted for more than 10%
of total receivables as of December 31, 2007 and 2006.
26
9. LEASE EXPENSE
The Company leases buildings on a month-to-month basis and equipment as
needed. On February 1, 2007 the Company entered into a lease agreement for
additional warehouse space at a cost of $5,750 per month or $69,000 per
year. The lease expires on February 1, 2009. Total rental expense for all
equipment and building operating leases was $72,000 in 2007 and $21,000 in
2006.
10. 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 2.00 percentage points over 30-day LIBOR. There were no
outstanding borrowings under this line of credit at December 31, 2007 and
2006.
11. EMERGING ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 was effective for the
Company as of January 1, 2007. The impact of the adoption on the Financial
Statements as of January 1, 2007, was an increase in total liabilities of
$137,000 and a decrease in retained earnings of $137,000.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. This Statement applies
under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements. In
February 2008, the FASB issued FASB Staff Position FAS 157-2, "Effective
Date of FASB Statement No. 157" (the FSP). The FSP delayed, for one year,
the effective date of FAS 157 for all nonfinancial assets and liabilities,
except those that are recognized or disclosed in the financial statements
on at least an annual basis. This statement is effective for the Company
beginning January 1, 2008. The deferred provisions of FAS 157 will be
effective for the Company's fiscal year 2009. Because SFAS No. 157 does not
require any new fair value measurements or remeasurements of previously
computed fair values, the Company does not believe the adoption of SFAS No.
157 will have a material effect on its results of operations or financial
condition.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159"). SFAS 159 allows
entities to measure at fair value many financial instruments and certain
other assets and liabilities that are not otherwise required to be measured
at fair value. SFAS 159 is effective for fiscal years beginning after
November 15, 2007.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements" ("SFAS 160"). SFAS 160 requires all
entities to report minority interests in subsidiaries as equity in the
consolidated financial statements, and requires that transactions between
entities and noncontrolling interests be treated as equity. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008, with
early adoption prohibited. The Company does not expect the adoption of this
statement will have a material impact on its financial position or results
of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised) Business
Combinations ("SFAS 141(R)"). SFAS 141 (R) establishes principles and
requirements for how the acquirer of a business recognizes and measures in
its
27
financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree. The statement
also provides guidance for recognizing and measuring the goodwill acquired
in the business combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS 141(R) is effective for
the fiscal year beginning after December 15, 2008 with early adoption
prohibited. The standard will change the Company's accounting treatment for
business combinations on a prospective basis.
28
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES. As of December 31, 2007, an evaluation was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
design and operation of these disclosure controls and procedures were effective
to ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in applicable rules and forms.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING. Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15f under
the Exchange Act. Our internal control system is designed to provide reasonable
assurance to our management and board of directors regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures
that:
- Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the company;
- Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
- Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on
management's assessment and those criteria, management believes that, as of
December 31, 2007, the Company maintained effective internal control over
financial reporting.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Our management's report of the effectiveness on the design and
operation of our internal control over financial reporting was not subject to
attestation by the Company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this annual report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no change in the
Company's internal control over financial reporting identified in connection
with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the
Exchange Act that occurred during the period covered by this report and that has
materially affected, or is reasonable likely to materially affect, the Company's
internal control over financial reporting.
29
ITEM 8B. OTHER INFORMATION
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included in the Company's definitive proxy statement for
the 2008 Annual Meeting of Shareholders under the captions "Election of
Directors," "Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" is incorporated by reference. The following information
completes the Company's response to this Item 9.
The Company has adopted a code of ethics that applies to the Company's
Chief Executive Officer, Chief Financial Officer, Controller and other employees
performing similar functions. This code of ethics is filed as Exhibit 14 to this
report. The Company intends to satisfy the disclosure requirement under Item 10
of Form 8-K regarding an amendment to, or a waiver from, this code of ethics by
posting such information on its Web site which is located at www.ikonics.com.
ITEM 10. EXECUTIVE COMPENSATION
The information included in the Company's definitive proxy statement for
the 2008 Annual Meeting of Shareholders under the captions "Election of
Directors--Director Compensation," "Summary Compensation Table," "Outstanding
Equity Awards at Fiscal Year-End" 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 2008 Annual Meeting of Shareholders under the captions "Security Ownership
of Principal Shareholders and Management" and "Equity Compensation Plan
Information" is incorporated by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information included in the Company's definitive proxy statement for
the 2008 Annual Meeting of Shareholders under the caption "Election of
Directors" is incorporated by reference. The Company has not engaged in any
transaction since the beginning of its last fiscal year and does not currently
propose to engage in any transaction required to be disclosed pursuant to Item
404 of Regulation S-B.
ITEM 13. EXHIBITS
The following exhibits are filed as part of this Annual Report on Form
10-KSB for the fiscal year ended December 31, 2007:
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 Current Report on Form 8-K
filed with the Commission on February 22, 2007 (File 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).)
30
10.1 IKONICS Corporation 1995 Stock Incentive Plan, as amended.
(Incorporated by reference to Exhibit B to the Company's proxy
statement for its 2004 Annual Meeting of Shareholders filed with the
Commission on March 29, 2004 (File 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).)
14 Code of Ethics. (Incorporated by reference to the like numbered
Exhibit to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2003 (File No. 000-25727).)
23 Consent of Independent Registered Public Accounting Firm
24 Powers of Attorney.
31.1 Rule 13a-14(a)/15d-14(a) Certifications of CEO.
31.2 Rule 13a-14(a)/15d-14(a) Certifications of CFO.
32 Section 1350 Certifications.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information included in the Company's definitive proxy statement for
the 2008 Annual Meeting of Shareholders under the caption "Audit and Non-Audit
Fees" is incorporated by reference.
31
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 20, 2008.
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 20, 2008.
/s/ William C. Ulland
-------------------------------------
William C. Ulland, Chairman,
Chief Executive Officer
and President
(Principal Executive Officer)
/s/ Jon Gerlach
-------------------------------------
Jon Gerlach, Chief Financial Officer
and Vice President of Finance
(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
32
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
14 Code of Ethics..................................................... Incorporated by Reference
23 Consent of Independent Registered Public Accounting Firm.......... Filed Electronically
24 Powers of Attorney................................................. Filed Electronically
31.1 Rule 13a-14(a)/15d-14(a) Certifications of CEO..................... Filed Electronically
31.2 Rule 13a-14(a)/15d-14(a) Certifications of CFO..................... Filed Electronically
32 Section 1350 Certifications........................................ Filed Electronically