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, 2003 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: None Securities registered under Section 12(g) of the Act: Common Stock, par value $.10 per share Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] The issuer's revenues for its most recent fiscal year were: $12,105,127 The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 27, 2004 was $7,137,064.40, based on the closing price for the issuer's Common Stock on such date as reported on the Nasdaq SmallCap Market. For purposes of determining this number, all officers and directors of the issuer are considered to be affiliates of the issuer, as well as individual stockholders holding more than 10% of the issuer's outstanding Common Stock. This number is provided only for the purpose of this report on Form 10-KSB and does not represent an admission by either the issuer or any such person as to the status of such person. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date: Common Stock, $.10 par value - - 1,251,454 issued and outstanding as of February 27, 2004. 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 2004 Annual Meeting of Shareholders are incorporated by reference in Part III. PART I ITEM 1. BUSINESS GENERAL IKONICS Corporation ("IKONICS" or the "Company") was incorporated in Minnesota as Chroma-Glo, Inc. in 1952 and changed its name to The Chromaline Corporation in 1982. In December 2002, the Company changed its name to IKONICS Corporation. The Company develops, manufactures and sells light sensitive liquid coatings ("emulsions") and films, as well as ink jet receptive films for commercial and industrial applications in the United States and abroad. The Company also markets ancillary chemicals, equipment and other consumables to provide a full line of products and services to its customers. The Company's products serve the screen printing and abrasive etching markets. The screen printing products represent the Company's largest product line. These products are used by screen printers to create stencil images. These images produce basic designs for fabric decoration and product identification, as well as complex designs for compact discs and electronic circuits. The abrasive etching products are used by consumers to create architectural glass, art pieces and awards and in various industrial applications. The Company also sells a line of ink jet receptive films used for the creation of photopositives and photonegatives. Over 90% of the Company's products are consumables. PRODUCTS IKONICS' core technology is the use of photochemicals to create and transfer images. This technology is similar to photographic film technology except that the Company uses organic polymers or natural protein rather than silver to make the product photo-reactive ("light sensitive"). The products IKONICS targets at the screen printing industry are light sensitive films and light sensitive emulsions used by customers to create an image on a printing screen; the equivalent of a printing plate in other types of printing processes. In the abrasive etching market, the Company's products are also films and emulsions. These products are used to create a stencil by decorators of glass and other hard surfaces, including crystal, marble, metals, wood, stone and plastics. The stencil is applied directly to the article to be decorated by the sand blasting process through a self-adhesive feature or with a separate adhesive. The open areas of the stencil permit the sand blast grit to erode the surface while the closed areas of the stencil repel the sand blast grit, protecting areas of the surface being decorated. All of IKONICS' light sensitive products are sensitive to ultraviolet radiation. The Company uses different chemicals to create sensitivity to light, including a molecule which it developed internally and patented. DISTRIBUTION The Company currently has approximately 140 domestic and international distributors. IKONICS sells its products through non-exclusive distributors in competitive markets, such as the United States, Canada, Mexico and Europe. The Company has exclusive distribution arrangements in markets such as South and Central America, Australia, South Africa, Canada, India and other Asian countries. The Company also sells its products through direct sales to certain end users who do not require the services of a distributor or dealer to service their account. In addition, IKONICS markets and sells its products through magazine advertising, trade shows and the internet. 2 IKONICS has a diverse customer base both domestically and abroad and does not depend on one or a few customers for a material portion of its revenues. QUALITY CONTROL IN MANUFACTURING In March 1994, IKONICS became the first firm in northern Minnesota to receive ISO 9001 certification. ISO 9000 is a series of worldwide standards issued by the International Organization for Standardization that provide a framework for quality assurance. ISO 9001 is the most comprehensive standard of the ISO 9000 series. The Company was recertified in 1997, 1999 and 2002. IKONICS' quality function goal is to train all employees properly in both their work and in the importance of their work. Internal records of quality-related graphs and tables are reviewed regularly and discussions are held among management and employees regarding how improvements might be realized. The Company has rigorous materials selection procedures and also uses environmental testing and screen print equipment tailored to fit customers' needs. RESEARCH AND DEVELOPMENT/INTELLECTUAL PROPERTY IKONICS spent 5.2% of sales ($632,000) on research and development in 2003 and 6.0% ($706,000) in 2002. In its research program, IKONICS has developed unique light sensitive molecules which have received two U.S. patents. These patents expire in 2011 and 2014, respectively. In addition, the Company holds a number of other patents related to its photopolymer chemistry that expire between 2003 and 2023. The Company also has six United States patent applications pending. There can be no assurance that any patent granted to the Company will provide adequate protection to the Company's intellectual property. Within IKONICS, steps are taken to protect the Company's trade secrets, including physical security, confidentiality and non-competition agreements with employees and confidentiality agreements with vendors. In its product development program, IKONICS is fully equipped to simulate customer uses of its products. The Company's facilities include a walk-in environmental chamber which simulates customer uses and storage conditions of IKONICS products for different climatic zones. In addition to its patents, the Company has various trademarks including the "Chromaline," "PhotoBrasive" and "Nichols" trademarks. RAW MATERIALS The primary raw materials used by IKONICS in its production are photopolymers, polyester films, polyvinylacetates, polyvinylalcohols and water. The Company purchases raw materials from a variety of domestic and foreign sources with no one supplier being material to the Company. The purchasing staff at the Company's headquarters leads in the identification of both domestic and foreign sources for raw materials and negotiates price and terms for all domestic and foreign markets. IKONICS' involvement in foreign markets has given it the opportunity to become a global buyer of raw materials at lower overall cost than it had previously enjoyed. The Company has a number of suppliers and no one supplier is essential to the Company's operations. To date, there have been no significant shortages of raw materials and alternative sources are available. The Company believes it has good supplier relations. COMPETITION The Company competes in its markets based on product development capability, quality, reliability, availability, technical support and price. The screen printing market is much larger than the decorative sand blasting market, however, the abrasive etching market is currently experiencing faster growth. IKONICS has two primary competitors in its screen printing film business, both of which are foreign-owned entities. They are larger than IKONICS and possess greater resources than the Company in many areas. The Company has numerous competitors in the market for screen print emulsions many of whom are larger than IKONICS and possess greater resources. The market for the Company's abrasive etching products has one significant competitor. IKONICS considers itself to the leader in this market. 3 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 6, 2004, the Company had approximately 70 full-time employees, 66 of whom are located at the Company's headquarters in Duluth, Minnesota and four of whom are outside technical sales representatives in various locations around the United States. None of the Company's employees are subject to a collective bargaining agreement and the Company believes that its employee relations are good. 4 ITEM 2. PROPERTY The Company primarily conducts its operations in Duluth, Minnesota. The administrative, sales, research and development, quality and manufacturing activities are housed in a 60,000 square-foot, four-story building, including a basement level. The building is approximately seventy years old and has been maintained in good condition. Shipping and distribution for the Company operates from a 5,625 square-foot warehouse adjacent to the existing plant building that was constructed in 1997. These facilities are owned by the Company with no existing liens or leases. The Company also leases warehouse space at two locations in Superior, Wisconsin. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders by the registrant during the fourth quarter of the fiscal year covered by this report. 5 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq SmallCap Market under the symbol IKNX. The following table sets forth, for the fiscal quarters indicated, the high and low bid prices for the Company's Common Stock as reported on both markets for the periods indicated. The quotations reflect inter-dealer prices without retail mark-up, mark-down or commission, and may not represent actual transactions.
HIGH LOW ---- --- FISCAL YEAR ENDED DECEMBER 31, 2003: First Quarter............................................................ $6.25 $3.05 Second Quarter........................................................... 5.78 3.90 Third Quarter............................................................ 6.25 4.92 Fourth Quarter........................................................... 8.34 5.55 FISCAL YEAR ENDED DECEMBER 31, 2002: First Quarter............................................................ $3.25 $2.95 Second Quarter........................................................... 3.27 3.00 Third Quarter............................................................ 3.49 2.85 Fourth Quarter........................................................... 5.10 3.25
As of February 27, 2004, the Company had approximately 580 shareholders of record. The Company has never declared or paid any dividends on its Common Stock. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following management discussion and analysis focuses on those factors that had a material effect on the Company's financial results of operations and financial condition during 2003 and 2002 and should be read in connection with the Company's audited financial statements and notes thereto for the years ended December 31, 2003 and 2002. 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 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. - The belief that the Company's current financial resources, cash generated from operations and the Company's capacity for debt and/or equity financing will be sufficient to fund current and anticipated business operations and capital expenditures. The belief that the Company's low debt levels and available line of credit make it unlikely that a decrease in product demand would impair the Company's ability to fund operations--Changes in anticipated operating results, credit availability, equity market conditions or the Company's debt levels may further enhance or inhibit the Company's ability to maintain or raise appropriate levels of cash. - The Company's expectation that capital expenditures will be funded with cash generated from operating activities--This expectation may be affected by changes in the Company's anticipated capital expenditure requirements resulting from unforeseen required maintenance or repairs. The funding of 6 planned or unforeseen expenditures may also be affected by changes in anticipated operating results resulting from decreased sales or increased operating expenses. - The Company's belief that its vulnerability to foreign currency fluctuations and general economic conditions in foreign countries is not significant--This belief may be impacted by economic, political and social conditions in foreign markets and changes in regulatory and competitive conditions or a change in the amount or geographic focus of the Company's international sales. - The Company's plans to continue to invest in research and development efforts, expedite internal product development and invest in technological alliances, as well as the expected focus and results of such investments--These plans and expectations may be impacted by general market conditions, unanticipated changes in expenses or sales, delays in the development of new products, technological advances, the ability to find suitable and willing technology partners or other changes in competitive or market conditions. - The Company's efforts to grow its international business--These efforts may be impacted by economic, political and social conditions in current and anticipated foreign markets, regulatory conditions in such markets, unanticipated changes in expenses or sales, changes in competitive conditions or other barriers to entry or expansion. - The Company's belief as to future activities that may be undertaken to expand the Company's business--Actual activities undertaken may be impacted by general market conditions, competitive conditions in the Company's industry, unanticipated changes in the Company's financial position or the inability to identify attractive acquisition targets or other business opportunities. CRITICAL ACCOUNTING POLICIES The Company prepares the financial statements in conformity with accounting principles generally accepted in the United States of America. Therefore, the Company is required to make certain estimates, judgments and assumptions that the Company believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The accounting policies, which IKONICS believes are the most critical to aid in fully understanding and evaluating its reported financial results, include the following: Accounts Receivable. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit worthiness, as determined by review of the current credit information. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified. While such credit losses have historically been within expectations and the provisions established, the Company cannot guarantee that it will continue to experience the same collection history that has occurred in the past. The general payment terms are net 30-45 days for domestic customers and net 60-90 days for foreign customers. Inventory. Inventories are valued at the lower rate 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. Deferred Tax Assets. At December 31, 2003, the Company had approximately $194,000 of deferred tax assets. The deferred tax assets result primarily due to timing differences in intangible assets and property and equipment. The Company has recorded a $46,000 valuation allowance to reserve for items that will more likely than not be realized. The Company has determined that it is more likely than not that the remaining deferred tax assets will be realized and that an additional valuation allowance for such assets is not currently required. Revenue Recognition - The Company recognizes revenue on products when title passes, which is usually upon shipment. Freight billed to customers is included in sales. Shipping costs are included in cost of goods sold. 7 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 Sales. The Company's net sales increased 2.6% to $12.1 million in 2003, compared to net sales of $11.8 million in 2002. Sales in the United States increased 1.8% to $8.2 million in 2003, from $8.0 million in 2002. Sales in the United States slightly increased as a result of an improvement in the general economic climate. International sales increased 4.3% to $3.9 million from $3.8 million in 2002. Cost of Goods Sold. Cost of goods sold was $6.6 million, or 54.5% of sales, in 2003 and $6.8 million, or 57.7% of sales, in 2002. The decrease in cost of goods sold reflects an improved product mix across all geographic areas and lower costs for some raw materials. The Company also ended sales to certain marginally profitable customers at the beginning of 2003. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased to $4.2 million, or 34.5% of sales, in 2003 from $3.8 million, or 32.5% of sales, in 2002. The increase reflects a contingent liability for unpaid state sales tax, higher sales and marketing expenses, including costs to set up a training facility in Singapore, and bad debt expense. Research and Development Expenses. Research and development expenses were $632,000, or 5.2% of sales, in 2003 compared to $706,000, or 6.0% of sales, in 2002. The reduction was due to lower patent legal fees, lower travel expenses and lower production trial costs. Loss on Investment. The Company wrote down the value of its investment in Apprise Technologies ("Apprise") by $75,000 during the second quarter of 2003. This write down occurred because the latest issuance price per share of Apprise was below the value carried on the Company's books. Interest Income. Interest income increased to $16,000 in 2003, compared to $13,000 for 2002. The higher interest income is due to the growing amount of invested funds. Interest is earned primarily from government obligation revenue bonds of various municipalities and school districts. Income Taxes. Income taxes were $129,000, or an effective rate of 20.3%, for 2003 compared to $101,000, or an effective rate of 21.9%, for 2002. The lower effective tax rate during 2003 relates to an increase in tax benefits of the extraterritorial income exclusion on foreign sales. 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 $1,508,000 and $384,000 at December 31, 2003 and December 31, 2002, respectively. The Company generated $1,401,000 in cash from operating activities during 2003 compared to the generation of $249,000 in cash from operating activities during the same period in 2002. Cash provided by operating activities is primarily the result of net income adjusted for non-cash depreciation, amortization, loss on investment, provision for doubtful accounts, and certain changes in working capital components. During 2003, trade receivables increased by $7,000, net of the allowance for doubtful accounts. The increase in receivables was driven by moderately 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 increased by $35,000, reflecting higher raw material levels. Accounts payable decreased by $52,000, reflecting timing of payments to suppliers. Accrued expenses increased by $207,000 due to probable future sales tax payments and the timing of payroll. The Company used $277,000 and $336,000 in cash for investing activities during 2003 and 2002, respectively. During 2003, the Company spent $245,000 on the following: plant equipment upgrades to improve efficiency and reduce operating costs, additions to the Company's business software, improvements to the 8 Company's trade show booths and construction costs on the leased training facility in Singapore. The Company also incurred $60,000 in patent application costs that it records as an asset and amortizes upon successful completion of the application process. During 2002, the Company purchased $250,000 in capital equipment and business software and spent $123,000 on patent application costs and on a license for technology applicable to its abrasive etching business. During 2003 the Company purchased $84,000 in marketable securities and sold $106,000 in marketable securities. During 2002, the Company repurchased 23,500 shares of its outstanding Common Stock for $72,000. A bank line of credit exists providing for borrowings of up to $1,250,000. Outstanding debt under this line of credit is collateralized by accounts receivable and inventory and bears interest at 2.25 percentage points over the 30-day LIBOR rate. The Company did not utilize this line of credit during the year and there was no debt outstanding under this line as of December 31, 2003. The Company made a $150,000 draw on this line of credit on June 20, 2002, primarily to cover a royalty payment to Aicello. The Company repaid this draw within a short period of time, utilizing cash from operations. 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 The Company spent $245,000 on capital expenditures during 2003. This spending included plant equipment upgrades to improve efficiency and safety, additions to the Company's business software, vehicles, improvements to the Company's trade show booths and construction costs on the leased training facility in Singapore. Commitments for capital expenditures include ongoing manufacturing equipment upgrades, development equipment to modernize the capabilities and processes of IKONICS' laboratory, and research and development to improve measurement and quality control processes. These commitments are expected to be funded with cash generated from operating activities. INTERNATIONAL ACTIVITY The Company markets its products to over 80 countries in North America, Europe, Latin America, Asia and other parts of the world. Foreign sales were approximately 32% of total sales during 2003 and 2002. Foreign sales in 2003 reflected higher sales to China and a decrease in sales to India. Fluctuations of certain foreign currencies have not significantly impacted the Company's operations because the Company's foreign sales are not concentrated in any one region of the world. The Company believes its vulnerability to uncertainties due to foreign currency fluctuations and general economic conditions in foreign countries is not significant. Substantially all of the Company's foreign transactions are negotiated, invoiced and paid in U.S. dollars. A portion of the Company's foreign sales are invoiced and paid in Eurodollars. IKONICS has not implemented a hedging strategy to reduce the risk of foreign currency translation exposures, which management does not believe to be significant based on the scope and geographic diversity of the Company's foreign operations as of December 31, 2003. FUTURE OUTLOOK IKONICS has invested on average over 6% of its sales dollars for the past several years in research and development. The Company plans to maintain its efforts in this area and expedite internal product development as well as form technological alliances with outside experts to ensure commercialization of new product opportunities. 9 In addition to its traditional emphasis on domestic markets, the Company will continue efforts to grow its business internationally by attempting to develop new markets and expanding market share where it has already established a presence. Other future activities undertaken to expand the Company's business may include acquisitions, building expansion and additions, equipment additions, new product development and marketing opportunities. RECENT ACCOUNTING PRONOUNCEMENTS In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (FAS 149). FAS 149 amends and clarifies financial accounting and reporting for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities under FAS 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this statement did not have a material impact on the Company's financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (FAS 150). FAS 150 clarifies the accounting for certain financial instruments and characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of these financial instruments were classified as equity. FAS 150 is effective for all financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period after June 15, 2003. The adoption of this statement did not have a material impact on the Company's financial statements. 10 ITEM 7. FINANCIAL STATEMENTS INDEPENDENT AUDITOR'S REPORT Stockholders and Board of Directors IKONICS Corporation Duluth, Minnesota We have audited the accompanying balance sheets of IKONICS Corporation as of December 31, 2003 and 2002, and the related statements of operations, stockholders' equity 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IKONICS Corporation as of December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ McGladrey & Pullen, LLP Duluth, Minnesota February 6, 2004 11 IKONICS CORPORATION BALANCE SHEETS DECEMBER 31, 2003 AND 2002
2003 2002 ASSETS Current Assets: Cash and cash equivalents $1,507,794 $ 384,107 Marketable securities 221,907 246,094 Trade receivables, less allowance for doubtful accounts of $100,000 1,859,480 1,933,769 in 2003 and 2002 Inventories (Note 1) 1,807,233 1,771,905 Prepaid expenses and other assets 73,260 89,937 Income tax refund receivable 0 122,469 Deferred taxes (Note 3) 128,000 82,000 ---------- ---------- Total current assets 5,597,674 4,630,281 PROPERTY, PLANT, AND EQUIPMENT, at cost: Land and building 1,406,377 1,355,588 Machinery and equipment 2,337,166 2,231,478 Office equipment 1,185,098 1,144,564 Vehicles 191,628 167,102 ---------- ---------- 5,120,269 4,898,732 Less accumulated depreciation 4,010,110 3,694,105 ---------- ---------- 1,110,159 1,204,627 INTANGIBLE ASSETS, less accumulated amortization of $85,154 in 2003 and $60,966 in 2002 (Note 4) 308,017 271,751 DEFERRED TAXES (Note 3) 66,000 118,000 OTHER ASSETS (Note 1) 112,834 187,500 ---------- ---------- $7,194,684 $6,412,159 ========== ==========
12 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 264,744 $ 317,229 Accrued compensation 227,318 204,624 Other accrued expenses 207,506 23,643 Income taxes payable 126,766 0 ----------- ----------- Total current liabilities 826,334 545,496 STOCKHOLDERS' EQUITY: Preferred stock, par value $.10 per share; authorized 250,000 shares; issued none Common stock, par value $.10 per share; authorized 4,750,000 shares; issued and outstanding 1,248,127 shares-2003 and 2002 124,813 124,813 Additional paid-in capital 1,269,489 1,269,489 Retained earnings 4,987,311 4,483,895 Accumulated other comprehensive loss (13,263) (11,534) ----------- ----------- Total stockholders' equity 6,368,350 5,866,663 ----------- ----------- $ 7,194,684 $ 6,412,159 =========== ===========
See notes to financial statements. 13 IKONICS CORPORATION STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002 NET SALES $ 12,105,127 $ 11,797,279 COSTS AND EXPENSES: Cost of goods sold 6,601,263 6,808,130 Selling, general and administrative 4,181,486 3,835,097 Research and development 631,658 706,343 ------------ ------------ 11,414,407 11,349,570 ------------ ------------ INCOME FROM OPERATIONS 690,720 447,709 LOSS ON INVESTMENT (74,666) 0 INTEREST INCOME 16,362 13,108 ------------ ------------ INCOME BEFORE INCOME TAXES 632,416 460,817 FEDERAL AND STATE INCOME TAXES (Note 3) 129,000 101,000 ------------ ------------ NET INCOME $ 503,416 $ 359,817 ============ ============ EARNINGS PER SHARE: Basic $ 0.40 $ 0.29 ============ ============ Diluted $ 0.40 $ 0.29 ============ ============ WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING: Basic 1,248,127 1,252,020 ============ ============ Diluted 1,263,404 1,252,809 ============ ============
See notes to financial statements. 14 IKONICS CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2003 AND 2002
ACCUMULATED OTHER ADDITIONAL COMPREHENSIVE COMMON STOCK PAID-IN RETAINED INCOME TOTAL SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY ----------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001 1,271,627 $ 127,163 $ 1,293,460 $ 4,170,246 $ (10,829) $ 5,580,040 Net income 359,817 359,817 Unrealized loss on available-for-sale investments (705) (705) ----------- Total comprehensive income 359,112 Purchase and retirement of 23,500 shares of common stock (23,500) (2,350) (23,971) (46,168) (72,489) --------- ---------- ------------ ------------ ---------- ----------- BALANCE AT DECEMBER 31, 2002 1,248,127 124,813 1,269,489 4,483,895 (11,534) 5,866,663 Net income 503,416 503,416 Unrealized loss on available-for-sale investments (1,729) (1,729) ----------- Total comprehensive income 501,687 --------- ---------- ------------ ------------ ---------- ----------- BALANCE AT DECEMBER 31, 2003 1,248,127 $ 124,813 $ 1,269,489 $ 4,987,311 $ (13,263) $ 6,368,350 ========= ========== ============ ============ ========== ===========
See notes to financial statements. 15 IKONICS CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 503,416 $ 359,817 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 339,041 314,364 Amortization 24,188 18,178 Gain on sale of property and equipment (5,500) (13,116) Loss on investment 74,666 0 Provision for doubtful accounts 81,254 60,183 Deferred income taxes 6,000 81,000 Changes in working capital components: (Increase) decrease in: Trade receivables (6,965) (520,970) Inventories (35,328) (166,235) Prepaid expenses and other assets 16,677 28,241 Income taxes refund receivable 122,469 10,561 (Decrease) increase in: Accounts payable (52,485) 19,673 Accrued expenses 206,557 57,421 Income taxes payable 126,766 0 ----------- ----------- Net cash provided by operating activities 1,400,756 249,117 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (244,573) (250,366) Proceeds on sale of property and equipment 5,500 47,250 Purchase of intangibles (60,454) (123,439) Purchases of marketable securities (83,980) (9,645) Proceeds from sale of marketable securities 106,438 0 ----------- ----------- Net cash used in investing activities (277,069) (336,200) CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of company stock 0 (72,489) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,123,687 (159,572) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 384,107 543,679 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,507,794 $ 384,107 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid (refunded) for income taxes $ (126,514) $ (5,472) =========== =========== Cash paid for interest $ 0 $ 503 =========== ===========
See notes to financial statements. 16 IKONICS CORPORATION NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2003 AND 2002 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business - 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 include textiles, billboards, electronics, glassware, fine china, and many other industrial and commercial applications. The Company's principal markets are throughout the United States. In addition, the Company sells to Western Europe, Latin America, Asia, and other parts of the world. The Company extends credit to its customers, all on an unsecured basis, on terms that it establishes for individual customers. Fifty-three percent and forty-four percent, respectively, of the Company's accounts receivable at December 31, 2003 and 2002 are due from foreign customers. The foreign receivables are composed primarily of open credit arrangements with terms ranging from 45 to 90 days. No receivable from a single customer exceeded 10% of total receivables at December 31, 2003 or December 31, 2002. No single customer represented greater than 10% of total revenue in 2003. One customer accounted for 17.6% of total receivables at December 31, 2002. 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 putable variable rate municipal bonds backed by a letter of credit and money market funds in which carrying value of both instruments approximates market value because of the short maturity of these instruments. Marketable Securities - Marketable securities are classified as available-for-sale securities and consist primarily of municipal revenue bonds that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, or changes in the availability or yield of alternative investments. These securities are carried at fair market value with changes in fair value recorded in comprehensive income. The majority of these municipal bonds have been in a continuous loss position for over 12 months. The fair value of municipal bonds that have been in continuous loss for 12 months or more at December 31, 2003 is $116,840 with unrealized losses of $13,022. The fair value of municipal bonds that have been in continuous loss for less than 12 months at December 31, 2003 is $56,920 with unrealized losses of $1,337. The unrealized losses are generally due to changes in interest rates, and as such, are considered to be temporary, by the Company. 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. 17 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 $264,000 and $224,000 higher than reported at December 31, 2003 and 2002, respectively. The major components of inventories are as follows:
2003 2002 Raw materials $ 928,949 $ 735,006 Work-in-progress 231,269 257,813 Finished goods 911,419 1,003,342 Reduction to LIFO cost (264,404) (224,256) ------------- ------------- Total inventories $ 1,807,233 $ 1,771,905 ============= =============
Depreciation - Depreciation of property 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 5-10 Vehicles 3
Intangibles Assets - Intangible assets consist primarily of patents, licenses and covenants not to compete arising from business combinations. Intangible assets are amortized on a straight-line basis over their estimated useful lives or terms of their agreement. Other Assets - Other assets consist of a $112,834 equity investment in Apprise Technologies, Inc. This investment is accounted for on the cost method. During the second quarter of 2003, the Company wrote down the value of its investment in Apprise Technologies, Inc. by $74,666. The latest issuance price for shares of Apprise was below the value carried on the Company's books. One of the Company's directors is the CEO of Apprise Technologies, Inc. Impairment of Long-Lived Assets - Management periodically reviews the carrying value of long-term assets for potential impairment by comparing the carrying value of these assets to the estimated undiscounted future cash flows expected to result from the use of these assets. Should the sum of the related, expected future net cash flows be less than the carrying value, an impairment loss would be measured. An impairment loss would be measured by the amount by which the carrying value of the asset exceeds the fair value of the asset with fair value being determined using discounted cash flows. To date, management has determined that no impairment of these assets exists. Revenue Recognition - The Company recognizes revenue on products when title passes, which is usually upon shipment. Freight billed to customers is included in sales. Shipping costs are included in cost of goods sold. Deferred Taxes - Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences. Operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. 18 Comprehensive Income - The Company's comprehensive income consists of net income and unrealized gains and losses on marketable securities, net of taxes. Earnings Per Common Share (EPS) - Basic EPS is calculated using net income divided by the weighted average of common shares outstanding during the year. Diluted EPS is similar to Basic except that the weighted average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares, such as options, had been issued. Shares used in the calculation of diluted EPS are summarized below:
2003 2002 Weighted average common shares outstanding 1,248,127 1,252,020 Dilutive effect of stock options 15,277 789 --------- --------- Weighted average common and common equivalent shares outstanding 1,263,404 1,252,809 ========= =========
Options to purchase 168,108 and 150,029 shares of common stock were outstanding as of the years ended December 31, 2003 and 2002, respectively. Employee Stock Plan - The Company has a stock-based compensation plan, which is described more fully in Note 7. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based employee compensation cost has been recognized, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share had compensation cost been determined based on the grant date fair values of awards (the method described in FASB Statement No. 123, Accounting for Stock-Based Compensation):
Years Ended December 31, -------------------------------- 2003 2002 Net income: As reported $ 503,416 $ 359,817 Deduct total stock-based employee compensation expense determined under fair value based method for all awards 79,377 110,365 ----------- ----------- Pro forma $ 424,039 $ 249,452 ----------- ----------- Basic earnings per share: As reported $ 0.40 $ 0.29 Pro forma $ 0.34 $ 0.20 Diluted earnings per share: As reported $ 0.40 $ 0.29 Pro forma $ 0.34 $ 0.20
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. 19 Foreign Operations - The Company markets in Europe, Latin America, Asia, and other parts of the world. Foreign sales approximated 32% total sales in 2003 and 2002. Line of Credit - The Company has a $1,250,000 bank line of credit that provides for working capital financing. This line of credit is subject to annual renewal on each May 1, is collateralized by trade receivables and inventory, and bears interest at 2.25% points over 30-day LIBOR. There was no outstanding balance at December 31, 2003 and 2002. Accounting Pronouncements - In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (FAS 149). FAS 149 amends and clarifies financial accounting and reporting for derivative instruments including certain derivative instruments embedded in other contracts and for hedging activities under FAS 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this statement did not have a material impact on the Company's financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (FAS 150). FAS 150 clarifies the accounting for certain financial instruments and characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of these financial instruments were classified as equity. FAS 150 is effective for all financial instruments entered into or modified after May 31, 2003 and is otherwise effective at the beginning of the first interim period after June 15, 2003. The adoption of this statement did not have a material impact on the Company's financial statements. 2. STOCKHOLDERS' EQUITY During the year ended December 31, 2002, the Company repurchased 23,500 shares of its common stock for $72,489, which shares now constitute authorized but unissued shares. The Company did not repurchase any shares during the year ended December 31, 2003. 20 3. INCOME TAXES Income tax expense for the years ended December 31, 2003 and 2002 consists of the following:
2003 2002 Current: Federal $ 100,000 $ 10,000 State 23,000 10,000 ----------- ----------- 123,000 20,000 Deferred 6,000 81,000 ----------- ----------- $ 129,000 $ 101,000 =========== ===========
The expected provision for income taxes, computed by applying the U.S. federal income tax rate of 35% to income before taxes, is reconciled to income tax expense as follows:
2003 2002 Expected provision for federal income taxes $ 221,200 $ 161,200 State income taxes, net of federal benefit 13,700 10,100 Extraterritorial income exclusion (127,800) (78,800) Meals and entertainment 10,200 13,600 Tax-exempt interest (3,500) (3,900) R&D Credit (7,600) (9,000) Apprise valuation allowance 28,000 0 Other (5,200) 7,800 ----------- ----------- $ 129,000 $ 101,000 =========== ===========
Deferred tax assets consist of the following as of December 31, 2003 and 2002:
2003 2002 Property and equipment and other assets $ 35,000 $ 61,000 Accrued vacation 16,000 27,000 Other accrued expenses 57,000 0 Inventories 36,000 12,000 Allowance for doubtful accounts 36,000 36,000 Allowance for sales returns 7,000 7,000 Intangible assets 31,000 57,000 Capital loss carryforward 46,000 20,000 ----------- ----------- 264,000 220,000 Less valuation allowance (46,000) (20,000) ----------- ----------- 218,000 200,000 Deferred tax liabilities: Prepaid expenses 24,000 0 ----------- ----------- $ 194,000 $ 200,000 =========== ===========
The components giving rise to the net deferred tax assets described above have been included in the accompanying balance sheet as of December 31, 2003 and 2002 as follows: Current assets $ 128,000 $ 82,000 Noncurrent assets 66,000 118,000 ----------- ----------- $ 194,000 $ 200,000 =========== ===========
The noncurrent deferred tax assets are net of the valuation allowance. The Company increased its valuation allowance by $26,000 during 2003 because of the additional capital loss carryforward which may not be utilized. 21 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. Intangible assets at December 31, 2003 and 2002 consist of the following:
December 31, 2003 December 31, 2002 ----------------- ----------------- Gross Carrying Accumulated Gross Carrying Accumulated Amount Amortization Amount Amortization Amortized intangible assets: Patents $193,171 $(51,197) $132,717 $(41,800) Licenses 100,000 (10,625) 100,000 (2,500) Non-compete agreement 100,000 (23,332) 100,000 (16,666) -------- -------- -------- -------- $393,171 $(85,154) $332,717 $(60,966) ======== ======== ======== ========
Net intangible assets as December 31, 2003 and 2002 are $308,017 and $271,751, respectively.
2003 2002 ---- ---- Aggregate amortization expense: For the year ended December 31 $ 24,188 $ 18,178 Estimated amortization expense: For the year ended December 31, 2004 $ 28,400 For the year ended December 31, 2005 28,400 For the year ended December 31, 2006 28,400 For the year ended December 31, 2007 28,400 For the year ended December 31, 2008 28,400
In connection with the license agreements, the Company has agreed to pay royalties ranging from 3% to 5% on the future sales of products subject to the agreements. 5. PENSION PLAN The Company has established a salary deferral plan under Section 401(k) of the Internal Revenue Code. The plan allows eligible employees to defer up to 15% of their compensation. Such deferrals accumulate on a tax-deferred basis until the employee withdraws the funds. The Company contributes 5% of each eligible employee's compensation. Total pension expense for the years ended December 31, 2003 and 2002 was approximately $138,000 and $145,000, respectively. 6. GEOGRAPHIC INFORMATION The Company manages and operates its business on the basis of one reportable segment. See Note 1 for a brief description of the Company's business. As of December 31, 2003, the Company had operations established in various countries throughout the world. The Company is exposed to the risk of changes in social, political, and economic conditions inherent in foreign operations, and the Company's results of operations are affected by fluctuations in foreign currency exchange rates. No single foreign country accounted for more than 10% of the Company's net sales for 2003 and 2002. Net sales by geographic area are presented by attributing revenues from external customers on the basis of where the products are sold. 22
2003 2002 Net sales by geographic area: United States $ 8,190,798 $ 8,045,967 International 3,914,329 3,751,312 -------------- --------------- $ 12,105,127 $ 11,797,279 ============== ===============
7. STOCK OPTIONS During 1995, the Company adopted a stock incentive plan for the issuance of up to 38,500 shares of common stock. In 1999, the Company increased the number of shares reserved for issuance under this plan to 203,500 shares. The plan provides for granting eligible participants stock options or other stock awards, as described by the plan, at option prices ranging from 85% to 110% of fair market value at date of grant. Options granted expire up to seven years after the date of grant. Such options generally become exercisable over a one- to three-year period.
2003 2002 Dividend yield 0.0% 0.0% Expected volatility 73.5% 72.5% Expected life of option five years five years Risk-free interest rate 3.0% 4.4% Fair value of each option on grant date $ 2.61 $ 2.00
23 A summary of the status of the Company's stock option plan as of December 31, 2003 and 2002 and changes during the years ending on those dates is presented below:
2003 2002 ----------------------- --------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price Outstanding at beginning of year 150,029 $5.93 142.920 $6.20 Granted 33,579 4.30 26,079 3.17 Exercised 0 0 Expired and forfeited (15,500) 5.74 (18,970) 4.14 ------- ------- Outstanding at end of year 168,108 5.50 150,029 5.93 ======= =======
The following table summarizes information about stock options outstanding at December 31, 2003:
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 2003 Life Price 2003 Price $3.00 - 3.99 23,579 3.42 $3.18 15,355 $3.21 4.00 - 4.99 65,204 3.00 4.40 42,279 4.48 5.00 - 5.99 16,975 3.00 5.08 9,141 5.10 6.00 - 6.99 26,000 1.32 6.56 26,000 6.56 7.00 - 7.99 5,000 1.32 7.22 5,000 7.22 8.00 - 8.99 18,150 2.32 8.18 18,150 8.18 9.00 - 9.99 13,200 1.80 9.15 13,200 9.15 ------- ------- 168,108 3.36 5.50 129,125 5.90 ======= =======
8. CONCENTRATION OF CREDIT RISK The Company maintains its cash balances primarily in one financial institution. As of December 31, 2003, the balance exceeded the Federal Deposit Insurance Corporation coverage. The Company reduces its exposure to credit risk by maintaining such balances with financial institutions that have high credit ratings. Accounts receivable are financial instruments that also expose the Company to concentration of credit risk. The large number of customers comprising the Company's customer base and their dispersion across different geographic areas limits such exposure. In addition, the Company routinely assesses the financial strength of its customers and maintains an allowance for doubtful accounts that management believes will adequately provide for credit losses. Concentration of credit risk with respect to trade receivables is not significant. No one customer accounts for more than 10% of total receivables as of December 31, 2003. 9. LEASE COMMITMENTS As of December 31, 2003, the Company was obligated under non-cancelable operating lease agreements for certain equipment and a building. Future minimum lease payments for non-cancelable operating leases with initial or remaining terms in excess of one year are as follows: 24 2004 $41,028 2005 $20,012 2006 $ 3,261
The Company also leases buildings on a month-to-month basis. Total rental expense for all equipment and building operating leases was $54,729 in 2003 and $77,040 in 2002. 10. CONTINGENCIES The Company has entered into licensing agreements which require it to make royalty payments on sales of certain products. Royalty payments range from 3% to 5% of net sales on these products. The Company incurred $107,444 of expense under these agreements during 2003, as compared to $119,792 during 2002. The Company has identified the probable under payment of sales tax. Accordingly, the Company accrued $160,000 for the future payment of the unpaid sales taxes. 25 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 8A. CONTROLS AND PROCEDURES As of the end of the period covered by this report, the Company conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of the Company's disclosure control and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. 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. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information included in the Company's definitive proxy statement for the 2004 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 saisfy 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 2004 Annual Meeting of Shareholders under the captions "Election of Directors -- Director Compensation," "Summary Compensation Table," "Option Grants in Last Fiscal Year," "Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values" and "Employment Contracts; Termination of Employment and Change-In-Control Arrangements" is incorporated by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information included in the Company's definitive proxy statement for the 2004 Annual Meeting of Shareholders under the captions "Security Ownership of Principal Shareholders and Management" and "Equity Compensation Plan Information is incorporated by reference in response to this Item 11. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information included in the Company's definitive proxy statement for the 2004 Annual Meeting of Shareholders under the caption "Certain Relationships and Related Transactions" is incorporated by reference. 26 ITEM 13. EXHIBITS, AND REPORTS ON FORM 8-K (a) The following exhibits are filed as part of this Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003:
Exhibit Description ------- ----------- 3.1 Restated Articles of Incorporation of Company, as amended. (Incorporated by reference to the like numbered Exhibit to the Company's Registration Statement on Form 10-SB filed with the Commission on April 7, 1999 (Registration No. 000-25727).) 3.2 By-Laws of the Company, as amended. (Incorporated by reference to the like numbered Exhibit to the Company's Registration Statement on Form 10-SB filed with the Commission on April 7, 1999 (Registration No. 000-25727).) 4 Specimen of Common Stock Certificate. (Incorporated by reference to the like numbered Exhibit to Amendment No. 1 to the Company's Registration Statement on Form 10-SB filed with the Commission on May 26, 1999 (Registration No. 000-25727).) 10.1 IKONICS Corporation 1995 Stock Incentive Plan, as amended. (Incorporated by reference to the like numbered Exhibit to the Company's Registration Statement on Form 10-SB filed with the Commission on April 7, 1999 (Registration No. 000-25727).) 10.5 Revolving Credit Agreement dated April 30, 1999 between the Company and M&I Bank. (Incorporated by reference to the like numbered Exhibit to Amendment No. 1 to the Company's Registration Statement on Form 10-SB filed with the Commission on May 26, 1999 (Registration No. 000-25727).) 14 Code of Ethics. 23 Consent of McGladrey & Pullen LLP. 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.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed during the quarter ended December 31, 2003: On November 4, 2003, the Company filed a Current Report on Form 8-K including a press release announcing the Company's financial results for the three and nine months ended September 30, 2003. ITEM 14. PRINCIPAL ACCOUNT FEES AND SERVICES The information included in the Company's definitive proxy statement for the 2004 Annual Meeting of Shareholders under the caption "Audit and Non-Audit Fees" is incorporated by reference. 27 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 29, 2004. 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 29, 2004. /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 28 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............................................................ Filed Electronically 23 Consent of McGladrey & Pullen LLP........................................ 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