IKONICS Corporation Annual Report 2002

FY2002 Annual Report · IKONICS Corporation

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Our Business

Derived from the Greek word eikon, or image, the funda-
mental business of the IKONICS Corporation is the creation
and transfer of physical and visual images. Through
processes based in photochemistry, abrasive etching, inkjet
printing, chemical etching and other technologies, IKONICS
participates in a diverse spectrum of markets. From tradi-
tional and high-tech screen printing, to decorative and
industrial etching and imaging, IKONICS Corporation con-
ducts business in over 60 countries.

Through its three commercial divisions, IKONICS
approaches its respective markets with global perspective
and a focus on emerging markets.

This anticipatory perspective is illustrated in the
growth and development of IKONICS' PhotoBrasive Systems
Division. Launched in 1985, PhotoBrasive Systems leads
the awards and recogni-
tion market in abrasive
etching technology, prod-
uct development and
sales. Having gained dom-
inance within its primary
markets,
PhotoBrasive
Systems is now working to
penetrate new markets
with its unique technolo-
gy. Product and market
advancement are assisted
by cooperative agreements
with the DuPont Corporation and the Aicello Corporation of
Japan.

Abrasive etching can be used to decorate
a wide variety of objects ranging from
small items such as awards and giftware
to large walls and monuments.

Chromaline Screen Print Products is IKONICS' largest
and oldest division. Serving the screen printing industry
since 1952, first as Chroma-Glo, then as The Chromaline

Corporation, the Chromaline
brand is recognized as a world
leader in the development and
sale of screen stencil supplies.
Leveraging the strength of the
in the
Chromaline brand
screen print market allows
IKONICS to introduce new
products, new technologies
and new ways of selling into
Screen printing is used for a diverse
this market. In 2002 this
base of applications such as textile,
strategy resulted in the suc-
industrial and graphics printing.
cessful introduction of the
Photo courtesy of TEC Graphics Inc.,
AccuArt family of inkjet-able
Neenah, WI.
substrates to the screen print and other printing markets.
The AccuArt and AccuBlack products have gained recogni-
tion as the highest quality products available, while
AccuMark is a value leader. These products place
Chomaline Screen Print Products in a leadership position in
the industry trend toward digital printing.

The goal of the SplitRock Technologies Division is to

develop a suite of IKONICS’
patentable technologies to
industries where they offer
unique solutions to imaging
process problems. A special
focus is the application of
IKONICS technology to the
imaging and etching of met-
als. SplitRock Technologies
represents potential growth into major new markets
through the creative application of core technical
strengths.

A new avenue for IKONICS technolo-
gy is in the imaging and etching of
metals.

IKONICS serves a wide
variety of imaging markets
through three separate
commercial divisions:
Chromaline Screen Print
Products - Photostencil
products and inkjet media
for professional screen
printers.

PhotoBrasive Systems -
Photo resist films, equip-
ment and supplies for
commercial and industrial
abrasive etching.
SplitRock Technologies -
Unique imaging technologies
for new markets.

2002 ANNUAL REPORT

IKONICS CORPORATION

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Letter to the Shareholders

films. Our AccuArt and AccuBlack films are
recognized as leadership products for the
printing of high contrast waterproof images,
photopositives and photonegatives. These
films are now joined by AccuMark, which
meets the demands of the more price-sensitive
user. In 2003 we will be offering multiple for-
mats and prompt delivery of these films.

Through our SplitRock Technologies
Division we are actively exploring new markets
for our technologies, particularly in the metal
engraving industry. We believe that the key
technologies are patentable, and see signifi-
cant market potential particularly in the sig-
nage and die-making industry where this
technology is unique and, we believe, may
offer substantial benefits over the existing
methods.

On a geographical basis, we see expanded
sales for all our products in Asia and are plan-
ning to open a training center in Singapore in
the second quarter.

While we are positioning for growth in
2003, the experience of the past two years has
made us a leaner and more cost-conscious
company. This attention to cost will continue,
ensuring that increased revenues get to the
bottom line.

For the Board of Directors,

William C. Ulland
Chairman, President and CEO
March 7, 2003

The year 2002 marked a return to growth and
profitability for the company. For the year,
sales were a record $11,797,279, a 10%
increase over 2001. Earnings were $359,817 or
$.29 per share compared to a loss of $.16 per
share in 2001. This growth was led by an
increase in sales to Asia and through our
PhotoBrasive Systems division.

Equally important as the financial per-
formance is the foundation that was laid for
future growth. In December, we changed our
name to IKONICS Corporation. This reflects
the expansion from our traditional base in the
screen printing
the
Chromaline brand commands a strong posi-
tion, into other markets where we are or can
become technology and industry leaders.

industry, where

To date, our other primary market has
been abrasive etching, served by our
PhotoBrasive Systems Division. In 2000 and
2001 this division was severely hurt by the
effects of a patent infringement suit with the
Aicello Corporation of Japan. Although the
suit was settled in January of 2001, it was not
until 2002 that we regained market leader-
ship. Our future in this industry has been
strengthened by a recent technology agree-
ment with DuPont Corporation. This agree-
ment gives IKONICS the exclusive worldwide
right to manufacture, use and sell Dupont's
RapidMask™ photoresist film in the abrasive
etching market. We have distributed
RapidMask since February of 2000, and believe
that with some product improvements and a
lowering of cost, it could become the premier
product in this market as well as a means to
expand the market. With the assistance of
DuPont, we have begun to reformulate
RapidMask and I am very optimistic that we
will achieve our goal of product improvement.
The cost objective has already been substan-
tially met.

In our traditional screen printing market,
the Chromaline Screen Print Products Division
of IKONICS is planning for significant growth,
led by our AccuArt™ Family of inkjet receptive

Bill Ulland
Chairman, President
and CEO

Table of Contents
2

Our Business

Letter to
Shareholders

4-7 Management
Discussion &
Analysis

Management Report/
Independent
Auditors’ Report

Balance Sheets

Statements of
Operations /
Stockholders’ Equity

Statements of Cash
Flows

12-16 Notes to Financial
Statements

5 Year History/
Stock & Counsel
Information

Board of Directors &
Officers

Our Global Markets

IKONICS CORPORATION

2002 ANNUAL REPORT

Financial Results

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 con-
dition during 2002 and 2001 and should be read in con-
nection with the Company's audited financial statements
and notes thereto for the years ended December 31, 2002
and 2001.

Factors that May Affect Future Results
Certain statements made in this Annual Report on Form 10-
KSB, including those summarized below, are forward-look-
ing statements within the meaning of the safe harbor pro-
visions of Section 21E of the Securities Exchange Act of
1934, as amended, that involve risks and uncertainties, and
actual results may differ. Factors that could cause actual
results to differ include those identified below.

• The belief that the Company's current financial
resources, cash generated from operations and the
Company's capacity for debt and/or equity financing will
be sufficient to fund current and anticipated business
operations and capital expenditures. The belief that the
Company's low debt levels and available line of credit
make it unlikely that a decrease in product demand
would impair the Company's ability to fund operations-
Changes in anticipated operating results, credit availability,
equity market conditions or the Company's debt levels may
further enhance or inhibit the Company's ability to main-
tain or raise appropriate levels of cash.

• The Company's expectation that capital expenditures
in 2003 will be funded with cash generated from oper-
ating activities—This expectation may be affected by
changes in the Company's anticipated capital expenditure
requirements resulting from unforeseen required mainte -
nance or repairs. The funding of planned or unforeseen
expenditures may also be affected by changes in anticipat-
ed 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 invest-
ments— These plans and expectations may be impacted by

general market conditions, unanticipated changes in
expenses or sales, delays in the development of new prod-
ucts, technological advances, the ability to find suitable
and willing technology partners or other changes in com-
petitive or market conditions.

• The Company's efforts to grow its international busi-
ness—These efforts may be impacted by economic, politi-
cal and social conditions in current and anticipated foreign
markets, regulatory conditions in such markets, unantici-
pated 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 opportuni-
ties.

Critical Accounting Policies
The Company prepares the financial statements in con-
formity with accounting principles generally accepted in
the United States of America. Therefore, the Company is
required to make certain estimates, judgments and assump-
tions that the Company believes are reasonable based upon
the information available. These estimates and assump-
tions 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 pre-
sented. The accounting policies, which IKONICS believes
are the most critical to aid in fully understanding and eval-
uating 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 histori-
cal experience and any specific customer collection issues
that have been identified. While such credit losses have
historically been within expectations and the provisions
established, the Company cannot guarantee that it will
continue to experience the same collection history that has
occurred in the past. The general payment terms are net
30-45 days for domestic customers and net 60-90 days for
foreign customers. The concentration of credit risk is not
significant except for a receivable from one of the
Company's larger customers, which accounted for 17.6% of
total receivables as of December 31, 2002.

Inventory - Inventories are valued at the lower rate of
cost or market value. The Company monitors its inventory

2002 ANNUAL REPORT

IKONICS CORPORATION

for obsolescence and records reductions in cost when
required.

Deferred Tax Assets - At December 31, 2002, the
Company had approximately $200,000 of deferred tax
assets. The deferred tax assets result primarily due to tim-
ing differences in intangible assets and property and equip-
ment. The Company has recorded a $20,000 valuation
allowance to reserve for items that will more likely than not
be realized. The Company has determined that it is more
likely than not that the remaining deferred tax assets will
be realized and that an additional valuation allowance for
such assets is not currently required.

Revenue Recognition - The Company recognizes revenue
on products when title passes, which is usually upon ship-
ment. Freight billed to customers is included in sales.
Shipping costs are included in cost of goods sold.

Results of Operations
Year Ended December 31, 2002 Compared to Year Ended
December 31, 2001.

Sales - The Company's net sales increased 9.7% to $11.8
million in 2002, compared to net sales of $10.8 million in
2001. Sales in the United States increased 6.7% to $8.0
million in 2002, from $7.5 million in 2001. Sales in the
United States improved somewhat from the weakness in
2001 that reflected the continuing domestic economic
recession. International sales increased 15.2% to $3.8 mil-
lion from $3.3 million in 2001. Sales to India and China
increased in 2002 as compared to 2001.

Cost of Goods Sold - Cost of goods sold was $6.8 million,
or 57.7% of sales, in 2002 and $6.2 million, or 57.8% of
sales, in 2001. The increase in cost of goods sold was due
to a shift in the Company's product mix related to equip-
ment and glass sales. The increase in cost of goods sold
also reflects higher raw material costs, specifically for mylar
and resins, as a result of volatile world petroleum prices.

Selling, General and Administrative Expenses - Selling,
general and administrative expenses decreased to $3.8 mil-
lion, or 32.5% of sales, in 2002 from $4.1 million, or 38.0%
of sales, in 2001. The reduction was due in part to the
December 2001 expensing of the remaining $197,000 of
goodwill associated with the June 2000 acquisition of
Nichols & Associates, due to its impairment. In addition,
expenses were lower in 2002 due to headcount reductions
and lower legal fees.

Research and Development Expenses - Research and
development expenses were $706,000, or 6.0% of sales, in
2002 compared to $793,000, or 7.4% of sales, in 2001. The
reduction was due to lower production trial costs and lower
costs for lab supplies partially offset by higher payroll relat-
ed costs as headcount remained steady.

Financial Results

Interest Expense - The Company incurred minimal interest
expense on a $150,000 loan drawn from its revolving cred-
it facility on June 20, 2002. This draw funded a $125,000
royalty payment to The Aicello Corporation, which was the
second of two royalty payments required under a license
agreement entered into with Aicello in January 2001. This
loan draw was completely repaid in July 2002.

Interest Income - Interest income decreased to $13,000 in
2002, compared to $35,000 for 2001. The decrease was due
to the sale, in late 2001, of higher income, higher risk pre-
ferred corporate bonds and the purchase of certain general
revenue obligation bonds of a number of Minnesota munic-
ipalities.

Income Taxes - An income tax expense of $101,000 was
recorded for 2002, for an effective rate of 21.9%, compared
to an income tax benefit of $92,000, for an effective rate
of 30.9%, for 2001. The difference in the effective rate is
due to permanent differences for allowable tax deductions,
including an extraterritorial income exclusion.

Liquidity and Capital Resources
The Company has financed its operations principally with
funds generated from operations. These funds have been
sufficient to cover the Company's normal operating expen-
ditures, annual capital requirements and research and
development expenditures.

Cash and cash equivalents were $384,000 and $544,000
at December 31, 2002 and December 31, 2001, respective-
ly. The Company generated $249,000 in cash from operat-
ing activities during 2002 and $356,000 during 2001. Cash
generated from operating activities is primarily provided by
net income or loss, as adjusted for various non cash items
including deferred taxes and depreciation. Trade receiv-
ables in 2002 increased $461,000, net of the allowance for
doubtful accounts, reflecting substantially higher domestic
sales to the abrasive etching market and higher sales to
India and China, which carry longer terms of sale. Prepaid
expenses decreased $28,000 in 2002. Inventories increased
$166,000 during 2002, reflecting higher raw material levels
and increased inventories of AccuArt film. Income tax
refund receivable decreased $11,000 in 2002. Accounts
payable increased $20,000 during 2002. Accrued expenses
increased $57,000 in 2002, reflecting payroll related obli-
gations. During 2001, the Company had a non-cash charge
of $197,000 for the write-off of goodwill associated with
the Nichols acquisition that was deemed to be impaired.
During 2001, trade receivables decreased by $166,000,
reflecting an increased effort to reduce the number of days
that sales are outstanding. Prepaid expenses in 2001
decreased by a moderate $10,000. Inventories increased by
$80,000 during 2001 reflecting new product launches for

IKONICS CORPORATION

2002 ANNUAL REPORT

Financial Results

the AccuArt film line and the U.V. Minder measuring
devices. For 2001, the Company experienced an income tax
benefit reflecting its operating loss for the year. While the
Company received an income tax refund for 2001, it was
lower than the refund received in 2000, as reflected in the
$98,000 decrease in the Company's income tax receivable.
Accounts payable decreased by $62,000 in 2001, reflecting
normal variations in spending patterns. Accrued expenses
decreased by $23,000 in 2001, reflecting lower payroll and
fringe benefit requirements and legal fees.

The Company used $336,000 and provided $116,000 in
cash from investing activities during 2002 and 2001,
respectively. Net cash used for investing activities was uti-
lized, in part, for plant and equipment. In addition, the
Company replaced its business software in 2002. These
expenditures amounted to $250,000 and $259,000 in 2002
and 2001, respectively. In addition, the Company sold a
number of its vehicles to reduce operating costs and gener-
ated $47,000 in proceeds from such sales. During 2002, the
Company purchased a license to film technology applicable
to its abrasive etching business for $50,000. In addition,
the Company purchased, for $50,000, a license to produce,
market and sell RapidMask film, also for the abrasive etch-
ing market. The Company also incurred costs of $23,000
related to the patent applications covering a number of its
technologies. During the first quarter of 2001, the
Company sold a portion of its securities holdings to fund
the $150,000 royalty payment to Aicello and an additional
investment of $75,000 in Apprise Technologies. Among
other activities, Apprise is conducting research in ultravio-
let light technology that complements the markets served
by the Company. The Company's total interest in Apprise
would amount to approximately 6.4% equity ownership of
that company if all warrants were exercised. During the
fourth quarter of 2001, the Company sold its preferred
security stock holdings and purchased general revenue obli-
gation bonds in certain municipalities and school districts.
During 2001, the Company used $609,000 in cash for the
purchase of marketable securities and generated $1.0 mil-
lion in cash from the sale of marketable securities. Any
unrealized gains or losses are included in other compre-
hensive income.

The Company used $73,000 in cash during 2002 for the
repurchase of 23,500 shares of its outstanding common
stock under its stock repurchase program. No shares were
repurchased during 2001.

A bank line of credit exists providing for borrowings of
up to $1,250,000. Outstanding debt under this line of cred-
it is collateralized by accounts receivable and inventory and
bears interest at 2.25 percentage points over the 30 day
LIBOR rate. The Company has not utilized this line of cred-
it to a material extent and there was no debt outstanding

under this line as of December 31, 2002 or 2001.

The Company believes that current financial resources,
cash generated from operations and the Company's capaci-
ty for debt and/or equity financing will be sufficient to
fund current and anticipated business operations. The
Company also believes that its low debt levels and available
line of credit make it unlikely that a decrease in demand
for the Company's products would impair the Company's
ability to fund operations.

Capital Expenditures
The Company spent $250,000 on capital expenditures dur-
ing 2002. This spending included manufacturing equip-
ment upgrades to improve efficiency and reduce operating
costs, and new vehicles under its rotating replacement pol-
icy. The Company also replaced its business software in
order to improve internal reporting for decision-making
purposes and improve the efficiency of administrative and
manufacturing operations.

Commitments for capital expenditures include ongoing
manufacturing equipment upgrades, development equip-
ment to modernize the capabilities and processes of IKON-
ICS' laboratory, and research and development to improve
measurement and quality control processes. These com-
mitments are expected to be funded with cash generated
from operating activities.

International Activity
The Company markets its products to over 60 countries in
North America, Europe, Latin America, Asia and other parts
of the world. Foreign sales were approximately 31% and
30% of total sales during 2002 and 2001, respectively.
Foreign sales in 2002 reflected higher sales to India and
China. Fluctuations of certain foreign currencies have not
significantly impacted the Company's operations because
the Company's foreign sales are not concentrated in any
one region of the world. The Company believes its vulner-
ability 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 strat-
egy to reduce the risk of foreign currency translation expo-
sures, which management does not believe to be significant
based on the scope and geographic diversity of the
Company's foreign operations as of December 31, 2002.

Future Outlook
IKONICS has invested over 6% of its sales dollars for the
past several years in research and development. The
Company plans to maintain its efforts in this area and expe-

2002 ANNUAL REPORT

IKONICS CORPORATION

dite internal product development as well as form techno-
logical alliances with outside experts to ensure commer-
cialization of new product opportunities.

In addition to its traditional emphasis on domestic
markets, the Company will continue efforts to grow its busi-
ness internationally by attempting to develop new markets
and expanding market share where it has already estab-
lished a presence.

Other future activities undertaken to expand the
Company's business may include acquisitions, building
expansion and additions, equipment additions, new prod-
uct development and marketing opportunities.

Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 143, "Accounting for Asset Retirement
Obligations." The provisions of SFAS 143 apply to all enti-
ties that incur obligations associated with the retirement of
tangible long-lived assets. This statement is effective for
financial statements issued for fiscal years beginning after
June 15, 2002 and will become effective for the Company
commencing with our 2003 fiscal year. This accounting pro-
nouncement is not expected to have a significant impact
on our financial position or results of operations.

In April 2002, the FASB issued Statement of Financial
Accounting Standards No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS 145
rescinds and amends certain previous standards related pri-
marily to debt and leases. The most substantive amendment
requires sale-leaseback accounting for certain lease modifi-
cations that have economic effects that are similar to sale-
leaseback transactions. The provisions of SFAS 145 related
to the rescission of SFAS 4 are effective for financial state -
ments issued for fiscal years beginning after May 15, 2002
and will become effective for the Company commencing
with our 2003 fiscal year. The provisions of SFAS 145 relat-
ed to the rescission of SFAS 13 became effective for trans-
actions occurring after May 15, 2002. All other provisions
of SFAS 145 are effective for financial statements issued on
or after May 15, 2002. This accounting pronouncement is
not expected to have a significant impact on our financial
position or results of operations.

Financial Results

tive for exit or disposal activities that are initiated after
December 31, 2002. This accounting pronouncement is not
expected to have a significant impact on our financial posi-
tion or results of operations.

In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure."
SFAS 148 amends SFAS 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transi-
tion for an entity that voluntarily changes to the fair value
based method of accounting for stock-based compensation.
It also amends the disclosure provisions of that statement.
The disclosure provisions of this statement are effective for
the December 31, 2002 financial statements.

Market for Registrant’s Common Equity
and Related Stockholder Matters
The Company's Common Stock is traded on the Nasdaq
SmallCap Market under the symbol IKNX. The following
table sets forth, for the fiscal quarters indicated, the high
and low bid prices for the Company's Common Stock as
reported on both markets for the periods indicated. The
quotations reflect inter-dealer prices without retail mark-
up, mark-down or commission, and may not represent
actual transactions.

Fiscal Year Ended December 31, 2002:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Fiscal Year Ended December 31, 2001:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

High

$3.25
3.27
3.49
5.10

$5.25
5.00
4.20
3.80

Low

$2.95
3.00
2.85
3.25

$4.63
3.25
3.20
2.62

As of February 26, 2003, the Company had approxi-
mately 450 shareholders of record. The Company has never
declared or paid any dividends on its Common Stock.

MANAGEMENT’S REPORT
The financial statements of IKONICS Corporation have been
prepared by company management who are responsible for
their content. These statements have been prepared in
accordance with accounting principles generally accepted
in the United States of America and, where appropriate,
reflect estimates based on judgements of management.

IKONICS maintains a system of internal controls. Our
system provides reasonable assurance that assets are pro-
tected, transactions are appropriately reported, and estab-
lished procedures are followed.

The financial statements have been audited by Deloitte

IKONICS CORPORATION

2002 ANNUAL REPORT

To the Stockholders and Board of Directors of
IKONICS Corporation,
We have audited the accompanying balance sheet of IKON-
ICS Corporation (formerly The Chromaline Corporation) as
of December 31, 2002, and the related statements of oper-
ations, stockholders' equity and cash flows for the year
then ended. These financial statements are the responsi-
bility of the Company's management. Our responsibility is
to express an opinion on these financial statements based
on our audit.

We conducted our audit in accordance with auditing
standards generally accepted in the United States of
America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial state-
ments. An audit also includes assessing the accounting
principles used and significant estimates made by manage -
ment, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reason-
able basis for our opinion.

In our opinion, the 2002 financial statements referred
to above present fairly, in all material respects, the finan-
cial position of IKONICS Corporation as of December 31,
2002, and the results of its operations and its cash flows for
the year then ended in conformity with accounting princi-
ples generally accepted in the United States of America.

McGladrey & Pullen LLP
Duluth, Minnesota
January 30, 2003

Financial Results

& Touche LLP and McGladrey & Pullen LLP, independent
auditors.

The Audit Committee of the Board of Directors, com-
prised of outside directors, meets periodically with the
independent auditors and management to discuss the com-
pany’s internal accounting controls and financial reporting
matters. The independent auditors have unrestricted
access to the Audit Committee, without management pres-
ent, to discuss the results of their audit, the adequacy of
internal accounting controls, and the quality of financial
reports.

William C. Ulland
Chairman, President & CEO

Jeffery A. Laabs
Chief Financial Officer

INDEPENDENT AUDITORS’ REPORTS
To the Stockholders and Board of Directors of
IKONICS Corporation,
We have audited the accompanying balance sheet of IKON-
ICS Corporation (formerly The Chromaline Corporation) as
of December 31, 2001 and the related statements of opera-
tions, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to
express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with auditing
standards generally accepted in the United States of
America. Those standards require that we plan and perform
the audit to obtain reasonable assurance that the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles
used and significant estimates made by management, as
well as evaluating the overall financial statement presenta -
tion. We believe our audit provides a reasonable basis for
our opinion.

In our opinion, the 2001 financial statements referred
to above present fairly, in all material respects, the finan-
cial position of IKONICS Corporation as of December 31,
2001 and the results of its operations and its cash flows for
the years then ended, in conformity with accounting prin-
ciples generally accepted in the United States of America.

Deloitte & Touche LLP
Minneapolis, Minnesota
February 6, 2002

2002 ANNUAL REPORT

IKONICS CORPORATION

BALANCE SHEETS
December 31, 2002 and 2001

ASSETS
CURRENT ASSETS:

Financial Results

2002

2001

Cash and cash equivalents
Marketable securities
Trade receivables, less allowance for doubtful accounts of $100,000 in 2002 and 2001
Inventories
Prepaid expenses and other assets
Income tax refund receivable
Deferred taxes (Note 3)

Total current assets

PROPERTY, PLANT, AND EQUIPMENT, at cost:

Land and building
Machinery and equipment
Office equipment
Vehicles

Less accumulated depreciation

INTANGIBLE ASSETS (Note 4)

DEFERRED TAXES (Note 3)

OTHER ASSETS (Note 1)

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:

Accounts payable
Accrued compensation
Other accrued expenses

STOCKHOLDERS' EQUITY:

Total current liabilities

Preferred stock, par value $.10 per share; authorized 250,000 shares; issued none
Common stock, par value $.10 per share; authorized 4,750,000 shares;

issued and outstanding 1,248,127 shares-2002, 1,271,627 shares-2001

Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss

Total stockholders' equity

See notes to financial statements.

$ 384,107
246,094
1,933,769
1,771,905
89,937
122,469
82,000
4,630,281

1,355,588
2,231,478
1,144,564
167,102
4,898,732
3,694,105
1,204,627

271,751

118,000

187,500
$ 6,412,159

$ 317,229
204,624
23,643
545,496

124,813
1,269,489
4,483,895
(11,534)
5,866,663
$ 6,412,159

$ 543,679)
237,154)
1,472,982)
1,605,670)
118,178)
133,030)
68,000)
4,178,693)

1,355,588)
2,189,159)
1,036,077)
223,265)
4,804,089)
3,501,330)
1,302,759)

166,490)

213,000)

187,500)
$ 6,048,442)

$ 297,556)
143,338)
27,508)
468,402)

127,163)
1,293,460)
4,170,246)
(10,829)
5,580,040)
$6,048,442)

IKONICS CORPORATION

2002 ANNUAL REPORT

Financial Results

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001

NET SALES

COSTS AND EXPENSES:

Cost of goods sold
Selling, general, and administrative
Research and development

2002
$11,797,279

6,808,130
3,835,097
706,343
11,349,570

2001
$ 10,752,133)

6,209,505)
4,081,635)
793,484)
11,084,624)

INCOME (LOSS) FROM OPERATIONS

447,709

(332,491)

INTEREST INCOME

13,108

34,590)

INCOME (LOSS) BEFORE INCOME TAXES

460,817

(297,901)

FEDERAL AND STATE INCOME TAXES (BENEFIT) (Note 3)

NET INCOME (LOSS)

EARNINGS (LOSS) PER SHARE:

Basic
Diluted

WEIGHTED AVERAGE COMMON SHARES ASSUMED OUTSTANDING:

Basic
Diluted

STATEMENTS OF STOCKHOLDERS’ EQUITY

Common Stock

BALANCE AT DECEMBER 31, 2000

Net loss
Unrealized gain on available-for-sale investments
Total comprehensive income
BALANCE AT DECEMBER 31, 2001

Net income
Unrealized gain on available-for-sale investments
Total comprehensive income
Purchase and retirement of 23,500 shares
of common stock

BALANCE AT DECEMBER 31, 2002

See notes to financial statements.

101,000

359,817

$ 0.29
$ 0.29

1,252,020
1,252,809

(92,000)

$ (205,901)

$ (0.16)
$ (0.16)

1,271,627)
1,271,627)

Shares
1,271,627

Amount
127,163

Additional
Paid-in
Capital
1,293,460

Accumulated Other
Comprehensive
Income
(Loss)
(10,833)

Retained
Earnings
4,376,147
(205,901)

1,271,627

127,163

1,293,460

4,170,246
359,817

(10,829)

(705)

Total
Equity
5,785,937)
(205,901)
4)
(205,897)
5,580,040)
359,817)
(705)
359,112)

(23,500)
1,248,127

(2,350)
$124,163

(23,971) (46,168)
$1,269,489 $4,483,895

(72,489)
$(11,534) $5,866,663)

2002 ANNUAL REPORT

IKONICS CORPORATION

Financial Results

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002 AND 2001

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

2002

2001

$ 359,817

$(205,901)

Depreciation
Amortization
Write-off of goodwill
Gain on sale of property and equipment
Provision for doubtful accounts
Deferred income taxes
Changes in working capital components:

(Increase) decrease in:

Trade receivables
Inventories
Prepaid expenses and other assets
Income taxes refund receivable

(Decrease) increase in:
Accounts payable
Accrued expenses

Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment
Proceeds on sale of property and equipment
Purchase of intangibles
Purchases of marketable securities
Proceeds from sale of marketable securities
Purchase of investments

Net cash (used in)/provided by investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Repurchase of company stock

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION -

Cash paid (refunded) for income taxes

Cash paid for interest

See notes to financial statements.

314,364
18,178

(13,116)
60,183
81,000

(520,970)
(166,235)
28,241
10,561

19,673
57,421
249,117

(250,366)
47,250
(123,439)
(9,645)

(336,200)

(72,489)

(159,572)
543,679
$ 384,107

$ (5,472)

$ 503

366,367
15,678)
196,647)
(10,172)
121,690)
(117,000)

44,374)
(79,677)
10,191)
98,080)

(61,525)
(22,717)
356,035)

(259,230)
23,375)

(609,386)
1,036,392)
(75,000)
116,151)

472,186)
71,493)
$ 543,679)

$ 57,133)

IKONICS CORPORATION

2002 ANNUAL REPORT

Financial Results

NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 2002 and 2001

1. Summary of Significant Accounting Policies
Description of Business - IKONICS Corporation (the
Company), formerly The Chromaline Corporation, develops
and manufactures high-quality photochemical imaging sys-
tems for sale primarily to a wide range of printers and dec-
orators of surfaces. Customers' applications include tex-
tiles, 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 unse-
cured basis, on terms that it establishes for individual cus-
tomers.

Forty-four percent and forty percent, respectively, of
the Company's accounts receivable at December 31, 2002
and 2001 are due from foreign customers. The foreign
receivables are composed primarily of open credit arrange -
ments with terms ranging from 45 to 90 days. One cus-
tomer accounted for 17.6% of total receivables at December
31, 2002. No receivable from a single customer exceeded
10% of total receivables at December 31, 2001. No single
customer represented greater than 10% of total revenue in
2002 or 2001.

A summary of the Company's significant accounting

policies follows:

Cash Equivalents - The Company considers all highly liq-
uid debt instruments purchased with a maturity of three
months or less to be cash equivalents. Cash equivalents
consist of money market funds in which carrying value
approximates market value because of the short maturity
of these instruments.

Marketable Securities - Marketable securities are classified
as available-for-sale securities and consist primarily of
municipal revenue bonds that will be held for indefinite
periods of time, including securities that may be sold in
response to changes in market interest or prepayment
rates, needs for liquidity, or changes in the availability or
yield of alternative investments. These securities are car-
ried at fair market value with changes in fair value record-
ed in comprehensive income.

Trade Receivables - Trade receivables are carried at origi-
nal invoice amount less an estimate made for doubtful
receivables based on a review of all outstanding amounts on
a monthly basis. Management determines the allowance for
doubtful accounts by regularly evaluating individual cus-
tomer receivables and considering a customer's financial

condition, credit history, and current economic conditions.
Trade receivables are written off when deemed uncol-
lectible. Recoveries of trade receivables previously written
off are recorded when received. Accounts are considered
past due if payment is not received according to agreed-
upon terms.

Inventories - Inventories are stated at the lower of cost or
market using the last-in, first-out (LIFO) method. If the
first-in, first-out cost method had been used, inventories
would have been approximately $224,000 and $212,000
higher than reported at December 31, 2002 and 2001,
respectively. The major components of inventory are as fol-
lows:

Raw materials
Work-in-progress
Finished goods
Reduction to LIFO cost
Total inventory

2002
$ 735,006
257,813
1,003,342
(224,256)
$ 1,771,905

2001
$ 638,424
236,493
942,301
(211,548)
$ 1,605,670

Depreciation - Depreciation of property and equipment is
computed using the straight-line method over the follow-
ing estimated useful lives:

Building
Machinery and equipment
Office equipment
Vehicles

Years
25
5
5
3

Intangibles Assets - Intangible assets consist primarily of
patents, licenses and covenants not to compete arising
from business combinations. Intangible assets are amor-
tized on a straight-line basis over their estimated useful
lives or terms of their agreement.

Other Assets - Other assets consist of a $187,500 equity
investment in Apprise Technologies, Inc. This investment
is accounted for on the cost method. One of the Company's
directors is the CEO of Apprise Technologies, Inc.

Impairment of Long-Lived Assets - Management periodi-
cally 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 meas-
ured by the amount by which the carrying value of the
asset exceeds the fair value of the asset with fair value
being determined using discounted cash flows. To date,
other than the goodwill impairment discussed in Note 4,

2002 ANNUAL REPORT

IKONICS CORPORATION

management has determined that no other impairment of
these assets exists.

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 recog-
nized for taxable temporary differences. Temporary differ-
ences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of
enactment.

Comprehensive Income - The Company's comprehensive
income consists of net income and unrealized holding gains
and losses on marketable securities.

Earnings Per Common Share (EPS) - Basic EPS is calcu-
lated 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 com-
mon shares outstanding is increased to include the number
of additional common shares that would have been out-
standing if the dilutive potential common shares, such as
options, had been issued.

Shares used in the calculation of diluted EPS are sum-

marized below:

Weighted average common
shares outstanding

Dilutive effect of stock options
Weighted average common &

common equivalent shares
outstanding

2002

2001

1,252,020
789

1,271,627
0

1,252,809

1,271,627

Options to purchase 150,029 and 144,075 shares of
common stock were outstanding during the years ended
December 31, 2002 and 2001, respectively. The options to
purchase were excluded from the computation of common
stock equivalents because they were anti-dilutive for the
year ended December 31, 2001.

Financial Results

7. The Company accounts for those plans under the recog-
nition and measurement principles of APB Opinion No. 25,
“Accounting for Stock Issued to Employees,” and related
interpretations. Accordingly, no stock-based employee
compensation cost has been recognized, as all options
granted under those plans had an exercise price equal to
the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on
net income and earnings per share had compensation cost
for all of the stock-based compensation plans been deter-
mined 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,
Net income (loss):

As reported

2002

2001

$359,817

$(205,901)

Deduct total stock-based employee
compensation expense determined
under fair value based method
or all awards

110,365

119,050

Pro forma

$249,452

$(324,959)

Basic earnings (loss) per share:

As reported
Pro forma

Diluted earnings (loss) per share:

As reported
Pro forma

$
$

0.29
0.20

$
$

(0.16)
(0.26)

Use of Estimates - The preparation of the financial state -
ments in conformity with accounting principles generally
accepted in the United States of America requires manage -
ment to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates.

Foreign Operations - The Company markets in Europe,
Latin America, Asia, and other parts of the world. Foreign
sales approximated 31% and 30% of total sales in 2002 and
2001, respectively.

Line of Credit - The Company has a $1,250,000 bank line
of credit that provides for working capital financing. This
line of credit is subject to annual renewal on each May 1,
is collateralized by trade receivables and inventory, and
bears interest at 2.25% points over 30-day LIBOR. There
was no outstanding balance at December 31, 2002 and
2001.

Employee Stock Plans - The Company has a stock-based
compensation plan, which is described more fully in Note

Reclassification - Certain reclassifications were made to
the 2001 financial statements to conform to the 2002 pres-

IKONICS CORPORATION

2002 ANNUAL REPORT

Financial Results

entation. These reclassifications had no impact on net
income or stockholders' equity as previously reported.

Accounting Pronouncements - In August 2001, the
Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No.
143, "Accounting for Asset Retirement Obligations." The
provisions of SFAS 143 apply to all entities that incur obli-
gations associated with the retirement of tangible long-
lived assets. This statement is effective for financial state -
ments issued for fiscal years beginning after June 15, 2002
and will become effective for the Company commencing
with our 2003 fiscal year. This accounting pronouncement
is not expected to have a significant impact on our finan-
cial position or results of operations.

In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146
addresses financial accounting and reporting for costs asso-
ciated with exit or disposal activities and nullifies EITF
Issue No. 94-3. This SFAS requires that a liability for a cost
associated with an exit or disposal activity be recorded at
fair value when the liability is incurred. SFAS 146 is effec-
tive for exit or disposal activities that are initiated after
December 31, 2002. This accounting pronouncement is not
expected to have a significant impact on our financial posi-
tion or results of operations.

It also amends the disclosure provisions of SFAS 123. The
disclosure provisions of SFAS 148 are effective for the
December 31, 2002 financial statements.

2. STOCKHOLDERS' EQUITY
During the year ended December 31, 2002, the Company
repurchased 23,500 shares of its common stock for $72,489,
which shares now constitute authorized but unissued
shares. The Company did not repurchase any shares during
the year ended December 31, 2001.

3. INCOME TAXES
Income tax (benefit) expense for the years ended December
31, 2002 and 2001 consists of the following:
Current:
2002
$ 10,000
10,000
20,000
81,000
$ 101,000

2001
$ 26,600
(1,600)
25,000
(117,000)
$ (92,000)

Federal
State

Deferred

The expected provision for income taxes, computed by
applying the U.S. federal income tax rate of 34% to income
before taxes, is reconciled to income tax (benefit) expense
as follows:

Expected provision for federal

income taxes

$ 161,200 $(101,000)

2002

2001

State income taxes, net of federal

benefit

Extraterritorial income exclusion
Meals and entertainment

Other

10,100
(78,800)
13,600
(5,100)
$ 101,000

(1,600)
5,300
11,600
(6,300)
$ (92,000)

Deferred tax assets consist of the following as of December
31, 2002 and 2001:

Property and equipment and

other assets
Accrued vacation
Inventory
Allowance for doubtful accounts
Allowance for sales returns
Intangible assets
Capital loss carryforward
Other
Valuation allowance

2002

2001

$ 61,000
27,000
12,000
36,000
7,000
57,000
20,000
0
(20,000)
$ 200,000

$ 86,000
24,000
49,000
37,000
7,000
73,000
20,000
5,000
(20,000)
$ 281,000

4. INTANGIBLE ASSETS
In June 2000, the Company acquired certain assets and
assumed certain liabilities of Nichols & Associates. In

2002 ANNUAL REPORT

IKONICS CORPORATION

Financial Results

conditions inherent in foreign operations, and the
Company's results of operations are affected by fluctuations
in foreign currency exchange rates. No single foreign coun-
try accounted for more than 10% of the Company's net
sales for 2002 and 2001. Net sales by geographic area are
presented by attributing revenues from external customers
on the basis of where the products are sold.

Net sales by geographic area:

United States
International

2002
$ 8,045,967
3,751,312
$11,797,279

2001
$ 7,526,493
3,225,640
$10,752,133

7. STOCK OPTIONS
During 1995, the Company adopted a stock incentive plan
for the issuance of up to 38,500 shares of common stock.
In 1999, the Company increased the number of shares
reserved for issuance under this plan to 203,500 shares.
The plan provides for granting eligible participants stock
options or other stock awards, as described by the plan, at
option prices ranging from 85% to 110% of fair market
value at date of grant. Options granted expire up to seven
years after the date of grant. Such options generally
become exercisable over a one- to three-year period.

Dividend yield
Expected volatility
Expected life of option
Risk-free interest rate
Fair value of each option on grant date

2002

2001
0.0%
0.0%
72.5% 74.4%
5 years 5 years
4.4% 4.7%
$ 2.00 $2.91

A summary of the status of the Company's stock option
plan as of December 31, 2002 and 2001 and changes dur-
ing the years ending on those dates is presented below:

2002
Weighted
Average
Exercise

Shares Price

2001
Weighted
Average
Exercise
Price

142,920 $6.20
3.17

26,079

89,450 $7.13
4.66
55,125

(18,970)

4.14

(1,655) 5.45

Outstanding at

beginning of year

Granted
Exercised
Expired
Outstanding at end

of year

150,029

5.93

142,920

6.20

accordance with SFAS No. 121, “Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of,” the Company evaluated the net book
value of the recorded goodwill against the estimated future
cash flows and determined the goodwill was impaired and
thus written off during the year ended December 31, 2001.
The Company expensed $197,000 under selling, general and
administrative expense in 2001 as a result of goodwill
impairment.

Intangible assets at December 31, 2002 consist of the

following:

As of December 31, 2002

Gross

Carrying Accumulated
Amount Amortization

$132,717
100,000
100,000
$332,717

$(41,800)
(2,500)
( 16,666)
$(60,966)

$ 18,178

$ 23,600
23,600
23,600
23,600
23,600

Amortized intangible assets:

Patents
Licenses
Non-compete agreement

Amortized intangible assets:
For the year ended Dec. 31, 2002

Estimated amortization expense:
For the year ended Dec. 31, 2003
For the year ended Dec. 31, 2004
For the year ended Dec. 31, 2005
For the year ended Dec. 31, 2006
For the year ended Dec. 31, 2007

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 com-
pensation. Such deferrals accumulate on a tax-deferred
basis until the employee withdraws the funds. The
Company contributes 5% of each eligible employee's com-
pensation. Total pension expense for the years ended
December 31, 2002 and 2001 was approximately $145,000
and $138,000, respectively.

6. GEOGRAPHIC INFORMATION
The Company manages and operates its business on the
basis of one reportable segment. See Note 1 for a brief
description of the Company's business. As of December 31,
2002, the Company had operations established in various
countries throughout the world. The Company is exposed
to the risk of changes in social, political, and economic

IKONICS CORPORATION

2002 ANNUAL REPORT

Financial Results

The following table summarizes information about stock options outstanding at December 31, 2002:

Options Outstanding

Options Exercisable

Range of
Exercise
Price
$3.13 - 3.44
4.60
5.06 - 5.25
6.56
7.22 - 7.84
8.18
9.00 - 9.20

Number
Outstanding at
December 31,
2002
26,079
44,625
9,475
28,000
8,300
20,350
13,200
150,029

Weighted-
Average
Remaining
Contractual
Life
4.42
3.31
3.49
2.32
2.78
3.32
3.96
3.36

Weighted-
Average
Exercise
Price
$3.17
4.60
5.10
6.56
7.47
8.18
9.15
5.93

Number
Exercisable at
December 31,
2002

Weighted-
Average
Exercise
Price

22,105
8,808
21,324
8,300
20,350
13,200
94,087

$4.60
5.10
6.56
7.47
8.18
9.15
6.75

10. CONTINGENCIES
The Company has entered into licensing agreements which
require them to make royalty payments on sales of certain
products. Royalty payments range from 3% to 5% of net
sales on these products. The Company incurred $119,792
of expense under these agreements during 2002 as com-
pared to $103,125 during 2001.

8. CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances primarily in one
financial institution. As of December 31, 2002, the bal-
ance 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 cus-
tomer base and their dispersion across different geograph-
ic areas limits such exposure. In addition, the Company
routinely assesses the financial strength of its customers
and maintains an allowance for doubtful accounts that
management believes will adequately provide for credit
losses.

Concentration of credit risk with respect to trade
receivables is not significant except for a receivable from
one of its largest customers, which accounted for 17.6% of
total receivables as of December 31, 2002.

9. LEASE COMMITMENTS
As of December 31, 2002, the Company was obligated
under non-cancelable operating lease agreements for cer-
tain equipment. Future minimum lease payments for non-
cancelable operating leases with initial or remaining terms
in excess of one year are as follows:

2003
2004
2005

$26,112
$19,661
$ 4,989

The Company also leases buildings on a month-to-month
basis. Total rental expense for all equipment and building
operating leases was $77,040 in 2002 and $80,512 in 2001.

2002 ANNUAL REPORT

IKONICS CORPORATION

5 Year History

Net Sales
Pretax Income (Loss)
Net Income (Loss)
Net Cash Provided by Operations

Return on Sales
Return on Assets
Return on Avg. Stockholders' Equity
Debt to Equity
Net Cash Provided by Operations per Diluted Share

Diluted EPS
Stock price: High
Low
Close

Financial Results

1998
9,740,481
1,372,531
880,531
507,411

1999
$ 10,382,227
$ 1,234,794
$
803,793
$ 1,096,463

2000
$ 10,367,270
$ 364,007
255,007
$
182,527
$

2001
$ 10,752,133
(297,901)
$
(205,901)
$
356,035
$

$
$
$
$

2002
$ 11,797,279
$ 460,817
$ 359,817
249,117
$

9.0%
16.7%
20.1%
8.2%
$ 0.39

7.7%
13.1%
15.3%
8.8%
$ 0.84

2.5%
4.0%
4.5%
9.6%
0.14

$ 0.68
$ 9.44
$ 6.36
$ 6.82

$ 0.62
$ 8.41
$ 6.14
$ 7.25

$ 0.20
$ 7.50
$ 4.00
$ 4.88

$
$
$
$

-1.9%
-3.4%
-3.6%
8.4%
0.28

3.0%
5.6%
6.3%
9.3%
0.20

( 0.16)
5.25
2.62
3.00

$ 0.29
5.10
$
2.85
$
3.30
$

Weighted Average Shares Outstanding
Weighted Average Shares & Equivalent Shares Outstanding*

1,286,658
1,297,432

1,297,519
1,305,995

1,295,239
1,301,311

1,271,627
1,271,627

1,252,020
1,252,809

Total Assets
Total Liabilities
Total Stockholders' Equity
Capital Spending

$
$
$
$

5,260,643
400,810
4,859,833
508,676

$ 6,159,003
497,528
$
$ 5,661,475
491,269
$

$ 6,338,581
552,644
$
$ 5,785,937
230,379
$

$ 6,048,442
468,402
$
$ 5,580,040
259,230
$

$ 6,412,159
545,496
$
$ 5,866,663
250,366
$

*Share & per share amounts have been adjusted for the 10% stock
dividend on 12/31/99.

COMMON STOCK
IKONICS Corporation common stock is traded on the Nasdaq
SmallCap Market (ticker symbol: IKNX). For investment
and stock information, contact:
Jeff Laabs, CFO
IKONICS Corporation
4832 Grand Avenue
Duluth, MN 55807
PH: 218-628-2217
e-mail: jlaabs@ikonics.com

TRANSFER AGENT
Wells Fargo Shareowner Services
161 North Concord Exchange
South St. Paul, MN 55075-1139

Shareholders with questions on stock holdings, transfer
requirements and address changes contact Wells Fargo Bank
at 651-450-4058 or 651-306-4341.

AUDITOR
McGladrey & Pullen LLP
700 Missabe Building
227 W. First Street
Duluth, MN 55802
218-727-5025

COUNSEL
Hanft Fride
1000 U.S. Bank Place
130 W. Superior Street
Duluth, MN 55802
218-722-4766

IKONICS CORPORATION

2002 ANNUAL REPORT

Board of Directors/Officers

Board of Directors
Charles H. Andresen
Attorney/Shareholder
Andresen, Haag, Paciotti,
& Butterworth P.A.

Duluth, MN
Director Since 1979

Rondi Erickson
CEO/Director
Apprise Technologies, Inc.
Duluth, MN
Director Since 2000

David O. Harris
President
David O. Harris, Inc.
Minneapolis, MN
Director Since 1965

H. Leigh Severance
President
Severance Capital
Management
Denver, CO
Director Since 2000

Gerald W. Simonson
Venture Capital Investor
President
Omnetics Connector Corp.
Minneapolis, MN
Director Since 1978

William C. Ulland
Chairman of the Board,
President & CEO
IKONICS Corporation
Duluth, MN
Director Since 1972

Officers

From left to right: Bill Ulland, Claude Piguet, Toshi Komatsu,
Jeff Laabs, Bob Banks.

Robert D. Banks
Vice-President, International

Claude Piguet
Executive Vice-President

Toshifumi Komatsu
Vice-President, Technology

Jeffery A. Laabs
Chief Financial Officer

William C. Ulland
Chairman of the Board,
President & CEO

ADDITIONAL FINANCIAL INFORMATION
Stockholders of record automatically receive quarterly earnings
information, and street name holders may do so upon written
request. For a copy of the Form 10-KSB, as filed with the
Securities and Exchange Commission, and other financial infor-
mation available at no charge to stockholders, please contact:

Jeff Laabs, Chief Financial Officer
IKONICS Corporation
4832 Grand Avenue, Duluth, MN 55807
PH: 218-628-2217 • E-mail: jlaabs@ikonics.com

ANNUAL MEETING
The Company’s annual meeting will be held April 24, 2003 at
1:00 p.m. at the Kitchi Gammi Club, 831 East Superior Street,
Duluth, MN.

2002 ANNUAL REPORT

IKONICS CORPORATION

For the last 30 years, IKONICS has worked hard to develop
an international sales program, resulting in current sales to
more than 60 countries. Currently, one third of our total
sales come from the international markets and represent
screen print and abrasive etching products as well as
inkjet-able substrates. Across the Americas, in Asia,
Europe, Africa and parts of the Middle East, IKONICS has
built time-tested business relationships that fuel the com-
aggressive

pany's
growth goals.

IKONICS' inter-
national success can
be
to
attributed
patient, persistent
relationship building
that has resulted in a
strong dealer net-
work. Our sales force,
chemists and techni-
cians travel regularly
with our internation-
al dealers, reinforcing
product knowledge
and gathering market
information.

Bob Banks, VP, International, is shown visiting
the Taj Mahal in Agra, India, with representa-
tives from IKONICS Indian Master Distributor.

It is impossible
to visit each business
using IKONICS products around the world. Instead, we
work hand-in-hand with its dealers exhibiting in regional
trade fairs. This cooperation further cements the compa-
ny/dealer bond. But more importantly, IKONICS accesses a

Our Global Markets

large number of product users. Trade fairs provide critical
market information, maximize dealer efforts, and give us a
chance to be face-to-face with as many customers as possi-
ble.

IKONICS offers further technical support through
regional training seminars. We have taught seminars in
English and Spanish, and through local dealers, have uti-
lized native speakers in the region we are serving. This
year, IKONICS is opening a permanent training facility in
Southeast Asia, an area of high demand and high potential.
Our plan is to use this base
to attract new dealers and
seize direct sales opportu-
nities.

Communications tech-
nology has simplified our
work with our global dealer
network. Certainly, tele-
phone calls and dealer vis-
its are key to maintaining
relationships, but IKONICS
also uses e-mail and the
web to speed communica-
tion worldwide. Product announcements, technical
updates, and mass mailings are now accomplished with the
stroke of a key.

Abrasive etching is an emerging technol-
ogy in international markets. IKONICS
plans to expand the penetration of the
PhotoBrasive Systems product line.

Our newest international growth opportunity is with
our PhotoBrasive line of products. We are attempting to
access markets previously untouched or underserved. Our
market efforts will focus on our newest technologies,
RapidMask™ and other self adhesive films.

IKONICS CORPORATION

2002 ANNUAL REPORT