2 0 0 6 A N N U A L R E P O R T
IKONMetal Brass
Thru-Holes on Silicon Wafer
Deep Etching on Alumina
UPC Identification on Graphite
Acquired December 2006
C O R P O R A T E P R O F I L E
2006 Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$14,888,912
Earnings per common share (diluted) . . . . . . . . . . . . . . . . . . .$0.55
Founded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1952
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
NASDAQ Symbol . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .IKNX
LETTER TO SHAREHOLDERS
I am pleased to report sales and earnings for the year 2006.
Net sales increased by 7% to $14,889,000 and earnings by
24% to $1,124,000 or $0.55 per diluted share. We remain
financially very sound, with a strong balance sheet.
In addition to a positive financial year we have laid the
foundation for future growth.
At the end of 2006 we acquired the image mate™ brand
of screen print products from Franklin International. The
products and distributor base complement our domestic
and export screen print products, with a number of oppor-
tunities for cross fertilization and a dual brand marketing
strategy. For 2006, Franklin’s image mate estimated
sales were $600,000.
During 2006, we spent considerable effort bringing our
abrasive etching technology to the industrial ceramics
and electronic wafer markets. This effort is based on pro-
prietary products (including our DuPont licensed
RapidMask™ film), designed to meet specific industrial
needs. Although this is a longer sales cycle than we are
accustomed to and 2006 has been a learning year, we
believe we now have significant business opportunities in
sight. I anticipate this effort will be a contributor to
future growth.
Also, during the year we increased our investment in
Imaging Technology International, recognized leaders in
industrial digital inkjet technology. We have made the
development of inkjettable fluids and fluid receptive sub-
strates a priority for our R&D effort and capital expendi-
tures. We have established a digital inkjet lab in Duluth
and have made progress toward the commercialization of
an advanced digital technology.
Finally, in the second half of 2006, we improved the
production process for IKONMetal™, and the product is
being sold to both the signage and award/trophy
markets. Our IKONBraille™ product has encountered
similar production issues; but I believe we are well on our
way to solving them.
I anticipate that 2007 will be another successful year for
IKONICS, with our core businesses continuing to grow
and our new initiatives bringing increased revenues and
profits while diversifying our customer base. I do,
however, expect that compliance costs associated with
Sarbanes Oxley Rule 404 will be a drag on earnings.
BILL ULLAND
CHAIRMAN, PRESIDENT & CEO
For the Board of the Directors
William C. Ulland
Chairman, President and CEO
The preceding letter contains statements regarding future financial
results, new products, the success of acquisitions and other matters that
involve risks and uncertainties. The Company's actual results could
differ materially as a result of domestic and global economic conditions,
competitive market conditions, acceptance of new products, the ability to
identify, complete and successfully integrate suitable acquisitions, as well
as the other factors described elsewhere in this Annual Report and in the
Company's most recent Form 10-KSB and most recent Form 10-QSB on
file with the SEC.
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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 finan-
cial results of operations and financial condition during 2006
and 2005 and should be read in connection with the Company’s
audited financial statements and notes thereto for the years
ended December 31, 2006 and 2005.
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 amend-
ed, 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 costs related to Section 404 of the
Sarbanes-Oxley Act of 2002 should be higher in 2007—This
belief may be impacted by changes in law or regulation
affecting the timing of the Company’s required compliance
with Section 404 or unanticipated barriers to such compli-
ance resulting from the Company’s internal controls or third
party influences.
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
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 curren-
cy fluctuations and general economic conditions in foreign
countries is not significant—This belief may be impacted by
economic, political and social conditions in foreign markets,
changes in regulatory and competitive conditions, a change
in the amount or geographic focus of the Company’s interna-
tional sales, or changes in purchase or sales terms.
TABLE OF CONTENTS
Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . 2
Management Discussion & Analysis . . . . . . . . . 3-6
Management Report . . . . . . . . . . . . . . . . . . . . . . . . 6
Independent Auditor’s Report . . . . . . . . . . . . . . . . 6
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Statements of Operations . . . . . . . . . . . . . . . . . . . 8
Statements of Stockholders’ Equity . . . . . . . . . . . 8
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . 9
Notes to Financial Statements . . . . . . . . . . . . 10-14
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . 14
Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5-Year History . . . . . . . . . . . . . . . . . . . . Back Cover
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 condi-
tions 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 activ-
ities undertaken may be impacted by general market
conditions, competitive conditions in the Company’s indus-
try, unanticipated changes in the Company’s financial
position or the inability to identify attractive acquisition
targets or other business opportunities.
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CRITICAL ACCOUNTING POLICIES
The Company prepares its financial statements in conformity
with accounting principles generally accepted in the United
States of America. Therefore, the Company is required to make
certain estimates, judgments and assumptions that the
Company believes are reasonable based upon the information
available. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the periods presented. The accounting policies which
IKONICS believes are the most critical to aid in fully under-
standing 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 continu-
ously 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 histori-
cally been within expectations and the provisions established,
the Company cannot guarantee that it will continue to experi-
ence 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 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, 2006, the Company had approximately
$145,000 of net deferred tax assets. The deferred tax assets
result primarily from temporary differences in accrued expens-
es, inventory reserves, intangible assets and property and
equipment. The Company has recorded a $27,000 valuation
allowance to reserve for items that more likely than not will 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.
RESULTS OF OPERATIONS
Year Ended December 31, 2006 Compared
to Year Ended December 31, 2005
Sales
The Company’s net sales increased 6.6% to $14.9 million in
2006, compared to net sales of $14.0 million in 2005. Sales
increases were realized in both international and domestic
markets. International shipments grew 10.1% mainly due to
increased film shipments to Asia. The 5.1% domestic sales
increase was driven by both higher film and glass shipments.
FINANCIAL RESULTS
Cost of Goods Sold
Cost of goods sold was $8.2 million, or 55.0% of sales, in 2006
and $7.7 million, or 55.5% of sales, in 2005. The decrease in the
cost of sales as a percentage of sales during 2006 reflects a more
favorable product mix partially offset by rising raw material and
transportation costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $4.5
million, or 30.2% of sales, in 2006 from $4.4 million, or 31.3% of
sales, in 2005. The 2006 increase was due to $140,000 of addi-
tional trade show and advertising expenses. Salary, insurance
and pension costs also increased by $100,000. These cost increas-
es were partially offset by a $80,000 decrease in travel costs and
a $20,000 decrease in depreciation. The Company also incurred
$40,000 in additional expenses related to Sarbanes-Oxley compli-
ance in 2005 as compared to 2006. The Company anticipates that
Sarbanes-Oxley compliance expenses will increase by $60,000 in
2007 as compared to 2006.
Research and Development Expenses
Research and development expenses were $742,000, or 5.0% of
sales, in 2006 compared to $642,000, or 4.6% of sales, in 2005.
The increase is due to an increase in spending on new product
development, production trials, and additional research and
development staff.
Interest Income
Interest income increased to $115,000 for 2006, compared to
$58,000 for 2005. The increase was primarily due to increased
interest rates and a larger average cash balance during the year.
Income Taxes
The income tax provision differs from the expected tax expense
primarily due to the benefits of the foreign sales exclusion, state
income taxes and federal tax credits for research and develop-
ment. Income tax expense in 2006 was $466,000, or an effective
rate of 29.3%. Income tax expense for 2005 was $348,000, or an
effective rate of 27.7%. The lower effective rate for 2005 was
partially due to a study performed by the Company during 2005
related to its research and development activities resulting in
tax credits totaling $15,000. The Company also realized a larger
benefit in 2005 related to the foreign sales exclusion.
Liquidity and Capital Resources
The Company has financed its operations principally with funds
generated from operations. These funds have been sufficient to
cover the Company’s normal operating expenditures, annual capi-
tal requirements, and research and development expenditures.
Cash and cash equivalents were $3,428,000 and $3,412,000 at
December 31, 2006 and 2005, respectively. The Company gener-
ated $1,076,000 in cash from operating activities during 2006
compared to $980,000 of cash generated from operating activities
during 2005. Cash provided by operating activities is primarily
the result of net income adjusted for non cash depreciation,
amortization, stock based compensation, deferred taxes, and
certain changes in working capital components discussed in the
following paragraph.
During 2006, trade receivables increased by $274,000. The
increase in receivables is primarily related to higher sales. The
Company believes that the quality of its receivables is high and
that strong internal controls are in place to maintain proper
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FINANCIAL RESULTS
collections. Inventory levels increased by $34,000 due to higher
raw material and finished goods inventory stock. Accounts
payable decreased by $150,000, reflecting the timing of
payments to suppliers. Income taxes payable increased by
$74,000 as a result of the timing of estimated 2006 tax payments
compared to the calculated 2006 tax liability.
The Company used $1,283,000 and $423,000 in cash for invest-
ing activities during 2006 and 2005, respectively. During 2006,
the Company invested $538,000 in imaging Technology interna-
tional Corporation ("iTi") to acquire 69,166 common shares. The
Company owns 105,662 shares of iTi which represents 7% of the
total outstanding common shares of iTi. iTi is a leader in the
development of industrial production systems based on inkjet
technology and the Company believes iTi's expertise fits strategi-
cally with the Company's expertise in developing substrates for
inkjet printing and the Company's plans to develop proprietary
industrial inkjet technologies. On December 29, 2006, the
Company acquired the image mate™ line of screen printing prod-
ucts from Franklin International for $533,000. Unaudited image
mate sales in 2006 were estimated to be $600,000. The acquisition
included inventory, equipment, deposits under an agreement to
purchase key raw materials from Franklin International and an
agreement not to compete. The Company made $274,000 of prop-
erty and equipment purchases during 2006. The purchases were
comprised of plant and research equipment to improve efficiency
and safety, reduce operating costs and update facilities, and two
automobiles. The Company also incurred $28,000 in patent appli-
cation costs that it recorded as an asset and amortizes upon
successful completion of the application process. The Company
received $84,000 during 2006 from the sale of marketable securi-
ties and $6,000 from the sale of an automobile.
During 2005, the Company invested $253,000 in iTi to
acquire 36,496 common shares and warrants to purchase an
additional 33,333 common shares of iTi. The Company made
$211,000 of property and equipment purchases during 2005 and
$12,000 in patent application costs. The Company received
$43,000 during 2005 from the sale of marketable securities and
$11,000 from the sale of automobiles.
The Company realized $223,000 in cash from financing activ-
ities during 2006 compared to $117,000 received in 2005. During
2006, the Company received $186,000 for the issuance of 48,324
shares of common stock issued upon the exercise of stock options
compared to $233,000 received during 2005 for 57,491 shares of
common stock issued upon the exercise of stock options. The
Company also realized a $37,000 cash benefit during 2006 relat-
ed to the excess tax benefit from the exercise of stock options.
The Company repurchased 25,499 shares of its common stock at
a cost of $116,000 during 2005.
A bank line of credit provides for borrowings of up to
$1,250,000. Borrowings under this line of credit are collateralized
by accounts receivable and inventory and bear interest at 2.00
percentage points over the 30 day LIBOR rate. The Company did
not utilize this line of credit during the year and there were no
borrowings outstanding as of December 31, 2006. The line of
credit was also not utilized during 2005 and there were no
borrowings outstanding under this line as of December 31, 2005.
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 $274,000 on capital expenditures during
2006. This spending included plant and research equipment
upgrades to improve efficiency and safety, reduce operating
costs, update facilities and vehicles.
Plans for capital expenditures include ongoing manufactur-
ing equipment upgrades, development equipment to modernize
the capabilities and processes of IKONICS’ laboratory, research
and development to improve measurement and quality control
processes and vehicles. These commitments are expected to be
funded with cash generated from operating activities.
International Activity
The Company markets its products to numerous countries in all
regions of the world including North America, Europe, Latin
America, and Asia. Foreign sales were approximately 30.4% of
total sales during 2006 and 29.4% of total sales in 2005. Foreign
sales in 2006 reflect increased shipments to Asia. Fluctuations in
certain foreign currencies have not significantly impacted the
Company’s operations because the Company’s foreign sales are
not concentrated in any one region of the world. The Company
believes its vulnerability to uncertainties due to foreign currency
fluctuations and general economic conditions in foreign countries
is not significant.
The Company’s foreign transactions are primarily negotiated,
invoiced and paid in U.S. dollars while a portion is transacted in
Euros. IKONICS has not implemented an economic hedging
strategy to reduce the risk of foreign currency translation 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, 2006.
Future Outlook
IKONICS has invested on average over 4% of its sales dollars for
the past few years in research and development. The Company
plans to maintain its efforts in this area and expedite internal
product development, as well as form technological alliances
with outside experts to ensure commercialization of new product
opportunities.
In addition to its traditional emphasis on domestic markets,
the Company will continue efforts to grow its business interna-
tionally 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 addi-
tions, equipment additions, new product development and
marketing opportunities.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(“FASB”)
issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and tran-
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sition. FIN 48 will be effective for the Company beginning in
fiscal 2007. The Company does not expect this interpretation will
have a material effect on its financial statements and related
disclosures.
In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclo-
sures about fair value measurements. This Statement applies
under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously conclud-
ed in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, SFAS 157 does
not require any new fair value measurements. SFAS 157 is
effective for the Company beginning in fiscal year 2008. The
Company is evaluating the statement to determine the effect on
its financial statements and related disclosures.
MARKET FOR COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s Common Stock is traded on the Nasdaq Capital
Market under the symbol IKNX. The following table sets forth, for
the fiscal quarters indicated, the high and low bid prices for the
Company’s Common Stock as reported on the Nasdaq Capital
Market for the periods indicated. The quotations reflect inter-
dealer prices without retail mark-up, mark-down or commission,
and may not represent actual transactions.
Fiscal Year Ended December 31, 2006:
High
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $8.33
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . 10.47
8.97
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
8.60
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal Year Ended December 31, 2005:
High
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $7.35
7.00
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . .
6.99
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . .
8.99
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . .
Low
$6.26
7.06
7.15
7.02
Low
$5.51
4.20
4.95
5.78
As of February 28, 2007, the Company had approximately 654
shareholders. The Company has never declared or paid any divi-
dends on its Common Stock.
The Company did not purchase shares of its equity securities
during 2006. A total of 50,007 shares of Common Stock may yet be
purchased under the repurchase program approved by the
Company’s Board of Directors in February 2005.
FINANCIAL RESULTS
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 protected,
transactions are appropriately reported, and established proce-
dures are followed.
The financial statements have been audited by McGladrey &
Pullen LLP, an independent registered public accounting firm.
The Audit Committee of the Board of Directors, comprised of
outside directors, meets periodically with the independent audi-
tors and management to discuss the company’s internal
accounting controls and financial reporting matters. Our inde-
pendent public accounting firm has unrestricted access to the
Audit Committee, without management present, 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
Jon Gerlach
Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
IKONICS Corporation
Duluth, Minnesota
We have audited the balance sheets of IKONICS Corporation as
of December 31, 2006 and 2005, and the related statements of
operations, stockholders’ equity and comprehensive income and
cash flows for the years then ended. These financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial state-
ments based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the finan-
cial 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 evaluat-
ing 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 pres-
ent fairly, in all material respects, the financial position of
IKONICS Corporation as of December 31, 2006 and 2005, and the
results of its operations and its cash flows for the years then ended
in conformity with U.S. generally accepted accounting principles.
As discussed in Note 1 to the financial statements, effective
January 1, 2006 the Company adopted Statement of Financial
Accounting Standards No. 123 (Revised 2004), “Shared-Based
Payment.”
/s/ McGladrey & Pullen, LLP
Duluth, Minnesota
March 21, 2007
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BALANCE SHEETS: DECEMBER 31, 2006 & 2005
ASSETS
Current Assets:
2006
2005
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,428,186
_
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade receivables, less allowance for
doubtful accounts of $50,000 (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories (Notes 1 and 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits, prepaid expenses and other assets (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,976,893
2,494,876
232,255
97,000
8,229,210
Property, Plant, and Equipment, at cost:
Land and building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,500,271
2,396,867
817,406
203,816
4,918,360
3,926,440
991,920
Intangible Assets, less accumulated amortization of $159,351 in
2006 and $134,642 in 2005 (Notes 3 and 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
485,421
Deferred Income Taxes (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48,000
$3,412,072
84,875
1,702,608
2,364,056
65,747
99,000
7,728,358
1,479,824
2,531,734
1,280,149
174,803
5,466,510
4,514,945
951,565
279,086
61,000
Investments in Non-Marketable Equity Securities (Note 1) . . . . . . . . . . . . . . . . . .
988,910
$10,743,461
450,790
$9,470,799
LIABILITIES AND STOCKHOLDERS’ EQUITY
2006
2005
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$288,449
324,082
172,381
94,450
879,362
$438,597
279,042
217,912
56,743
992,294
Commitments and Contingencies (Note 4)
Stockholders’ Equity:
Preferred stock, par value $.10 per share; authorized 250,000 shares:
issued none
Common stock, par value $.10 per share; authorized 4,750,000 shares:
issued and outstanding 2,010,861 shares in 2006 and 1,962,537
shares in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See notes to financial statements.
201,086
1,979,012
7,684,001
_
9,864,099
$10,743,461
196,254
1,721,119
6,560,236
896
8,478,505
$9,470,799
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STATEMENTS OF OPERATIONS: YEARS ENDED DECEMBER 31, 2006 & 2005
2006
2005
Net Sales (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,888,912
Costs and Expenses:
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,181,814
4,490,381
742,406
13,414,601
$13,971,217
7,748,707
4,383,144
641,622
12,773,473
Income from Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,474,311
1,197,744
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
115,454
58,425
Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,589,765
1,256,169
Federal and State Income Taxes (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
466,000
348,000
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,123,765
$908,169
Earnings Per Common Share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.56
$0.55
$ 0.47
$0.46
Weighted Average Common Shares:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,000,017
2,027,916
1,944,330
1,986,885
See notes to financial statements.
STATEMENTS OF STOCKHOLDERS’ EQUITY & COMPREHENSIVE INCOME: YEARS ENDED DECEMBER 31, 2006 & 2005
Common Stock
Shares
Amount
1,930,545
_
_
_
57,491
(25,499)
_
1,962,537
_
_
_
48,324
_
_
$193,055
_
_
_
5,749
(2,550)
_
196,254
_
_
_
4,832
_
_
Additional
Paid-in
Capital
Accumulated
Other
Retained Comprehensive
Income (Loss)
Earnings
$1,477,815
_
_
_
227,042
(19,519)
35,781
1,721,119
_
_
_
181,503
14,055
62,335
$5,745,662
908,169
_
_
_
(93,595)
_
6,560,236
1,123,765
_
_
_
_
_
$(2,316)
_
3,212
_
_
_
_
896
_
(896)
_
_
_
_
Total
Stock-
holders’
Equity
$7,414,216
908,169
3,212
911,381
232,791
(115,664)
35,781
8,478,505
1,123,765
(896)
1,122,869
186,335
14,055
62,335
Balance at December 31, 2004
Net income
Unrealized gain on available-for-sale securities
Total comprehensive income
Exercise of stock options
Common stock repurchased
Tax benefit resulting from stock option exercises
Balance at December 31, 2005
Net income
Unrealized loss on available-for-sale securities
Total comprehensive income
Exercise of stock options
Tax benefit resulting from stock option exercises
Stock based compensation and related tax benefit
Balance at December 31, 2006
2,010,861
$201,086
$1,979,012
$7,684,001
$ _
$9,864,099
See notes to financial statements.
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STATEMENTS OF CASH FLOWS: YEARS ENDED DECEMBER 31, 2006 & 2005
2006
2005
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,123,765
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from share-based payment arrangement . . . . . . . . . . . . . . . . . . . .
Tax benefit from stock option exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) Loss on sale of vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in working capital components, net of effects of
242,833
24,710
(36,712)
14,055
25,623
(640)
15,000
business acquisition:
Trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
(274,285)
34,101
(16,508)
(150,148)
(491)
74,419
1,075,722
Cash Flows from Investing Activities:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds on sale of vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business acquisition (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of non-marketable equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(273,548)
6,000
(532,921)
(28,045)
(538,120)
83,979
(1,282,655)
Cash Flows from Financing Activities:
Excess tax benefit from share-based payment arrangement . . . . . . . . . . . . . . . . . . . .
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
36,712
186,335
_
223,047
$908,169
269,549
24,914
_
35,781
_
7,992
48,000
(59,704)
(162,774)
(8,402)
(97,794)
(12,258)
26,574
980,047
(211,276)
11,000
_
(11,651)
(253,330)
42,695
(422,562)
_
232,791
(115,664)
117,127
Net Increase in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,114
674,612
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . .
3,412,072
2,737,460
Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,428,186
$3,412,072
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$362,526
$237,645
See notes to financial statements.
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NOTES TO FINANCIAL STATEMENTS: YEARS ENDED DECEMBER 31, 2006 AND 2005
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Foreign Sales
IKONICS Corporation (the Company) develops and manufac-
tures high-quality photochemical imaging systems for sale
primarily to a wide range of printers and decorators of surfaces.
Customers’ applications are primarily screen printing and abra-
sive etching. The Company’s principal markets are throughout
the United States. In addition, the Company sells to Western
Europe, Latin America, Asia, and other parts of the world. The
Company extends credit to its customers, all on an unsecured
basis, on terms that it establishes for individual customers.
Foreign sales approximated 30.4% of total sales in 2006 and
29.4% of total sales in 2005. Thirty-nine percent and forty-four
percent, respectively, of the Company’s accounts receivable at
December 31, 2006 and 2005 are due from foreign customers. The
foreign receivables are composed primarily of open credit arrange-
ments with terms ranging from 45 to 90 days. No single customer
represented greater than 10% of net sales in 2006 or in 2005.
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 the carrying value of both types of instruments
approximate market value because of the short maturity of
these instruments.
Marketable Securities
Marketable securities were classified as available-for-sale and
consist primarily of municipal revenue bonds that were 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 were carried at fair
market value with changes in fair value, net of tax, recorded in
other comprehensive income. There were no marketable securi-
ties at December 31, 2006.
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 deter-
mines the allowance for doubtful accounts by regularly evaluating
individual customer receivables and considering a customer’s
financial condition, credit history, and current economic condi-
tions. Trade receivables are written off when deemed
uncollectible. Recoveries of trade receivables previously written
off are recorded when received. Accounts are considered past due
if payment is not received according to agreed-upon terms.
Inventories
Inventories are stated at the lower of cost or market using the
last-in, first-out (LIFO) method. If the first-in, first-out cost
method had been used, inventories would have been approxi-
mately $535,000 and $509,000 higher than reported at
December 31, 2006 and 2005, respectively. The major compo-
nents of inventories are as follows:
2006
Raw materials . . . . . . . . . . . . . . . . $1,577,165
225,033
Work-in-progress . . . . . . . . . . . . .
1,227,806
Finished goods . . . . . . . . . . . . . . .
Reduction to LIFO cost . . . . . . . .
(535,128)
Total inventories . . . . . . . . . . . . . . $2,494,876
2005
$1,483,881
212,254
1,176,647
(508,726)
$2,364,056
Depreciation
Depreciation of property, plant and equipment is computed
using the straight-line method over the following estimated
useful lives:
Years
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15-40
5-10
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . .
3-10
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible Assets
Intangible assets consist primarily of patents, licenses and
covenants not to compete arising from business combinations.
Intangible assets are amortized on a straight-line basis over
their estimated useful lives or agreement terms. Remaining
estimated useful lives on intangible assets range from 5 to 14
years. Intangible assets with finite lives are assessed for impair-
ment whenever events or circumstances indicate the carrying
value may not be fully recoverable by comparing the carrying
value of the intangibles to their future undiscounted cash flows.
To the extent there is impairment, analysis is performed based
on several criteria, including, but not limited to, revenue trends,
discounted operating cash flows and other operating factors to
determine the impairment amount.
Investments in Non-Marketable Equity Securities
Investments in non-marketable equity securities consist of a
$791,450 investment in Imaging Technology International
("iTi"). The Company acquired an additional 69,166 common
shares of iTi during 2006. The Company currently owns 105,662
common shares of iTi which represents 7% of the total outstand-
ing common shares of iTi. iTi is a leader in the development of
industrial production systems based on inkjet technology and
the Company believes iTi's expertise fits strategically with the
Company's expertise in developing substrates for inkjet print-
ing and its plan to develop proprietary industrial inkjet
technology. The Company has a $197,460 equity investment in
Apprise Technologies, Inc. As of December 31, 2006, the
Company's ownership of Apprise's common and preferred stock
represented approximately 4.95% of the outstanding shares of
Apprise. The Company accounts for these investments by the
cost method because the common stock of each corporation is
unlisted and the criteria for using the equity method of account-
ing are not satisfied. The Company reviews these investments
for impairment annually and writes them down whenever the
recorded amount exceeds estimated fair market value. During
February 2007, Apprise was acquired by Eco Lab Incorporated
for cash. The Company realized a gain of approximately $55,000
on the first payment from the transaction. The Company also
expects to receive an additional $40,000 in 2008 at which time
an additional gain will be recognized. Cash received in
February 2007 was $253,000.
Fair Value of Financial Instruments
The carrying amounts of financial instruments, including cash,
cash equivalents, accounts receivable, accounts payable, and
accrued liabilities approximate fair value due to the short matu-
rity of these instruments. The carrying value of the
non-marketable equity securities approximated their estimated
fair value based on management’s knowledge of recent sales
prices of the non-marketable equity securities.
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NOTES TO FINANCIAL STATEMENTS: YEARS ENDED DECEMBER 31, 2006 AND 2005
Revenue Recognition
The Company recognizes revenue on sales of 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 and operating loss and tax credit carryforwards and
deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by 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.
The adoption of FAS 123(R) lowered net income by approxi-
mately $25,600 for the year ended December 31, 2006, compared
to accounting for share-based compensation under APB No. 25.
The Company has elected the alternative (short-cut) method for
calculating the pool of excess tax benefits (APIC Pool) available
to absorb tax shortages recognized subsequent to the adoption of
FAS 123(R). The Company’s calculation of the APIC windfall at
January 1, 2006 was $3,000.
The following table illustrates the effect on net income and
earnings per share if we had applied the fair value recognition
provisions of FAS 123(R) during the period prior to its effective
date. For the purposes of this pro forma disclosure, the value of
the options is estimated using a Black-Scholes option-pricing
model and amortized to expense over the vesting periods of the
options.
Year Ended December 31, 2005
Net income:
Comprehensive Income
The Company’s comprehensive income consists of net income
and net unrealized holding gains and losses on marketable secu-
rities, net of taxes.
Earnings Per Common Share (EPS)
Basic EPS is calculated using net income divided by the weight-
ed average of common shares outstanding during the year.
Diluted EPS is similar to Basic except that the weighted aver-
age 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.
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $908,169
Deduct total stock-based employee
compensation expense determined under
fair value based method for all awards . . . . . . .
21,214
Pro forma
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $886,955
Basic earnings per common share:
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per common share: . . . . . . . . . . . .
As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.47
$0.46
$0.46
$0.45
Shares used in the calculation of diluted EPS are summarized below:
Weighted average common
shares outstanding . . . . . . . . . . . .
Dilutive effect of
stock options . . . . . . . . . . . . . . . . .
Weighted average common
and common equivalent
shares outstanding . . . . . . . . . . . .
2006
2005
2,000,017
1,944,330
27,899
42,555
2,027,916
1,986,885
Options to purchase 88,222 and 130,285 shares of common stock
were outstanding as of December 31, 2006 and 2005, respectively.
Employee Stock Plan
Effective January 1, 2006, the Company adopted Financial
Accounting Standards Board Statement No. 123 (revised 2004),
“Share-Based Payment,” (FAS 123(R)) using the modified-prospec-
tive-transition method. Prior to the adoption of FAS 123(R), we
accounted for stock option grants under APB Opinion No. 25,
“Accounting for Stock Issued to Employees” (the intrinsic value
method), and accordingly recognized no compensation expense for
stock option grants.
Under the modified-prospective-transition method, FAS
123(R) applies to new awards and to awards that were outstand-
ing on January 1, 2006 that are subsequently modified,
repurchased, or cancelled. Under this method compensation cost
in 2006 includes cost for options granted prior to but not vested
as of December 31, 2005, and options granted in 2006. Prior
periods were not restated to reflect the impact of adopting the
new standard.
As of December 31, 2006, there was approximately $36,000 of
unrecognized compensation cost related to unvested share-
based compensation awards granted. That cost is expected to be
recognized over the next three years.
The Company receives a tax deduction for certain stock
option exercises during the period in which the options are exer-
cised, generally for the excess of the prices at which the option
shares are sold over the exercise price of the options. Prior to the
adoption of FAS 123(R), the Company reported all tax benefits
relating to the exercise of stock options as operating cash flows
in our statement of cash flows. In accordance with FAS 123(R),
for the year ended December 31, 2006, we began reporting the
excess tax benefits from the exercise of stock options as a reduc-
tion of operating and an increase in financing cash flows. For the
year ended December 31, 2006, $36,712 of excess tax benefits
were reported in the statement of cash flows.
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 assump-
tions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates.
Foreign Currency Translation
Foreign currency transactions and translation adjustments did not
have a significant effect on the Statements of Stockholders’ Equity
and Comprehensive Income and Cash Flows for 2006 and 2005.
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NOTES TO FINANCIAL STATEMENTS: YEARS ENDED DECEMBER 31, 2006 AND 2005
2. INCOME TAXES
Income tax expense for the years ended December 31, 2006 and
2005 consists of the following:
2006
2005
Current:
Federal . . . . . . . . . . . . . . . . . . . . $401,000
50,000
State . . . . . . . . . . . . . . . . . . . . . .
451,000
15,000
$466,000
Deferred . . . . . . . . . . . . . . . . . . .
$262,000
38,000
300,000
48,000
$348,000
The expected provision for income taxes, computed by applying the
U.S. federal income tax rate of 35% in 2006 and 2005 to income
before taxes, is reconciled to income tax expense as follows:
2006
2005
Expected provision for
federal income taxes . . . . . . . . . . . . $556,400
State income taxes,
net of federal benefit . . . . . . . . . . . .
Extraterritorial income exclusion . .
Domestic manufacturers deduction . .
Non-deductible meals
and entertainment . . . . . . . . . . . . . .
Tax-exempt interest . . . . . . . . . . . . .
R&D Credit . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . .
16,400
(39,000)
(13,600)
(30,000)
. . . . . . . . . . . . . . . . . . . . . . . . . . . $466,000
36,300
(49,400)
(11,100)
$439,700
25,700
(64,700)
_
13,600
(18,100)
(29,000)
(19,200)
$348,000
Deferred tax assets consist of the following as of December 31,
2006 and 2005:
2006
2005
Property and equipment
and other assets . . . . . . . . . . . . . . . . $38,000
19,000
Accrued vacation . . . . . . . . . . . . . . .
49,000
Other accrued expenses . . . . . . . . . .
12,000
Inventories . . . . . . . . . . . . . . . . . . . .
18,000
Allowance for doubtful accounts . . .
7,000
Allowance for sales returns . . . . . . .
10,000
Intangible assets . . . . . . . . . . . . . . .
27,000
Capital loss carryforward . . . . . . . .
180,000
(27,000)
153,000
Less valuation allowance . . . . . . . .
$40,000
14,000
47,000
20,000
18,000
7,000
21,000
27,000
194,000
(27,000)
167,000
Deferred tax liabilities:
Prepaid expenses . . . . . . . . . . . . . . .
8,000
$145,000
7,000
$160,000
The deferred tax amounts described above have been included in
the accompanying balance sheet as of December 31, 2006 and
2005 as follows:
2006
Current assets . . . . . . . . . . . . . . . . . $97,000
48,000
Noncurrent assets . . . . . . . . . . . . . .
$145,000
2005
$99,000
61,000
$160,000
3. PURCHASE OF ASSETS
On December 29, 2006, the Company acquired certain assets
of Franklin International Inc. (Franklin) related to the
image mate™ line of screen printing products. The acquisition
was accounted for under the purchase method of accounting.
Accordingly, the assets acquired were recorded at their fair
market value. The assets acquired include lab equipment, raw
materials and finished goods inventory, and a non-compete agree-
ment with Franklin. The costs allocated to the non-compete
agreement will be amortized on a straight-line basis over its seven
year term. In connection with the acquisition, the Company
entered into an agreement to prepay for inventory purchases from
Franklin, which are expected to be utilized over three years.
The fair market value of the assets acquired resulted in the
following purchase price allocation:
Cash price paid for assets . . . . . . . . . . . . . . . . . . . . . $528,921
Acquisition costs incurred . . . . . . . . . . . . . . . . . . . . .
4,000
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . $532,921
Purchase Price Allocation
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $164,921
150,000
Deposit for inventory purchases . . . . . . . . . . . . . . . .
15,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
203,000
Noncompete agreement . . . . . . . . . . . . . . . . . . . . . . .
$532,921
If the acquisition had occurred on January 1, 2005, the unaudit-
ed pro forma impact on revenues would have been to increase
revenues by approximately $600,000 for each of the years ended
December 31, 2005 and 2006. The unaudited proforma net
income and earnings per common share would not have been
significant to the amounts reported in the Company’s financial
statements for such years.
4. INTANGIBLE ASSETS
Intangible assets consist primarily of patents, licenses and covenants not to compete arising from business combinations. Intangible
assets are amortized on a straight-line basis over their estimated useful lives or terms of their agreement, whichever is shorter.
During 2005, application costs for two patents with total capitalized costs of $30,341 were expensed as it was determined that these
projects had no future value. No impairment adjustments to intangible assets were made during the year ended December 31, 2006.
Intangible assets at December 31, 2006 and 2005 consist of the following:
December 31, 2006
December 31, 2005
Gross Carrying Amount
Accumulated Amortization
Gross Carrying Amount Accumulated Amortization
Amortized intangible assets:
Patents . . . . . . . . . . . . . . . . . . . $241,773
Licenses . . . . . . . . . . . . . . . . . . 100,000
Non-compete agreement . . . . . 303,000
$644,773
$(81,022)
(35,000)
(43,330)
$(159,352)
$213,728
100,000
100,000
$413,728
Aggregate amortization expense:
2006
For the year ended December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,710
$(71,102)
(26,875)
(36,664)
$(134,642)
2005
$24,914
Estimated amortization expense for the year ended December 31:
2007 . . . . . $53,710
2008 . . . . .$53,710
2009 . . . . .$53,710
2010 . . . . .$53,710
2011 . . . . .$53,710
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. The Company incurred $119,000 of expense under these agreements during 2006, and $108,000 during 2005.
5. RETIREMENT PLAN
The Company has established a salary deferral plan under Section 401(k) of the Internal Revenue Code. Such deferrals accumulate on
a tax-deferred basis until the employee withdraws the funds. The Company contributes 5% of each eligible employee’s compensation.
Total retirement expense for the years ended December 31, 2006 and 2005 was approximately $163,000 and $150,000, respectively.
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NOTES TO FINANCIAL STATEMENTS: YEARS ENDED DECEMBER 31, 2006 AND 2005
6. SEGMENT INFORMATION
The Company's reportable segments are strategic business units that offer different products and have a varied customer base.
There are three reportable segments: Domestic, Export, and IKONICS Imaging. Domestic sells screen printing film, emulsions,
and inkjet receptive film which is sold to distributors located in the United States. IKONICS Imaging sells photo resistant film,
art supplies, glass, metal medium and related abrasive etching equipment to end user customers located in the United States.
It is also entering the market for etched ceramics, glass and silicon wafers; and is developing and selling proprietary inkjet
technology. Export sells primarily the same products as Domestic and IKONICS Imaging to foreign customers. The account-
ing policies applied to determine the segment information are the same as those described in the summary of significant
accounting policies.
Management evaluates the performance of each segment based on the components of divisional income, and with the exception for accounts
receivable, does not allocate assets and liabilities to segments. Financial information with respect to the reportable segments follows:
For the year ended December 31, 2006 Domestic
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,777,987
3,803,598
Cost of good sold . . . . . . . . . . . . . . . . . . . . . .
965,695
Selling, general and administrative* . . . . . .
842,144
Accounts receivable . . . . . . . . . . . . . . . . . . .
For the year ended December 31, 2005 Domestic
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,512,880
3,071,175
Cost of good sold . . . . . . . . . . . . . . . . . . . . . .
935,424
Selling, general and administrative* . . . . . .
696,615
Accounts receivable . . . . . . . . . . . . . . . . . . . .
Export**
$4,531,605
2,955,011
395,619
780,599
Export**
$4,115,198
2,669,605
445,852
748,002
IKONICS Imaging
$4,579,320
2,143,205
1,479,464
384,748
Other
$ _
_
1,649,603
(30,598)
IKONICS Imaging
$4,343,139
2,007,927
1,381,117
290,305
Other
$ _
_
1,620,751
(32,314)
Total
$14,888,912
8,181,814
4,490,381
1,976,893
Total
$13,971,217
7,748,707
4,383,144
1,702,608
*The company does not allocate all general and administrative expenses to its operating segments for internal reporting.
**In 2006 and 2005, the Company marketed its products in various countries throughout the world. The Company is exposed to the
risk of changes in social, political, and economic conditions inherent in foreign operations, and the Company’s results of operations
are affected by fluctuations in foreign currency exchange rates. No single foreign country accounted for more than 10% of the
Company’s net sales for 2006 and 2005.
30.4% and 29.4%, respectively, of the Company’s net sales at December 31, 2006 and 2005 are from foreign customers.
7. STOCK OPTIONS
During 1995, the Company, with the approval of its shareholders, adopted a stock incentive plan for the issuance of up to 57,750
shares of common stock. In 1999, the Company, with the approval of its shareholders, increased the number of shares reserved for
issuance under this plan to 305,250 shares and, in 2004, increased the number of shares reserved for issuance under this plan to
342,750 shares. The plan provides for granting eligible participants stock options or other stock awards, as described by the plan,
at option prices ranging from 85% to 110% of fair market value at date of grant. Options granted expire up to seven years after the
date of grant. Such options generally become exercisable over a one to three year period. A total of 55,673 shares of common stock
are reserved for additional grants of options under the plan at December 31, 2006.
Under the plan, the Company charged compensation cost of $25,623 against income and recognized a total income tax benefit in
the income statement of $26,482 for 2006. No compensation cost or income tax benefit was recognized in the income statement for
share-based compensation in 2005.
The fair value of share-based payment awards was estimated using the Black-Scholes option pricing model with the following assumptions:
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life of option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006
0.0%
60.6 - 63.0%
five years
4.8-5.0%
2005
0.0%
63.2%
five years
3.9%
A summary of the status of the Company’s stock option plan as of December 31, 2006 and changes during the year then ended is
presented below:
Weighted Average Weighted Average Remaining Aggregate
Shares
Options
130,285
Outstanding at January 1, 2006
7,250
Granted
(48,324)
Exercised
(989)
Expired and forfeited
Outstanding at December 31, 2006
88,222
Vested or expected to vest at December 31, 2006 87,722
73,888
Exercisable at December 31, 2006
Exercise Price
$3.27
8.03
3.86
4.50
3.33
3.33
$2.75
Contractual Term (years)
Intrinsic Value
1.55
1.55
1.12
$392,710
$392,710
$370,356
The weighted-average grant-date fair value of options granted was $4.58 and $2.44 for the years ended December 31, 2006 and 2005,
respectively. The total intrinsic value of options exercised was $227,175 and $109,345 for the years ended December 31, 2006 and
2005, respectively.
The following table summarizes information about stock options outstanding at December 31, 2006:
Range of
Number
Outstanding at
Options Outstanding
Weighted-
Average Remaining
Exercise Price December 31, 2006 Contractual Life (years)
$2.00 - 2.99
3.00 - 3.99
4.00 - 4.99
7.00 - 7.99
58,222
11,250
9,250
9,500
88,222
0.89
1.59
3.32
3.79
1.55
Options Exercisable
Weighted-Average
Exercise Price
$2.44
3.36
4.32
7.79
$3.33
Number Exercisable at Weighted-Average
December 31, 2006
58,222
11,250
2,916
1,500
73,888
Exercise Price
$2.44
3.36
4.32
7.01
$2.75
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NOTES TO FINANCIAL STATEMENTS: YEARS ENDED DECEMBER 31, 2006 AND 2005
8. CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances primarily in one financial institution. As of December 31, 2006, 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 accounted for more than 10% of total receivables as of December 31, 2006.
9. LEASE EXPENSE
The Company leases buildings on a month-to-month basis and equipment as needed. Total rental expense for all equipment and
building operating leases was $21,000 in 2006 and $30,000 in 2005. On February 1, 2007 the Company entered into a one year
lease agreement for additional warehouse space at a cost of $5,750 per month or $69,000 per year.
10. LINE OF CREDIT
The Company has a $1,250,000 bank line of credit that provides for working capital financing. This line of credit is subject to annual
renewal on each May 1, is collateralized by trade receivables and inventory, and bears interest at 2.00 percentage points over 30-
day LIBOR. There were no outstanding borrowings under this line of credit at December 31, 2006 and 2005.
11. ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial
statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold
and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 will be effective for the Company beginning in fiscal 2007. Management does not expect
this interpretation will have material effect on the Company’s our financial statements and related disclosures.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establish-
es a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value
measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the
FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for the Company beginning in fiscal
year 2008. Management is evaluating the statement to determine the effect, if any, on the financial statements and related disclosures.
BOARD OF DIRECTORS
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Charles H. Andresen
Attorney
Andresen &
Butterworth P.A.
Duluth, MN
Director Since 1979
OFFICERS
Rondi Erickson
Co-Owner
Nokomis Restaurant
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
President
Omnetics Connector
Corporation
Minneapolis, MN
Director Since 1978
William C. Ulland
Chairman, President
& CEO
IKONICS Corporation
Duluth, MN
Director Since 1972
Robert D. Banks
Vice President,
International
Toshifumi Komatsu
Vice President,
Technology
Jon Gerlach
Vice President,
Finance, CFO
Claude Piguet
Executive
Vice President
Parnell Thill
Vice President,
Marketing
William C. Ulland
Chairman, 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 finan-
cial information available at no charge to stockholders, please contact:
ANNUAL MEETING
The Company’s annual meeting will be
held April 26, 2007 at 1:00 p.m. at the
Kitchi Gammi Club, 831 East Superior
Street, Duluth, MN.
Jon Gerlach, Chief Financial Officer
IKONICS Corporation
4832 Grand Avenue
Duluth, MN 55807
Phone: 218-628-2217
E-mail: jgerlach@ikonics.com
FIVE-YEAR HISTORY
Net Sales
Pretax Income
Net Income
Net Cash Provided by Operations
Return on Sales
Return on Assets
Return on Avg.
Stockholders' Equity
Debt to Equity
Diluted EPS
Stock price: High
Low
Close
Weighted Average
Shares Outstanding
Weighted Average
Shares & Equivalent
Total Assets
Total Liabilities
Total Stockholders’ Equity
Capital Spending
2002
$11,797,279
$460,817
$359,817
$249,117
3.0%
5.6%
6.3%
9.3%
$0.19
$3.40
$1.90
$2.20
2003
$12,105,127
$632,416
$503,416
$1,400,756
4.2%
7.0%
8.2%
13.0%
$0.27
$5.56
$2.03
$4.20
2004
$13,682,449
$1,031,351
$758,351
$1,261,855
5.5%
8.9%
11.0%
14.5%
$0.38
$8.30
$4.48
$7.35
2005
$13,971,217
$1,256,169
$908,169
$980,047
6.5%
9.6%
11.4%
11.7%
$0.46
$8.99
$4.20
$6.35
2006
$14,888,912
$1,589,765
$1,123,765
$1,075,722
7.5%
10.5%
12.3%
8.9%
$0.55
$10.47
$6.26
$7.53
1,878,030
1,872,190
1,906,771
1,944,330
2,000,017
1,879,213
$6,412,159
$545,496
$5,866,663
$250,366
1,895,106
$7,194,684
$826,334
$6,368,350
$244,573
1,982,814
$8,489,988
$1,075,772
$7,414,216
$270,089
1,986,885
$9,470,799
$992,294
$8,478,505
$211,276
2,027,916
$10,743,461
$879,362
$9,864,099
$273,548
Share & per share amounts have been adjusted for the 2004 three-for-two stock split. All share and per share information presented has been
adjusted as if the stock split occurred on the earliest date presented.
NET SALE S 20 02- 2006
NET INCOME 20 02- 2006
$ 1 6 , 0 0 0 , 0 0 0
$ 1 4 , 0 0 0 , 0 0 0
$ 1 2 , 0 0 0 , 0 0 0
$ 1 0 , 0 0 0 , 0 0 0
$8000,000
$6 0 00,000
$ 4 , 0 0 0 , 0 0 0
$ 2 , 0 0 0 , 0 0 0
$0
2002
2003
2004
2005
200 6
$ 1 , 2 0 0 , 0 0 0
$ 1 , 0 0 0 , 0 0 0
$ 8 0 0 , 0 0 0
$ 6 0 0 , 0 0 0
$ 4 0 0 , 0 0 0
$ 2 0 0 , 0 0 0
$ 0
2002
2003
2004
20 05
2 0 06
4832 Grand Avenue, Duluth, MN 55807 | toll free: 1-800-328-4261 | phone: 218-628-2217 | fax: 218-628-3245 | www.ikonics.com | info@ikonics.com
ISO 9001 CERTIFIED NASDAQ LISTED: IKNX
070301