UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the Fiscal Year Ended December 31, 2010
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the Transition Period From _______________ to _______________.
Commission file number 000-25727
IKONICS CORPORATION
(Exact name of registrant as specified in its charter)
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Minnesota
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41-0730027
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. employer
identification no.)
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4832 Grand Avenue
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Duluth, Minnesota
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55807
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(Address of principal executive offices)
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(Zip code)
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Registrants telephone number, including area code: (218) 628-2217
Securities registered under Section 12(b) of the Act:
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Name of Each Exchange
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Title of Each Class
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On Which Registered
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Common Stock, par value $.10 per share
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Nasdaq Capital Market
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Securities registered under Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes
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No
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Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of
the Exchange Act. Yes
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No
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Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files.)
Yes
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No
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Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained in this form, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(do not check if smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
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No
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The aggregate market value of the voting stock held by non-affiliates of the registrant as of
June 30, 2010 was $6,064,421 based on the most recent closing price for the issuers Common Stock
on such date as reported on the Nasdaq Capital Market. For purposes of determining this number,
all officers and directors of the issuer are considered to be affiliates of the issuer, as well as
individual stockholders holding more than 10% of the issuers outstanding Common Stock. This
number is provided only for the purpose of this report on Form 10-K and does not represent an
admission by either the issuer or any such person as to the status of such person.
State the number of shares outstanding of each of the issuers classes of common equity, as of
the latest practical date: Common Stock, $.10 par value 1,973,607 issued and outstanding as of
February 23, 2011.
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of the
safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, relating
to future events or the future financial performance of the Company. Forward-looking statements
are only predictions or statements of intention subject to risks and uncertainties and actual
events or results could differ materially from those projected. Factors that could cause actual
results to differ include the risks, uncertainties and other matters set forth below under the
caption Factors that May Affect Future Results and the matters set forth under the captions
Business and Managements Discussion and Analysis of Financial Condition and Results of
Operations, as well as those discussed elsewhere in this Annual Report on
Form 10-K
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TABLE OF CONTENTS
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Companys definitive proxy statement for its 2011 Annual Meeting of
Shareholders are incorporated by reference in Part III.
PART I
Item 1. Business
General
IKONICS Corporation (IKONICS or the Company) was incorporated in Minnesota as Chroma-Glo,
Inc. in 1952 and changed its name to The Chromaline Corporation in 1982. In December 2002, the
Company changed its name to IKONICS Corporation. The Company develops, manufactures and sells
light-sensitive liquid coatings (emulsions) and films for screen printing and abrasive etching.
The Company also markets inkjet receptive films and ancillary chemicals. The Company resells
equipment and other consumables to provide a full line of products and services to its customers.
In 2006, the Company began to offer custom technology services for silicon wafers, glass wafers,
industrial ceramics and composite materials based on proprietary technology, and also began a
research program to develop digital imaging technologies (DTX) for niche industrial markets. The
Companys products serve the screen printing, awards and recognition, signage, electronics,
aerospace, and industrial ceramics and industrial digital inkjet markets, as well as other
industrial markets. On December 29, 2006, the Company acquired the image mate
®
line of screen
print photochemical products and adhesives from Franklin International. These products continue to
be sold under the image mate
®
brand, primarily through
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established image mate
®
distribution, although some cross fertilization between the image mate
®
and Chromaline
brands does occur. In 2006, the Company established the IKONICS Imaging business unit. The IKONICS
Imaging business unit includes PhotoBrasive Systems which provides products for the awards and
recognition and monument markets. The IKONICS Imaging Business unit also develops the Companys
industrial digital inkjet and composite machining technology along with providing electronic wafer
and ceramic etching services for industrial markets. In 2009, the Companys industrial offering
expanded to the Companys new facility, which was completed at the end of 2008. In 2010, the
Company sold its first DTX printer and developed proprietary photo resists films for the
micromachining of electronic parts. The Company has applied for patents related to the photo
resist films.
Products
IKONICS traditional core technology is the use of photochemicals to create masks or stencils
for the transfer of images by screen printing or abrasive etching. Recently, the Companys product
offering has expanded to include new business initiatives such as inkjet receptive substrates,
digitally generated acid resist transfer films, etched electronic wafers and industrial, ceramics,
and sound absorbing technology for the aerospace industry.
Distribution
The Company currently has approximately 200 domestic and international distributors. The
Company also sells its products through direct sales to certain end users who do not require the
services of a distributor. In addition, IKONICS markets and sells its products through magazine
advertising, trade shows and the internet.
IKONICS has a diverse customer base both domestically and abroad and does not depend on one or
a few customers for a material portion of its revenues. In 2010 and 2009, no one customer
accounted for more than 10% of net sales.
Quality Control in Manufacturing
In March 1994, IKONICS became the first firm in northern Minnesota to receive ISO 9001
certification. ISO 9000 is a series of worldwide standards issued by the International
Organization for Standardization that provide a framework for quality assurance. ISO 9001 is the
most comprehensive standard of the ISO 9000 series. The Company has been recertified every three
years beginning in 1997. IKONICS quality function goal is to train all employees properly in both
their work and in the importance of their work. Internal records of quality, including related
graphs and tables, are reviewed regularly and discussions are held among management and employees
regarding how improvements might be realized. The Company has rigorous materials selection
procedures and also uses environmental testing and screen print equipment tailored to fit
customers needs.
Research and Development/Intellectual Property
IKONICS spent 4.2% of sales ($696,000) on research and development in 2010 and 4.3% of sales
($654,000) in 2009. In its research program, IKONICS has developed ultraviolet light-sensitive
chemistries used in the manufacture of screen print stencils, photoresists for abrasive etching and
ink jet fluids. The Company has a number of patents and patent applications on these chemistries
and applications. There can be no assurance that any patent granted to the Company will provide
adequate protection to the Companys intellectual property. Within IKONICS, steps are taken to
protect the Companys trade secrets, including physical security, confidentiality and
non-competition agreements with employees, and confidentiality agreements with vendors. Over the
past few years, the Company has directed a larger portion of it research and development resources
towards industrial inkjettable fluids and substrates. The Company has also developed proprietary
products and techniques for the etching of electronic wafers, industrial ceramics and composite
materials in used for jet engine sound deadening.
In addition to its patents, the Company has various trademarks including the IKONICS,
Chromaline, PhotoBrasive, AccuArt, Nichols, image mate and DTX trademarks. The image
mate trademark was acquired as part of an asset purchase from Franklin International during
December 2006.
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Raw Materials
The primary raw materials used by IKONICS in its production are photopolymers, polyester
films, polyvinylacetates, polyvinylalcohols and water. The Companys purchasing staff leads in the
identification of both domestic and foreign sources for raw materials and negotiates price and
terms for all domestic and foreign markets. IKONICS involvement in foreign markets has given it
the opportunity to become a global buyer of raw materials at lower overall cost. The Company has a
number of suppliers for its operations. Some suppliers provide a significant amount of key raw
materials to the Company, but the Company believes alternative sources are available for most
materials. For those raw materials where an alternative source is not readily available, the
Company is developing contingency raw material replacement plans. To date, there have been no
significant shortages of raw materials. The Company believes it has good supplier relations.
Competition
The Company competes in its markets based on product development capability, quality,
reliability, availability, technical support and price. Though the screen printing market is much
larger than the awards and recognition market, IKONICS commands significantly more market share in
the latter. IKONICS has two primary competitors in its screen printing film business. They are
larger than IKONICS and possess greater resources than the Company in many areas. The Company has
numerous competitors in the market for screen print emulsions many of whom are larger than IKONICS
and possess greater resources. The market for the Companys abrasive etching products in the
awards and recognition market has one significant competitor. IKONICS considers itself to be the
leader in this market. There are significant competitors, using different technologies in the new
markets being entered by the Company.
Government Regulation
The Company is subject to a variety of federal, state and local industrial laws and
regulations, including those relating to the discharge of material into the environment and
protection of the environment. The governmental authorities primarily responsible for regulating
the Companys environmental compliance are the Environmental Protection Agency, the Minnesota
Pollution Control Agency and the Western Lake Superior Sanitary District. Failure to comply with
the laws promulgated by these authorities may result in monetary sanctions, liability for
environmental clean-up and other equitable remedies. To maintain compliance, the Company may make
occasional changes in its waste generation and disposal procedures.
These laws and regulations have not had a material effect upon the capital expenditures or
competitive position of the Company. The Company believes that it complies in all material
respects with the various federal, state and local regulations that apply to its current
operations. Failure to comply with these regulations could have a negative impact on the Companys
operations and capital expenditures and such negative impact could be significant.
Employees
As of February 23, 2011, the Company had approximately 72 full-time employees, 67 of whom are
located at the Companys headquarters in Duluth, Minnesota and five of whom are outside technical
sales representatives in various locations in America. None of the Companys employees are subject
to a collective bargaining agreement and the Company believes that its employee relations are good.
Item 1A. Risk Factors
Not Applicable
Item 1B. Unresolved Staff Comments
None
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Item 2. Property
The Company primarily conducts its operations in Duluth, Minnesota. The administrative,
sales, research and development, quality and manufacturing activities are housed in a 60,000
square-foot, four-story building,
including a basement level. The building is approximately seventy years old and has been
maintained in good condition. The Company also utilizes a 5,625 square-foot warehouse adjacent to
the existing plant building that was constructed in 1997. These facilities are owned by the
Company with no existing liens or leases. In April 2008, the Company acquired an 11 acre property
and constructed a new 35,000 square foot manufacturing and warehouse facility. The facility was
necessary to accommodate the Companys new business initiatives and growth plans and was completed
in 2008 at a cost of $4.4 million.
Item 3. Legal Proceedings
None.
Item 4. [Removed and Reserved]
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Companys Common Stock is traded on the Nasdaq Capital Market under the symbol IKNX. The
following table sets forth, for the fiscal quarters indicated, the high and low sales prices for
the Companys Common Stock as reported on the Nasdaq Capital Market for the periods indicated.
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High
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Low
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Fiscal Year Ended December 31, 2010:
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First Quarter
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$
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7.16
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$
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6.30
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Second Quarter
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7.50
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6.52
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Third Quarter
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7.32
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6.40
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Fourth Quarter
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8.00
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6.91
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Fiscal Year Ended December 31, 2009:
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First Quarter
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5.80
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$
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4.00
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Second Quarter
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6.87
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4.35
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Third Quarter
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7.98
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5.50
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Fourth Quarter
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8.29
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6.30
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As of February 23, 2011, the Company had approximately 596 shareholders. The Company has
never declared or paid any dividends on its Common Stock.
In prior years, the Companys board of directors had authorized the repurchase of 250,000 shares of
common stock. A total of 216,969 shares have been repurchased under this program including 2,200
shares repurchased during 2010. The plan allows for an additional 33,031 shares to be repurchased.
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(c) Total Number of
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Shares Purchased as
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(d) Maximum Number of
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(a) Total Number
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Part of Publicly
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Shares that May
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of
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(b) Average Price
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Announced Plans
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Yet Be Purchased Under
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Shares Purchased
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Paid per Share
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or Programs
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The Plans or Programs
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January 1, 2010 through July 31, 2010
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35,231
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August 1, 2010 through August 31, 2010
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2,200
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$
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6.88
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2,200
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33,031
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September 1, 2010 through December 31,
2010
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33,031
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2,200
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$
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6.88
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2,200
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33,031
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5
Item 6. Selected Financial Data
Not applicable
Item 7. Managements 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 Companys financial results of operations and financial condition during 2010 and
2009 and should be read in connection with the Companys audited financial statements and notes
thereto for the years ended December 31, 2010 and 2009, included herein.
Factors that May Affect Future Results
Certain statements made in this Annual Report on Form 10-K, including those summarized below,
are forward-looking statements within the meaning of the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, and actual
results may differ. Factors that could cause actual results to differ include those identified
below.
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The belief that the Companys current financial resources, cash generated from
operations and the Companys capacity for debt and/or equity financing will be
sufficient to fund current and anticipated business operations and capital
expenditures. The belief that the Companys low debt levels and available line of
credit make it unlikely that a decrease in product demand would impair the Companys
ability to fund operations
Changes in anticipated operating results, credit
availability, equity market conditions or the Companys debt levels may further enhance
or inhibit the Companys ability to maintain or raise appropriate levels of cash.
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The Companys expectations as to the level and use of planned capital expenditures
and that capital expenditures will be funded with cash generated from operating
activities
This expectation may be affected by changes in the Companys anticipated
capital expenditure requirements resulting from unforeseen required maintenance,
repairs or capital asset additions. The funding of planned or unforeseen expenditures
may also be affected by changes in anticipated operating results resulting from
decreased sales, lack of acceptance of new products or increased operating expenses or
by other unexpected events affecting the Companys financial position.
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The Companys belief that its vulnerability to foreign currency fluctuations and
general economic conditions in foreign countries is not significant
This belief may be
impacted by economic, political and social conditions in foreign markets, changes in
regulatory and competitive conditions, a change in the amount or geographic focus of
the Companys international sales, or changes in purchase or sales terms.
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The Companys 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.
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The Companys belief that sales growth will occur in China and India due to
increased sales efforts
These efforts may be impacted by economic, political and
social conditions in these foreign markets, regulatory conditions in such markets,
unanticipated changes in expenses or sales, lack of market acceptance of the Companys
products, changes in competitive conditions or other barriers to entry or expansion.
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The Companys belief as to future sources of sales growth and profitability,
including from photo resist film, export markets and other products the Company
sells
The sources of future increases to the Companys sales and profitability, and
the Companys ability to increase sales or profitability at all, may be impacted by
lack of market acceptance for the Companys products, adverse changes to the global
economy and consumer confidence, the adequacy of the Companys intellectual property
protections, the Companys ability to customize its products for new markets, the
Companys ability to
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maintain the quality of its receivables while adding customers in new markets and the
Companys ability to maintain its reputation for quality products.
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Critical Accounting Estimates
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 estimates which IKONICS believes are the
most critical to aid in fully understanding and evaluating its reported financial results include
the following:
Accounts Receivable.
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customers current credit worthiness, as
determined by review of the current credit information. The Company continuously monitors
collections and payments from its customers and maintains a provision for estimated credit losses
based upon historical experience and any specific customer collection issues that have been
identified. While such credit losses have historically been within expectations and the provisions
established, the Company cannot guarantee that it will continue to experience the same collection
history that has occurred in the past. The general payment terms are net 30-45 days for domestic
customers and net 30-90 days for foreign customers. A small percentage of the accounts receivable
balance are denominated in a foreign currency with no concentration in any given country. At the
end of each reporting period, the Company analyzes the receivable balance for customers paying in a
foreign currency. These balances are adjusted to each quarter or year spot rate in accordance with
FASB ASC 830, Foreign Currency Matters.
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 from cost when required.
Income Taxes.
At December 31, 2010, the Company had net current deferred tax assets of
$157,000 and net noncurrent deferred tax liabilities of $171,000. The deferred tax assets and
liabilities result primarily from temporary differences in property and equipment, accrued
expenses, and inventory reserves. In connection with the recording of an impairment charge during
2009 as described below, the Company has recorded a deferred tax asset and corresponding full
valuation allowance in the amount of $323,000 as it is more likely that this asset will not be
realized. The fully reserved $323,000 deferred tax asset related to the capital loss can be
carried back two years and carried forward four years and must be offset by a capital gain. The
Company has determined that is more likely than not that the remaining deferred tax assets will be
realized and that an additional valuation allowance for such assets in not currently required. The
Company accounts for its uncertain tax positions under the provision of FASB ASC 740, Income Taxes.
At December 31, 2009 the Company had recorded a liability of $27,000 related to an uncertain tax
position which was eliminated during 2010 and had no reserves for uncertain tax positions at
December 31, 2010.
Investments in Non-Marketable Equity Securities
. The carrying value of financial instruments,
such as cash, short-term investments, accounts receivable, accounts payable and accrued liabilities
approximate their fair value because of their short term nature. The Company does not hold or issue
financial instruments for trading purposes. The Companys investment in non-marketable securities
was comprised of shares in iTi and previously carried at cost. In 2009, the Company recorded an
impairment charge of $918,951, reducing the investment in iTi to $0, because iTi was unable to fund
operations, acquire financing or negotiate the sale of the Company. iTi has since ceased
operations and has been liquidated.
Revenue Recognition.
The Company recognizes revenue on sales of products when title passes
which can occur at the time of shipment or when the goods arrive at the customer location depending
on the agreement with the customer. The Company sells its products to both distributors and
end-users. Sales to distributors and end-users are recorded based upon the criteria governed by
the sales, delivery, and payment terms stated on the invoices from the Company to the purchaser.
In addition to transfer of title / risk of loss, all revenue is recorded in accordance with the
criteria outlined within SAB 104 and FASB ASC 605 Revenue Recognition:
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(a)
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persuasive evidence of an arrangement (principally in the form
of customer sales orders and the Companys sales invoices)
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(b)
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delivery and performance (evidenced by proof of delivery, e.g.
the shipment of film and substrates with bill of lading used for proof of
delivery for FOB shipping point terms, and the carrier booking confirmation
report used for FOB destination terms). Once the finished product is shipped
and physically delivered under the terms of the invoice and sales order, the
Company has no additional performance or service obligations to complete
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(c)
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a fixed and determinable sales price (the Companys pricing is
established and is not based on variable terms, as evidenced in either the
Companys invoices or the limited number of distribution agreements; the
Company rarely grants extended payment terms and has no history of concessions)
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(d)
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a reasonable likelihood of payment (the Companys terms are
standard, and the Company does not have a substantial history of customer
defaults or non-payment)
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Sales are reported on a net basis by deducting credits, estimated normal returns and discounts.
The Companys return policy does not vary by geography. The customer has no rotation or price
protection rights and the Company is not under a warranty obligation except for a minimal
obligation related to six months of service on the DTX printer sold in 2010. Freight billed to
customers is included in sales. Shipping costs are included in cost of goods sold.
Results of Operations
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Sales.
The Companys net sales increased 9.2% in 2010 to a record $16.5 million compared to
net sales of $15.1 million in 2009. Strong sales in Europe and Latin America drove a 17.1% Export
sales increase for 2010 compared to 2009. IKONICS Imaging also realized a 19.9% sales increase
over 2009. Over one-half of the IKONICS Imaging sales increase was related to the Companys new
business initiatives. Sales to the awards and trophy market also grew in 2010. Partially
offsetting these sales increases, Domestic sales decreased 2.0% in 2010 due to lower private label
film shipments.
Gross Profit
. Gross profit was $6.8 million, or 41.1% of sales, in 2010 and $6.1 million, or
40.1% of sales, in 2009. Export gross profit percentage increased to 30.0% in 2010 compared to
26.5% in 2009 due to higher volumes and an improved sales mix. Improved volumes and sales mix
also accounted for IKONICS Imagings gross profit percentage increase from 44.3% in 2009 to 45.5%
in 2010. Domestic gross profit percentage improved slightly from 47.1% in 2009 to 47.4% in 2010.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses of
$4.6 million, or 27.7% of sales, in 2010 were comparable to selling general and administrative
expenses in 2009 of $4.5 million, or 30.0% of sales.
Research and Development Expenses.
Research and development expenses in 2010 were $696,000,
or 4.2% of sales, versus $654,000, or 4.3% of sales, in 2009. The 2010 increase is related
primarily to the $31,000 abandonment of patent applications. The Company records patent
application costs as an asset and amortizes those costs upon successful completion of the
application process or expenses those costs when an application is abandoned.
Gain on Sale of Non-Marketable Equity Securities.
The Company realized a gain of $29,800 in
2009 on the sale of its investment in the common and preferred stock of Apprise Technologies, Inc.
The original sale took place during 2007. The final $29,800 received in 2009 was related to a
portion of the original sales price that was placed in escrow at the time of the sale for
indemnification obligations as part of the agreement between Apprise and its purchaser. The
Company did not have any non-marketable equity securities as of December 31, 2010 and accordingly
did not have any gain on any such securities during 2010.
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Loss on Investment in Non-Marketable Equity Securities .
The Companys 2009 investment in
non-marketable securities was comprised of shares in iTi and was previously carried at cost.
Non-marketable securities are not adjusted to fair value on a recurring basis; however, they are
assessed for an other than temporary decline in fair value. A decline in the market value for
these securities that is determined to be other than temporary results in a revaluation of its
carrying amount to fair value. An impairment analysis was conducted in accordance with applicable
accounting standards in 2009, and the Company recorded an impairment charge of $919,000, which
represents a full write-off of the Companys investment in iTi to $0. The Company did not have any
loss on investments in non-marketable equity securities in 2010.
Interest Income.
The Company earned $19,700 of interest income in 2010 compared to $8,000 in
2009. The interest earned in 2010 and 2009 is related to interest received from the Companys
short-term investments, which consist of fully insured certificates of deposit with remaining
maturities ranging from 2 to 12 months.
Income Taxes.
During 2010, the Company realized income tax expense of $440,000, or an
effective rate of 28.3%, compared to income tax expense of $296,000 in 2009. Income tax expense in
2010 and 2009 was impacted by derecognizing a liability for unrecognized tax benefits relating to a
tax year where the statute of limitations expired during the year. A $27,000 liability was
derecognized in 2010 while a $21,000 liability was derecognized in 2009. During 2010, the Company
also recorded an out-of-period tax benefit adjustment of $15,000 relating to December 31, 2009
estimates for tax credits as well as the receipt of interest of approximately $13,000 related to
Minnesota state income tax returns. Income tax expense in 2010 and 2009 also benefitted from the
domestic manufacturing deduction, and research and development credits. In 2009 the Company did
not receive a tax benefit from the $919,000 loss on investment in non-marketable equity securities
since the Company recorded a full valuation allowance against the deferred tax asset resulting from
the loss on the capital asset impairment charge, as it is currently more likely that the deferred
tax asset will not be realized.
Liquidity and Capital Resources
The Company has financed its operations principally with funds generated from operations.
These funds have been sufficient to cover the Companys normal operating expenditures, annual
capital requirements, and research and development expenditures.
Cash was $1,291,000 and $1,305,000 at December 31, 2010 and 2009, respectively. In addition
to its cash, the Company also held $2,218,000 of short term investments as of December 31, 2010 and
$802,000 of short term investments as of December 31, 2009. The Company generated $1,601,000 in
cash from operating activities during 2010, compared to generating $1,374,000 of cash from
operating activities in 2009. Cash provided by operating activities is primarily the result of the
net income (loss) adjusted for non-cash loss and gain on investments, non-cash depreciation and
amortization, loss on intangible asset abandonment, deferred taxes, and certain changes in working
capital components discussed in the following paragraph.
During 2010, trade receivables decreased by $132,000. The decrease in receivables was driven
by improved collection related to an improved economy. Inventory levels increased $127,000 due to
higher levels of raw material and finished goods to support the increase in sales volumes. Prepaid
expenses and other assets increased $3,000. Accounts payable increased $155,000 due to of the
timing of payments to and purchases from vendors. Accrued liabilities decreased $114,000 due to
the timing of payroll and the derecognizing of a liability for unrecognized tax benefits relating
to a tax year where the statute of limitations expired during the year. Income taxes payable
decreased $73,000 reflecting 2010 estimated tax payments.
During 2010, investing activities used $1,637,000. The Company invested $2,621,000 in fully
insured certificates of deposits with six $200,000 certificates of deposit maturing during 2010.
Purchases of property and equipment totaled $189,000. These capital expenditures were mainly for
production equipment and three vehicles for sales persons. The Company received $22,000 from
vehicle and equipment sales during 2010. Also during 2010, the Company incurred $54,000 in patent
application costs that the Company records as an asset and amortizes upon successful completion of
the application process.
9
During 2009, investing activities used $847,000. The Company invested $1,002,000 in
fully insured certificates on deposits with one $200,000 certificate of deposit maturing during
2009. Purchases of property and equipment were $90,000, mainly for new equipment to support the
Companys new business initiatives and research activities. Also during 2009, the Company incurred
$10,000 in patent application costs that the Company records as an asset and amortizes upon
successful completion of the application process or expenses if the application is abandoned. The
Company received proceeds of approximately $30,000 in 2009 on the 2007 sale of its investment in
the common and preferred stock of Apprise Technologies, Inc. and $26,000 for the sale of equipment
and vehicles.
During 2010 the Company received $23,000 from financing activities. The Company received
$37,000 from the issuance of 8,500 shares of common stock from the exercise of stock options and
the Company repurchased 2,200 shares of it own stock for $15,000. The Company used $124,000 in
financing activities during 2009 to repurchase 26,926 shares of its own stock
A bank line of credit exists providing for borrowings of up to $1,250,000. The line of credit
is collateralized by trade receivables and inventory and bears interest at 2.5 percentage points
over the 30-day LIBOR rate. The Company did not utilize this line of credit during 2010 and 2009
and there were no borrowings outstanding as of December 31, 2010 and 2009. There are no financial
covenants related to the line of credit.
The Company believes that current financial resources, its line of credit, cash generated from
operations and the Companys 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 Companys products
would impair the Companys ability to fund operations.
Capital Expenditures
In 2010, the Company had $189,000 in capital expenditures. These capital expenditures were
mainly for production equipment and three vehicles for sales persons.
In 2009, the Company made $90,000 in capital expenditures, mainly for equipment to support the
Companys new business initiatives and research activities.
The Company expects capital expenditures in 2011 of approximately $600,000. Plans for capital
expenditures include two mandatory elevator and manufacturing equipment upgrades, development
equipment to modernize the capabilities and processes of IKONICS laboratory, research and
development to improve measurement and quality control processes and a vehicle. These commitments
are expected to be funded with cash generated from operating activities.
International Activity
The Company markets its products in numerous countries in all regions of the world, including
North America, Europe, Latin America, and Asia. The Companys 2010 foreign sales of $5,421,000
were approximately 32.8% of total sales, compared to the 2009 foreign sales of $4,629,000, which
were 30.6% of total sales. The increase in foreign sales in 2010 was primarily due to growth in
both Europe and Latin America. The Company anticipates sales growth in India and China due to
increased sales efforts. Fluctuations in certain foreign currencies have not significantly
impacted the Companys operations because the Companys 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 Companys foreign transactions are primarily negotiated, invoiced and paid in U.S.
dollars, while a portion is transacted in Euros. IKONICS has not implemented an economic hedging
strategy to reduce the risk of foreign currency translation exposures, which management does not
believe to be significant based on the scope and geographic diversity of the Companys foreign
operations as of December 31, 2010. Furthermore, the impact of foreign exchange on the Companys
balance sheet and operating results was not material in either 2010 or 2009.
10
Future Outlook
IKONICS has spent on average over 4% of its sales dollars for the past few years in research
and development and has made capital expenditures related to its digital technology program. The
Company plans to maintain its efforts in this area and expedite internal product development as
well as form technological alliances with outside experts to commercialize new product
opportunities.
In 2010, the Company made substantial progress on its new business initiatives. Photomachining
and sound deadening were in commercial operation supplying product to major electronics, defense
and aerospace customers. A DTX printer was sold in the fourth quarter of 2010; it is performing to
expectations and generating sales of related consumables. In 2010, the Company entered into a
strategic alliance with Colour Scanner Technology GMBH for the supply and marketing of DTX
printers. The Company was also awarded a European patent on its DTX technology in 2010.
In 2010, the Company developed and applied for a patent on its I-HE photo resist film for the
etching of electronic wafers and developed I-XE low silicone photo resist film for the aerospace
industry. The Company believes both films have been well received and have begun to generate
profitable sales which the Company believes will continue in 2011.
Export sales grew by 17% in 2010 and the Company expects continued growth in 2011 as the
Company will continue efforts to grow its business internationally by attempting to develop new
markets and expanding market share where it has already established a presence.
In 2010, the Companys traditional domestic screen print stencil business was flat. The
Company anticipates growth in this area in 2011 with an improving economy and new sales efforts.
Sales to the awards and recognition market of the Companys sandblast resist films rebounded in
2010 with the improving economy, and the Company expects that trend to continue in 2011.
Other future activities undertaken to expand the Companys business may include acquisitions,
building improvements, equipment additions, new product development and marketing opportunities.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting Pronouncements
None
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
11
Item 8. Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
IKONICS Corporation
We have audited the accompanying balance sheets of IKONICS Corporation as of December 31, 2010 and
2009, and the related statements of operations, stockholders equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of IKONICS Corporation as of December 31, 2010 and 2009, and the
results of its operations and its cash flows for the years then ended in conformity with U.S.
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Duluth, Minnesota
March 3, 2011
12
IKONICS CORPORATION
BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash (Note 7)
|
|
$
|
1,291,383
|
|
|
$
|
1,304,586
|
|
Short-term investments
|
|
|
2,217,990
|
|
|
|
802,165
|
|
Trade receivables, less allowance of $60,000 in 2010 and
$78,000 in 2009 (Notes 5, 7, and 8)
|
|
|
1,883,428
|
|
|
|
2,015,798
|
|
Inventories (Notes 1 and 8)
|
|
|
2,198,064
|
|
|
|
2,070,602
|
|
Prepaid expenses and other assets
|
|
|
63,965
|
|
|
|
61,337
|
|
Deferred income taxes (Note 2)
|
|
|
157,000
|
|
|
|
163,000
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
7,811,830
|
|
|
|
6,417,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPERTY, PLANT, AND EQUIPMENT, at cost:
|
|
|
|
|
|
|
|
|
Land and building
|
|
|
5,888,445
|
|
|
|
5,883,794
|
|
Machinery and equipment
|
|
|
2,455,238
|
|
|
|
2,456,218
|
|
Office equipment
|
|
|
642,100
|
|
|
|
741,895
|
|
Vehicles
|
|
|
234,650
|
|
|
|
241,006
|
|
|
|
|
|
|
|
|
|
|
|
9,220,433
|
|
|
|
9,322,913
|
|
Less accumulated depreciation
|
|
|
4,207,500
|
|
|
|
4,088,669
|
|
|
|
|
|
|
|
|
|
|
|
5,012,933
|
|
|
|
5,234,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS, less accumulated amortization of $376,983 in
2010 and $325,576 in 2009
(Note 3)
|
|
|
317,168
|
|
|
|
345,540
|
|
|
|
|
|
|
|
|
|
|
$
|
13,141,931
|
|
|
$
|
11,997,272
|
|
|
|
|
|
|
|
|
13
IKONICS CORPORATION
BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
441,830
|
|
|
$
|
286,610
|
|
Accrued compensation
|
|
|
282,196
|
|
|
|
337,365
|
|
Other accrued liabilities (Note 2)
|
|
|
45,868
|
|
|
|
104,408
|
|
Income taxes payable
|
|
|
8,090
|
|
|
|
80,803
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
777,984
|
|
|
|
809,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES (Note 2)
|
|
|
171,000
|
|
|
|
162,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
948,984
|
|
|
|
971,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $.10 per share; authorized 250,000 shares:
|
|
|
|
|
|
|
|
|
issued none
|
|
|
|
|
|
|
|
|
Common
stock, par value $.10 per share; authorized 4,750,000 shares:
|
|
|
|
|
|
|
|
|
issued and
outstanding 1,973,357 shares in 2010 and 1,967,057 shares in 2009 (Note 6)
|
|
|
197,336
|
|
|
|
196,706
|
|
Additional paid-in capital
|
|
|
2,263,176
|
|
|
|
2,198,289
|
|
Retained earnings
|
|
|
9,732,435
|
|
|
|
8,631,091
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
12,192,947
|
|
|
|
11,026,086
|
|
|
|
|
|
|
|
|
|
|
$
|
13,141,931
|
|
|
$
|
11,997,272
|
|
|
|
|
|
|
|
|
See notes to financial statements.
14
IKONICS CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
NET SALES
|
|
$
|
16,517,338
|
|
|
$
|
15,121,617
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
9,713,054
|
|
|
|
9,054,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
6,804,284
|
|
|
|
6,066,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING, GENERAL AND ADMINSTRATIVE EXPENSES
|
|
|
4,574,452
|
|
|
|
4,543,448
|
|
|
|
|
|
|
|
|
|
|
RESEARCH AND DEVELOPMENT EXPENSES
|
|
|
695,593
|
|
|
|
653,747
|
|
|
|
|
|
|
|
|
|
|
|
5,270,045
|
|
|
|
5,197,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
1,534,239
|
|
|
|
869,651
|
|
|
|
|
|
|
|
|
|
|
GAIN ON SALE OF NON-MARKETABLE EQUITY SECURITIES
|
|
|
|
|
|
|
29,762
|
|
|
|
|
|
|
|
|
|
|
LOSS ON INVESTMENT IN NON-MARKETABLE EQUITY SECURITIES
|
|
|
|
|
|
|
(918,951
|
)
|
|
|
|
|
|
|
|
|
|
INTEREST INCOME
|
|
|
19,681
|
|
|
|
8,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
1,553,920
|
|
|
|
(11,360
|
)
|
|
|
|
|
|
|
|
|
|
FEDERAL AND STATE INCOME TAXES (Note 2)
|
|
|
440,000
|
|
|
|
296,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
1,113,920
|
|
|
$
|
(307,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.56
|
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.56
|
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,971,717
|
|
|
|
1,973,739
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
1,973,447
|
|
|
|
1,973,739
|
|
|
|
|
|
|
|
|
See notes to financial statements.
15
IKONICS CORPORATION
STATEMENTS OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Stock-
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
holders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
BALANCE AT DECEMBER 31, 2008
|
|
|
1,993,983
|
|
|
$
|
199,398
|
|
|
$
|
2,202,888
|
|
|
$
|
9,031,354
|
|
|
$
|
11,433,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(307,360
|
)
|
|
|
(307,360
|
)
|
Common Stock Repurchased
|
|
|
(26,926
|
)
|
|
|
(2,692
|
)
|
|
|
(28,249
|
)
|
|
|
(92,903
|
)
|
|
|
(123,844
|
)
|
Stock based compensation and related tax benefit
|
|
|
|
|
|
|
|
|
|
|
23,650
|
|
|
|
|
|
|
|
23,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2009
|
|
|
1,967,057
|
|
|
|
196,706
|
|
|
|
2,198,289
|
|
|
|
8,631,091
|
|
|
|
11,026,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,113,920
|
|
|
|
1,113,920
|
|
Exercise of stock options
|
|
|
8,500
|
|
|
|
850
|
|
|
|
36,890
|
|
|
|
|
|
|
|
37,740
|
|
Common stock repurchased
|
|
|
(2,200
|
)
|
|
|
(220
|
)
|
|
|
(2,334
|
)
|
|
|
(12,576
|
)
|
|
|
(15,130
|
)
|
Tax benefit resulting from stock option exercises
|
|
|
|
|
|
|
|
|
|
|
914
|
|
|
|
|
|
|
|
914
|
|
Stock based compensation and related tax benefit
|
|
|
|
|
|
|
|
|
|
|
29,417
|
|
|
|
|
|
|
|
29,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2010
|
|
|
1,973,357
|
|
|
$
|
197,336
|
|
|
$
|
2,263,176
|
|
|
$
|
9,732,435
|
|
|
$
|
12,192,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
16
IKONICS CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,113,920
|
|
|
$
|
(307,360
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
402,027
|
|
|
|
424,573
|
|
Amortization
|
|
|
51,407
|
|
|
|
55,251
|
|
Stock based compensation
|
|
|
29,417
|
|
|
|
23,650
|
|
(Gain) loss on sale of equipment and vehicles
|
|
|
(13,766
|
)
|
|
|
8,059
|
|
Loss on intangible asset abandonment
|
|
|
31,372
|
|
|
|
12,700
|
|
Gain on sale of non-marketable equity securities
|
|
|
|
|
|
|
(29,762
|
)
|
Loss on investment in non-marketable equity securities
|
|
|
|
|
|
|
918,951
|
|
Deferred income taxes
|
|
|
15,000
|
|
|
|
(48,000
|
)
|
Changes in working capital components:
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
132,370
|
|
|
|
61,360
|
|
Inventories
|
|
|
(127,462
|
)
|
|
|
38,562
|
|
Prepaid expenses and other assets
|
|
|
(2,628
|
)
|
|
|
130,864
|
|
Income tax refund receivable
|
|
|
|
|
|
|
185,869
|
|
Accounts payable
|
|
|
155,220
|
|
|
|
(178,173
|
)
|
Accrued liabilities
|
|
|
(113,709
|
)
|
|
|
(3,233
|
)
|
Income taxes payable
|
|
|
(71,799
|
)
|
|
|
80,803
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
1,601,369
|
|
|
|
1,374,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(189,150
|
)
|
|
|
(90,313
|
)
|
Proceeds from sale of equipment and vehicles
|
|
|
22,200
|
|
|
|
25,500
|
|
Purchases of intangibles
|
|
|
(54,407
|
)
|
|
|
(10,206
|
)
|
Purchases of short-term investments
|
|
|
(2,621,393
|
)
|
|
|
(1,002,165
|
)
|
Proceeds from sale of short-term investments
|
|
|
1,205,568
|
|
|
|
200,000
|
|
Proceeds from sale of non-marketable equity securities
|
|
|
|
|
|
|
29,762
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,637,182
|
)
|
|
|
(847,422
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(15,130
|
)
|
|
|
(123,844
|
)
|
Proceeds from exercise of stock options
|
|
|
37,740
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
22,610
|
|
|
|
(123,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
(13,203
|
)
|
|
|
402,848
|
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF YEAR
|
|
|
1,304,586
|
|
|
|
901,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF YEAR
|
|
$
|
1,291,383
|
|
|
$
|
1,304,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes, net of refunds received of $81,422 and
$119,423, respectively
|
|
$
|
531,799
|
|
|
$
|
96,380
|
|
|
|
|
|
|
|
|
See notes to financial statements.
17
IKONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
1.
|
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
|
|
|
Description of Business and Foreign Export Sales
IKONICS Corporation (the Company) develops
and manufactures high-quality photochemical imaging systems for sale primarily to a wide
range of printers and decorators of surfaces. Customers applications are primarily screen
printing and abrasive etching. The Companys principal markets are throughout the United
States. In addition, the Company sells to Europe, Latin America, Asia, and other parts of
the world. The Company extends credit to its customers, all on an unsecured basis, on terms
that it establishes for individual customers.
|
|
|
|
Foreign export sales approximated 32.8% of net sales in 2010 and 30.6% of net sales in 2009.
The Companys accounts receivable at December 31, 2010 and 2009 due from foreign customers
were 38.5% and 36.7%, respectively. The foreign export receivables are composed primarily of
open credit arrangements with terms ranging from 30 to 90 days. No single customer
represented greater than 10% of net sales in 2010 or in 2009.
|
|
|
|
The Company considers events or transactions that occur after the balance sheet date but
before the financial statements are issued to provide additional evidence relative to certain
estimates or to identify matters that require additional disclosure. Subsequent events have
been evaluated through March 3, 2011, the date the financial statements were issued.
|
|
|
|
A summary of the Companys significant accounting policies follows:
|
|
|
|
Short-Term Investments
Short-term investments consist of $2,217,990 and $802,165 of fully
insured certificates of deposit with maturities ranging from one to twelve months as of
December 31, 2010 and 2009, respectively.
|
|
|
|
Trade Receivables
Trade receivables are carried at original invoice amount less an
estimate made for doubtful receivables based on a review of all outstanding amounts on an
on-going basis. Management determines the allowance for doubtful accounts by regularly
evaluating individual customer receivables and considering a customers financial condition,
credit history, and current economic conditions. Trade receivables are written off when
deemed uncollectible. Recoveries of trade receivables previously written off are recorded
when received. Accounts are considered past due if payment is not received according to
agreed-upon terms.
|
|
|
|
A small percentage of the accounts receivable balance is denominated in a foreign currency
with no concentration in any given country. At the end of each reporting period, the Company
analyzes the receivable balance for customers paying in a foreign currency. These balances are
adjusted to each quarter or year spot rate in accordance with FASB ASC 830, Foreign Currency
Matters. Foreign currency transactions and translation adjustments did not have a significant
effect on the Balance Sheet or the Statements of Stockholders Equity and Cash Flows for 2010
and 2009.
|
|
|
|
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 $993,000 and $893,000 higher than reported at December 31, 2010
and 2009, respectively. During 2009, certain inventory quantities were reduced, which
resulted in liquidations of LIFO inventory layers. The liquidations decreased cost of goods
sold by approximately $59,000 in 2009. No layers were liquidated in 2010. The major
components of inventories, net of the allowance for obsolescence, are as follows:
|
18
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Raw materials
|
|
$
|
1,403,875
|
|
|
$
|
1,333,549
|
|
Work-in-progress
|
|
|
294,006
|
|
|
|
277,876
|
|
Finished goods
|
|
|
1,493,226
|
|
|
|
1,351,736
|
|
Reduction to LIFO cost
|
|
|
(993,043
|
)
|
|
|
(892,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
2,198,064
|
|
|
$
|
2,070,602
|
|
|
|
|
|
|
|
|
|
|
Depreciation
Depreciation of property, plant and equipment
is computed using the straight-line method over the
following estimated useful lives:
|
|
|
|
|
|
|
|
Years
|
|
Buildings
|
|
|
15-40
|
|
Machinery and equipment
|
|
|
5-10
|
|
Office equipment
|
|
|
3-10
|
|
Vehicles
|
|
|
3
|
|
|
|
Intangible Assets
Intangible assets consist primarily of patents, licenses and covenants
not to compete arising from business combinations. Intangible assets are amortized on a
straight-line basis over their estimated useful lives or agreement terms. Intangible assets
with finite lives are assessed for impairment whenever events or circumstances indicate the
carrying value may not be fully recoverable by comparing the carrying value of the
intangibles to their future undiscounted cash flows. To the extent the undiscounted cash
flows are less than the carrying value, analysis is performed based on several criteria,
including, but not limited to, revenue trends, discounted operating cash flows and other
operating factors to determine the impairment amount.
|
|
|
As of December 31, 2010 the remaining estimated weighted average useful lives of intangible
assets are as follows:
|
|
|
|
|
|
|
|
Years
|
|
Patents
|
|
|
16.5
|
|
Licenses
|
|
|
5.0
|
|
Non-compete agreements
|
|
|
3.5
|
|
|
|
Fair Value of Financial Instruments
The carrying amounts of financial instruments,
including cash, short-term investments, accounts receivable, accounts payable, and accrued
liabilities approximate fair value due to the short maturity of these instruments.
|
|
|
Revenue Recognition
The Company recognizes revenue on sales of products when title passes
which can occur at the time of shipment or when the goods arrive at the customer location
depending on the agreement with the customer. The Company sells its products to both
distributors and end-users. Sales to distributors and end-users are recorded based upon the
criteria governed by the sales, delivery, and payment terms stated on the invoices from the
Company to the purchaser. In addition to transfer of title / risk of loss, all revenue is
recorded in accordance with the criteria outlined within SAB 104 and FASB ASC 605 Revenue
Recognition:
|
|
|
|
(a) persuasive evidence of an arrangement (principally in the form of customer sales
orders and the Companys sales invoices, as generally there is no other formal
agreement underlying the sale transactions)
|
|
|
|
|
(b) delivery and performance (evidenced by proof of delivery, e.g. the shipment of
film and substrates with bill of lading used for proof of delivery for FOB shipping
point terms, and the carrier booking confirmation report used for FOB destination
terms). Once the finished product is shipped and physically delivered under the
terms of the invoice and sales order, the Company has no additional performance or
service obligations to complete
|
19
|
|
|
(c) a fixed and determinable sales price (the Companys pricing is established and
is not based on variable terms, as evidenced in either the Companys invoices or the
limited number of distribution agreements; the Company rarely grants extended
payment terms and has no history of concessions)
|
|
|
|
|
(d) a reasonable likelihood of payment (the Companys terms are standard, and the
Company does not have a substantial history of customer defaults or non-payment)
|
|
|
Sales are reported on a net basis by deducting credits, estimated normal returns and
discounts. The Companys return policy does not vary by geography. The customer has no
rotation or price protection rights and the Company is not under a warranty obligation except
for a minimal obligation related to six months of service on the DTX printer sold in 2010.
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.
|
|
|
|
Earnings (loss) Per Common Share (EPS)
Basic EPS is calculated using net income divided by
the weighted average of common shares outstanding. Diluted EPS is similar to Basic EPS except
that the weighted average number of common shares outstanding is increased to include the
number of additional common shares, when dilutive, that would have been outstanding if the
potential dilutive common shares, such as those shares subject to options, had been issued.
For the year ended December 31, 2009, the effect of all stock-based awards were anti-dilutive
due to the net loss incurred and, therefore, they were not included in the computation of per
share amounts.
|
|
|
|
Shares used in the calculation of diluted EPS are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Weighted average common shares outstanding
|
|
|
1,971,717
|
|
|
|
1,973,739
|
|
Dilutive effect of stock options
|
|
|
1,730
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common and common equivalent shares outstanding
|
|
|
1,973,447
|
|
|
|
1,973,739
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010, options to purchase 16,250 shares of common stock with a weighted
average exercise price of $7.89 were outstanding, but were excluded from the computation of
common share equivalents because they were anti-dilutive. If the Company had been in a net
income position in 2009, 28,000 options with a weighted average exercise price of $4.83 would
have been included as part of the weighted average common as the options would have been
dilutive.
|
|
|
Employee Stock Plan
The Company accounts for employee stock options under the provision of
ASC 718 Compensation Stock Compensation.
|
|
|
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates include the allowance for doubtful
accounts receivable, the reserve for inventory obsolescence and the valuation allowance for
deferred tax assets.
|
20
|
|
Income tax expense (benefit) for the years ended December 31, 2010 and 2009 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
428,000
|
|
|
$
|
325,000
|
|
State
|
|
|
(3,000
|
)
|
|
|
19,000
|
|
|
|
|
|
|
|
|
|
|
|
425,000
|
|
|
|
344,000
|
|
Deferred
|
|
|
15,000
|
|
|
|
(48,000
|
)
|
|
|
|
|
|
|
|
|
|
$
|
440,000
|
|
|
$
|
296,000
|
|
|
|
|
|
|
|
|
|
|
The expected provision (benefit) for income taxes, computed by applying the U.S.
federal income tax rate of 35% in 2010 and 2009 to income before taxes, is
reconciled to income tax expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Expected provision (benefit) for federal income taxes
|
|
$
|
544,000
|
|
|
$
|
(5,000
|
)
|
State income taxes, net of federal benefit
|
|
|
(2,100
|
)
|
|
|
15,300
|
|
Reversal of uncertain tax positions
|
|
|
(27,000
|
)
|
|
|
(21,000
|
)
|
Domestic manufacturers deduction
|
|
|
(50,100
|
)
|
|
|
(12,800
|
)
|
Non-deductible meals, entertainment, and life insurance
|
|
|
20,400
|
|
|
|
16,300
|
|
Valuation allowance for capital loss on investment in non-marketable equity securities
|
|
|
|
|
|
|
331,000
|
|
Research and development credit
|
|
|
(16,600
|
)
|
|
|
(14,800
|
)
|
Other
|
|
|
(28,600
|
)
|
|
|
(13,000
|
)
|
|
|
|
|
|
|
|
|
|
$
|
440,000
|
|
|
$
|
296,000
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities) consist of the following as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Accrued vacation
|
|
$
|
21,000
|
|
|
$
|
23,000
|
|
Inventories
|
|
|
113,000
|
|
|
|
114,000
|
|
Allowance for doubtful accounts
|
|
|
12,000
|
|
|
|
18,000
|
|
Allowance for sales returns
|
|
|
11,000
|
|
|
|
11,000
|
|
Capital loss carryforward
|
|
|
323,000
|
|
|
|
331,000
|
|
Less valuation allowance
|
|
|
(323,000
|
)
|
|
|
(331,000
|
)
|
|
|
|
|
|
|
|
|
|
|
157,000
|
|
|
|
166,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment and other assets
|
|
|
(160,000
|
)
|
|
|
(160,000
|
)
|
Intangible assets
|
|
|
(11,000
|
)
|
|
|
(3,000
|
)
|
Prepaid expenses
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(14,000
|
)
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
The deferred tax amounts described above have been included in the accompanying balance sheet
as of December 31, 2010 and 2009 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Current assets
|
|
$
|
157,000
|
|
|
$
|
163,000
|
|
Noncurrent assets (liabilities)
|
|
|
(171,000
|
)
|
|
|
(162,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(14,000
|
)
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010 and 2009, the Company established a valuation allowance against its
deferred tax asset related to the Companys $919,000 loss on its investment in non-marketable
equity securities since it is more likely that the deferred tax asset will not be realized.
The deferred tax asset and valuation allowance at December 31, 2010 and December 31, 2009 was
$323,000 and $331,000, respectively. In 2010 the Company was able to offset $8,000 of the
deferred tax asset with the gain realized on its 2007 sale of its investments in
Apprise Technologies. As of December 31, 2010 the remaining deferred tax asset related to
|
21
|
|
the capital loss can be carried back two years and carried forward four years and must be offset
by a capital gain.
|
|
|
The Company accounts for its uncertain tax positions under the provisions of FASB ASC 740,
Income Taxes. During 2010 and 2009, the statute of limitations for the relevant taxing
authority to examine and challenge the tax position for open years expired, resulting in
decreases in income tax expense of $27,000 in 2010 and $21,000 in 2009. As of December 31,
2010, there was no liability for unrecognized tax benefits compared to a liability of $27,000
as of December 31, 2009. The liability for unrecognized tax benefits was included in other
accrued liabilities.
|
|
|
It has been the Companys policy to recognize interest and penalties related to uncertain tax
positions in income tax expense. The Company had accrued approximately $8,000 of interest
related to uncertain tax positions at December 31, 2009. The unrecognized tax benefits at
December 31, 2009 relate to taxation of foreign export sales. At December 31, 2010 there is
no accrual for interest related to uncertain tax positions as there is no liability for
unrecognized tax benefits at December 31, 2010.
|
|
|
The Company is subject to taxation in the United States and various states. The material
jurisdictions that are subject to examination by tax authorities primarily include Minnesota
and the United States, for tax years 2007, 2008, 2009 and 2010.
|
|
|
A reconciliation of the beginning and ending amounts of unrecognized tax benefit for 2010 and
2009 is as follows:
|
|
|
|
|
|
Balance at January 1, 2009
|
|
$
|
48,000
|
|
Expiration of the statute of limitations for the
assessment of taxes
|
|
|
(21,000
|
)
|
|
|
|
|
Balance at December 31, 2009
|
|
|
27,000
|
|
Expiration of the statute of limitations for the
assessment of taxes
|
|
|
(27,000
|
)
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
|
|
|
|
|
|
22
3.
|
|
INTANGIBLE ASSETS
|
|
|
|
Intangible assets consist of patents, patent applications, licenses and covenants not to
compete arising from business combinations. Capitalized patent application costs are
included with patents. Intangible assets are amortized on a straight-line basis over their
estimated useful lives or terms of their agreement, whichever is shorter. In 2010 the
Company wrote off $31,000 of costs related to patent applications compared to $13,000 written
off in 2009. No other impairment adjustments to intangible assets were made during the year
ended December 31, 2010 or 2009.
|
|
|
|
Intangible assets at December 31, 2010 and 2009 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
291,151
|
|
|
$
|
(123,489
|
)
|
|
$
|
268,116
|
|
|
$
|
(115,872
|
)
|
Licenses
|
|
|
100,000
|
|
|
|
(67,500
|
)
|
|
|
100,000
|
|
|
|
(59,376
|
)
|
Non-compete agreements
|
|
|
303,000
|
|
|
|
(185,994
|
)
|
|
|
303,000
|
|
|
|
(150,328
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
694,151
|
|
|
$
|
(376,983
|
)
|
|
$
|
671,116
|
|
|
$
|
(325,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate amortization expense:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31
|
|
|
|
|
|
|
|
|
|
$
|
51,407
|
|
|
$
|
55,251
|
|
|
|
Estimated amortization expense for the years ending December 31:
|
|
|
|
|
|
2011
|
|
|
46,000
|
|
2012
|
|
|
46,000
|
|
2013
|
|
|
41,000
|
|
2014
|
|
|
12,000
|
|
2015
|
|
|
9,000
|
|
|
|
In connection with the license agreements, the Company has agreed to pay royalties ranging
from 3% to 5% on the sales of products subject to the agreements. The Company incurred
$87,000 of expense under these agreements during 2010, and $74,000 during 2009 which have
been included in selling, general and administrative expenses in the Statements of
Operations.
|
|
|
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 up to 5% of each eligible employees compensation. Total
retirement expense for the years ended December 31, 2010 and 2009 was approximately $188,000
and $175,000, respectively.
|
|
|
The Companys 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 in the market for etched industrial ceramics, glass
and silicon wafers, sound deadening products for aerospace; and is developing and selling
proprietary inkjet technology. Export sells primarily the same products as Domestic and
IKONICS Imaging to foreign customers. The accounting policies applied to determine the
segment information are the same as those described in the summary of significant accounting
policies.
|
23
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, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IKONICS
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
Export*
|
|
|
Imaging
|
|
|
Other
|
|
|
Total
|
|
Net sales
|
|
$
|
6,653,723
|
|
|
$
|
5,420,601
|
|
|
$
|
4,443,014
|
|
|
$
|
|
|
|
$
|
16,517,338
|
|
Cost of goods sold
|
|
|
3,497,971
|
|
|
|
3,792,335
|
|
|
|
2,422,748
|
|
|
|
|
|
|
|
9,713,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,155,752
|
|
|
|
1,628,266
|
|
|
|
2,020,266
|
|
|
|
|
|
|
|
6,804,284
|
|
Selling, general and
Administrative
|
|
|
973,623
|
|
|
|
571,826
|
|
|
|
1,128,508
|
|
|
|
1,900,495
|
|
|
|
4,574,452
|
|
Research and
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
695,593
|
|
|
|
695,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
Operations
|
|
$
|
2,182,129
|
|
|
$
|
1,056,440
|
|
|
$
|
891,758
|
|
|
$
|
(2,596,088
|
)
|
|
$
|
1,534,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IKONICS
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
Export*
|
|
|
Imaging
|
|
|
Other
|
|
|
Total
|
|
Net sales
|
|
$
|
6,788,355
|
|
|
$
|
4,628,855
|
|
|
$
|
3,704,407
|
|
|
$
|
|
|
|
$
|
15,121,617
|
|
Cost of goods sold
|
|
|
3,589,054
|
|
|
|
3,400,896
|
|
|
|
2,064,821
|
|
|
|
|
|
|
|
9,054,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,199,301
|
|
|
|
1,227,959
|
|
|
|
1,639,586
|
|
|
|
|
|
|
|
6,066,846
|
|
Selling, general and
Administrative
|
|
|
944,273
|
|
|
|
552,616
|
|
|
|
1,112,485
|
|
|
|
1,934,074
|
|
|
|
4,543,448
|
|
Research and
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
653,747
|
|
|
|
653,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
Operations
|
|
$
|
2,255,028
|
|
|
$
|
675,343
|
|
|
$
|
527,101
|
|
|
$
|
(2,587,821
|
)
|
|
$
|
869,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables as of December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Domestic
|
|
$
|
874,535
|
|
|
$
|
976,967
|
|
Export
|
|
|
725,007
|
|
|
|
740,547
|
|
IKONICS Imaging
|
|
|
325,334
|
|
|
|
331,117
|
|
Other
|
|
|
(41,448
|
)
|
|
|
(32,833
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,883,428
|
|
|
$
|
2,015,798
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
In 2010 and 2009, 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 Companys results of operations are
affected by fluctuations in foreign currency exchange rates. No single foreign country
accounted for more than 10% of the Companys net sales for 2010 and 2009.
|
Sales to foreign customers were 32.8% and 30.6% of the Companys net sales for 2010 and 2009,
respectively.
|
24
|
|
The Company has a stock incentive plan for the issuance of up to 442,750 shares of common
stock. 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 three year period. A total of 125,573 shares
of common stock are reserved for additional grants of options under the plan at December 31,
2010.
|
|
|
Under the plan, the Company charged compensation cost of $29,417 and $23,650 against income
in 2010 and 2009, respectively.
|
|
|
As of December 31, 2010, there was approximately $36,000 of unrecognized compensation cost
related to unvested share-based compensation awards granted which is expected to be
recognized over the next three years.
|
|
|
Proceeds from the exercise of stock options were $37,740 for 2010. There were no options
exercised in 2009.
|
|
|
The fair value of options granted during 2010 and 2009 were estimated using the Black-Scholes
option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
45.2
|
%
|
|
|
47.2
|
%
|
Expected life of option
|
|
Five Years
|
|
|
Five Years
|
|
Risk-free interest rate
|
|
|
2.5
|
%
|
|
|
2.0
|
%
|
Fair value of each option on grant date
|
|
$
|
3.08
|
|
|
$
|
2.10
|
|
|
|
There were 4,000 options and 21,750 options granted during 2010 and 2009, respectively.
|
|
|
FASB ASC 718, Compensation Stock Compensation specifies that initial accruals be based on
the estimated number of instruments for which the requisite service is expected to be
rendered. Therefore, the Company is required to incorporate a preexisting forfeiture rate
based on the historical forfeiture expense and prospective actuarial analysis, estimated at
2%.
|
|
|
A summary of the status of the Companys stock option plan as of December 31, 2010 and
changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
(years)
|
|
|
Value
|
|
Outstanding at January 1, 2010
|
|
|
45,500
|
|
|
$
|
5.91
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,000
|
|
|
|
7.39
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(8,500
|
)
|
|
|
4.44
|
|
|
|
|
|
|
|
|
|
Expired and forfeited
|
|
|
(500
|
)
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
40,500
|
|
|
$
|
6.38
|
|
|
|
2.65
|
|
|
$
|
38,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at
December 31, 2010
|
|
|
40,500
|
|
|
$
|
6.38
|
|
|
|
2.65
|
|
|
$
|
38,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2010
|
|
|
19,583
|
|
|
$
|
6.95
|
|
|
|
1.88
|
|
|
$
|
11,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
The weighted-average grant date fair value of options granted was $3.08 and $2.10 for the
years ended December 31, 2010 and 2009, respectively. The total intrinsic value of options
exercised was $24,945 for the year ended December 31, 2010. There were no options exercised
in 2009.
|
|
|
The following table summarizes information about stock options outstanding at December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Weighted-
|
|
|
Number
|
|
|
Weighted-
|
|
|
|
Outstanding at
|
|
|
Remaining
|
|
|
Average
|
|
|
Exercisable at
|
|
|
Average
|
|
|
|
December 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
December 31,
|
|
|
Exercise
|
|
Range of Exercise Price
|
|
2010
|
|
|
Life (years)
|
|
|
Price
|
|
|
2010
|
|
|
Price
|
|
$5.00 -$5.99
|
|
|
19,000
|
|
|
|
3.31
|
|
|
$
|
5.00
|
|
|
|
5,500
|
|
|
$
|
5.00
|
|
$6.00 -$6.99
|
|
|
5,250
|
|
|
|
2.58
|
|
|
$
|
6.71
|
|
|
|
3,500
|
|
|
$
|
6.71
|
|
$7.00 - $8.99
|
|
|
16,250
|
|
|
|
1.90
|
|
|
$
|
7.89
|
|
|
|
10,583
|
|
|
$
|
8.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,500
|
|
|
|
2.65
|
|
|
$
|
6.38
|
|
|
|
19,583
|
|
|
$
|
6.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
|
CONCENTRATION OF CREDIT RISK
|
|
|
|
The Company maintains its cash balances primarily at one financial institution in a partially
insured checking account that does not provide for interest. Instead, the account earns
credits which offset banking fees.
|
|
|
|
Accounts receivable are financial instruments that also expose the Company to concentration
of credit risk. The large number of customers comprising the Companys 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.
|
|
8.
|
|
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 October 31, is collateralized by
trade receivables and inventories, and bears interest at 2.5 percentage points over 30-day
LIBOR. There were no outstanding borrowings under this line of credit at December 31, 2010
and 2009. There are no financial covenants related to the line of credit.
|
26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
.
As of December 31, 2010, an evaluation was carried out under
the supervision and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934 (the Exchange Act)). Based upon that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the design and operation of these disclosure controls and
procedures were effective to ensure that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable rules and forms.
Managements Annual Report on Internal Control Over Financial Reporting.
Our management is
responsible for establishing and maintaining adequate internal control over financial reporting as
defined in Rules 13a-15(f) and 15d-15(f ) under the Exchange Act. Our internal control system is
designed to provide reasonable assurance to our management and board of directors regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our internal control over
financial reporting includes those policies and procedures that:
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Pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
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Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
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Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect
on the financial statements.
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Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2010. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control
Integrated Framework
. Based on managements assessment and those criteria, management believes
that, as of December 31, 2010, the Company maintained effective internal control over financial
reporting.
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Our managements report of the
effectiveness on the design and operation of our internal control over financial reporting was not
subject to attestation by the Companys registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.
Changes in Internal Control Over Financial Reporting.
There was no change in the Companys internal
control over financial reporting identified in connection with the evaluation required by Rule
13a-15(d) and Rule 15d-15(d) of the Exchange Act that occurred during the period covered by this
report and that has materially affected, or is reasonable likely to materially affect, the
Companys internal control over financial reporting.
Item 9B. Other Information
None.
27
PART III
Item 10. Directors and Executive Officers of the Registrant
The information included in the Companys definitive proxy statement for the 2011 Annual
Meeting of Shareholders under the captions Election of Directors, Executive Officers and
Section 16(a) Beneficial Ownership Reporting Compliance is incorporated by reference. The
following information completes the Companys response to this Item 9.
The Company has adopted a code of ethics that applies to the Companys Chief Executive
Officer, Chief Financial Officer, Controller and other employees performing similar functions.
This code of ethics is filed as Exhibit 14 to this report. The Company intends to satisfy the
disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from,
this code of ethics by posting such information on its Web site which is located at
www.ikonics.com.
Item 11. Executive Compensation
The information included in the Companys definitive proxy statement for the 2011 Annual
Meeting of Shareholders under the captions Election of DirectorsDirector Compensation, Summary
Compensation Table, Outstanding Equity Awards at Fiscal Year-End and Employment Contracts;
Termination of Employment and Change-In-Control Arrangements is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information included in the Companys definitive proxy statement for the 2011 Annual
Meeting of Shareholders under the captions Security Ownership of Principal Shareholders and
Management and Equity Compensation Plan Information is incorporated by reference.
28
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information included in the Companys definitive proxy statement for the 2011 Annual
Meeting of Shareholders under the caption Election of Directors is incorporated by reference.
The Company has not engaged in any transaction since the beginning of its last fiscal year and does
not currently propose to engage in any transaction required to be disclosed pursuant to Item 404 of
Regulation S-K.
Item 14. Principal Accountant Fees and Services
The information included in the Companys definitive proxy statement for the 2011 Annual
Meeting of Shareholders under the caption Principal Accounting Firm Fees is incorporated by
reference.
Item 15. Exhibits and Financial Statement Schedules
The following exhibits are filed as part of this Annual Report on Form 10-K for the fiscal
year ended December 31, 2010:
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Exhibit
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Description
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3.1
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Restated Articles of Incorporation of Company, as amended. (Incorporated by reference to
the like numbered Exhibit to the Companys Registration Statement on Form 10-SB filed with
the Commission on April 7, 1999 (Registration No. 000-25727).)
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3.2
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By-Laws of the Company, as amended. (Incorporated by reference to the like numbered
Exhibit to the Companys Current Report on Form 8-K filed with the Commission on February 22,
2007 (File No. 000-25727).)
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4
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Specimen of Common Stock Certificate. (Incorporated by reference to the like numbered
Exhibit to Amendment No. 1 to the Companys Registration Statement on Form 10-SB filed with
the Commission on May 26, 1999 (Registration No. 000-25727).)
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10.1
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IKONICS Corporation 1995 Stock Incentive Plan, as amended.
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14
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Code of Ethics. (Incorporated by reference to the like numbered Exhibit to the Companys
Annual Report on Form 10-KSB for the year ended December 31, 2003 (File No. 000-25727).)
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23
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Consent of Independent Registered Public Accounting Firm.
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24
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Powers of Attorney.
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31.1
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Rule 13a-14(a)/15d-14(a) Certifications of CEO.
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31.2
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Rule 13a-14(a)/15d-14(a) Certifications of CFO.
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32
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Section 1350 Certifications.
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29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized on March 3, 2011.
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IKONICS CORPORATION
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By
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/s/ William C. Ulland
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William C. Ulland,
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Chairman, Chief Executive Officer and President
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities indicated
on March 3, 2011.
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/s/ William C. Ulland
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William C. Ulland, Chairman,
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Chief Executive Officer and
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President (Principal Executive Officer)
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/s/ Jon Gerlach
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Jon Gerlach,
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Chief Financial Officer and
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Vice President of Finance
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(Principal Financial and Accounting Officer)
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Charles H. Andresen*
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Director
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Rondi Erickson*
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Director
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H. Leigh Severance*
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Director
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Gerald W. Simonson*
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Director
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Lockwood Carlson*
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Director
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David O. Harris*
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Director
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*
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William C. Ulland, by signing his name hereto, does hereby sign this document on behalf of
each of the above named Directors of the registrant pursuant to powers of attorney duly
executed by such persons.
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/s/ William C. Ulland
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William C. Ulland, Attorney-in-Fact
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30
INDEX TO EXHIBITS
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Exhibit
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Description
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Page
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3.1
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Restated Articles of Incorporation of Company, as amended
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Incorporated by Reference
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3.2
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By-Laws of the Company, as amended.
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Incorporated by Reference
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4
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Specimen of Common Stock Certificate
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Incorporated by Reference
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10.1
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IKONICS Corporation 1995 Stock Incentive Plan, as amended
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Filed electronically
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14
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Code of Ethics
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Incorporated by Reference
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23
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Consent of Independent Registered Public Accounting Firm
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Filed Electronically
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24
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Powers of Attorney
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Filed Electronically
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31.1
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Rule 13a-14(a)/15d-14(a) Certifications of CEO
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Filed Electronically
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31.2
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Rule 13a-14(a)/15d-14(a) Certifications of CFO
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Filed Electronically
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32
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Section 1350 Certifications
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Filed Electronically
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EXHIBIT 10.1
IKONICS CORPORATION
1995 STOCK INCENTIVE PLAN
(AS AMENDED AS OF NOVEMBER 18, 2010)
The purpose of the IKONICS Corporation 1995 Stock Incentive Plan (the Plan) is to advance
the interests of the IKONICS Corporation (the Company) and its stockholders by enabling the
company and its subsidiaries to attract and retain persons of ability to perform services for the
Company and its subsidiaries by providing an incentive to such individuals through equity
participation in the Company and by rewarding such individuals who contribute to the achievement by
the Company of its economic objectives.
The following terms will have the meaning set forth below, unless the context clearly
otherwise requires:
2.1 Board means the Board of Directors of the Company.
2.2 Broker Exercise Notice means a written notice pursuant to which a Participant,
upon exercise of an Option, irrevocably instructs a broker or dealer to sell a sufficient
number of shares or loan a sufficient amount of money to pay all or a portion of the
exercise price of the Option and/or any related withholding tax obligations and remit such
sums to the Company and directs the Company or deliver stock certificates to be issued upon
such exercise directly to such broker or dealer.
2.3 Change in Control means an event described in Section 13.1 of the Plan.
2.4 Code means the Internal Revenue Code of 1986, as amended.
2.5 Committee means the group of individuals administering the Plan, as provided in
Section 3 of the Plan.
2.6 Common Stock means the common stock of the Companys $.10 par value, or the number
and kind of shares of stock or other securities into which such Common Stock may be changed
in accordance with Section 4.3 of the Plan.
2.7 Disability means the disability of the Participant such as would entitle the
Participant to receive disability income benefits pursuant to the long-term disability plan
of the Company or Subsidiary then covering the Participant or, if no such plan exists or is
applicable to the Participant, the permanent and total disability of the Participant within
the meaning of Section 22(e)(3) of the Code.
2.8 Eligible Recipients means all directors (including non-employee directors),
officers and employees of the Company or any Subsidiary.
2.9 Exchange Act means the Securities Exchange Act of 1934, as amended.
2.10 Fair Market Value means, with respect to the Common Stock, as of any date (or, if
no shares were traded or quoted on such date, as of the next preceding date on which there
was such a trade or quote):
a. If the Common Stock is listed (or admitted to unlisted trading privileges) on
an exchange or reported on the NASDAQ National Market System or bid and asked prices
are reported on the NASDAQ system or a comparable reporting service, the closing
sale price or the mean of the closing bid and asked prices, as the case may be.
b. If the Common Stock is not so listed or reported, such price as the Committee
determines in good faith in the exercise of its reasonable discretion.
2.11 Incentive Award means an Option, Stock Appreciation Right, Restricted Stock
Award, Performance Unit or Stock Bonus granted to an Eligible Recipient pursuant to the
Plan.
2.12 Incentive Stock Option means a right to purchase Common Stock granted to an
Eligible Recipient pursuant to Section 6 of the Plan that qualifies as an incentive stock
option within the meaning of Section 422 of the Code.
2.13 Non-Statutory Stock Option means a right to purchase Common Stock granted to an
Eligible Recipient pursuant to Section 6 of the Plan that does not qualify as a Incentive
Stock Option.
2.14 Option means an Incentive Stock Option or a Non-Statutory Stock Option.
2.15 Participant means an Eligible Recipient who receives one or more Incentive Awards
under the Plan.
2.16 Performance Unit means a right granted to an Eligible Recipient pursuant to
Section 9 of the Plan to receive a payment from the Company, in the form of stock, cash or a
combination of both, upon the achievement of established performance goals.
2.17 Previously Acquired Shares means shares of Common Stock that are already owned by
the Participant or, with respect to any Incentive Award, that are to be issued upon the
grant, exercise or vesting of such Incentive Award.
2.18 Restricted Stock Award means an award of Common Stock granted to an Eligible
Recipient pursuant to Section 8 of the Plan that is subject to the restrictions on
transferability and the risk of forfeiture imposed by the provisions of such Section 8.
2.19 Retirement means normal or approved early termination of employment or service
pursuant to and in accordance with the regular retirement/pension plan or practice of the
Company or Subsidiary then covering the Participant, provided that if the Participant is not
covered by any such plan or practice, the Participant will be deemed to be covered by the
Companys plan or practice for purposes of this determination.
2.20 Securities Act means the Securities Act of 1933, as amended.
2.21 Stock Appreciation Right means a right granted to an Eligible Recipient pursuant
to Section 7 of the Plan to receive a payment from the Company, in the form of stock, cash
or a combination of both, equal to the difference between the Fair Market Value of one or
more shares of Common Stock and the exercise price of such shares under the terms of such
Stock Appreciation Right.
2.22 Stock Bonus means an award of Common Stock granted to an Eligible Recipient
pursuant to Section 10 of the Plan.
2.23 Subsidiary means any entity that is directly or indirectly controlled by the
Company or any entity in which the Company has a significant equity interest, as determined
by the Committee.
2.24 Tax Date means the date any withholding tax obligation arises under the Code for
a Participant with respect to an Incentive Award.
3.1
The Committee
. The Plan will be administered by the Board or by a committee
of the Board consisting of not less than two persons; provided, however, that from and after
the date on which the Company first registers a class of its equity securities under Section
12 of the Exchange Act, the Plan will be administered by the Board, all of whom will be
disinterested persons within the meaning of Rule 16b-3 under the Exchange Act, or by a
committee consisting solely of not fewer than two members of the Board who are such
disinterested persons. As used in this Plan, the term Committee will refer to the Board
or to such a committee, if established. To the extent consistent with corporate law, the
Committee may delegate to any officers of the Company the duties, power and authority of the
Committee under the Plan pursuant to such conditions or limitations as the Committee may
establish; provided, however, that only the Committee may exercise such duties, power and
authority with respect to Eligible Recipients who are subject to Section 16 of the Exchange
Act. The Committee may exercise its duties, power and authority under the Plan in its sole
and absolute discretion without the consent of any Participant or other party, unless the
Plan specifically provides otherwise. Each determination, interpretation or other action
made or taken by the Committee pursuant to the provisions of the Plan will be conclusive and
binding for all purposes and on all persons, and no member of the Committee will be liable
for any action or determination made in good faith with respect to the Plan or any Incentive
Award granted under the Plan.
3.2
Authority of the Committee
.
a. In accordance with and subject to the provisions of the Plan, the Committee
will have the authority to determine all provisions of Incentive Awards as the
Committee may deem necessary or desirable and as consistent with the terms of the
Plan, including, without limitation, the following: (i) the Eligible Recipients to
be selected as Participants; (ii) the nature and extent of the Incentive Awards to
be made to each Participant (including the number of shares of Common Stock to be
subject to each Incentive Award, any exercise price, the manner in which Incentive
Awards will vest or become exercisable and whether Incentive Awards will be granted
in tandem with other Incentive Awards) and the form of written agreement, if any,
evidencing such Incentive Award; (iii) the time or times when Incentive Awards will
be granted; (iv) the duration of each Incentive Award; and (v) the restrictions and
other conditions to which the payment or vesting of Incentive Awards may be subject.
In addition, the Committee will have the authority under the Plan to pay the
economic value of any Incentive Award in the form of cash, Common Stock or any
combination of both.
b. The Committee will have the authority under the Plan to amend or modify the
terms of any outstanding Incentive Award in any manner, including, without
limitation, the authority to modify the number of shares or other terms and
conditions of an Incentive Award, extend the term of an Incentive Award, accelerate
the exercisability or vesting or otherwise terminate any restrictions relating to an
Incentive Award, accept the surrender of any outstanding Incentive Award or, to the
extent not previously exercised or vested, authorize the grant of new Incentive
Awards in substitution for surrendered Incentive Awards; provided, however that the
amended or modified terms are permitted by the Plan as then in effect and that any
Participant adversely affected by such amended or modified terms has consented to
such amendment or modification. No amendment or modification to an Incentive Award,
however, whether pursuant to this Section 3.2 or any other provisions of the Plan,
will be deemed to be a regrant of such Incentive Award for purposes of this Plan.
c. In the event of (i) any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, extraordinary dividend or divestiture
(including a spin-off) or any other change in corporate structure or shares, (ii)
any purchase, acquisition, sale or disposition of a significant amount of assets or
a significant business; (iii) any change in accounting principles or practices, or
(iv) any other similar change, in each case with respect to the Company or any other
entity whose performance is relevant to the grant or vesting of an Incentive Award,
the Committee (or, if the Company is not the surviving corporation in any such
transaction, the board of directors of the surviving corporation) may, without the
consent of any affected Participant, amend or modify the vesting criteria of any
outstanding Incentive Award that is based in whole or in part on the financial
performance of the Company (or any Subsidiary or division thereof) or such other
entity so as equitably to reflect such event, with the desired result that the
criteria for evaluating such financial performance of the Company or such other
entity will be substantially the same (in the discretion of the Committee or the
board of directors of the surviving corporation) following such event as prior to
such event; provided, however, that the amended or modified terms are permitted by
the Plan as then in effect.
4.
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Shares Available for Issuance.
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4.1
Maximum Number of Shares
. Subject to adjustment as provided in Section 4.3
of the Plan, the maximum number of shares of Common Stock that will be available for
issuance under the Plan will be 442,750 shares. The shares available for issuance under the
Plan shall be shares authorized but unissued, under the Companys Articles of Incorporation.
4.2
Accounting for Incentive Awards
. Shares of Common Stock that are issued
under the Plan or that are subject to outstanding Incentive Awards will be applied to reduce
the maximum number of shares of Common Stock remaining available for issuance under the
Plan. Any shares of Common Stock that are subject to an Incentive Award that lapses,
expires, is forfeited or for any reason is terminated unexercised or unvested and any shares
of Common Stock that are subject to an Incentive Award that is settled or paid in cash or
any form other than shares of Common Stock will automatically again become available for
issuance under the Plan. Any shares of Common Stock that constitute the forfeited portion of
a Restricted Stock Award, however, will not become available for further issuance under the
Plan.
4.3
Adjustments to Shares of Incentive Awards
. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation, reclassification,
stock dividend, stock split, combination of shares, rights offering, divestiture or
extraordinary dividend (including a
spin-off) or any other change in the corporate structure or shares of the Company, the
Committee (or, if the Company is not the surviving corporation in any such transaction, the
board of directors of the surviving corporation) will make appropriate adjustment (which
determination will be conclusive) as to the number and kind of securities available for
issuance under the Plan and, in order to prevent dilution or enlargement of the rights of
Participants, the number, kind and, where applicable, exercise price of securities subject
to outstanding Incentive Awards.
Participants in the Plan will be those Eligible Recipients who, in the judgment of the
Committee, have contributed, are contributing or are expected to contribute to the achievement of
economic objectives of the Company or its subsidiaries. Eligible Recipients may be granted from
time to time one or more Incentive Awards, singly or in combination or in tandem with other
Incentive Awards, as may be determined by the Committee. Incentive Awards will be deemed to be
granted as of the date specified in the grant resolution of the Committee, which date will be the
date of any related agreements with the Participant.
6.1
Grant
. An Eligible Recipient may be granted one or more Options under the
Plan, and such Options will be subject to such terms and conditions, consistent with the
other provisions of the Plan, as may be determined by the Committee. The Committee may
designate whether an Option is to be considered an Incentive Stock Option or a Non-Statutory
Stock Option.
6.2
Exercise Price
. The per share price to be paid by a Participant upon
exercise of an Option will be determined by the Committee in its discretion at the time of
the Option grant, provided that (a) such price will not be less than 100% of the Fair Market
Value of one share of Common Stock on the date of grant with respect to an Incentive Stock
Option (110% of the Fair Market Value if, at the time the Incentive Stock Option is granted,
the Participant owns, directly or indirectly, more than 10% of the total combined voting
power of all classes of stock of the Company or any parent or subsidiary corporation of the
Company), and (b) such price will not be less than 85% of the Fair Market Value of one share
of Common Stock on the date of grant with respect to a Non-Statutory Stock Option.
6.3
Exercisability and Duration
. An Option will become exercisable at such times
and in such installments as may be determined by the Committee at the time of grant;
provided, however, that no Incentive Stock Option may be exercisable after 10 years from its
date of grant (five years from its date of grant if, at the time the Incentive Stock Option
is granted, the Participant owns, directly or indirectly, more than 10% of the total
combined voting power of all classes of stock of the Company or any parent or subsidiary
corporation of the Company).
6.4
Payment of Exercise Price
. The total purchase price of the shares to be
purchased upon exercise of an Option will be paid entirely in cash (including check, bank
draft or money order); provided, however, that the Committee may allow such payments to be
made, in whole or in part and upon such terms and conditions as may be established by the
Committee, by tender of a Broker Exercise Notice, Previously Acquired Shares, a promissory
note or by a combination of such methods.
6.5
Manner of Exercise
. An Option may be exercised by a Participant in whole or
in part from time to time, subject to the conditions contained in the Plan and in the
agreement
evidencing such Option, by delivery in person, by facsimile or electronic transmission or
through the mail of written notice of exercise to the Company (Attention: Chief Financial
Officer) at its principal executive office in Duluth, Minnesota and by paying in full the
total exercise price for the shares of Common Stock to be purchased in accordance with
Section 6.4 of the Plan.
6.6
Aggregate Limitation of Stock Subject to Incentive Stock Options
. To the
extent that the aggregate Fair Market Value (determined as of the date an Incentive Stock
Option is granted) of the shares of Common Stock with respect to which incentive stock
options (within the meaning of Section 422 of the Code) are exercisable for the first time
by a Participant during any calendar year (under the Plan and any other incentive stock
option plans of the Company or any subsidiary or parent corporation of the Company (within
the meaning of the Code)) exceeds $100,000 (or such other amount as may be prescribed by the
Code from time to time), such excess Options will be treated as Non-Statutory Stock Options.
The determination will be made by taking incentive stock options into account in the order
in which they were granted. If such excess only applies to a portion of an incentive stock
option, the Committee will designate which shares will be treated as shares to be acquired
upon exercise of an incentive stock option.
7.
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Stock Appreciation Rights.
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7.1
Grant
. An Eligible Recipient may be granted one or more Stock Appreciation
Rights under the Plan, and such Stock Appreciation Rights shall be subject to such terms and
conditions, consistent with the other provisions of the Plan, as will be determined by the
Committee.
7.2
Exercise Price
. The exercise price of a Stock Appreciation Right will be
determined by the Committee at the date of grant but will not be less than 85% of the Fair
Market Value of one share of Common Stock on the date of grant.
7.3
Exercisability and Duration
. A Stock Appreciation Right will become
exercisable at such time and in such installments as may be determined by the Committee at
the time of grant; provided, however, that no Stock Appreciation Right may be exercisable
prior to six months or after 10 years from its date of grant. A Stock Appreciation Right
will be exercised by giving notice in the same manner as for Options, as set forth in
Section 6.5 of the Plan.
8.
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Restricted Stock Awards
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8.1
Grant
. An Eligible Recipient may be granted one or more Restricted Stock
Awards under the Plan, and such Restricted Stock Awards will be subject to such terms and
conditions, consistent with the other provisions of the Plan, as may be determined by the
Committee. The Committee may impose such restrictions or conditions, not inconsistent with
the provisions of the Plan, to the vesting of such Restricted Stock Awards as it deems
appropriate, including, without limitation, that the Participant remain in the continuous
employ or service of the Company or a subsidiary for a certain period or that the
Participant or the Company (or any subsidiary or division thereof) satisfy certain
performance goals or criteria.
8.2
Rights as a Stockholder; Transferability
. Except as provided in Sections
8.1, 8.3 and 14.3 of the Plan, a Participant will have all voting, dividend, liquidation and
other rights with respect to shares of Common Stock issued to the Participant as a
Restricted Stock Award under this Section 8 upon the Participant becoming the holder of
record of such shares as if such Participant were a holder of record of shares of
unrestricted Common Stock.
8.3
Dividends and Distributions
. Unless the Committee determines otherwise
(either in the agreement evidencing the Restricted Stock Award at the time of grant or at
any time after the grant of the Restricted Stock Award), any dividends or distributions
(including regular quarterly cash dividends) paid with respect to shares of Common Stock
subject to the unvested portion of a Restricted Stock Award will be subject to the same
restrictions as the shares to which such dividends or distributions relate. In the event the
Committee determines not to pay such dividends or distributions currently, the Committee
will determine whether any interest will be paid on such dividends or distributions. In
addition, the Committee may require such dividends and distributions to be reinvested (and
in such case the Participants consent to such reinvestment) in shares of Common Stock that
will be subject to the same restrictions as the shares to which such dividends or
distributions relate.
8.4
Enforcement of Restrictions
. To enforce the restrictions referred to in this
Section 8, the Committee may place a legend on the stock certificates referring to such
restrictions and may require the Participant, until the restrictions have lapsed, to keep
the stock certificates, together with duly endorsed stock powers, in the custody of the
Company or its transfer agent or to maintain evidence of stock ownership, together with duly
endorsed stock powers, in a certificateless book-entry stock account with the Companys
transfer agent.
An Eligible Recipient may be granted one or more Performance Units under the Plan, and such
Performance Units will be subject to such terms and conditions, consistent with the other
provisions of the Plan, as may be determined by the Committee. The Committee may impose such
restrictions or conditions, not inconsistent with the provisions of the Plan, to the vesting of
such Performance Units as it deems appropriate, including, without limitation, that the Participant
remain in the continuous employ or service of the Company or any subsidiary for a certain period or
that the Participant or the Company (or any Subsidiary or division thereof) satisfy certain
performance goals or criteria. The Committee will have the discretion either to determine the form
in which payment of the economic value of vested Performance Units will be made to the Participant
(i.e., cash, Common Stock or any combination thereof) or to consent to or disapprove the election
by the Participant of the form of such payment.
An Eligible Recipient may be granted one or more Stock Bonuses under the Plan, and such Stock
Bonuses will be subject to such terms and conditions, consistent with the other provisions of the
Plan, as may be determined by the Committee. The Participant will have all voting, dividend,
liquidation and other rights with respect to the shares of Common Stock issued to a Participant as
a Stock Bonus under this Section 10 upon the Participant becoming the holder of record of such
shares; provided, however, that the Committee may impose such restrictions on the assignment or
transfer of a Stock Bonus as it deems appropriate.
11.
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Effect of Termination of Employment or Other Service.
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11.1
Termination Due to Death, Disability or Retirement
. In the event a
Participants employment or other service with the Company and all subsidiaries is
terminated by reason of death, Disability or Retirement:
a. All outstanding Options and Stock Appreciation Rights then held by the
Participant will remain exercisable to the extent exercisable as of such termination
for a period of 30 days after such termination (but in no event after the expiration
date of any such Option or Stock Appreciation Right);
b. All outstanding Restricted Stock Awards then held by the Participant that
have not vested will be terminated and forfeited; and
c. All outstanding Performance Units and Stock Bonuses then held by the
Participant will vest and/or continue to vest in the manner determined by the
Committee and set forth in the agreement evidencing such Performance Units or Stock
Bonuses.
11.2
Termination for Reasons Other than Death, Disability or Retirement
.
a. In the event a Participants employment or other service is termination with
the Company and all subsidiaries for any reason other than death, Disability or
Retirement, or a Participant is in the employ or service of a subsidiary and the
subsidiary ceases to be a subsidiary of the Company (unless the Participant
continues in the employ or service of the Company or another subsidiary), all rights
of the Participant under the Plan and any agreements evidencing an Incentive Award
will immediately terminate without notice of any kind, and no Options or Stock
Appreciation Rights then held by the Participant will thereafter be exercisable, all
Restricted Stock Awards then held by the Participant that have not vested will be
terminated and forfeited, and all Performance Units and Stock Bonuses then held by
the Participant will vest and/or continue to vest in the manner determined by the
Committee and set forth in the agreement evidencing such Performance Units or Stock
Bonuses; provided, however, that if such termination is due to any reason other than
termination by the Company or any subsidiary for cause, all outstanding Options
and Stock Appreciation Rights then held by such Participant will remain exercisable
to the extent exercisable as of such termination for a period of 30 days after such
termination (but in no event after the expiration date of any such Option or Stock
Appreciation Right).
b. For purposes of this Section 11.2, cause (as determined by the Committee)
will be a defined in any employment or other agreement or policy applicable to the
Participant or, if no such agreement or policy exists, will mean (i) dishonesty,
fraud, misrepresentation, embezzlement or deliberate injury or attempted injury, in
each case related to the Company or any subsidiary, (ii) any unlawful or criminal
activity of a serious nature, (iii) any intentional and deliberate breach of a duty
or duties that, individually or in the aggregate, are material in relation to the
Participants overall duties, or (iv) any material breach of any employment,
service, confidentiality or non-compete agreement entered into with the Company or
any subsidiary.
11.3
Modification of Rights Upon Termination
. Notwithstanding the other
provisions of this Section 11, upon a Participants termination of employment or other
service with the Company and all subsidiaries, the Committee may in its discretion (which
may be exercised at any time on or after the date of grant, including following such
termination) cause Options and Stock Appreciation Rights (or any part thereof) then held by
such Participant to become or continue to become exercisable and/or remain exercisable
following such termination of employment or service and Restricted Stock Awards, Performance
Units and Stock Bonuses then held by such Participant to vest and/or continue to vest or
become free of transfer restrictions, as the case may be, following such termination of
employment or service, in each casein the manner determined by the Committee; provided,
however, that no Option or Stock Appreciation Right may remain exercisable beyond its
expiration date.
11.4
Breach of Confidentiality or Non-Compete Agreements
. Notwithstanding
anything in this Plan to the contrary, in the event that a Participant materially breaches
the terms of any confidentiality or non-compete agreement entered into with the Company or
any subsidiary, whether such breach occurs before or after termination of such Participants
employment or other service with the Company or any subsidiary, the Committee may
immediately terminate all rights of the Participant under the Plan and any agreements
evidencing an Incentive Award then held by the Participant without notice of any kind.
11.5
Date of Termination of Employment or Other Service
. Unless the Committee
otherwise determines, a Participants employment or other service will, for purposes of the
Plan, be deemed to have terminated on the date recorded on the personnel or other records of
the Company or the subsidiary for which the Participant provides employment or other
service, as determined by the Committee based upon such records.
12.
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Payment of Withholding Taxes.
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12.1
General Rules
. The Company is entitled to (a) withhold and deduct from
future wages of the Participant (or from other amounts that may be due and owing to the
Participant from the Company or a subsidiary), or make other arrangements for the collection
of, all legally required amounts necessary to satisfy any and all federal, state and local
withholding and employment-related tax requirements attributable to an Incentive Award,
including, without limitation, the grant, exercise or vesting of, or payment of dividends
with respect to, an Incentive Stock Option, or (b) require the Participant promptly to remit
the amount of such withholding to the Company before taking any action, including issuing
any shares of Common Stock, with respect to an Incentive Award.
12.2
Special Rules
. The Committee may, upon terms and conditions established by
the Committee, permit or require a Participant to satisfy, in whole or in part, any
withholding or employment-related tax obligation described in Section 12.1 of the Plan by
electing to tender Previously Acquired Shares, a Broker Exercise Notice or a promissory note
(on terms acceptable to the Committee in its sole discretion), or by a combination of such
methods.
13.1
Change in Control
. For purposes of this Section 13.1, a Change in Control
of the Company will mean the following:
a. the sale, lease, exchange or other transfer, directly or indirectly, of
substantially all of the assets of the Company (in one transaction or in a series of
related transactions) to a person or entity that is not controlled by the Company;
b. the approval by the stockholders of the Company of any plan or proposal for
the liquidation or dissolution of the Company;
c. a merger or consolidation to which the Company is a party if the stockholders
of the Company immediately prior to the effective date of such merger or
consolidation have beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act), immediately following the effective date of such merger or
consolidation, of securities of the surviving corporation representing (i) more than
50%, but not more than 80% of the combined voting power of the surviving
corporations then outstanding securities ordinarily having the right to vote at
elections of directors, unless such merger or consolidation has been approved in
advance by the Incumbent Directors (as defined in Section 13.2 below), or (ii) 50%
or
less of the combined voting power of the surviving corporations then outstanding
securities ordinarily having the right to vote at elections of directors (regardless
of any approval by the Incumbent Directors);
d. any person becomes after the effective date of the Plan the beneficial
owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
(i) 40% or more, but not 50% or more, of the combined voting power of the Companys
outstanding securities ordinarily having the right to vote at elections of
directors, unless the transaction resulting in such ownership has been approved in
advance by the Incumbent Directors, or (ii) 50% or more of the combined voting power
of the Companys outstanding securities ordinarily having the right to vote at
elections of directors (regardless of any approval by the Incumbent Directors);
e. the Incumbent Directors cease for any reason to constitute at least a
majority of the Board; or
f. a change in control of the Company of a nature that would be required to be
reported pursuant to Section 13 or 15(d) of the Exchange Act, whether or not the
company is then subject to such reporting requirements.
13.2
Incumbent Directors
. For purposes of this Section 13, Incumbent Directors
of the Company means any individuals who are members of the Board on the effective date of
the Plan and any individual who subsequently becomes a member of the Board whose election,
or nomination for election by the Companys stockholders, was approved by a vote of at least
a majority of the Incumbent Directors (either by specific vote or by approval of the
Companys proxy statement in which such individual is named as a nominee for director
without objection to such nomination).
13.3.
Acceleration of Vesting
. Without limiting the authority of the Committee
under Section 3.2 of the Plan, if a Change in Control of the Company occurs, then unless the
Committee otherwise determines and sets forth in the agreement evidencing an Incentive Award
at the time of grant of such Incentive Award, (a) all outstanding Options and Stock
Appreciation Rights will become immediately exercisable in full and will remain exercisable
for the remainder of their terms, regardless of whether the Participant to whom such Options
or Stock Appreciation Rights have been granted remains in the employ or service of the
Company or any Subsidiary; (b) all outstanding Restricted Stock Awards will become
immediately fully vested and non-forfeitable; and (c) all outstanding Performance Units and
Stock Bonuses then held by the Participant will vest and/or continue to vest in the manner
determined by the Committee and set forth in the agreement evidencing such Performance
Unites or Stock Bonuses.
13.4
Cash Payment for Options
. If a Change of Control of the Company occurs,
then the Committee, if approved by the Committee either in an agreement evidencing an
Incentive Award at the time of grant or at any time after the grant of an Incentive Award,
may determine that some or all Participants holding outstanding Options will receive, with
respect to some or all of the shares of Common Stock subject to such Options, as of the
effective date of any such Change in Control of the Company, cash in an amount equal to the
excess of the Fair Market Value of such shares immediately prior to the effective date of
such Change in Control of the Company over the exercise price per share of such Options.
13.5
Limitation on Change in Control Payments
. Notwithstanding anything in
Section 13.3 or 13.4 of the Plan to the contrary, if, with respect to a Participant, the
acceleration
of the vesting of an Incentive Award as provided in Section 13.3 or the payment of cash in
exchange for all or part of an Incentive Award as provided in Section 13.4 (which
acceleration or payment could be deemed a payment within the meaning of Section 280G(b)(2)
of the Code), together with any other payments which such Participant has the right to
receive from the Company or any corporation that is a member of an affiliate group (as
defined in Section 1504(a) of the Code without regarding to Section 1504(b) of the Code) of
which the Company is a member, would constitute a parachute payment (as defined in Section
280G(b)(2) of the Code), then the payments to such Participant pursuant to Section 13.3 or
13.4 will be reduced to the largest amount as will result in no portion of such payments
being subject to the excise tax imposed by Section 4999 of the Code; provided, however, that
if such Participant is subject to a separate agreement with the Company or a subsidiary that
specifically provides that payments attributable to one or more forms to employee stock
incentives or to payments made in lieu of employee stock incentives will not reduce any
other payments under such agreement, event if it would constitute an excess parachute
payment, or provides that the Participant will have the discretion to determine which
payment will be reduced in order to avoid an excess parachute payment, then the limitations
of this Section 13.5 will, to that extent, not apply.
14.
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Rights of Eligible Recipients and Participants; Transferability.
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14.1
Employment or Service
. Nothing in the Plan will interfere with or limit in
any way the right of the Company or any Subsidiary to terminate the employment or service of
any Eligible Recipient or Participant at any time, nor confer upon any Eligible Recipient or
Participant any right to continue in the employ or service of the Company or any Subsidiary.
14.2
Rights as a Stockholder
. As a holder of Incentive Awards (other than
Restricted Stock Awards and Stock Bonuses), a Participant will have no rights as a
stockholder unless and until such Incentive Awards are exercised for, or paid in the form
of, shares of Common Stock and the Participant becomes the holder of record of such shares.
Except as otherwise provided in the Plan, no adjustment will be made for dividends or
distributions with respect to such Incentive Awards as to which there is a record date
preceding the date the Participant becomes the holder of record of such shares, except as
the Committee may determine.
14.3
Restrictions on Transfer
. Except pursuant to testamentary will or the laws
of descent and distribution or as otherwise expressly permitted by the Plan, no right or
interest of any Participant in an Incentive Award prior to the exercise or vesting of such
Incentive Award will be assignable or transferable, or subjected to any lien, during the
lifetime of the Participant, either voluntarily or involuntarily, directly or indirectly, by
operation of law or otherwise. A Participant will, however, be entitled to designate a
beneficiary to receive an Incentive Award upon such Participants death, and in the event of
a Participants death, payment of any amounts due under the Plan will be made to, and
exercise of any Options (to the extent permitted pursuant to Section 11 of the Plan) may be
made by, the Participants legal representatives, heirs and legatees.
14.4
Non-Exclusivity of the Plan
. Nothing contained in the Plan is intended to
modify or rescind any previously approved compensation plans or programs of the Company or
create any limitations on the power or authority of the Board to adopt such additional or
other compensation arrangements as the Board may deem necessary or desirable.
15.
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Securities Law and Other Restrictions.
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Notwithstanding any other provision of the Plan or any agreements entered into pursuant to the
Plan, the Company will not be required to issue any shares of Common Stock under this Plan, and a
Participant may not sell, assign, transfer or otherwise dispose of shares of Common Stock issued
pursuant to Incentive Awards granted under the Plan, unless (a) there is in effect with respect to
such shares a registration statement under the Securities Act and any applicable state securities
laws or an exemption from such registration under the Securities Act and applicable state
securities laws, and (b) there has been obtained any other consent, approval or permit from any
other regulatory body which the Committee deems necessary or advisable. The Company may condition
such issuance, sale or transfer upon the receipt of any representations or agreements from the
parties involved, and the placement of any legends on certificates representing shares of Common
Stock, as may be deemed necessary or advisable by the Company in order to comply with such
securities law or other restrictions.
16.
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Plan Amendment, Modification and Termination.
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The Board may suspend or terminate the Plan or any portion thereof at any time, and may amend
the Plan from time to time in such respects as the Board may deem advisable in order that Incentive
Awards under the Plan will conform to any change in applicable laws or regulations or in any other
respect the Board may deem to be in the best interests of the Company; provided, however, that no
amendments to the Plan will be effective without approval of the stockholders of the Company if
stockholder approval of the amendment is then required pursuant to Rule 16b-3 under the Exchange
Act, Section 422 of the Code or the rules of the NASD or any stock exchange. No termination,
suspension or amendment of the Plan may adversely affect any outstanding Incentive Award without
the consent of the affected Participant; provided, however, that this sentence will not impair the
right of the Committee to take whatever action is deems appropriate under Sections 3.2(c), 4.3 and
13 of the Plan.
17.
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Effective Date and Duration of the Plan
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The Plan is effective as of February 19, 2009, the date it was adopted by the Board in its
current form. The Plan will terminate at midnight on February 18, 2019, and may be terminated prior
to such time by Board action, and no Incentive Award will be granted after such termination.
Incentive Awards outstanding upon termination of the Plan may continue to be exercised, or become
free of restrictions, in accordance with their terms.
18.1
Governing Law
. The validity, construction, interpretation, administration
and effect of the Plan and any rules, regulations and actions relating to the Plan will be
governed by and construed exclusively in accordance with the laws of the State of Minnesota,
notwithstanding the conflicts of laws principles of any jurisdictions.
18.2
Successors and Assigns
. The Plan will be binding upon and inure to the
benefit of the successors and permitted assigns of the Company and the Participants.