10KSB 1 epol10k2.txt FORM 10KSB SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended FEBRUARY 28, 2001 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-17741 EPOLIN, INC. (Name of Small Business Issuer in Its Charter) New Jersey 22-2547226 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification organization) Number) 358-364 Adams Street Newark, New Jersey 07105 (Address of principal (Zip Code) executive offices) Issuer's telephone number, including area code: (973) 465-9495 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock (no par value) Check whether the Issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State Issuer's revenues for its most recent fiscal year: $2,329,610 As of February 28, 2001, the aggregate market value of the Common Stock held by non-affiliates of the Issuer (4,674,431 shares) was approximately $981,630. The number of shares outstanding of the Common Stock (no par value) of the Issuer as of the close of business on February 28, 2001 was 11,339,355. Documents Incorporated by Reference: None PART I Item 1. Description of Business. Introduction Epolin Inc. ("Epolin" or the "Company") is a manufacturing and research and development company which was incorporated in the State of New Jersey on May 8, 1984. The Company is engaged in commercial production and sale of specialty chemicals, especially certain dyes which management believes are useful materials because they have the capability to absorb near infrared radiation. Its principal offices are located at 358-364 Adams Street, Newark, New Jersey 07105 and its telephone number is (973) 465-9495. In April 1989, Epolin successfully completed an initial public offering of its securities pursuant to a public offering generating net proceeds of approximately $1,950,000. Simultaneously, upon closing of the offering, Epolin acquired 100% of the stock of Accort Labs, Inc. ("Accort"), then an affiliated entity. Commencing upon completion of the Company's public offering through January 1990, the Company's efforts were primarily devoted to the renovation and completion of its 17,000 square foot manufacturing and office facility. The principal product(s) that the Company developed were expanding polymeric coatings. The Company has since curtailed this effort due primarily to the high cost of the product and the lower price commanded by similar products now sold into this maturing market. The Company has more recently established itself as a supplier of near infrared dyes as well as other specialty chemical products. It sells its dyes primarily to lens manufacturers who serve as the suppliers to the laser protection eyewear market as well as the welding market. Since completion of the Company's public offering, the Company's revenues had been primarily generated through the synthesis and sale of specialty organic chemical products. Building upon this base, the Company singled out near infrared dye technology as a most promising product line and has emphasized the development, manufacture and sale of these dyes to the optical industry. The Company's prior emphasis on the expanding monomer technology has been significantly modified. The expanding monomers failed to reach any significant level of sales and sales growth because the price of UV coatings, a major application for the technology, had fallen dramatically and the market could not sustain the higher pricing for the Company's product. Research and development on expanding monomer applications was therefore curtailed and the Company became fully committed to specialty chemical manufacture especially to near infrared dye development, manufacture and sales. This part of the product line has proven to be a successful one to pursue in that the sales of these dyes have averaged at a growth rate of approximately 15% to 20% per year for the last five years. No assurance can be given that such trend will continue. The Company believes that its future lies with dye technology and is formulating long range plans to exploit new applications for both the near infrared dyes as well as other dyes. Paralleling the growth of the dye business, the Company has maintained a level of production and sales of specialty products made on a custom basis. These include additives for plastics, thermochromic materials for use in paints as well as other specialty chemicals made in low volume to sell at prices that reflect the value of the product. A discussion of this market is described in the first subsection that follows. Thereafter the current market for dyes are described as well as the newer applications which will be the basis for new markets for dyes. In July 1997, the Board of Directors of Epolin approved a plan of merger (the "Plan") wherein Epolin's wholly-owned subsidiary, Accort, would merge into Epolin. The effective date of the Plan was deemed to have occurred as of the beginning of fiscal 1998. The merger was approved by the State of New Jersey as of December 30, 1998. As a result, Accort's assets, liabilities and stockholders' equity as of March 1, 1997 were transferred to Epolin. The Company's wholly-owned subsidiary, Epolin Holding Corp. ("Epolin Holding"), was incorporated in the State of New Jersey as a real estate holding company. Prior to being acquired by the Company in January 1998, it was owned and controlled by Murray S. Cohen and James Ivchenko (officers and directors of the Company). This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs and assumptions made by the Company's management as well as information currently available to the management. When used in this document, the words "anticipate", "believe", "estimate", and "expect" and similar expressions, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward- looking statements. Specialty Chemical Products Although the Company is heavily engaged in the manufacture and sale of dyes, specialty chemical manufacture continues to constitute approximately 22% of its sales. It is currently working on the preparation and sale of a variety of specialty chemical products on behalf of companies that sell into the adhesives, plastics, aerospace, pharmaceutical and flavors and fragrance industries. The Company's products primarily serve as intermediates, additives and process aids for complex chemical formulations. The Company markets its products to other companies who are in need of low level quantities of unique chemicals which provide specialized functions and are necessary elements in complex chemical mixtures manufactured by the Company's respective customers. These products are produced on a low volume basis in chemical production equipment ranging from 50 liter size flasks to two hundred gallon reactors. The Company sustains this business because its customers find it economically inefficient to manufacture such low volume specialty chemicals for their own use. Raw materials utilized in connection with the preparation of specialty chemical products are either available from chemical suppliers or made by the Company in its own facilities. This segment of the Company's business is manufactured on an individual basis to meet each customers respective needs. Presently, the Company provides products used as components in plastics, process aids, adhesives and coatings, flavors and odorant mixtures, pharmaceutical and medical products and aerospace materials. Although the specialty chemical business currently commands approximately 22% of total sales, the Company does not expect this segment of its business to grow. It has, instead, made a strong research and development commitment to the growth of the specialty dye business. This market is described in segments in the following subsections. Dyes for Laser Protection The Company has sold near infrared dyes since 1990 to customers who manufacture and sell eyewear to protect personnel from the harmful effects of laser light. In the first stages of the Company's marketing efforts, the Company sold dyes that had a special capability to absorb the emissions of the neodynium- YAG laser. This laser was and is used by the military for range finders carried by tanks. Following the Company's success in selling dyes for military usage, new markets were developed selling to manufacturers of safety eyewear for personnel who worked with lasers or were exposed to very strong sources of infrared radiation. The Company sells dyes into a market that requires the use of absorptive dyes for face shields, helmets and goggles to protect personnel from the harmful effects of radiation from welding. Nationally prescribed specifications now state that welding shields must absorb specific levels of the infrared generated by the welding arc in order to protect personnel from eye damage. The specifications have come about because a number of studies had shown that excessive infrared radiation can cause the development of premature cataracts. Thus, for different levels of protection, a specific reduction of ultraviolet, visible and infrared emissions are now required. As a result, the Company now offers a line of dyes for welding that absorb the entire range of welding radiation. Management believes many welding customers and potential customers are attracted to the Company's dyes because they had been tied to dye suppliers who would only sell the dyes if the customer were to purchase the suppliers resin or formulated resin. Freedom to formulate any resin and do in plant injection molding of lenses or shields, has significant cost implications for these customers. The availability of the Company's dyes has allowed the Company to gain new customers. The Company expects to see this welding market grow in the future not only because of increased sensitivity to the health effects of conventional welding methods but also because of the increasing use of lasers for welding. These instruments will require closer monitoring for exposure of personnel to laser light but will also require personnel peripheral to the welding operation to be protected. Dyes for Sun Protection There have been various reports that near infrared radiation causes slow but long term damage to the eye leading to premature cataracts. Certain customers incorporate the Company's dyes into premium sunglasses to sell at premium pricing. An additional value in sunglasses containing near infrared dyes is that there is a noticeable heat reduction on the eye which allows long term use in the sun. Management believes that this reduces problems associated with discomfort due to perspiration around the eye. Dyes for Filters A smaller but not well characterized market exists for filters that block certain frequencies in the near infrared and visible spectrum. Most of the inquiries come from instrument makers who purchase glass filters containing rare earth oxides. These filters are expensive and are subject to chipping, shattering and other breakage. Management believes the use of a clear plastic filter containing the Company's dyes would lower cost and increase reliability. This high value added market is under development. No assurance can be given that the Company will be able to successfully develop this market. Dyes for Heat Shields It has been shown in experimental and theoretical studies that a window containing near infrared dyes is capable of reducing the internal heat load of a structure by 40 to 50 percent. This type of application of infrared dyes is reported in use for sun roofs of automobiles in Japan. The specific advantage offered by near infrared dyes is heat reduction coupled with good visible transparency. This allows high visibility while, at the same time, effectively blocking the frequencies responsible for transporting heat. Management believes near infrared dyes can be effectively used in a wide variety of applications as heat shields. The Company has set its sights on this potential market by initiating research and development studies leading to dyes or dye combinations that can meet the tight requirements demanded by this market. Of particular concern to the Company is the need for long term performance which, at a minimum, requires a working lifetime of seven years exposure to direct sunlight. By developing dyes of greatly improved thermal and ultraviolet stability, the Company believes it can meet the long term exposure requirements for heat shields. The Company further believes that of particular importance is the ability of these new dyes to be used in the manufacture of extruded engineering plastic products. Known near infrared dyes do not possess the thermal stability to survive processing of large extruded structures. The Company believes that it can demonstrate that these new dyes offer a degree of freedom in plastics processing and that this can represent an important developing market. No assurance can be given, however, that the foregoing can be demonstrated, or if demonstrated, that the Company will be able to successfully develop this market. Dyes for Security Inks Certain of the near infrared dyes absorb very little of the visible spectrum. These can be used at low concentration in inks and paints and not be visually detected. However, when viewed by reflection of an infrared laser or lamp, the presence of dye is easily seen as a black marking. Mechanical "readers" can be used to detect the presence of dyes by responding with a simple "go, no-go" signal. Management believes that the industrial security and currency marking is potentially a large volume application for these dyes. No assurance can be given that the Company will be able to successfully develop this market. Dyes for Interlayer and Laminates One of the most abrasion resistant surfaces is that of glass. The Company has found that the interlayer used for glass to glass laminates can incorporate dyes and bond to the glass strongly. These laminated glass structures can perform like the plastic heat shields described above. The Company believes that such laminated glass structures have the added advantage of abrasion resistance and in automotive applications, are shatter-proof. The Company is pursuing markets for laminates as shatter-proof windshield and sun roofs. No assurance can be given that the Company will find a successful developer in this market. Effect of Compliance With Government Regulation Manufacturers of chemical products are subject to extensive Federal and State environmental regulations. Although the Company believes that its manufacturing processes do not result in the emission of volatile organic vapors into the atmosphere, and that the Company is not in violation of any State or Federal environmental regulations, the Company is required to comply with such regulations with respect to manufacture, storage and/or disposal of toxic materials. To the Company's knowledge, it is in compliance with present regulations. However, no assurances can be given that future regulations will not be adopted, compliance with which will result in substantial expense to, and otherwise adversely affect the Company's business. In addition, the Company is subject to the State of New Jersey Industrial Site Recovery Act (ISRA), which, among other requirements, requires the Company to obtain prior approval before relocating its facilities or consummating a transaction that would result in a change in control of the Company. The Company's facilities are subject to inspection to ascertain whether the Company has complied with State environmental regulations. While the Company believes it has complied with such regulations, there can be no assurance that the Company will not be required to incur expenses to remedy any future environmental violations discovered. The Company is in the process of registering certain new and proprietary products with the Toxic Substances Control Agency (TSCA) which is required in order for the Company to offer for sale any new chemical product. No assurances can be given that such registrations will be approved. Research and Development The Company has made a commitment of resources to research and development for new dyes and for improvement of the Company's capability to provide technical services to its dye customers. In this regard, the Company has undertaken a dye synthesis effort to develop and produce dyes with greatly improved thermal stability. These dyes are now a part of the Company's product line and sales have started to grow. There is available to the Company the plastic processing equipment similar to that used by the Company's customers to extrude and injection mold plastic-dye formulations. Management expects that this will allow the Company to better understand its customer's problems and to design solutions. Competition The Company generally experiences, in management's opinion, limited competition in all areas of its business from some companies many of which are larger and better financed. At the present time, however, the Company believes that it has a unique position as a supplier of near infrared dyes. Management believes that the only other suppliers of these dyes use them as a vehicle to sell other products. Management believes that these companies will only sell the dye to purchasers of their resins or to those who buy their formulated resin or their finished lenses. Such companies do not sell the pure dye which is done by the Company. Insofar as the major profit incentive comes from the manufacture and sale of finished product, Management believes those companies that have the capability to formulate dyes in resin and injection mold the formulated resin, have a strong incentive to purchase the dye without any other requirements. However, in the future, other dye manufacturers may change their policy and sell dye directly. This will present the Company with a challenge to its pricing structure. However, because of the Company's low overhead, it is believed that such a challenge can be met successfully. The Company has also invested resources in improved processes for the manufacture of dyes so that the Company can consider itself a low cost producer. The research and development program has introduced a new family of near infrared dyes that show a marked improvement in thermal and light stability over existing dyes. The Company believes that this new family of dyes will allow it to maintain a strong position as a dye supplier for laser safety and welding optical wear. Technological Obsolescence The chemical and plastics industry is characterized by rapid technological changes. Although the near infrared dyes that form the major portion of the Company's product line have been used in protective eyewear since 1976, the field has proven to be an active one for other applications and the Company must anticipate competition to develop. To remain competitive, the Company has committed itself to make capital investments to maintain its position as a key dye supplier in this field. There can be no assurance that the Company's dye technology will not be rendered less competitive, or obsolete, by the development by others of new methods to achieve laser safety and other forms of eye protection. Furthermore, to remain competitive, the Company may be required to make large, ongoing capital investments to develop and produce dyes at competitive prices. There is no assurance that can be given that the funds for such investments will be available to the Company. Patents and Proprietary Protection The Company does not rely upon patents for protection of its dye business. It has, however, anticipated the need for such proprietary protection and has acted by applying for patents on a class of new dyes that it has developed. In connection therewith, a patent was recently granted by the U.S. Patent Office (U.S. Patent 5,686,639) for a new class of quinone diimmonium salts in November 1997. Other patent disclosures have been submitted and the Company intends to prepare appropriate applications as it deems necessary in the future. No assurance can be given that other patents with regard to the foregoing will be issued. The Company has allowed its patent position on two patents it owns on Expanding Monomers to lapse by not paying the maintenance fees. This will have no material impact on the Company's business since the Company decided previously to curtail the development of this technology. The Company intends to continue an intensive patent program on new dyes, especially in those instances where composition of matter claims can be obtained. There can be no assurance that these patents will be of commercial benefit to the Company, or otherwise offer the Company protection from competing products. Although the issuance of a patent entitles the owner to a statutory presumption of validity, the presumption is not conclusive as to validity or the scope of enforceability of the claims therein. The enforceability and validity of a patent can be challenged by litigation after its issuance and, if the outcome of litigation is adverse to the owner of the patent, other parties may be free to use the subject matter covered by the patent. Moreover, the cost of defending these patents against infringement could require substantial expenditures which the Company may decide it is unable to afford. In addition, persons or entities may have filed patent applications and may have been issued patents on inventions or otherwise possess proprietary rights to technologies potentially useful to the Company. There can be no assurance that others may not independently develop the same, similar or alternative technologies or otherwise obtain access to the Company's proprietary technologies. Sales A material portion of the Company's business is dependent on certain domestic customers, the loss of which could have a material effect on operations. During the year ended February 28, 2001, approximately 52.4% of sales were to four customers. Three of these customers, located in the Eastern United States, comprised 43.8% of sales at February 28, 2001. During the year ended February 29, 2000, approximately 46.9% of sales were to four customers. Three of these customers, located in the Eastern United States, comprised 35.1% of sales at February 29, 2000. Employees The Company presently employees six persons, all on a full time basis. The Company's employees are not represented by labor unions. Item 2. Description of Property. The Company presently occupies approximately 19,500 square feet of manufacturing, warehouse and administrative space in Newark, New Jersey which property the Company has occupied since June 1989. Prior to October 1996, the Company occupied approximately 17,000 square feet of such space. During fiscal 1996, Management decided to explore the possibility of purchasing said property from its then owner, a non-affiliated entity which purchase would include such additional space of approximately 2,500 square feet. In order to finance the purchase, the Company was advised by its proposed lender that the members of the Company's Board of Directors would be required to guarantee the repayment of any financing. At a meeting of the Board of Directors held in June 1996, only Murray S. Cohen and James Ivchenko, each an officer and director of the Company, agreed to participate in any such arrangement. It was agreed that Dr. Cohen and Mr. Ivchenko, or an entity to be formed by them, would purchase the property and lease the property to the Company under a long term arrangement. As a result, Dr. Cohen and Mr. Ivchenko entered into an agreement to purchase the property for the sum of $450,000, which agreement was prior to closing assigned to Epolin Holding Corp. ("Epolin Holding") a company formed by Dr. Cohen and Mr. Ivchenko to acquire the property. Such purchase was completed in October 1996. Simultaneously with the closing, the Company entered into substantially similar leasing arrangements with Epolin Holding as then existed with the former owner of the property. Such new lease expires in October 2001 (with three 5 year options) with annual rent of $97,740 subject to annual adjustments based on increases in the Consumer Price Index. Such rent includes real estate taxes and insurance expenses. In January 1998, Epolin Holding became a wholly-owned subsidiary of Epolin. Item 3. Legal Proceedings. In August 2000, the Company received a letter from a law firm representing a former officer of the Company (who is also a current director) alleging age discrimination and other monetary claims pertaining to such former officer's past employment. In addition, in September 2000, the Company received a letter from the same law firm on behalf of another director (who was then an employee of the Company) alleging similar claims. In December 2000, these individuals instituted suit in the Superior Court of New Jersey, Bergen County-Law Division, against the Company and the other directors of the Company alleging claims pursuant to their past employment as well as a derivative claim, as minority stockholders. The Company believes such claims are without merit and intends to defend such matter vigorously. Nevertheless, while the outcome of this action cannot be predicted at this time, taking into account the uncertainty and risks inherent in any litigation, management does not anticipate that the ultimate disposition will have a material adverse effect on the Company. Other than the foregoing matter, there are no other material pending legal proceedings to which the Company is a party or to which any of its property is subject. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders. PART II Item 5. Market for Common Equity and Related Stockholder Matters. (a) Market Information. The Company's Common Stock is presently being traded in the over-the-counter market under the symbol "EPLN" and is listed on the OTC Bulletin Board. The following chart sets forth the range of the high and low bid quotations for the Company's Common Stock for each period indicated. The quotations represent prices between dealers and do not include retail markups, markdowns, commissions or other adjustments and may not represent actual transactions. Period Bid Prices Fiscal year ended February 29, 2000: High Low March 1, 1999 to May 31, 1999 $.24 $.19 June 1, 1999 to Aug. 31, 1999 $.31 $.19 Sept. 1, 1999 to Nov. 30, 1999 $.31 $.23 Dec. 1, 1999 to Feb. 29, 2000 $.8125 $.24 Fiscal year ended February 28, 2001: High Low March 1, 2000 to May 31, 2000 $.8125 $.3125 June 1, 2000 to Aug. 31, 2000 $.40 $.25 Sept. 1, 2000 to Nov. 30, 2000 $.44 $.29 Dec. 1, 2000 to Feb. 28, 2001 $.30 $.15 (b) Holders. As of February 28, 2001 there were approximately 300 record holders of the Company's Common Stock. (c) Dividends. The Company has never declared any cash dividends on its Common Stock. The Company expects to pay a dividend on its Common Stock in fiscal 2002. Item 6. Management's Discussion and Analysis or Plan of Operation. The following discussion of the Company's financial condition and results of operations is based on the Company's Consolidated Financial Statements and the related notes thereto. Overview Epolin, Inc. is a manufacturing and research and development company which was incorporated in the State of New Jersey in May 1984. The Company is principally engaged in the development, production and sale of near infrared dyes to the optical industry for laser protection and for welding applications and other dyes, specialty chemical products that serve as intermediates and additives used in the adhesive, plastic, aerospace, pharmaceutical, flavors and fragrance industries to a group of customers located in in the United States and throughout the world. Results of Operations Fiscal 2001 Compared to Fiscal 2000 During the year ended February 28, 2001, the Company reported sales of approximately $2,330,000 as compared to sales of approximately $1,927,000, an increase of approximately $403,000 or 20.9%. This increase in sales was primarily attributable to an increase in sales of the Company's near infrared absorbing dyes, and increases in sales of new dyes for new applications. Operating income for fiscal 2001 increased to approximately $916,000 as compared to operating income of approximately $680,000 for fiscal 2000, an increase of approximately $236,000. This change resulted primarily from an increase in sales as well as decreases in selling, general and administrative expenses. Cost of sales in fiscal 2001 was approximately $699,000 compared to cost of sales in fiscal 2000 of approximately $501,000. In fiscal 2001, the Company's selling, general and administrative expenses were approximately $714,000 as compared to selling, general and administrative expenses of approximately $746,000 for the fiscal year ended February 29, 2000. During the fiscal year ended February 28, 2001, the Company realized approximately $74,000 in interest income as compared to approximately $50,000 in interest income for the prior year. This increase resulted primarily from increases in available cash in fiscal 2001. During the fiscal year ended February 28, 2001, the Company reported income before taxes of approximately $990,000 as compared to income before taxes of approximately $730,000 for the fiscal year ended February 29, 2000. Net income after taxes was approximately $835,000 or $.07 per share for fiscal 2001 as compared to net income after taxes of approximately $380,000 or $.03 per share for fiscal 2000. Fiscal 2000 Compared to Fiscal 1999 During the year ended February 29, 2000, the Company reported sales of approximately $1,927,000 as compared to sales of approximately $1,681,000 during the year ended February 28, 1999, an increase of approximately $246,000 or 14.6%. This increase in sales was primarily attributable to an increase in sales of the Company's near infrared absorbing dyes, and increases in sales of new dyes for new applications. Operating income for fiscal 2000 increased to approximately $680,000 as compared to operating income of approximately $280,000 for fiscal 1999, an increase of approximately $400,000. This change resulted primarily from an increase in sales as well as decreases in cost of sales and decreases in selling, general and administrative expenses. Cost of sales in fiscal 2000 was approximately $501,000 compared to cost of sales in fiscal 1999 of approximately $671,000. In fiscal 2000, the Company's selling, general and administrative expenses were approximately $746,000 as compared to selling, general and administrative expenses of approximately $731,000 for the fiscal year ended February 28, 1999. During the fiscal year ended February 29, 2000, the Company realized approximately $50,000 in interest income as compared to approximately $27,000 in interest income for the prior year. This increase resulted primarily from increases in available cash in fiscal 2000. During the fiscal year ended February 29, 2000, the Company reported income before taxes of approximately $730,000 as compared to income before taxes of approximately $307,000 for the fiscal year ended February 28, 1999. Net income after taxes was approximately $380,000 or $.03 per share for fiscal 2000 as compared to net income after taxes of approximately $148,000 or $.01 per share for fiscal 1999. Liquidity and Capital Resources On February 28, 2001, the Company had working capital of approximately $2,357,000, an equity to debt ratio of approximately 5.80 to 1, and stockholders' equity of approximately $2,835,000. On February 28, 2001, the Company had approximately $1,690,000 in cash and cash equivalents, total assets of approximately $3,324,000 and total liabilities of approximately $488,000. The Company believes that its available cash, cash flow from operations and projected revenues will be sufficient to fund the Company's operations for more than the next 12 months. The Company does not anticipate making any significant additional capital expenditures in the immediate future as it believes its present machinery and equipment will be sufficient to meet its near term needs. Inflation has not significantly impacted the Company's operations. Other Information In March 1998, the Board of Directors of the Company authorized a stock repurchase program of up to $150,000 of the Company's outstanding shares of Common Stock. In connection therewith, the Company announced that purchases may be made in the open market or in privately negotiated transactions from time to time, based on market prices and that the repurchase program may be suspended without further notice. Management believes the Company's shares are undervalued at current price levels and this program offers the Company a chance not only to repurchase some of its stock at prices management perceives to be attractive but it also enables the Company to enhance shareholder value although no assurance can be given that any such repurchases will have such effect. A total of 574,700 shares have been repurchased under this program through February 28, 2001 at a cumulative cost of $148,641, which includes 104,000 shares repurchased during the fiscal year ended February 28, 2001 at a cost of $33,135. Item 7. Financial Statements. See the Consolidated Financial Statements annexed to this report. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. Set forth below are the present directors and executive officers of the Company. Note that there are no other persons who have been nominated or chosen to become directors nor are there any other persons who have been chosen to become executive officers. There are no arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director or an officer. Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and have qualified. Officers serve at the discretion of the Board of Directors. Present Position Has Served As Name Age and Offices Director Since Murray S. Cohen 75 Chairman of the 1984 Board, Chief Executive Officer, Secretary and Director James Ivchenko 61 President and Director 1993 Claire Bluestein 75 Director 1984 Morris Dunkel 73 Director 1984 Chester C. Swasey 57 Director 1994 Abdelhamid A.H. Ramadan 61 Director 1994 None of the directors and officers is related to any other director or officer of the Company. Set forth below are brief accounts of the business experience during the past five years of each director and executive officer of the Company and each significant employee of the Company. MURRAY S. COHEN has served as Director, Chief Executive Officer and Chairman of the Board of the Company since June 1984 and Secretary since March 2001. From June 1984 to August 1994, Dr. Cohen was also President. From January 1978 through May 1983, Dr. Cohen was the Director of Research and Development for Apollo Technologies Inc., a company engaged in the development of pollution control procedures and devices. Dr. Cohen was employed as a Vice President and Technical Director of Borg-Warner Chemicals from 1973 through January 1978, where his responsibilities included the organization, project selection and project director of a 76 person technical staff which developed materials for a variety of plastic products. He received a Bachelor of Science Degree from the University of Missouri in 1949 and a Ph.D. in Organic Chemistry from the same institution in 1953. JAMES IVCHENKO has served as Director of the Company since September 1993, President since August 1994, and from February 1992 to August 1994, he was Technical Director and Vice President of Operations. Prior thereto, Mr. Ivchenko was employed by Ungerer & Co. as Plant Manager for the Totowa, New Jersey and Bethlehem, Pennsylvania facilities from May 1988 to May 1991. Mr. Ivchenko has over 30 years of experience in the flavor, fragrance and pharmaceutical intermediate industry. He received his Bachelor of Arts Degree, Masters of Science and Masters of Business Administrations from Fairleigh Dickinson University in New Jersey. CLAIRE BLUESTEIN has served as Director of the Company since June 1984. Since 1976, Dr. Bluestein has been president and sole shareholder of Captan Associates, Inc., a company engaged in the development of materials for commercial applications of radiation curing technology. Dr. Bluestein has been issued several patents by the United States Department of Commerce, Trademark and Patent Offices and has published a variety of chemistry related articles. Dr. Bluestein received her Bachelor of Arts Degree from the University of Pennsylvania in 1947. In 1948 she received a Master of Science Degree and in 1950 a Ph.D. in Organic Chemistry from the University of Illinois. MORRIS DUNKEL has served as Director of the Company since June 1984. From 1976 through 1983, Dr. Dunkel was employed by Tenneco Chemicals, Inc., a firm engaged in chemical production activities, in the capacities of manager and director of Tenneco's organic chemicals research and development division. Dr. Dunkel has been issued several United States patents and has published numerous articles relating to chemical processes. He received a Bachelor of Science Degree in 1950 from Long Island University. Dr. Dunkel received a Master of Science Degree from Brooklyn College in 1954 and Ph.D. in Organic Chemistry from the University of Arkansas in 1956. CHESTER C. SWASEY has served as Director of the Company since 1994. From August 1994 to August 2000, he was Vice President of Sales and Marketing. He is no longer employed by the Company. From 1992 to 1994, Mr. Swasey was employed as a Director of Marketing at Fairmount Chemical Company. From 1989 to 1992, he was employed as Manager of New Business Development at Union Carbide Corporation. Mr. Swasey has received several United States patents and has published a variety of technical papers related to the performance of plastics additives. Mr. Swasey received a Bachelor of Science degree in Chemistry from the City College of New York in 1965, and a Master of Business Administration degree from Fairleigh Dickinson University in 1973. ABDELHAMID A.H. RAMADAN has been a Director of the Company since July 1994. From November 1993 to December 2000, he was Manager for Research, Process Development and Quality Assurance of the Company. He is no longer employed by the Company. From March 1992 through October 1993, he served as production manager at Celgene Corp., and from 1989 through February 1992, he served as Senior Chemist and Chemical Hygiene Officer of the Company. From 1982 through 1988, Mr. Ramadan served as Production Department Head at Tenneco Chemicals. Mr. Ramadan received a Bachelor of Science Degree in Chemistry in 1963 from Ain Shams University - Cairo - Egypt. Item 10. Executive Compensation. The following summary compensation tables set forth information concerning the annual and long-term compensation for services in all capacities to the Company for the fiscal years ended February 28, 2001, February 29, 2000 and February 28, 1999, of those persons who were, at February 28, 2001 (i) the chief executive officer and (ii) the other most highly compensated executive officers of the Company, whose annual base salary and bonus compensation was in excess of $100,000 (the named executive officers): Summary Compensation Table Annual Compensation Name and Principal Fiscal Position Year Salary Bonus Murray S. Cohen 2001 $177,290(1)(3) $29,000 Chairman of the 2000 $127,874(3) $20,000 Board and Chief 1999 $111,538(3) $20,000 Executive Officer James Ivchenko 2001 $162,318(2)(3) $24,000 President 2000 $123,502(3) $15,000 1999 $106,538(3) $15,000 Long-Term Compensation Restricted Shares Name and Principal Fiscal Stock Underlying Position Year Awards Options Murray S. Cohen 2001 0 0 Chairman of the 2000 0 0 Board and Chief 1999 0 75,000 Executive Officer James Ivchenko 2001 0 0 President 2000 0 0 1999 0 75,000 (1) Includes $38,400 of additional compensation due to Murray S. Cohen based upon the Company's sales for fiscal 2000 paid in fiscal 2001 as determined under his employment contract. Does not include, however, additional compensation due to Dr. Cohen based upon the Company's sales for fiscal 2001 as determined under his employment contract which will be paid in fiscal 2002 which will be in the amount of $52,416. Also, does not include $49,948 paid to Dr. Cohen in fiscal 2001 for previously accrued salary. (2) Includes $28,905 of additional compensation due to James Ivchenko based upon the Company's sales for fiscal 2000 paid in fiscal 2001 as determined under his employment contract. Does not include, however, additional compensation due to Mr. Ivchenko based upon the Company's sales for fiscal 2001 as determined under his employment contract which will be paid in fiscal 2002 which will be in the amount of $40,768. (3) Does not include any deferred compensation arrangements for each of Dr. Cohen and Mr. Ivchenko. See "Deferred Compensation/Employment Contracts" below. Stock Option Plans The Company previously adopted the 1986 Employees' Stock Option Plan (the "1986 Plan"). As of April 1996, options may no longer be granted under the 1986 Plan. Under the terms of the 1986 Plan, options granted thereunder could be designated as options which qualify for incentive stock option treatment under Section 422A of the Internal Revenue Code of 1986, as amended (the "Code"), or options which do not so qualify. In December 1995, options to acquire up to 490,000 shares of the Company's Common Stock were granted under the 1986 Plan. Such options expire on December 1, 2005. To date, options to acquire 270,000 shares of the Company's Common Stock have been exercised under the 1986 Plan. The Company has repurchased 120,000 of such shares which were acquired upon exercise. In December 1998, the Company adopted the 1998 Stock Option Plan (the "1998 Plan") for employees, officers, consultants or directors of the Company to purchase up to 750,000 shares of Common Stock of the Company. Options granted under the 1998 Plan shall be non-statutory stock options which do not meet the requirements of Section 422 of the Code. Under the terms of the 1998 Plan, participants may receive options to purchase Common Stock in such amounts and for such prices as may be established by the Board of Directors or a committee appointed by the Board to administer the 1998 Plan. As of February 28, 2001, options to acquire 475,000 shares of the Company's Common Stock have been granted under the 1998 Plan and 275,000 options were available for future grant. To date, options to acquire 12,500 shares of the Company's Common Stock have been exercised under the 1998 Plan. The Company has repurchased all of such shares which were acquired upon exercise. No stock options or other stock appreciation rights were granted to any of the persons named in the Summary Compensation Table during the fiscal year ended February 28, 2001. The following table set forth certain information as to each exercise of stock options during the year ended February 28, 2001, by the persons named in the Summary Compensation Table and the fiscal year-end value of unexercised options: Aggregated Option Exercises in Fiscal 2001 and Year-End Option Value Number of Securities Shares Underlying Unexercised Acquired Options at February 28, 2001 On Value Exercise Realized Exercisable Unexercisable Murray S. Cohen -0- -0- 150,000 0 James Ivchenko -0- -0- 150,000 0 Value of Unexercised In-the-Money Options at February 28, 2001(1) Exercisable Unexercisable Murray S. Cohen $17,250 $0 James Ivchenko $17,250 $0 ________________________ (1) Realizable values are reported net of the option exercise price but before any income taxes that the executive may have to pay. Actual gains, if any, on stock option exercises are dependent on the future performance of the Common Stock as well as the option holder's continued employment through the vesting period. The amounts reflected in this table may never be obtained. Compensation of Directors Since inception, no director has received any cash compensation for his services as such. In the past, directors have been and will continue to be reimbursed for reasonable expenses incurred on behalf of the Company. Deferred Compensation/Employment Contracts Pursuant to a deferred compensation agreement, as amended, entered into with James Ivchenko, President of the Company, the Company has agreed to pay Mr. Ivchenko $32,000 per year for ten consecutive years commencing the first day of the month following Mr. Ivchenko reaching the age of 65. The obligation is being funded with a life insurance policy owned by the Company. Effective as of March 1, 1999, the Company entered into a ten year employment agreement with Mr. Ivchenko. Pursuant thereto, Mr. Ivchenko shall be paid an annual salary of not less than the greater of his annual base salary in effect immediately prior to the effective date of the agreement or any subsequently established annual base salary. In addition thereto, Mr. Ivchenko shall receive as additional compensation a certain percentage (as set forth below) of the Company's annual gross sales up to but not exceeding annual gross sales of $3 million. Such percentage starts at 1.50% for the fiscal year ended February 29, 2000 and increases by 0.25% per year during the term of the agreement. In the event of death or disability, the agreement provides that Mr. Ivchenko or his estate will receive 100% of his annual salary and additional compensation as described above for the fiscal year during which he died or became disabled, and 50% of his annual salary and annual additional compensation which he would had received (if not for his death or disability) for the remainder of the ten year term. Effective as of March 1, 1999, the Company also entered into a ten year employment agreement with Murray S. Cohen, Chairman of the Board and Chief Executive Officer of the Company. Pursuant thereto, Dr. Cohen shall be paid an annual salary of not less than the greater of his annual base salary in effect immediately prior to the effective date of the agreement or any subsequently established annual base salary. In addition thereto, Dr. Cohen shall receive as additional compensation a certain percentage (as set forth below) of the Company's annual gross sales up to but not exceeding annual gross sales of $3 million. Such percentage starts at 2.00% for the fiscal year ended February 29, 2000 and increases by 0.25% per year during the term of the agreement. In the event of death or disability, the agreement provides that Dr. Cohen or his estate will receive 100% of his annual salary and additional compensation as described above for the fiscal year during which he died or became disabled, and 50% of his annual salary and annual additional compensation which he would had received (if not for his death or disability) for the remainder of the ten year term. The Company had previously entered into a deferred compensation agreement in June 1998 with Dr. Cohen which provided for the payment of certain funds to Dr. Cohen for a period of ten years beginning two weeks after the date of his retirement. Such agreement was terminated in connection with the execution of the employment agreement with Dr. Cohen. In addition to the foregoing, Dr. Cohen will be entitled to receive $79,041 upon his retirement in connection with a deferred compensation agreement entered into in January 1996 which was terminated in June 1998. Such amount will be paid to Dr. Cohen upon retirement either in equal consecutive monthly payments for a period not exceeding 60 months or a single payment which will be at the discretion of the Company. The Company has also entered into deferred compensation agreements with Chester C. Swasey and Abdelhamid A.H. Ramadan. These agreements provide for annual payments of 50% of each employee's salary before bonuses at his respective retirement dates, to be paid in biweekly installments for 10 years. Management has elected not to provide any additional funding for either employee subsequent to the date at which each of the two employees were no longer employed with the Company. Item 11. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth, as February 28, 2001, certain information with regard to the record and beneficial ownership of the Company's Common Stock by (i) each stockholder owning of record or beneficially 5% or more of the Company's Common Stock, (ii) each director individually, (iii) all officers and directors of the Company as a group: Amount and Nature of Percent Name Beneficial Ownership of Class Murray S. Cohen(1)(2)* 2,845,958 24.8% James Ivchenko(1)* 1,719,587 15.0% Chester C. Swasey(3)* 930,822 8.2% Claire Bluestein(4)* 970,155 8.5% Morris Dunkel(4)* 225,000 2.0% Abdelhamid R.H. Ramadan(3)* 398,402 3.5% All Officers and Directors as a Group (6 persons) 7,089,924 62.0% * Indicates a Director of the Company. The address for each is 358-364 Adams Street, Newark, New Jersey 07105. (1) Includes 150,000 shares which each has the right to acquire within 60 days pursuant to the exercise of stock options granted under the Company's Stock Option Plans. Subsequent to the end of fiscal 2001, each of Dr. Cohen and Mr. Ivchenko acquired 75,000 shares upon exercise of certain stock options. (2) Includes 1,000,000 shares owned by three grandchildren of Dr. Cohen, which shares are held by Dr. Cohen's daughters as custodian. Dr. Cohen holds a proxy with respect to such shares which proxy expires in August 2002. As a result, Dr. Cohen may be deemed to be the beneficial owner of such shares. (3) Includes 75,000 shares which each has the right to acquire within 60 days pursuant to the exercise of stock options granted under the 1998 Plan. (4) Includes 25,000 shares which each has the right to acquire within 60 days pursuant to the exercise of stock options granted under the 1998 Plan. Item 12. Certain Relationships and Related Transactions. None. Item 13. Exhibits and Reports on Form 8-K. (a) Exhibits. 3.1 Epolin Inc.'s certificate of incorporation as amended (1) 3.2 Epolin Inc.'s by-laws(1) 4.1 Specimen certificate for common stock(1) ___________________ (1) Filed with the Company's Form S-18 Registration Statement SEC File 33-25405-NY. (b) Reports on Form 8-K. Listed below are reports on Form 8-K filed during the last quarter of the period covered by this report: None. 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. EPOLIN, INC. (Registrant) By: /s/ Murray S. Cohen Murray S. Cohen, Chief Executive Officer Dated: May 4, 2001 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 and on the dates indicated: Signature Title Date /s/ Murray S. Cohen Chief Executive Officer, 5/4/01 Murray S. Cohen Chairman of the Board, Secretary and Director (Principal Executive Officer and Principal Financial Officer) /s/ James Ivchenko President and Director 5/4/01 James Ivchenko /s/ Claire Bluestein Director 5/1/01 Claire Bluestein /s/ Morris Dunkel Director 5/3/01 Morris Dunkel Chester C. Swasey Director Abdelhamid A.H. Ramadan Director EPOLIN, INC. AND SUBSIDIARY FINANCIAL STATEMENTS YEARS ENDED FEBRUARY 28, 2001 AND FEBRUARY 29, 2000 CONTENTS PAGE Independent Auditor's Report 1 Consolidated Financial Statements: Consolidated Balance Sheets 2 - 3 Consolidated Statements of Income 4 Consolidated Statements of Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 - 7 Notes to Consolidated Financial Statements 8 - 16 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders EPOLIN, INC. AND SUBSIDIARY Newark, New Jersey We have audited the accompanying Consolidated Balance Sheets of Epolin, Inc. and its wholly owned Subsidiary as of February 28, 2001 and February 29, 2000 and the related Consolidated Statements of Income, Stockholders' Equity and Cash Flows for the years ended February 28, 2001, February 29, 2000 and February 28, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of Epolin Inc. and Subsidiary as of February 28, 2001 and February 29, 2000 and the results of its operations and cash flows for the years ended February 28, 2001, February 29, 2000 and February 28, 1999 in conformity with generally accepted accounting principles. POLAKOFF WEISMANN LEEN LLC April 11, 2001 F-1 EPOLIN, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS February 28, February 29, 2001 2000 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 1,690,455 1,182,937 Accounts receivable 306,283 288,836 Inventories 501,592 475,215 Prepaid expenses 29,123 30,999 Employee loans -- 4,769 Deferred tax assets-current portion 8,328 113,577 ----------- ----------- Total current assets 2,535,781 2,096,333 ----------- ----------- PLANT, PROPERTY AND EQUIPMENT - AT COST: Land 81,000 81,000 Building 369,000 369,000 Machinery and equipment 228,837 213,606 Furniture and fixtures 11,407 11,407 Leasehold improvements 432,037 432,037 ----------- ----------- Total 1,122,281 1,107,050 Less: Accumulated depreciation and amortization 673,014 648,937 ----------- ----------- Net plant, property and equipment 449,267 458,113 ----------- ----------- OTHER ASSETS: Deferred tax assets-non current portion 232,450 33,975 Cash value - life insurance policy 106,051 80,579 ----------- ----------- Total other assets 338,501 114,554 ----------- ----------- Total $ 3,323,549 2,669,000 =========== =========== The accompanying notes are an integral part of these statements. F-2 EPOLIN, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY
February 28, February 29, 2001 2000 ----------- ----------- CURRENT LIABILITIES: Accounts payable $ 10,193 17,330 Accrued expenses 134,158 162,084 Taxes payable: Payroll 3,725 1,310 Income 30,700 221,619 ----------- ----------- Total current liabilities 178,776 402,343 ----------- ----------- OTHER LIABILITIES: Deferred compensation 299,401 229,196 Loans payable-officers 10,319 10,319 ----------- ----------- Total other liabilities 309,720 239,515 ----------- ----------- Total liabilities 488,496 641,858 ----------- ----------- STOCKHOLDERS' EQUITY: Preferred stock, $15.513 par value; 940,000 shares authorized; none issued Perferred stock, series A convertible non-cumulative, $2.50 par value; redemption price and liquidation preference; 60,000 shares authorized; 5,478 shares issued and redeemed Common stock, no par value; 20,000,000 shares authorized; 11,956,500 and 11,806,500 shares issued and outstanding at 2001 and 2000, respectively 2,229,658 2,220,384 Paid-in capital 6,486 6,486 Retained earnings (deficit) 754,225 (80,822) ----------- ----------- Total 2,990,369 2,146,048 Less: Treasury stock-at cost 155,316 118,906 ----------- ----------- Total stockholders' equity 2,835,053 2,027,142 ----------- ----------- Total $ 3,323,549 2,669,000 =========== ===========
The accompanying notes are an integral part of these statements. F-3 EPOLIN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED FEBRUARY 28, 2001, FEBRUARY 29, 2000, AND FEBRUARY 28, 1999
2001 2000 1999 ----------- ----------- ----------- SALES $ 2,329,610 1,926,992 1,681,243 ----------- ----------- ----------- COST OF SALES AND EXPENSES: Cost of sales 699,386 501,437 670,793 Selling, general and administrative 714,335 745,743 730,816 ----------- ----------- ----------- Total 1,413,721 1,247,180 1,401,609 ----------- ----------- ----------- OPERATING INCOME 915,889 679,812 279,634 ----------- ----------- ----------- OTHER INCOME - INTEREST 73,968 50,080 27,304 ----------- ----------- ----------- INCOME BEFORE TAXES 989,857 729,892 306,938 INCOME TAXES 154,810 350,334 159,010 ----------- ----------- ----------- NET INCOME $ 835,047 379,558 147,928 =========== =========== =========== PER SHARE DATA: Basic earnings per common share 0.07 0.03 0.01 =========== =========== =========== Fully diluted earnings per common share 0.07 0.03 0.01 =========== =========== =========== Weighted average number of common shares outstanding 11,341,466 11,284,591 11,597,048 =========== =========== ===========
The accompanying notes are an integral part of these statements. F-4 EPOLIN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Retained Common Paid-in- Earnings Treasury Stockholders' Stock Capital Deficit Costs Equity ---------- ---------- ---------- ---------- ---------- Balance - March 1, 1998 $2,216,984 6,486 (608,308) -- 1,615,162 Common stock issued for stock option 3,400 -- -- -- 3,400 Net income -- -- 147,928 -- 147,928 Less cost of treasury stock -- -- -- (34,084) (34,084) ---------- ---------- ---------- ---------- ---------- Balance - February 28, 1999 2,220,384 6,486 (460,380) (34,084) 1,732,406 Net income -- -- 379,558 -- 379,558 Less cost of treasury stock -- -- -- (84,822) (84,822) ---------- ---------- ---------- ---------- ---------- Balance - February 29, 2000 2,220,384 6,486 (80,822) (118,906) 2,027,142 Common stock issued for stock option 9,274 -- -- -- 9,274 Net income -- -- 835,047 -- 835,047 Less cost of treasury stock -- -- -- (36,410) (36,410) ---------- ---------- ---------- ---------- ---------- Balance - February 28, 2001 $2,229,658 6,486 754,225 (155,316) 2,835,053 ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these statements F-5 EPOLIN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED FEBRUARY 28, 2001, FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
2001 2000 1999 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 835,047 379,558 147,928 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 24,077 17,423 62,113 Deferred tax expense (93,226) 8,555 42,817 Obligation under deferred compensation agreement 70,205 84,432 50,964 (Increase) decrease in: Accounts receivable (17,447) 42,078 (115,938) Inventories (26,377) (195,591) 102,652 Employee loans 4,769 5,593 (4,496) Prepaid expenses: Income taxes -- 22,504 10,295 Other 1,876 (14,052) 6,809 Security deposits -- -- 12,635 Increase (decrease) in: Accounts payable (7,137) (26,074) 3,019 Accrued expenses (27,926) 111,057 (4,516) Taxes payable: Payroll 2,415 -- (353) Income (190,919) 188,384 33,235 --------- --------- --------- Net cash provided by operating activities 575,357 623,867 347,164 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Loans payable - officers -- -- 10,319 Increase in cash value - life insurance policy (25,472) (18,021) (19,881) Assets from acquisition of subsidiary - net of accumulated depreciation -- -- (20,319) Payments for equipment (15,231) (13,815) -- --------- --------- --------- Net cash used by investing activities (40,703) (31,836) (29,881) --------- --------- ---------
The accompanying notes are an integral part of these statements. F-6 EPOLIN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED FEBRUARY 28, 2001, FEBRUARY 29, 2000 AND FEBRUARY 28, 1999
2001 2000 1999 ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of capital stock 9,274 -- 3,400 Purchase of treasury stock (36,410) (84,822) (34,084) ----------- ----------- ----------- Net cash used by financing activities (27,136) (84,822) (30,684) ----------- ----------- ----------- INCREASE IN CASH 507,518 507,209 286,599 CASH AND CASH EQUIVALENTS: Beginning 1,182,937 675,728 389,129 ----------- ----------- ----------- Ending $ 1,690,455 1,182,937 675,728 =========== =========== =========== SUPPLEMENTAL INFORMATION: Income taxes paid $ 483,391 149,649 80,700 =========== =========== =========== Interest paid $ 248 12,279 -- =========== =========== ===========
The accompanying notes are an integral part of these statements. F-7 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 NOTE A - ORGANIZATION AND BASIS OF PRESENTATION: The Company is engaged in the development, production and sale of near infrared dyes to the optical industry for laser protection and welding applications and other dyes and specialty chemical products that serve as intermediates and additives used in the adhesive, plastic, aerospace, pharmaceutical and flavors and fragrance industries to customers located in the United States and throughout the world. The Company's wholly owned Subsidiary, Epolin Holding, Corp., was incorporated in New Jersey as a real estate holding company whose asset consist of land and a building. Prior to being acquired on January 29, 1998, it was controlled by two officers/stockholders of the Company. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION - The accompanying Consolidated Financial Statements include the accounts of the Company and its Subsidiary. Intercompany transactions and balances have been eliminated in consolidation. Condensed consolidating financial statements for the year ended February 28, 2001 follows: CONDENSED CONSOLIDATING BALANCE SHEET
Epolin Epolin Holding Eliminations Consolidated ----------- ----------- ----------- ----------- Current assets $ 2,539,465 197,087 (200,771) 2,535,781 Non-current assets 970,202 408,929 (591,363) 787,768 ----------- ----------- ----------- ----------- Total $ 3,509,667 606,016 (792,134) 3,323,549 =========== =========== =========== =========== Total liabilities $ 674,614 360,078 (546,196) 488,496 ----------- ----------- ----------- ----------- Stockholders' equity: Common stock 2,229,658 -- -- 2,229,658 Additional paid-in capital 6,486 -- -- 6,486 Retained earnings 754,225 245,938 (245,938) 754,225 Treasury stock (155,316) -- -- (155,316) ----------- ----------- ----------- ----------- Total stockholders' equity 2,835,053 245,938 (245,938) 2,835,053 ----------- ----------- ----------- ----------- Total $ 3,509,667 606,016 (792,134) 3,323,549 =========== =========== =========== ===========
F-8 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF INCOME Epolin Epolin Holding Eliminations Consolidated ----------- ----------- ----------- ----------- Sales $ 2,329,610 -- -- 2,329,610 Other revenue -- 97,740 (97,740) -- ----------- ----------- ----------- ----------- Total 2,329,610 97,740 (97,740) 2,329,610 ----------- ----------- ----------- ----------- Cost of sales 699,386 -- -- 699,386 Selling, general and administrative 799,999 12,076 (97,740) 714,335 ----------- ----------- ----------- ----------- Total 1,499,385 12,076 (97,740) 1,413,721 ----------- ----------- ----------- ----------- Operating income 830,225 85,664 -- 915,889 Other income - interest 73,968 -- -- 73,968 ----------- ----------- ----------- ----------- Income before taxes 904,193 85,664 -- 989,857 Income taxes 148,652 6,158 -- 154,810 ----------- ----------- ----------- ----------- Net income $ 755,541 79,506 -- 835,047 =========== =========== =========== =========== CASH AND CASH EQUIVALENTS - Includes cash in bank and money market accounts for purposes of preparing the Statement of Cash Flows. CONCENTRATIONS OF CREDIT RISKS - The Company has cash deposits in financial institutions and brokerage houses in excess of the amount insured by agencies of the federal government in the amounts of $1,590,457 and $1,082,937 at February 28, 2001 and February 29, 2000, respectively. In evaluating this credit risk, the Company periodically evaluates the stability of these financial institutions. INVENTORIES - Consists of raw materials, work in process, finished goods and supplies valued at the lower of cost or market under the first-in, first-out method. FAIR VALUE OF FINANCIAL INSTRUMENTS - All reported assets and liabilities, which represent financial instruments, approximate the carrying values of such amounts. F-9 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) PLANT, PROPERTY AND EQUIPMENT - Stated at cost less accumulated depreciation and amortization. Provisions for depreciation are computed on the straight-line and declining balance methods, based upon the estimated useful lives of the assets. Depreciation and amortization expense totaled $24,077, $17,423 and $62,113 for the fiscal years 2001, 2000 and 1999, respectively. INCOME TAXES -The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", wherein the asset and liability method is used in accounting for income taxes. Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The temporary differences relate primarily to different accounting methods used for depreciation and amortization of property and equipment, allowance for doubtful accounts and net operating loss carry forwards. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles 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 amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. NOTE C - ECONOMIC DEPENDENCY: A material portion of the Company's business is dependent on certain domestic customers, the loss of which could have a material effect on operations. During the year ended February 28, 2001, approximately 52.4% of sales were to four customers. Three of these customers, located in the Eastern United States, account for 43.8% of sales at February 28, 2001. During the year ended February 29, 2000, approximately 46.9% of sales were to four customers. Three of these customers located in the Eastern United States comprised 35.1% of sales at February 29, 2000. F-10 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 NOTE D - INVENTORIES: 2001 2000 ---------- ---------- Raw materials and supplies $ 37,769 45,517 Work in process 65,624 12,074 Finished goods 398,199 417,624 ---------- ---------- Total $ 501,592 475,215 ========== ========== NOTE E - INCOME TAXES:
2001 2000 ---------- ---------- 1. Federal and State deferred tax assets include the following: Temporary differences - principally accelerated amortization of leasehold improvements for book purposes and deferred compensation $ 240,778 147,502 ---------- ---------- Current portion 8,328 113,527 ---------- ---------- Non-current portion $ 232,450 33,975 ========== ==========
2. Income tax expense (benefit) consists of the following components:
2001 2000 1999 --------- --------- --------- Current Federal $ 199,776 296,300 112,341 State 48,260 45,479 3,852 --------- --------- --------- Total current 248,036 341,779 116,193 --------- --------- --------- Deferred: Federal (72,158) (18,947) 9,995 State (21,068) 27,502 32,822 --------- --------- --------- Total deferred (93,226) 8,555 42,817 --------- --------- --------- Total $ 154,810 350,334 159,010 ========= ========= =========
F-11 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 NOTE E - INCOME TAXES (CONTINUED): 3. Reconciliation of income tax at the statutory rate to the Company's effective rate:
2001 2000 1999 --------- --------- --------- Computed at the statutory rate $ 283,916 245,159 219,815 State income taxes (net) 48,260 45,479 3,852 (Increase) Decrease in deferred tax asset (93,226) 34,476 -- General business creditor (51,314) (4,577) -- Non-deductible items (32,826) 29,797 (64,657) --------- --------- --------- Effective tax rate $ 154,810 350,334 159,010 ========= ========= =========
The Company does not have any net operating loss carryforwards available for either Federal or State tax purposes. NOTE F - ACCRUED SALARIES: On April 25, 1995, the Board of Directors authorized the issuance of 1,000,000 shares of common stock (market value $.04 per share) to an officer in lieu of $40,000 of his remaining accrued salary of $89,948. The remaining unpaid balance of $49,948 was paid in the current period. NOTE G - EMPLOYEE BENEFITS: SIMPLIFIED EMPLOYEE PENSION PLAN - Effective June 1, 1994, covering all eligible participating employees as defined. Employer contributions totaled $20,728, $15,397 and $12,908 for the years ended February 28, 2001, February 29, 2000 and 1999, respectfully. INCENTIVE COMPENSATION PLAN - On December 1989, the Company approved the 1989 Incentive Compensation Plan for the purpose of attracting and retaining key personnel. All employees of the Company are eligible to participate in the plan whereby incentive bonuses are determined by the Board of Directors and payable in shares of common stock. Shares issued are determined at fifty percent of the closing bid price, vested, and delivered over a three-year period. During the year ended February 28, 1999, 20,000 shares of common stock were issued covering a previously awarded bonus to an employee on May 18, 1998. F-12 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 NOTE G - EMPLOYEE BENEFITS (CONTINUED): EMPLOYEE OPTION PLAN - The Company previously adopted The 1986 Stock Option Plan. As of April 1996, options may no longer be granted. Under the terms of the Plan, options granted could be designated as portions which qualify for incentive stock option treatment under Section 422A of the Internal Revenue Code of 1986, as amended, or options which do not qualify. In December 1995, options to acquire up to 490,000 shares of the Company's common stock were granted and expire on December 1, 2005. In the current year, 150,000 shares of common stock were issued to two employees. Common stock issued for all prior years totaled 120,000 shares. Outstanding options remaining under the plan are as follows: Shares allocated as of February 28, 2001 220,000 ======= Option price $ 0.04 ======= All outstanding options are exercisable currently. No options were granted or expired during fiscal year ended February 28, 2001. The Company adopted the 1998 Stock Option Plan on December 1, 1998. Under the terms of the plan, the company reserved 750,000 shares of common stock for issuance pursuant to the exercise of options to be granted under the Plan, which do not meet the requirements of Section 422 of the Code. Options expire ten years after the date granted and are subject to a vesting period as follows: (1) no portion will be exercisable prior to the first anniversary of the date of grant, and (2) each of the options will become exercisable as to 50% of the shares underlying the option on each of the first and second anniversaries of the date granted at $0.15 per share. Options exercised as of February 28, 2001 - 12,500. Options granted as of February 28, 2001: No. of Shares Date Granted Expiration Date ------ ----------------- ----------------- 425,000 December 1, 1998 November 30, 2008 25,000 February 10, 1999 February 9, 2009 25,000 February 10, 2000 February 9, 2010 There are 275,000 options attributable to future grants. F-13 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 NOTE H - TREASURY STOCK: The Company made several purchases of their own common stock during the year ended February 28, 2001, totaling 104,000 shares at a cost of $33,135. Treasury stock at February 28, 2001 totaled 617,145 shares, including 42,445 shares, which were returned to the Company at no cost in prior years, at a cumulative cost of $155,316. NOTE I - RESEARCH AND DEVELOPMENT: Included in selling, general and administrative expenses totaling $288,481, $212,014 and $183,111 for the fiscal years 2001, 2000 and 1999, respectively. NOTE J - ACQUISITIONS: On January 29, 1998, the Company acquired 100 shares (100% interest) of Epolin Holding Corp.'s common stock. NOTE K - COMMITMENTS: On October 17, 1996, the premises leased from 350 South Street Partnership was purchased for $450,000 by Epolin Holding Corp., a New Jersey Corporation, controlled by Murray S. Cohen, Ph.D. and James A. Ivchenko, officers/stockholders of Epolin, Inc. This transaction was approved by the Board of Directors in June 1996 based upon the terms of a $350,000 mortgage obtained from the Broad National Bank wherein personal guarantees of two officers/stockholders were mandatory. Other directors declined participation in this transaction. The down payment of $100,000 was obtained from The Company, evidenced by a five (5) year promissory note of $75,565 (net of a three (3) months security deposit) under the terms of a five (5) year lease payable in monthly payments of $1,541, including interest at an annual rate of 8.25%. The lease, is for a term of five (5) years with three (3) five (5) year options at annual rentals of $97,740 subject to a Cost of Living Index adjustment effective with the second year. Rent includes reimbursed insurance. Epolin Holding Corp. became a wholly owned Subsidiary of Epolin, Inc. as of January 29, 1998. F-14 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 NOTE K - COMMITMENTS (CONTINUED): The minimum annual rental balance under the current lease expiring October 31, 2001 amounts to $65,160 for the year ending February 28, 2002. Years Ended Amounts ----------- ------- February 28, 2002 65,160 Management anticipates renewing the lease at terms yet to be determined. Rental expense charged to operations, eliminated in consolidation, amounted to $97,740, $97,740 and $89,595 for the years 2001, 2000 and 1999, respectively. DEFERRED COMPENSATION - On December 29, 1995, the Company entered into a deferred compensation agreement with an officer. The officer's additional annual compensation of $19,645 plus interest is being deferred until such time the officer reaches age 65 or is terminated. The obligation is being funded by a life insurance policy. Annual payments of $32,000 for ten consecutive years shall commence the first day of the month following the officer's 65th birthday or termination. On January 1, 1996 the company entered into a deferred compensation agreement with a second officer wherein $25,000 per year was accrued. This agreement, terminated on June 25, 1998, with unfunded accruals of $79,041 will be paid upon retirement either in equal consecutive monthly payments for a period not exceeding sixty (60) months or a single payment equal to the then present value of the account, said selection to be at the discretion of the company. The company entered into a second deferred compensation agreement with the same officer on June 25, 1998 which provided for the payment of certain funds for a period of ten years beginning two weeks after the date of his retirement. This agreement was terminated March 1, 1999. Effective March 1, 1999, the company adopted deferred compensation agreement with two of its employees. Under the term of the agreement, each employee will receive one twenty sixth (1/26) of fifty percent (50%) of their annual salary (excluding bonuses) as of the date of retirement. Each has a death vesting schedule. Management has elected not to provide any additional funding for either employee subsequent to the date at which each of the two employees were no longer employed with the company. Deferred compensation of $70,204, $22,932 and $21,840 was charged to operations for the years ended February 28, 2001, February 29, 2000 and 1999, respectively. F-15 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2001 NOTE K - COMMITMENTS (CONTINUED): EMPLOYMENT AGREEMENTS - Effective March 1, 1999, the Company entered into ten-year employment agreements with executive officers/directors: James Ivchenko, President - To be paid an annual salary of not less than the greater of his annual base salary in effect immediately prior to the effective date of the agreement or any subsequently established annual base salary. In addition, he is to receive 1.5% of gross annual sales of no more than $3,000,000, effective with the year ended February 29, 2000, increasing by 0.25% a year during the term of the agreement. Murray S. Cohen, PhD, Chairman of the Board and Chief Executive Officer - To be paid an annual salary of not less than the greater of his annual base salary in effect immediately prior to the effective date of the agreement or any subsequently established annual base salary. He is to receive 2.00% of gross annual sales of no more than $3,000,000, effective with the year ended February 29, 2000, increasing by 0.25% a year during the term of the agreement. CONTINGENCIES: In August 2000, the Company received a letter from a law firm representing a former officer of the Company (who is also a current director) alleging age discrimination and other monetary claims pertaining to such former officer's past employment. In addition, September 2000, the Company received a letter from the same law firm on behalf of another former employee of the Company (who is also a current director) alleging similar claims. In December 2000, these individuals instituted suit in the Superior Court of New Jersey, Bergen County - Law Division, against the Company and other directors of the Company alleging claims pursuant to their past employment as well as a derivative claim, as minority stockholders. The Company believes such claims are without merit and intends to defend such matter vigorously. Nevertheless, while the outcome of this action cannot be predicted at this time, taking into account the uncertainty and risks inherent in any litigation, management does not anticipate that the ultimate disposition will have a material adverse effect on the Company. F-16