10KSB 1 form10ksb022805.txt 10-KSB 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, 2005 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-28887 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: $2,880,100 As of May 10, 2005, the aggregate market value of the Common Stock held by non-affiliates of the Issuer (8,287,310 shares) was approximately $4,558,000. The number of shares outstanding of the Common Stock (no par value) of the Issuer as of the close of business on May 10, 2005 was 11,815,355. Documents Incorporated by Reference: None Transitional Small Business Disclosure Format: Yes [ ] No [ X ] EPOLIN, INC. TABLE OF CONTENTS PART I Page Item 1. Description of Business 3 Item 2. Description of Property 10 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security-Holders 10 PART II Item 5. Market for Common Equity and Related Stockholder Matters 10 Item 6. Management's Discussion and Analysis or Plan of Operation 12 Item 7. Financial Statements 17 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17 Item 8A. Controls and Procedures 17 Item 8B. Other Information 17 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 17 Item 10. Executive Compensation 19 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 22 Item 12. Certain Relationships and Related Transactions 23 Item 13. Exhibits 23 Item 14. Principal Accountant Fees and Services 24 Signatures 25 Forward-Looking Statements 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. Certain of these risks and uncertainties are discussed in this report under the caption "Uncertainties and Risk Factors" in Part I, Item 1 "Description of Business". The Company does not intend to update these forward-looking statements. PART I Item 1. Description of Business. Introduction Epolin, Inc. ("Epolin" or the "Company"), which was incorporated in the State of New Jersey in May 1984, is a specialized chemical company primarily engaged in the manufacturing, marketing, research and development of dyes and dye formulations. The Company's business is heavily weighted towards the development, manufacture and sale of near infrared dyes. Its principal offices are located at 358-364 Adams Street, Newark, New Jersey 07105 and its telephone number is (973) 465- 9495. The Company's web-site can be accessed at www.epolin.com. 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. Epolin Holding became a wholly- owned subsidiary in January 1998. Following completion of the Company's public offering in 1989, the Company's revenues were then 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 since 1991 has emphasized the development, manufacture and sale of these dyes. Paralleling the growth of the dye business, the Company maintains 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. However, unlike the dye business, the Company does not expect its specialty chemical business to grow. Unless the context otherwise requires, all references herein to the "Company" refer to Epolin, Inc. and its consolidated subsidiary, Epolin Holding Corp. Infrared Dyes To management's knowledge, and based upon its review of the web sites of the Company's known competition, management believes that the Company has one of the most extensive assortment of near infrared ("NIR") dyes in the world by offering the customer a varied assortment of dyes absorbing in the NIR region of the spectrum (from 700 to 1600NM). Nevertheless, the Company is not aware of any statistical evidence available to support its belief regarding its position in the industry. The dyes are sold as pure, crystalline, powders or as formulations or mixtures of dyes. Applications for these dyes cover several markets which are discussed 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. Dyes for Welding 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 and possibility of damage to the retina. 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. Management 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 Security Inks The Company has recently formulated NIR dyes into security inks, which absorb very little of the visible spectrum, and therefore cannot be detected at low concentrations in inks and paints. However, they can be viewed with a mechanical reader, and can therefore be deployed to verify authenticity in food and pharmaceutical labels, official documents, and credit cards. Commercialization of this segment has to date been in the area of silk screen inks for credit card manufacturing. Currency marking may be possible with the development of new formulations for jet and water soluble inks. The Company is also exploring the possibility of manufacturing and selling anti-Stokes materials for similar applications. These materials are not NIR dyes, but have a high demand for security tagants. Reliable supply sources will need to be established to aggressively pursue this market opportunity. Dyes for Specialty Filters Management believes a market exists for filters that block certain frequencies in the near infrared and visible spectrum. Most of the inquiries in this market come from instrument makers who use 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 market is under development. No assurance can be given that the Company will be able to successfully develop this market. Dyes for Sun Protection Premium-priced lenses that protect the human eye from NIR from the sun has not been an active market, but remains a potential market for the Company's dyes. Studies of the effects of NIR from the sun on the human eye may bring attention to this market in the future. Dyes for Heat Shields A potentially large market is thought to exist for a NIR dye that could block the heat from solar radiation while still allowing for high visibility, such as in sun roofs on automobiles. 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. Management believes that a formulation capable of withstanding deterioration from the sun over a useful life of at least seven years would be commercially viable, but has proven elusive. The Company is studying methods to improve performance under direct sunlight. 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 Interlayer and Laminates Laminated glass structures, with an interlayer of NIR dyes, may perform similar functions as the plastic heat shields described above, with the additional property of being shatterproof for potential automotive applications. Management believes that stability over a longer useful life is required to make these applications commercially viable. No assurance can be given that the Company will be able to successfully develop this market. Specialty Chemical Products Although the Company is heavily engaged in the manufacture and sale of dyes, the Company continues to maintain a level of production and sales of specialty products made on a custom basis. Such specialty chemical business, which does not represent greater than 10% of reported profits or losses of the Company, involves 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. 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 part 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. 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 registers all 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 for any new product. During each of the years ended February 28, 2005 and February 29, 2004, the Company expended approximately $18,000 for compliance with environmental laws. Actual costs to be incurred in future periods may vary from the foregoing costs, given inherent uncertainties in evaluating environmental exposures. Subject to the imprecision in estimating future environmental costs, the Company does not expect that any sum it may have to pay in connection with environmental matters would have a materially adverse effect on its financial condition or results of operations in any one year. Sources and Availability of Raw Materials The Company purchases chemicals from several large chemical manufacturers and then further processes them into its saleable products. Although the Company limits itself to a relatively small number of suppliers, it is not restricted to such suppliers, and Management believes the availability to such raw materials is widespread. During the year ended February 28, 2005, no significant difficulties were encountered in obtaining adequate supplies of raw materials. 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. New applications are pursued by a Director of Research under the direction of Dr. Cohen. Several programs for near infrared dyes are in various stages of commercialization, as generally described above. The Company's website is a constant source of new development ideas, as the scientific community is aware of the Company's expertise in the field of NIR dyes. New applications under development are in the following general markets: credit cards, heat blocking films; laser eye protection, military (night vision); document verification, military applications; welding and laser eye protection; medical devices; tagants; and hot melt additives. Such research and development activities are primarily undertaken with a specific customer in mind. Management believes that the practice of developing new applications directly for specific customers reduces the inherent risk of the development portfolio. Nevertheless, there can be no assurance that such research and development activities with specific customers in mind will lead to any significant sales of such new products. Because of the uncertainty of these efforts, revenue projections and estimated completion dates are difficult to measure. During the years ended February 28, 2005 and February 29, 2004, the amounts spent on research and development activities were approximately $408,000 and $374,000, respectively. All research and development costs are borne by the Company. Competition Although the Company generally experiences, in management's opinion, limited competition in all areas of its business, other dye companies exist which sell infrared dyes. In most cases, however, management believes that such other dye companies do not offer the broad range of dyes as offered by the Company nor can such other companies provide the level of technical service as provided by the Company. We believe that our extensive assortment of dyes, product performance, quality, technical and customer support, and price are all important factors in our competitiveness. In the future, other companies may change their policy and widen their offerings and expand their technical service. This will present the Company with a challenge to its pricing structure and competitive position. 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. For example, 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. 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, 2005, approximately 50.4% of sales were to three customers. Two of these customers, located in the Eastern United States, accounted for 44.0% of sales. During the year ended February 29, 2004, approximately 65.3% of sales were to four customers. Two of these customers, located in the Eastern United States, accounted for 42.0% of sales. Employees The Company presently employees ten persons on a full time basis. The Company's employees are not represented by labor unions. Uncertainties and Risk Factors In addition to other information and financial data set forth elsewhere in this report, the following risk factors should be considered carefully in evaluating the Company. OPERATING RESULTS MAY FLUCTUATE. Our operating results may fluctuate because of a number of factors, many of which are beyond our control. Some of these factors that affect our results but which are difficult to control or predict are: the reduction, rescheduling or cancellation of orders by customers whether as a result of slowing demand for our products, stockpiling of our products or otherwise; fluctuations in the timing and amount of customer requests for product shipments; fluctuations in product life cycles; changes in the mix of products that our customers buy; competitive pressures on selling prices; the ability of our customers to obtain products from their other suppliers; and general economic conditions. DEPENDENCE ON KEY CUSTOMERS. Our customers are concentrated, so the loss of one or more key customers could significantly reduce our revenues. In fiscal 2005, two customers located in the Eastern United States accounted for more than 10% of revenues from continuing operations. One customer accounted for 24.1% of sales of which 14.1% was near infrared dyes and 10% was security inks. The other customer accounted for 19.9% of sales of near infrared dyes. The loss of any of these customers could have a material adverse effect on the Company. TECHNOLOGICAL CHANGES. The chemical and plastics industry is characterized by rapid technological changes, so our success depends heavily on our ability to develop and introduce new products. In this regard, the Company must make 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 continue to be available to the Company. COMPETITION. Although the Company generally experiences, in management's opinion, limited competition in all areas of its business, other dye companies exist which sell infrared dyes. In most cases, however, management believes that such other dye companies do not offer the broad range of dyes as offered by the Company nor can such other companies provide the level of technical service as provided by the Company. We believe that our extensive assortment of dyes, product performance, quality, technical and customer support, and price are all important factors in our competitiveness. In the future, other companies may change their policy and widen their offerings and expand their technical service. This will present the Company with a challenge to its pricing structure and competitive position. ENVIRONMENTAL REGULATION. Manufacturers of chemical products are subject to extensive Federal and 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. In addition, 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. PATENTS AND PROPRIETARY PROTECTION. The Company does not rely upon patents for protection of its dye business. 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. SOURCES AND AVAILABILITY OF RAW MATERIALS. The Company purchases chemicals from several large chemical manufacturers and then further processes them into its saleable products. Although the Company limits itself to a relatively small number of suppliers, it is not restricted to such suppliers, and Management believes the availability to such raw materials is widespread. Nevertheless, there can be no assurance that raw materials will continue to be easily obtainable. Any difficulty in obtaining raw materials would have a material adverse effect on the Company's business. WE ARE DEPENDENT ON KEY PERSONNEL. Due to the specialized nature of our business, our success depends in part upon attracting and retaining the services of qualified managerial and technical personnel. Murray S. Cohen, the Company's Chairman of the Board and Chief Executive Officer, recently announced his intention to step down as Chief Executive Officer at an undetermined future date, while continuing to remain as Chairman of the Board and Chief Scientist for the Company. No assurance can be given that the Company will be able to find a suitable replacement for Dr. Cohen. DIVIDENDS. While the Company paid two cash dividends in each of the fiscal years ended 2002, 2003 and 2004, no dividends were paid in fiscal 2005. Any future dividends will depend on earnings, other financial requirements and other factors, many of which may be beyond the control of the Company. See Part II, Item 6, "Management's Discussion and Analysis or Plan of Operation - Operations Outlook" for an explanation of the Company's suspension for the time being of the cash dividends program which had been in place during fiscal 2002, 2003 and 2004. OUR STOCK PRICE MAY EXPERIENCE VOLATILITY. The market price of the Common Stock, which currently is listed in the OTC Bulletin Board, has, in the past, fluctuated over time and may in the future be volatile. The Company believes that there are a small number of market makers that make a market in the Company's Common Stock. The actions of any of these market makers could substantially impact the volatility of the Company's Common Stock. POTENTIAL FUTURE SALES PURSUANT TO RULE 144. Many of the shares of Common Stock presently held by management and others are "restricted securities" as that term is defined in Rule 144, promulgated under the Securities Act. Under Rule 144, a person (or persons whose shares are aggregated) who has satisfied a one- year holding period, may, under certain circumstances sell within any three-month period a number of shares which does not exceed the greater of 1% of the then outstanding shares of Common Stock, or the average weekly trading volume during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of shares without any quantity limitation by a person who is not an affiliate of the Company and who has satisfied a two-year holding period. Such holding periods have already been satisfied in many instances. Therefore, actual sales or the prospect of sales of such shares under Rule 144 in the future may depress the prices of the Company's securities. OUR COMMON STOCK IS A PENNY STOCK. Our Common Stock is classified as a penny Stock, which is traded on the OTCBB. As a result, an investor may find it more difficult to dispose of or obtain accurate quotations as to the price of the shares of the Common Stock. In addition, the "penny stock" rules adopted by the Securities and Exchange Commission subject the sale of the shares of the Common Stock to certain regulations which impose sales practice requirements on broker-dealers. For example, broker-dealers selling such securities must, prior to effecting the transaction, provide their customers with a document that discloses the risks of investing in such securities. Furthermore, if the person purchasing the securities is someone other than an accredited investor or an established customer of the broker- dealer, the broker-dealer must also approve the potential customer's account by obtaining information concerning the customer's financial situation, investment experience and investment objectives. The broker-dealer must also make a determination whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities. Accordingly, the Commission's rules may result in the limitation of the number of potential purchasers of the shares of the Common Stock. In addition, the additional burdens imposed upon broker-dealers by such requirements may discourage broker- dealers from effecting transactions in the Common Stock, which could severely limit the market of the Company's Common Stock. LIMITATIONS OF THE OTCBB CAN HINDER COMPLETION OF TRADES. Trades and quotations on the OTCBB involve a manual process that may delay order processing. Price fluctuations during a delay can result in the failure of a limit order to execute or cause execution of a market order at a price significantly different from the price prevailing when an order was entered. Consequently, one may be unable to trade in the Company's Common Stock at optimum prices. THE OTCBB IS VULNERABLE TO MARKET FRAUD. OTCBB securities are frequent targets of fraud or market manipulation, both because of their generally low prices and because OTCBB reporting requirements are less stringent than those of the stock exchanges or NASDAQ. INCREASED DEALER COMPENSATION COULD ADVERSELY AFFECT STOCK PRICE. OTCBB dealers' spreads (the difference between the bid and ask prices) may be large, causing higher purchase prices and less sale proceeds for investors. Except as required by the Federal Securities Law, the Company does not undertake any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-KSB or for any other reason. 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. The property is currently owned by Epolin Holding Corp. ("Epolin Holding"), a wholly-owned subsidiary of the Company. The Company presently occupies the property pursuant to a lease, effective November 1, 1996, which was for an initial term of five years with three five years options with annual rent of $97,740 subject to annual adjustments based on increases in the Consumer Price Index. The first five year option has been exercised which has extended the lease to October 31, 2006. Such rent includes real estate taxes and insurance expenses. Effective November 1, 2002, the Company began to sublease approximately 2,500 square feet of its space to a non-related party to operate an optics and security inks laboratory at an annual rent of $36,000. Such sublease is for an initial term of five years with one five year option. Item 3. Legal Proceedings. There are no 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. 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 28, 2005: High Low March 1, 2004 to May 31, 2004 $.65 $.45 June 1, 2004 to Aug. 31, 2004 $.60 $.48 Sept. 1, 2004 to Nov. 30, 2004 $.60 $.47 Dec. 1, 2004 to Feb. 28, 2005 $.60 $.50 Fiscal year ended February 29, 2004: High Low March 1, 2003 to May 31, 2003 $.70 $.52 June 1, 2003 to Aug. 31, 2003 $.55 $.43 Sept. 1, 2003 to Nov. 30, 2003 $.58 $.49 Dec. 1, 2003 to Feb. 29, 2004 $.56 $.52 Holders As of May 10, 2005, there were approximately 282 stockholders of record of the Company's Common Stock. This does not reflect persons or entities that hold their stock in nominee or "street name". Dividends The Company paid two cash dividends in each of the fiscal years ended 2002, 2003 and 2004. No dividends were paid in fiscal 2005. Any future dividends will depend on earnings, other financial requirements and other factors, many of which may be beyond the control of the Company. See Part II, Item 6, "Management's Discussion and Analysis or Plan of Operation - Operations Outlook" for an explanation of the Company's suspension for the time being of the cash dividends program which had been in place during fiscal 2002, 2003 and 2004. Recent Sales of Unregistered Securities In fiscal 2003, the Company issued 37,500 shares of Common Stock upon exercise of previously granted stock options at an aggregate exercise price of $9,375. In fiscal 2004, the Company issued 137,500 shares of Common Stock upon exercise of previously granted stock options at an aggregate exercise price of $29,375, and in fiscal 2005, the Company issued 25,000 shares of Common Stock upon exercise of previously granted stock options at an aggregate exercise price of $6,250. In addition, in fiscal 2003, the Company granted an aggregate of 25,000 stock options exercisable at $.30 per share; in fiscal 2004, the Company granted an aggregate of 162,000 stock options exercisable at $.35 per share; and, in fiscal 2005, the Company granted an aggregate of 100,000 stock options exercisable at $.51 per share. All of such stock options expire five or ten years after the date granted and are subject to various vesting periods. All of such securities were issued in reliance upon the exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, for "transactions by the issuer not involving any public offering". Equity Compensation Plan Information Number of securities to be issued upon Weighted-average exercise of exercise price of outstanding options, outstanding options, Plan category warrants and rights (a) warrants and rights (b) Equity compensation plans approved by security holders -0- -0- Equity compensation plans not approved by security holders 422,000 $0.35 Total 422,000 $0.35 Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected Plan category in column (a)) (c) Equity compensation plans approved by security holders -0- Equity compensation plans not approved by security holders 458,000 Total 458,000 The foregoing equity compensation plan information relates to the stock options granted under the 1998 Stock Option Plan, as well as the stock option granted outside of the plan to Greg Amato. See Part III, Item 10, "Stock Option Plans" for a description of the material features of the plan, as well as "Other Stock Option Arrangements" for information of the stock option granted to Mr. Amato. Item 6. Management's Discussion and Analysis or Plan of Operation. The following discussion should be read in conjunction with the audited consolidated financial statements and the notes thereto appearing elsewhere in this report and is qualified in its entirety by the foregoing. Executive Overview Epolin, Inc. (the "Company") is a specialized chemical company primarily engaged in the manufacturing, marketing, research and development of dyes and dye formulations. The Company's business is heavily weighted towards the development, manufacture and sale of near infrared dyes. Applications for these dyes cover several markets that include laser protection, welding, sunglasses, optical filters, glazing and imaging and security inks and tagants. The Company also manufactures specialty chemicals for certain United States chemical manufacturers. The Company has succeeded in growing over the last decade based on the development, application and manufacture of near infrared dyes. Although the Company does not rely upon patents for protection of its dye business, no competitors, to the Company's knowledge, actively market near infrared dyes without bundling the dyes as part of another product. The Company's dyes can be uniquely formulated to each customer's specifications and manufactured in the Company's own facility. In addition, the Company holds a broad range of dyes in inventory for immediate sale. The Company sells its products to manufacturers of plastics/resins, credit cards, electronics, glass and other basic materials. The Company's customers are located in all regions of the world, although 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. As the service economy continues to dwarf the manufacturing sector in the United States, the Company anticipates that its products will be increasingly used by manufacturers located abroad. During the year ended February 28, 2005, approximately 50.4% of sales were to three customers. Two of these customers, located in the Eastern United States, accounted for 44.0% of sales. During the year ended February 29, 2004, approximately 65.3% of sales were to four customers. Two of these customers, located in the Eastern United States, accounted for 42.0% of sales. The loss of one or more key customers could have a material adverse effect on the Company. Results of Operations The following table sets forth operations data expressed as a percentage of sales. Years Ended February 28, February 29, 2005 2004 Sales 100% 100% Cost of sales and expenses: Cost of sales 40.1 34.2 Selling, general and administrative 31.7 32.3 Total 71.8 66.5 Operating Income 28.2 33.5 Income before taxes 29.7 35.0 Net income (after taxes) 17.5 21.7 Sales Sales increased from $2,734,000 for the year ended February 29, 2004 to $2,880,000 for the year ended February 28, 2005, an increase of $146,000 or 5.3%. Such increase in sales is primarily due to an increase in sales of dyes for security inks. During fiscal 2005, the Company achieved an approximate $200,000 increase in sales of dyes for security inks compared to fiscal 2004, while sales of dyes in the Company's traditional markets of welding and eye protection have remained relatively unchanged since fiscal 2002 although such sales did in fact decrease in fiscal 2005 compared to fiscal 2004. The sales level of $2,880,000 reached during fiscal 2005 was an all time high for the Company. Yet, this was not significantly more than in 2004 ($2,734,000), 2003 ($2,690,000) or 2002 ($2,550,000). The plateau of sales over the last four years was in contrast to the greater sales growth the Company experienced prior to 2002 and beginning in 1991. While Management believes the Company has remained strong in the sale of dyes in its traditional markets of welding and eye protection, sales have remained relatively stagnant since fiscal 2002. The recent modest increases in total Company sales since 2002 is the result of increases in sales of dyes for security inks which is the area the Company expects to achieve its strongest growth. Cost of Sales and Expenses Cost of sales increased $218,000, to $1,155,000 for the year ended February 28, 2005 from $937,000 for the year ended February 29, 2004, an increase of $218,000. Selling, general and administrative expenses increased to $914,000 for the year ended February 28, 2005 from $882,000 for the year ended February 29, 2004, an increase of $32,000 notwithstanding that during fiscal 2004 the Company recognized an additional $86,000 which was included in fiscal 2004 selling, general and administrative expenses for a lawsuit settlement for which there was not a comparable item in fiscal 2005. The total of cost of sales and expenses for the year ended February 28, 2005 was $2,069,000 as compared to $1,819,000 for the year ended February 29, 2004, an increase of $250,000. Such increases in cost of sales were primarily due to increases in costs related to R&D salaries, inks and dye costs and applied factory overhead, with smaller increases in laboratory salaries, insurance expense and laboratory supplies. Such increase in selling, general and administrative expenses for the year ended February 28, 2005 compared to the prior year was primarily due to increases in officers and administrative salaries and benefits.$86,000 The recognition of $86,000 in fiscal 2004 resulted from a lump sum payment of approximately $193,000 included in the selling, general and administrative expenses reduced by approximately $108,000 for a deferred compensation liability eliminated as a result of the lawsuit settlement. Such lawsuit had been commenced in December 2000 by two individuals, each a former director and former employee of the Company. In the financial statements included with the Company's Form 10-KSB for the fiscal year ended February 29, 2004, the Company had classified such lump sum payment as an extraordinary item but as a result of comments received from the Commission such lump sum payment is now included in the selling, general and administrative expenses for the fiscal year ended February 28, 2004. Operating Income Operating income for fiscal 2005 decreased to $811,000 from $914,000 for fiscal 2004, a decrease of $103,000. This change was primarily due to the increases in cost of sales and selling, general and administrative expenses as described above, which increases were greater than the increase the Company achieved in sales for fiscal 2005 compared to fiscal 2004. Other Income Total other income for fiscal 2005 was $44,000 as compared to $43,000 for fiscal 2004. During fiscal 2005 and fiscal 2004, the Company realized $36,000 in rental income in each year. Effective November 1, 2002, the Company began to sublease approximately 2,500 square feet of its space to a non- related party to operate an optics and security inks laboratory at an annual rent of $36,000. The Company's interest income increased to $8,000 in fiscal 2005 from $7,000 in fiscal 2004. Net Income During the fiscal year ended February 28, 2005, the Company reported income before taxes of $855,000 as compared to income before taxes of $957,000 for the year ended February 29, 2004. Income taxes were $351,000 for fiscal 2005 compared to $365,000 for fiscal 2004. The decrease in income taxes of $14,000 is primarily the result of two separate items impacting on the Company's operation and income. Although sales increased, cost of sales and expenses increased at a greater rate causing net income to be lower in fiscal 2005 compared to fiscal 2004, resulting in lower income taxes. Net income after taxes was $504,000 or $0.04 per share for the year ended February 28, 2005 as compared to net income after taxes of $592,000 or $0.05 per share for the year ended February 29, 2004. This change was primarily due to the increases in cost of sales and selling, general and administrative expenses as described above, which increases were greater than the increase the Company achieved in sales for fiscal 2005 compared to fiscal 2004. Net income in the future will be dependent upon our ability to increase revenues faster than we increase our selling, general and administrative expenses, research and development expense and other expenses. Although sales did increase in fiscal 2005 compared to fiscal 2004, we did incur greater cost of sales and expenses which exceeded the increase we achieved in sales. Certain of these expenses are due to a greater emphasis being placed on marketing our traditional and new product lines and the hiring of additional employees. We are encouraged that we recently began shipping development quantities of dyes to certain new customers which we hope will lead to new ongoing business for the Company's products. No assurance can be given however that that such will be the case or that our sales will continue to grow. Operations Outlook We are currently going through a period of reassessing our direction in order to increase value for our shareholders. Our business, though reasonably healthy, has not recently grown to the degree management anticipated. The plateau of sales over the last four years, as described above, was in contrast to the sales growth we saw since 1991. Based upon these observations, we tried to learn what could be done to stimulate growth and recapture the promise of a true growth company. Our first task was to draw up a business plan. We believe this highlighted our one major weakness and that was in sales and marketing. For years we felt it to be unnecessary to go out and reach our customers. We believed that our web site was sufficiently explicit to attract anyone interested in near infrared light management to come to us because we were the "only game in town". We now realize that the customer has alternatives which do not include the use of Epolin dyes. We believe the business plan made clear the necessity of hiring a Sales/Marketing executive (which has been accomplished) along with back up technical service help (which is in process). In order to cover the cost of these additional personnel and place a greater emphasis on company growth, we have for the time being suspended the cash dividends program which we had been in place during fiscal 2002, 2003 and 2004. At the present time, we believe it is in the long term best interest of the shareholders for us to reinvest profits for future growth. Management has recognized that the Company's traditional markets - serving welding and eye protection plastics manufacturers - have gone through certain changes over the last few years in that certain customers have consolidated and/or moved manufacturing operations to low-cost countries, usually in the Far East. In some of these countries, eye protection may not be as highly valued by the citizenry. Management expects that this market will remain important as a continuing source of revenue, but it is not expected to contribute meaningful growth on a short-term or long-term basis. The Company now offers fully formulated dye packages which can be used by the lens manufacturer simply by adding the package to polycarbonate and injection molding the final product. This has allowed the Company to maintain a strong position in this market, although it is not expected to be a market which will experience significant growth. To date, such changes have not had a detrimental impact on net sales, inventories or cash flows. There can be no assurance that such a trend will continue. As a result, greater emphasis has recently been placed on sales and marketing in order to grow the Company's business in security inks and coatings. The new products that are now the firm underpinnings for future growth are based upon such security inks, new visible and infrared dyes and the forward integration of the Company's dyes into formulated pellets. For the fiscal year ended February 28, 2005 sales in these new product areas represented approximately 19% of all Company sales compared to fiscal year ended February 29, 2004 for which sales in these new product areas represented approximately 10% of all Company sales. Another factor that was considered in the business plan was management succession. Murray S. Cohen, the Company's Chairman of the Board and Chief Executive Officer, has announced his intention to step down as Chief Executive Officer at an undetermined future date, while continuing to remain as Chairman of the Board and Chief Scientist for the Company. With the hiring of a Sales/Marketing executive, such will add to our pool of personnel who can be considered at a later date for the position of CEO. Liquidity and Capital Resources The Company's primary source of funds is cash flow from operations in the normal course of selling products. On February 28, 2005, the Company had working capital of $2,340,000, a debt to equity ratio of 0.17 to 1, and stockholders' equity of $3,098,000 compared to working capital of $1,896,000, a debt to equity to ratio of 0.17 to 1, and stockholders' equity of $2,618,000 on February 29, 2004. On February 28, 2005, the Company had $1,233,000 in cash and cash equivalents, total assets of $3,635,000 and total liabilities of $537,000, compared to $548,000 in cash and cash equivalents, total assets of $3,067,000 and total liabilities of $449,000 on February 29, 2004. Increases in cash and cash equivalents were primarily due to an increase in net cash provided by operating activities and a change in financing activities for the fiscal year ended February 28, 2005 compared to the fiscal year ended February 29, 2004. Net cash provided by operating activities increased to $836,000 for fiscal 2005 from $219,000 for fiscal 2004 primarily due to decreases in accounts receivable, inventories and prepaid taxes, as well an adjustment made due to an obligation under a deferred compensation agreement. Net cash used by investing activities was $128,000 for fiscal 2005 compared to $92,000 for fiscal 2004 which change was primarily due to an increase in equipment purchases. Net cash used by financing activities was $24,000 for fiscal 2005 compared to net cash used by financing activities of $549,000 for fiscal 2004 resulting primarily from the stock dividends paid in fiscal 2004 for which there was not a comparable item in fiscal 2005, and a decrease in treasury stock purchased in fiscal 2005 compared to fiscal 2004. The Company anticipates, based on currently proposed plans and assumptions relating to its operations, that its current cash and cash equivalents together with projected cash flows from operations and projected revenues will be sufficient to satisfy its contemplated cash requirements for more than the next 12 months. The Company's contemplated cash requirements for fiscal 2006 and beyond will depend primarily upon level of sales of its products, inventory levels, product development, sales and marketing expenditures and capital expenditures. While Management believes the Company has remained strong in the sale of dyes in its traditional markets of welding and eye protection, such sales have not increased in volume in the past few years. Recently, greater emphasis has been placed on sales and marketing in order to grow the Company's business in security inks and coatings which Management expects to contribute meaningful growth to the Company. Inflation has not significantly impacted the Company's operations. Significant Accounting Policies Our discussion and analysis of the Company's financial condition and results of operations are based upon our consolidated financial statements which have been prepared in conformity with U.S. generally accepted accounting principles. Our significant accounting policies are described in Note B to the consolidated financial statements included elsewhere herein. The application of our critical accounting policies is particularly important to the portrayal of our financial position and results of operations. These critical accounting policies require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of the consolidated financial statements. Inventories - Our inventories consist of raw materials, work in process, finished goods and supplies which we value at the lower of cost or market under the first-in, first-out method. Plant, Property and Equipment - Our plant, property and equipment are stated at cost. We compute provisions for depreciation on the straight-line methods, based upon the estimated useful lives of the various assets. We also capitalize the costs of major renewals and betterments. Repairs and maintenance are charged to operations as incurred. Upon disposition, the cost and related accumulated depreciation are removed and any related gain or loss is reflected in earnings. Income taxes - We account for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", in which the asset and liability method is used in accounting for income taxes. We recognize deferred taxes for temporary differences between the basis of assets and liabilities for financial statement and for income tax purposes. Temporary differences relate primarily to different accounting methods used for depreciation and amortization of property and equipment and deferred compensation. Revenue Recognition - We recognize revenue consistent with the provisions of SEC Staff Accounting Bulletin No. 104, "Revenue Recognition", which sets forth guidelines in the timing of revenue recognition based upon factors such as passage of title, payments and customer acceptance. Any amounts received prior to satisfying our revenue recognition criteria will be recorded as deferred revenue in the accompanying balance sheet. We recognize revenue from product sales when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and we are reasonably assured of collecting the resulting receivable. Our policy is to replace certain products that do not conform to customer specifications, however replacements are made at our discretion subject to in house product lab analysis. There are no terms or conditions set forth within our sales contracts that provide for product replacements. We expense replacement costs as incurred. Stock-based Compensation - As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation," we continue to apply intrinsic value accounting for our stock option plans. Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. We have adopted disclosure-only provisions of SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123." Other Information In August 2001, the Board of Directors of the Company authorized a 500,000 share stock repurchase program. Pursuant to the repurchase program, the Company may purchase up to 500,000 shares of its common stock in the open market or in privately negotiated transactions from time to time, based on market prices. The Company indicated that the timing of the buyback of the Company's shares will be dictated by overall financial and market conditions and other corporate considerations. The repurchase program may be suspended without further notice. During the fiscal year ended February 28, 2005, a total of 50,000 were repurchased at a cumulative cost of $29,750. During the fiscal year ended February 29, 2004, a total of 184,000 shares were repurchased at a cumulative cost of $103,405. During the fiscal year ended February 28, 2003, a total of 32,500 shares were repurchased at a cumulative cost of $18,624 while during the fiscal year ended February 28, 2002, a total of 30,000 shares were repurchased at a cumulative cost of $14,837. The Company did not pay any cash dividends during the fiscal year ended February 28, 2005. During fiscal 2004, the Company paid two cash dividends, the first being $.02 per share in August 2003 and the second being $.02 per shares in February 2004. During the fiscal year ended February 28, 2003, the Company also paid two cash dividends, the first being $.04 per share in July 2002 and the second being $.03 per share in January 2003. Prior thereto, and during the fiscal year ended February 28, 2002, the Company also paid two cash dividends, the first being $.03 per share in June 2001 (which represented the first time that a cash dividend was paid by the Company) and the second being $.04 per share in February 2002. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements as defined in Item 303(c) of Regulation S-B. Item 7. Financial Statements. See the Financial Statements annexed to this report. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. Item 8A. Controls and Procedures. The Company's Chief Executive Officer and Principal Financial Officer have reviewed the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon this review, such officers believe that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be included in this report. The corrective action which has been taken in the financial statements included with this report (see Part II, Item 6, "Management's Discussion and Analysis or Plan of Operation - Cost of Sales and Expenses") has not impacted upon management's conclusions. Such corrective action which resulted from comments received from the Securities and Exchange Commission pertains to the reclassification of the litigation settlement in 2003 previously classified as an extraordinary item to its current treatment which is to include the settlement payment in selling, general and administrative expenses. There have been no significant changes in internal control over financial reporting that occurred during the fiscal year covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting, including the corrective action described above. Item 8B. Other Information. Not applicable. 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 79 Chairman of the 1984 Board, Chief Executive Officer, Secretary and Director James Ivchenko 65 President and Director 1993 Morris Dunkel 76 Director 1984 James R. Torpey, Jr. 55 Director 2001 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. MORRIS DUNKEL has served as Director of the Company since June 1984. Since 1992, he has been Vice President and Technical Director of Elan Chemical Inc., a chemical company in the flavor and fragrances industry. 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. JAMES R. TORPEY, JR. has served as Director of the Company since July 2001. Mr. Torpey is President of Madison Energy Consultants. From 1995 to 2002, he was Director of Technology Initiatives at First Energy/GPU, Chairman of the Solar Electric Power Association, and President and member of the Board of Directors of GPU Solar, Inc. He is currently a member of the U.S. Department of Energy Solar Industry Advisory Board. Mr. Torpey received his Masters of Business Administration from Rutgers University in 1991. GREG AMATO, age 48, has been employed by the Company since November 2004 and has been Vice President of Sales and Marketing since January 2005. From 1993 to 2004, Mr. Amato was employed by Elementis, PLC and certain of its subsidiaries and divisions, which company is a specialty chemical manufacturer. In connection therewith, Mr. Amato was Vice President, Specialty Markets of Elementis Specialties, Inc., located in Hightstown, New Jersey from 2000 to 2004 and was President of Elementis Performance Polymers of Belleville, New Jersey from 1998 to 2000. Mr. Amato received a Bachelor of Chemical Engineering from Georgia Institute of Technology in 1978. Audit Committee Financial Expert The Company does not have an audit committee financial expert, as such term is defined in Item 401(e) of Regulation S-B, serving on its audit committee because it has no audit committee and is not required to have an audit committee because it is not a listed security. Code of Ethics The Board of Directors has adopted a Code of Ethics applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, which is designed to promote honest and ethical conduct; full, fair, accurate, timely and understandable disclosure; and compliance with applicable laws, rules and regulations. A copy of the Code of Ethics will be provided to any person without charge upon written request to the Secretary of the Company at its executive offices, 358-364 Adams Street, Newark, New Jersey 07105. 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, 2005, February 29, 2004 and February 28, 2003, of those persons who were, at February 28, 2005 (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 2005 $266,462(1)(3) $40,000 Chairman of the 2004 $249,197(1)(3) $29,500 Board and Chief 2003 $227,146(1)(3) $32,000 Executive Officer James Ivchenko 2005 $245,699(2)(3) $35,000 President 2004 $229,002(2)(3) $25,000 2003 $208,097(2)(3) $27,000 Long-Term Compensation Restricted Shares Name and Principal Stock Underlying Position Awards Options Murray S. Cohen 2005 0 0 Chairman of the 2004 0 20,000 Board and Chief 2003 0 0 Executive Officer James Ivchenko 2005 0 0 President 2004 0 20,000 2003 0 0 _______________________ (1) Includes compensation of $82,017, $74,016 and $63,837 for 2005, 2004 and 2003, respectively, due to Murray S. Cohen based upon the Company's sales for fiscal 2004, 2003 and 2002 paid in fiscal 2005, 2004 and 2003, respectively, as determined under his employment contract. Does not include, however, compensation due to Dr. Cohen based upon the Company's sales for fiscal 2005 as determined under his employment contract which will be paid in fiscal 2006 which will be in the amount of $93,603. (2) Includes compensation of $68,347, $60,559 and $51,070 for 2005, 2004 and 2003, respectively, due to James Ivchenko based upon the Company's sales for fiscal 2004, 2003 and 2002 paid in fiscal 2005, 2004 and 2003, respectively, as determined under his employment contract. Does not include, however, compensation due to Mr. Ivchenko based upon the Company's sales for fiscal 2005 as determined under his employment contract which will be paid in fiscal 2006 which will be in the amount of $79,203. (3) Does not include other deferred compensation arrangements for each of Dr. Cohen and Mr. Ivchenko. See "Deferred Compensation/Employment Contracts and Change in Control Arrangements" 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 had an expiration date of December 1, 2005. In fiscal 2002, options to acquire 185,000 shares of the Company's Common Stock were exercised under the 1986 Plan. In prior years, options to acquire 270,000 shares of the Company's Common Stock were exercised under the 1986 Plan. In addition, options to acquire 35,000 shares under the 1986 Plan have lapsed. As a result, as of February 29, 2004, there are no outstanding options under the 1986 Plan. 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 (the "1998 Plan Option Pool"). In September 2001, the Board of Directors increased the size of the 1998 Plan Option Pool to 1,500,000 shares. 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, 2005, options to acquire 1,042,000 shares of the Company's Common Stock have been granted under the 1998 Plan and 458,000 options were available for future grant. To date, options to acquire 600,000 shares of the Company's Common Stock have been exercised and options to acquire 120,000 shares have been cancelled under the 1998 Plan. 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, 2005. The following table set forth certain information as to each exercise of stock options during the year ended February 28, 2005, by the persons named in the Summary Compensation Table and the fiscal year-end value of unexercised options: Aggregated Option Exercises in Fiscal 2005 and Year-End Option Value Number of Securities Shares Underlying Unexercised Acquired Options at February 28, 2005 On Value Exercise Realized Exercisable Unexercisable Murray S. Cohen -0- -0- 25,000 20,000 James Ivchenko -0- -0- 25,000 20,000 Value of Unexercised In-the-Money Options at February 28, 2005(1) Exercisable Unexercisable Murray S. Cohen $7,000 $3,600 James Ivchenko $7,000 $3,600 (1) Based on the average of the closing bid and asked prices of the Company's Common Stock as of February 28, 2005, minus the exercise price, multiplied by the number of shares underlying the options. The amounts reflected in this table may never be obtained. Other Stock Option Arrangements Pursuant to an employment agreement entered in with Greg Amato as of November 1, 2004, the Company has granted Mr. Amato an option to purchase 100,000 shares of Common Stock of the Company at an exercise price equal to the fair market value of the Company's Common Stock on November 1, 2004 which option shall be exercisable only after the completion of Mr. Amato's second year of employment under the employment agreement. In addition, pursuant to the employment agreement, Mr. Amato will receive, one year from the date of his employment agreement provided he is then employed by the Company, 100,000 shares of restricted Common Stock of the Company. Compensation of Directors In fiscal 2002, the Company began to pay all directors $750 for each board meeting attended. Previous thereto, and since the Company's inception, no director received any cash compensation for his services as such. Directors have always been and will continue to be reimbursed for reasonable expenses incurred on behalf of the Company. Deferred Compensation/Employment Contracts and Change in Control Arrangements 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. 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. The obligations to Mr. Ivchenko under his deferred compensation agreement are partially funded with a life insurance policy owned by the Company. Such funds, however, are not legally restricted and are considered part of the Company's general assets subject to claims of creditors. In addition, amounts due to Mr. Ivchenko under his employment agreement are unfunded. Accordingly, there can be no assurance that any such amounts due to Mr. Ivchenko will be paid. 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 obligation to pay Dr. Cohen $79,041 under his deferred compensation agreement is unfunded. In addition, amounts due to Dr. Cohen under his employment agreement are also unfunded. Accordingly, there can be no assurance that any such amounts due to Dr. Cohen will be paid. The Company does not have any termination or change in control arrangements with any of its named executive officers. Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The following table sets forth, as of May 10, 2005, 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 of the Company, (iii) the Company's Chief Executive Officer and other executive officers, if any, of the Company whose annual base salary and bonus compensation was in excess of $100,000 (the "named executive officers"), and (iv) all executive officers and directors of the Company as a group: Amount and Nature Percent Name of Beneficial Owner of Beneficial Ownership of Class Murray S. Cohen(1)* 1,895,958 16.0% James Ivchenko(2)* 1,469,587 12.4% Morris Dunkel(3)* 250,000 2.1% James R. Torpey, Jr.(3)* 37,500 ** Claire Bluestein(4)* 995,155 8.4% Santa Monica Partners, L.P.(5) 825,900 7.0% Sandra Lifschitz(6) 605,000 5.1% All Executive Officers and Directors as a Group (4 persons) 3,653,045 30.7% _________________________ * The address for each is 358-364 Adams Street, Newark, New Jersey 07105. ** Less than 1%. (1) Includes 1,845,958 shares held by Dr. Cohen and 25,000 shares held by the wife of Dr. Cohen. Also, includes 25,000 shares which Dr. Cohen has the right to acquire within 60 days pursuant to the exercise of options granted under the 1998 Plan. In addition, Dr. Cohen has options granted under the 1998 Plan to acquire an additional 20,000 shares which are not exercisable within 60 days. (2) Includes 1,005,000 shares held by Mr. Ivchenko and 439,587 held by Mr. Ivchenko and his wife, as joint tenants. Also, includes 25,000 shares which Mr. Ivchenko has the right to acquire within 60 days pursuant to the exercise of options granted under the 1998 Plan. In addition, Mr. Ivchenko has options granted under the 1998 Plan to acquire an additional 20,000 shares which are not exercisable within 60 days. (3) Includes 25,000 shares which each has the right to acquire within 60 days pursuant to the exercise of options granted under the 1998 Plan. In addition, each has options granted under the 1998 Plan to acquire an additional 10,000 shares which are not exercisable within 60 days. (4) Includes 25,000 shares which she has the right to acquire within 60 days pursuant to the exercise of options granted under the 1998 Plan. Ms. Bluestein is a former director of the Company. (5) This information is based solely upon information reported in filings made to the SEC on behalf of Santa Monica Partners, L.P. The address for Santa Monica Partners, L.P. is 1865 Palmer Avenue, Larchmont, New York. (6) This information is based solely upon information reported in filings made to the SEC on behalf of Sandra Lifschitz. Her address is 7 Tulane Drive, Livingston, New Jersey. The Stockholders Agreement Pursuant to a Stockholders Agreement executed in October 2002, each of the then members of the Board of Directors (which includes the four current members, as well as Claire Bluestein and Peter Kenny) has provided the Company with certain rights of refusal in the event any of such individuals desire to sell any of the shares of the Company's Common Stock which any of them hold of record or beneficially. Excluded from such restrictions are gifts in which the proposed donee agrees to be bound to the Stockholders Agreement and transfers by will or the laws of descent, provided the shares remain subject to said restrictions. In addition, shares may be transferred by such individuals with the prior approval of the Board of Directors of the Company (or any committee authorized by the Board to give such approval). Item 12. Certain Relationships and Related Transactions. See Part III, Item 10, "Deferred Compensation/Employment Contracts and Change in Control Arrangements" above for information on the transactions described therein. Item 13. 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) 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act) 31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rules 13a-14 and 15d-14 of the Exchange Act) 32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) ___________________ (1) Filed with the Company's Form S-18 Registration Statement SEC File 33-25405-NY. Item 14. Principal Accountant Fees and Services. The following is a summary of the fees billed to us by the principal accountants to the Company for professional services rendered for the fiscal years ended February 28, 2005 and February 29, 2004: Fiscal 2005 Fiscal 2004 Fee Category Fees Fees Audit Fees $45,200 $45,165 Audit Related Fees $0 $0 Tax Fees $2,835 $3,000 All Other Fees $0 $0 Total Fees $48,035 $48,165 Audit Fees. Consists of fees billed for professional services rendered for the audit of our financial statements and review of interim consolidated financial statements included in quarterly reports and services that are normally provided by the principal accountants in connection with statutory and regulatory filings or engagements. Audit Related Fees. Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under "Audit Fees". Tax Fees. Consists of fees billed for professional services for tax compliance, tax advice and tax planning. These services include preparation of federal and state income tax returns. All Other Fees. Consists of fees for product and services other than the services reported above. Pre-Approval Policies and Procedures Prior to engaging its accountants to perform a particular service, the Company's Board of Directors obtains an estimate for the service to be performed. All of the services described above were approved by the Board of Directors in accordance with its procedures. 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 25, 2005 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, 5/25/2005 Murray S. Cohen Chairman of the Board, Secretary and Director (Principal Executive Officer) /s/ James Ivchenko President and Director 5/25/2005 James Ivchenko (Principal Financial Officer) /s/ Morris Dunkel Director 5/25/2005 Morris Dunkel /s/ James R. Torpey, Jr. Director 5/25/2005 James R. Torpey, Jr. EPOLIN, INC. AND SUBSIDIARY FINANCIAL STATEMENTS YEARS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 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 - 22 INDEPENDENT AUDITOR'S REPORT Report of Independent Registered Public Accounting Firm 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 it's wholly owned Subsidiary as of February 28, 2005 and February 29, 2004 and the related Consolidated Statements of Income, Stockholders' Equity and Cash Flows for each of the two years in the period ended February 28, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Epolin Inc. and Subsidiary as of February 28, 2005 and February 29, 2004, and the results of its operations and its cash flows for each of the two years in the period ended February 28, 2005, in conformity with U.S. generally accepted accounting principles. Weismann Associates LLC Livingston, NJ 07039 March 28, 2005 1 EPOLIN, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS February 28, ----------------------- Current assets: 2005 2004 ---------- ---------- Cash and cash equivalents $1,232,666 547,930 Accounts receivable 553,011 643,581 Inventories 750,416 757,767 Prepaid expenses 49,874 57,385 Prepaid taxes 600 70,650 Deferred tax assets-current portion 2,322 3,710 ---------- ---------- Total current assets 2,588,889 2,081,023 ---------- ---------- Plant, property and equipment - at cost: Land 81,000 81,000 Building 369,000 369,000 Laboratory equipment 196,135 182,419 Office equipment 83,647 72,915 Leasehold improvements 664,665 600,679 ---------- ---------- Total 1,394,447 1,306,013 Less: Accumulated depreciation and amortization 750,104 716,081 ---------- ---------- Net plant, property and equipment 644,343 589,932 ---------- ---------- Other assets: Deferred tax assets-non current portion 196,051 229,417 Cash value - life insurance policy 206,170 166,772 ---------- ---------- Total other assets 402,221 396,189 ---------- ---------- Total $3,635,453 3,067,144 ========== ========== The accompanying notes are an integral part of these statements. 2 EPOLIN, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY
February 28, ------------------------- 2005 2004 ----------- ----------- Current liabilities: Accounts payable $ - 1,259 Accrued expenses 243,414 178,090 Taxes payable: Payroll 2,322 1,719 Income 3,270 3,708 ----------- ----------- Total current liabilities 249,006 184,776 ----------- ----------- Other liabilities - Deferred compensation 288,090 264,011 ----------- ----------- Total liabilities 537,096 448,787 ----------- ----------- Commitments and Contingencies Stockholders' equity: Preferred stock, $15.513 par value; 940,000 shares authorized; none issued Preferred 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; 12,729,000 and 12,704,000 shares issued, 11,815,355 and 11,840,355 shares outstanding at 2005 and 2004, respectively 2,340,183 2,333,933 Paid-in capital 6,486 6,486 Retained earnings 1,073,620 570,120 ----------- ----------- Total 3,420,289 2,910,539 Less: Treasury stock-at cost 321,932 292,182 ----------- ----------- Total stockholders' equity 3,098,357 2,618,357 ----------- ----------- Total $ 3,635,453 3,067,144 =========== ===========
The accompanying notes are an integral part of these statements. 3 EPOLIN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004
2005 2004 ----------- ----------- Sales $ 2,880,100 2,733,892 ----------- ----------- Cost of sales and expenses: Cost of sales 1,155,055 937,130 Selling, general and administrative 914,130 882,274 ----------- ----------- Total 2,069,185 1,819,404 ----------- ----------- Operating income 810,915 914,488 ----------- ----------- Other income: Rental income 36,000 36,000 Interest 7,709 7,003 ----------- ----------- Total other income 43,709 43,003 ----------- ----------- Income before taxes 854,624 957,491 Income taxes 351,124 365,357 ----------- ----------- Net income $ 503,500 592,134 =========== =========== Per share data: Basic earnings per common share $ 0.04 0.05 =========== =========== Fully diluted earnings per common share $ 0.04 0.05 =========== =========== Weighted average number of common shares outstanding 11,835,910 11,845,960 =========== ===========
The accompanying notes are an integral part of these statements. 4 EPOLIN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004
Number of Additional Outstanding Common Paid-in- Retained Treasury Treasury Stockholders' Shares Stock Capital Earnings Shares Costs Equity ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance - March 1, 2003 12,566,500 $ 2,304,558 6,486 452,700 679,645 (188,777) 2,574,967 Common stock issued for stock option 137,500 29,375 - - - - 29,375 Dividends paid - - - (474,714) - - (474,714) Treasury stock purchased - - - - 184,000 (103,405) (103,405) Net income - - - 592,134 - - 592,134 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance - February 29, 2004 12,704,000 $ 2,333,933 6,486 570,120 863,645 (292,182) 2,618,357 ============ ============ ============ ============ ============ ============ ============ Balance - March 1, 2004 12,704,000 $ 2,333,933 6,486 570,120 863,645 (292,182) 2,618,357 Common stock issued for stock option 25,000 6,250 - - - - 6,250 Treasury stock purchased - - - - 50,000 (29,750) (29,750) Net income - - - 503,500 - - 503,500 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance - February 28, 2005 12,729,000 $ 2,340,183 6,486 1,073,620 913,645 (321,932) 3,098,357 ============ ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements. 5 EPOLIN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004
2005 2004 ---------- ---------- Cash flows from operating activities: Net income $ 503,500 592,134 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 34,023 28,661 Deferred tax expense 34,754 52,249 Obligation under deferred compensation agreement 24,079 (83,547) (Increase) decrease in: Accounts receivable 90,570 (272,120) Inventories 7,351 (128,455) Prepaid expenses 7,511 (9,941) Prepaid taxes 70,050 22,888 Increase (decrease) in: Accounts payable (1,259) (5,151) Accrued expenses 65,324 19,168 Taxes payable 165 3,287 ---------- ---------- Net cash provided by operating activities 836,068 219,173 ---------- ---------- Cash flows from investing activities: Increase in cash value - life insurance policy (39,398) (38,186) Notes receivable - 14,139 Payments for equipment (88,434) (67,929) ---------- ---------- Net cash used by investing activities (127,832) (91,976) ---------- ----------
The accompanying notes are an integral part of these statements. 6 EPOLIN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 2005 2004 ----------- ----------- Cash flows from financing activities: Issuance of common stock 6,250 29,375 Dividends paid - (474,714) Treasury stock purchased (29,750) (103,405) ----------- ----------- Net cash used by financing activities (23,500) (548,744) ----------- ----------- Increase (decrease) in cash 684,736 (421,547) Cash and cash equivalents: Beginning 547,930 969,477 ----------- ----------- Ending $ 1,232,666 547,930 =========== =========== Supplemental information: Income taxes paid $ 302,400 281,400 =========== =========== The accompanying notes are an integral part of these statements. 7 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 Note A - Organization: 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, credit card security and protective documents 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 assets consist of land and a building. Prior to being acquired on January 29, 1998, two officers/stockholders of the Company controlled it. Note B - Summary of Significant Accounting Policies: 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 and its Subsidiary had cash deposits in a financial institution and brokerage house in excess of the amount insured by agencies of the federal government in amounts of $1,133,000 and $448,000 at February 28, 2005 and February 29, 2004, respectively. In evaluating this credit risk, the Company periodically evaluates the stability of the financial institution and brokerage house. 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 - The carrying amount of all reported assets and liabilities, which represent financial instruments, approximate the fair values of such amounts due to the nature of their relatively short maturity. Source of Raw Materials - The Company purchases chemicals from several large chemical manufacturers, further processing them into its saleable products. Although the Company limits itself to a relatively small number of suppliers, it is not restricted to such suppliers, and availability of such raw materials is widespread. 8 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 Note B - Summary of Significant Accounting Policies (continued): Principles of Consolidation - The accompanying Consolidated Financial Statements include the accounts of the Company and Subsidiary. Intercompany transactions and balances have been eliminated in consolidation. Condensed consolidating financial statements for the years ended February 28, 2005 are:
CONDENSED CONSOLIDATING BALANCE SHEET Epolin Epolin Holding Eliminations Consolidated ------------ ------------ ------------ ------------ Current assets $ 2,327,213 261,676 - 2,588,889 Non-current assets 1,308,240 572,247 (833,923) 1,046,564 ------------ ------------ ------------ ------------ Total $ 3,635,453 833,923 (833,923) 3,635,453 ============ ============ ============ ============ Total liabilities 537,096 200,533 (200,533) 537,096 ------------ ------------ ------------ ------------ Stockholders' equity: Common stock 2,340,183 - - 2,340,183 Additional paid-in capital 6,486 - - 6,486 Retained earnings 1,073,620 633,390 (633,390) 1,073,620 Treasury stock (321,932) - - (321,932) ------------ ------------ ------------ ------------ Total stockholders' equity 3,098,357 633,390 (633,390) 3,098,357 ------------ ------------ ------------ ------------ Total $ 3,635,453 833,923 (833,923) 3,635,453 ============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME Epolin Epolin Holding Eliminations Consolidated ------------ ------------ ------------ ------------ Sales $ 2,880,100 - - 2,880,100 Other revenue - 133,740 (97,740) 36,000 ------------ ------------ ------------ ------------ Total 2,880,100 133,740 (97,740) 2,916,100 ------------ ------------ ------------ ------------ Cost of sales 1,155,055 - - 1,155,055 Selling, general and administrative 996,156 15,714 (97,740) 914,130 ------------ ------------ ------------ ------------ Total 2,151,211 15,714 (97,740) 2,069,185 Operating income 728,889 118,026 - 846,915 Other income - interest 5,704 2,005 - 7,709 ------------ ------------ ------------ ------------ Income before taxes 734,593 120,031 - 854,624 Income taxes 340,474 10,650 - 351,124 ------------ ------------ ------------ ------------ Net income $ 394,119 109,381 - 503,500 ============ ============ ============ ============
9 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 Note B - Summary of Significant Accounting Policies (continued): Plant, Property and Equipment - Stated at cost. Provisions for depreciation are computed on the straight-line methods, based upon the estimated useful lives of the various assets. A summary of the major categories of the Company's plant property and equipment are as follows: Building Straight Line 39 Years Machinery and equipment Straight Line 5 - 7 Years Furniture and Fixtures Straight Line 7 Years Leasehold Improvements Straight Line 10 - 39 Years The costs of major renewals and betterments are capitalized. Repairs and maintenance are charged to operations as incurred. Upon disposition, the cost and related accumulated depreciation are removed and any related gain or loss is reflected in earnings. Depreciation and amortization expense totaled $34,023 and $28,661 for the years ended February 28, 2005 and February 29, 2004, 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 for income tax purposes. Temporary differences relate primarily to different accounting methods used for depreciation and amortization of property and equipment and deferred compensation. 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. 10 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 Note B - Summary of Significant Accounting Policies (continued): Revenue Recognition - The Company recognizes revenue consistent with the provisions of SEC Staff Accounting Bulletin No. 104, "Revenue Recognition", which sets forth guidelines in the timing of revenue recognition based upon factors such as passage of title, payments and customer acceptance. Any amounts received prior to satisfying our revenue recognition criteria will be recorded as deferred revenue in the accompanying balance sheet. The Company recognizes revenue from product sales when there is persuasive evidence that an arrangement exists, when title has passed, the price is fixed or determinable, and the Company is reasonably assured of collecting the resulting receivable. The Company's policy is to replace certain products that do not conform to customer specifications; however, replacements are made at the discretion of the Company subject to in house product lab analysis. There are no terms or conditions set forth within the Company's sales contracts that provide for product replacements. Replacement costs are expensed as incurred. Reclassifications - Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform with the current year presentation. Regulations - The Company expended approximately $17,974 to maintain compliance with certain Federal and State and City government regulations relative to the production of near infrared dyes and specialty chemicals. Net Income Per Share - Basic net income per share is calculated on the basis of the weighted average number of shares outstanding during the period, excluding dilution. Diluted net income per share is computed on the basis of the weighted average number of shares plus potentially dilutive common shares arising from the assumed exercise of stock options. Advertising Costs - Advertising costs, included in operating expenses, are expensed as incurred. Advertising expenses amounted to $19,861 and $15,591 for the years ended February 28, 2005 and February 29, 2004, respectively. 11 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 Note B - Summary of Significant Accounting Policies (continued): Stock-based Compensation - As permitted by SFAS No. 123 "Accounting for Stock-Based Compensation," The Company continues to apply intrinsic value accounting for its stock option plans. Compensation cost for stock options, if any, is measured as the excess of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. The Company has adopted disclosure-only provisions of SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB Statement No. 123." Deferred charges for options granted to non-employees are determined in accordance with FAS No. 123 and EITF 96-18 as the fair value of the consideration or the fair value of the equity instruments issued, whichever is more reliably measured. The weighted average Black-Scholes value of options granted under the stock plans during the years ended February 28, 2005 and February 29, 2004 was $.10 and $.11, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants: Years Ended February 28 and February 29, 2005 2004 ---- ---- Weighted average expected life in years 5 5 Dividends per share 0.04 0.03 Volatility 6.0% 6.0% Risk-free interest rate 3.9% 4.1% 12 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 Note B - Summary of Significant Accounting Policies (continued) Stock-based Compensation - The Company's pro forma net earnings and pro forma earnings per share based upon the fair value at the grant dates for awards under Epolin's plans are disclosed below. 2005 2004 ----------- ----------- Net earnings as reported $ 503,500 592,134 Deduct total additional stock-based employee compensation cost, net of tax that would have been included in net earnings under fair value method 32,300 34,050 =========== =========== Proforma net earnings $ 471,200 558,084 =========== =========== Basic earnings per share: As reported $ 0.04 0.05 =========== =========== Proforma $ 0.04 0.05 =========== =========== Average common shares outstanding 11,835,910 11,845,960 Diluted earnings per share: As reported $ 0.04 0.05 ----------- ----------- Proforma $ 0.04 0.05 ----------- ----------- Total diluted common shares outstanding 11,983,455 12,028,051 =========== =========== Note C - Inventories: 2005 2004 --------- --------- Raw materials and supplies $ 48,194 45,960 Work in process 245,704 219,337 Finished goods 456,518 492,470 --------- --------- Total $ 750,416 757,767 ========= ========= 13 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 Note D - Income Taxes: 1. Federal and State deferred tax assets include: 2005 2004 --------- --------- Temporary differences: Accelerated amortization $ 74,112 87,353 Deferred compensation 124,261 145,774 --------- --------- Total 198,373 233,127 Current portion 2,322 3,710 --------- --------- Non-current portion $ 196,051 229,417 ========= ========= 2. Income tax expense: 2005 2004 --------- --------- Current: Federal $ 252,840 250,747 State 63,530 62,361 --------- --------- Total current 316,370 313,108 --------- --------- Deferred: Federal 27,480 41,600 State 7,274 10,649 --------- --------- Total deferred 34,754 52,249 --------- --------- Total $ 351,124 365,357 ========= ========= 3. Reconciliation of income tax at the statutory rate to the Company's effective rate: 2005 2004 --------- --------- Computed at the statutory rate $ 290,572 284,349 State income taxes (net) 63,530 62,361 (Increase) Decrease in deferred tax asset 34,754 52,249 General business credits (26,750) (24,535) Non-deductible items (10,982) (9,067) --------- --------- Effective tax $ 351,124 365,357 ========= ========= 14 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 Note E - 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, 2005, approximately 50.4% of sales were to three customers. Two of these customers, located in the Eastern United States, accounted for 44.0% of sales. During the year ended February 29, 2004, approximately 65.3% of sales were to four customers, two of these customers, located in the Eastern United States, accounted for 42.0% of sales. Note F - Rental Income Under Sublease: The Company entered into a sublease agreement with a non-related party effective November 1, 2002 for a five-year term ending October 31, 2007. Under the terms of the lease, the tenant is to pay a base rent of $36,000 per year. In addition, the tenant is to reimburse the Company for all costs and expenses incurred by the Company for improvements to such leased property in excess of $75,000. The excess amount was recorded on the balance sheet as a note receivable. Payments on the note were $2,500 a month including interest of 6% a year. The note was paid in full as of August 31, 2003. Note G - Treasury Stock: Consists of 913,645 shares as of February 28, 2005 at a net cost of $321,932 and 863,645 shares at a net cost of $292,182 as of February 29, 2004. The Company purchased 50,000 shares during the year ended February 28, 2005 and 174,000 shares during the year ended February 29, 2004, respectively. Note H - Acquisitions: On January 29, 1998, the Company acquired 100% of stock in Epolin Holding Corp. Note I - Employee Benefits: Simplified Employee Pension Plan - Effective June 1, 1994, the Company provides a SAR/SEP plan to its employees as a retirement and income tax reduction facility. Full time employees are eligible to participate immediately. Employees may make pre-tax and after-tax contributions subject to Internal Revenue Service limitations. Company contributions range from three to 5 percent after completion of one year of service. Employer contributions totaled $40,119 and $37,568 for the years ended February 28, 2005 and February 29, 2004, respectively. 15 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 Note I - Employee Benefits (continued): 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, the Company issued 20,000 shares of common stock covering a previously awarded bonus to an employee on May 18, 1998. Stock Option Plan - The Company previously adopted The 1986 Stock Option Plan. As of April 1996, under the terms of the Plan, options may no longer be granted. On December 1, 1995, options to acquire up to 490,000 shares of the Company's common stock were granted. Options exercised for all prior years totaled 455,000. Options totaling 35,000 were cancelled in prior years. There were no outstanding options as of February 28, 2005. 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. On September 15, 2001, the Board of Directors increased the reserve to 1,500,000. Options granted expire five or ten years after the date granted and are subject to a vesting period as follows: (1) none 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. Options exercised through February 28, 2005 totaled 600,000. Options cancelled for all years totaled 120,000. A summary of the status of the Company's 1998 stock option plan as of February 28, 2005, and the changes during the year ended February 28, 2005 is presented below: Weighted-Average Fixed Options: Shares Exercise Price -------------- ------ -------------- Balance - March 1, 2003 367,500 $.24 Granted 162,000 .30 Exercised (137,500) .25 -------- Balance - February 28, 2004 392,000 .29 Granted - - Cancelled 45,000 Exercised (25,000) .25 -------- Balance - February 28, 2005 322,000 $.30 ======== Exercisable at February 28, 2005 180,000 16 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 FEBRUARY 29, 2004 Note I - Employee Benefits (continued): Stock Option Plan - The following table summarizes information about fixed stock options outstanding at February 28, 2005: Outstanding Options Exercisable Options ----------------------------------------------- ---------------------------- Number Weighted-average Number Range of Outstanding Remaining Exercisable Weighted-average Exercise Price at 2/28/05 Contractual Life at 2/28/05 Exercise Price -------------- ----------- ---------------- ----------- -------------- $.25 155,000 1.5 years 155,000 $ .25 .30 25,000 2.8 25,000 .30 .35 142,000 9.0 - .35 There are 458,000 options attributable to future grants. Stock Option and Stock-Based Employee Compensation - On November 1, 2004, the Company entered into an "Option Agreement and Investment Agreement" with an employee, the terms of which are as follows: 1. Stock Option - An option to purchase 100,000 shares of common stock at an exercise price equal to the fair market value of the Company's common stock at the date of grant. The option is exercisable only after the completion of the second year of employment. 2. Stock-based Employee Compensation - A grant of 100,000 shares of restricted common stock one year from the date of the agreement, provided the employee is then employed by the Company. Note J - Segment Reporting: The Company currently operates in a single operating segment. In addition, financial results are prepared and reviewed by management as a single operating segment. The Company continually evaluates its operating activities and the method utilized by management to evaluate such activities and will report on a segment basis if and when appropriate to do so. 17 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 FEBRUARY 29, 2004 Note J - Segment Reporting (continued): Sales by geographic area are as follows: Years Ended February 28, February 29, 2005 2004 ----------- ----------- United States $ 2,422,079 2,461,461 Asia 307,244 167,462 Europe 148,942 102,104 Other nations 1,835 2,865 ----------- ----------- Total $ 2,880,100 2,733,892 =========== =========== Two customers, located in the Eastern United States, accounted for more than 10% of revenues from continuing operations. One customer accounted for 24.1% of sales of which 14.1% was near infrared dyes and 10% was security inks. The other customer accounted for 19.9% of sales of near infrared dyes. Long-lived assets include net property and equipment. The Company had long-lived assets of $644,343 and $589,932 located in the United States at February 28, 2005 and February 29, 2004, respectively. Note K - Accrued Expenses: Accrued expenses consisted of the following as of February 28, 2005 February 29, 2004, respectively: 2005 2004 ----------- ----------- Salaries and wages $ 21,690 13,769 Employment agreement 172,806 150,364 Professional fees 15,000 10,000 Improvements 29,847 - Property taxes 4,071 3,957 =========== =========== Total accrued expenses $ 243,414 178,090 =========== =========== 18 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 FEBRUARY 29, 2004 Note L - Earnings per Share: Basic earnings per share are computed on the basis of the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options. The components of basic and diluted earnings per share are as follows: Years Ended February 28, February 29, ------------ ------------ 2005 2004 ------------ ------------ Basic Earnings Per Common Share: Net income $ 503,500 592,134 Average common shares outstanding 11,835,910 11,845,960 =========== =========== Basic earnings per common share $ 0.04 0.05 =========== =========== Diluted Earnings Per Common Share: Net income $ 503,500 592,134 =========== =========== Average common shares outstanding 11,835,910 11,845,960 Common shares issuable with respect to options issued to employees with a dilutive effect 147,545 182,091 ----------- ----------- Total diluted common shares outstanding 11,983,455 12,028,051 =========== =========== Diluted earnings per common share $ 0.04 0.05 =========== =========== 19 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 FEBRUARY 29, 2004 Note M - Commitments and Contingencies: Losses for contingencies such as litigation and environmental matters are recognized in income when they are probable and can be reasonably estimated. Gain contingencies are not recognized in income. Lease Obligations: The company leases its real estate under an operating lease with a related party. The lease effective November 1, 1996 was for a term of five (5) years with three (3) five (5) year options at annual rentals of $97,740. The Cost of Living Index adjustment effective with the second year has been waived by the subsidiary. Rent includes reimbursed insurance costs. Generally, management expects that the lease will be renewed in the normal course of business. Rental expense charged to operations, eliminated in consolidation, amounted to $97,740 for the years ended February 28, 2005 and February 29, 2004, respectively. Future minimum payments for the current option period: Fiscal years ending February: ----------------------------- 2006 $97,740 2007 97,740 2008 97,740 2009 65,160 Deferred Compensation - On December 29, 1995, the Company entered into a deferred compensation agreement with an officer whose additional annual compensation of $19,645 plus interest is deferred until he reaches age 65 or is terminated. The obligation is funded by a life insurance policy. Annual payments to the officer of $32,000 for ten consecutive years shall commence the first day of the month following his 65th birthday or termination. In connection with this agreement, deferred compensation of $24,080 was charged to selling, general and administrative expenses for the years ended February 28, 2005 and February 29, 2004, respectively. On January 1, 1996, the Company entered into a deferred compensation agreement with another officer wherein $25,000 per year was accrued. This agreement, with unfunded accruals of $79,041 terminated on June 25, 1998, and will be paid upon retirement in either 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. 20 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 Note M - Commitments and Contingencies (continued): Deferred Compensation - Effective March 1, 1999, the Company adopted deferred compensation agreements for two of its former employees. Under the term of the agreement, each employee would 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. These agreements are no longer operative as a result of the settlement of the lawsuit, which had been instituted by such two former employees, the terms of which are detailed under Note Q. Employment Agreements - Effective March 1, 1999, the Company entered into ten-year employment agreements with officers/directors: 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% on gross annual sales of no more than $3,000,000, effective with the year ended February 28, 2001, increasing by 0.25% a year during the term of the agreement. 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. He is to receive 1.5% on gross annual sales of no more than $3,000,000, effective with the year ended February 28, 2001, increasing by 0.25% a year during the term of the agreement. Accrued compensation included in selling, general and administrative as of February 28, 2005 and February 29, 2004 was $172,806 and $150,364, respectively. Note N - Research and Development: The Company has developed substantial research and development capability. The Company's efforts are devoted to (i) developing new products to satisfy defined market needs, (ii) providing quality technical services to assure the continued success of its products for its customers' applications, (iii) providing technology for improvements to its products, processes and applications, and (iv) providing support to its manufacturing plant for cost reduction, productivity and quality improvement programs. Expenditures for Company sponsored product research and product development of $407,705 and $374,348 were included in cost of sales for the years ended February 28, 2005 and February 29, 2004, respectively. Expenditures in 2006 are projected to remain at approximately the same level as in 2005. 21 EPOLIN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 2005 AND FEBRUARY 29, 2004 Note O - Environmental Matters The Company's past and present daily operations include activities, which are subject to extensive federal, and state environmental and safety regulations. Compliance with these regulations has not had, nor does the Company expect such compliance to have, any material effect upon expected capital expenditures, net income, financial condition or competitive position of the Company. The Company believes that its current practices and procedures comply with applicable regulations. The Company's policy is to accrue environmental and related costs of a non-capital nature when it is both probable that a liability has been incurred and that the amount can be reasonably estimated. No such amounts have been accrued in these statements. Note P - Stock Dividends: In July 2003, the Company's Board of Directors declared a cash dividend of two cents per share on all common shares outstanding. The dividend was paid on August 29, 2003 to shareholders of record August 15, 2003. In February 2004, the Company's Board of Directors declared a cash dividend of two cents per share on all common shares outstanding. The dividend was paid on February 27, 2004 to shareholders of record February 23, 2004. Note Q - Litigation: In December 2000, two individuals (each a former director and former employee of the Company) 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. Such claims included breach of contract, civil rights, age discrimination, wrongful termination, infliction of emotional distress and a shareholder derivative claim. In June 2003, the Company executed an agreement, which settled the lawsuit, and the action has been dismissed. The settlement included a lump sum payment to the plaintiffs in the amount of $312,000. In addition, the Company agreed to buy back 126,500 shares owned by one of the plaintiffs for the aggregate amount of $69,575 ($0.55 per share) as treasury stock. The Company has been reimbursed a portion of the settlement payments from its insurance company in the amount of $118,560. Included in the selling, general and administrative expenses for the year ended February 28, 2004 is the lump sum payment of $193,440. 22