-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PXxl/5yQ8DMwLE3t/Ifk9cQWd/kSfwTO2J6hBmI3kK+LuicAfzu8rdNM75op57eS 096tnc+i/IAhlbBGMfgvcA== 0000945836-98-000052.txt : 19980611 0000945836-98-000052.hdr.sgml : 19980611 ACCESSION NUMBER: 0000945836-98-000052 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980610 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPOLIN INC /NJ/ CENTRAL INDEX KEY: 0000797079 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 222547226 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-17741 FILM NUMBER: 98645651 BUSINESS ADDRESS: STREET 1: 358-364 ADAMS ST CITY: NEWARK STATE: NJ ZIP: 07105 BUSINESS PHONE: 2014659495 MAIL ADDRESS: STREET 1: 358-364 ADAMS ST CITY: NEWARK STATE: NJ ZIP: 07105 10KSB 1 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, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-17741 EPOLIN, INC. (Name of Small Business Issuer in Its Charter) New Jersey 22-2547226 (State or other jurisdiction (I.R.S. Employer of incorporation or Identification organization) Number) 358-364 Adams Street Newark, New Jersey 07105 (Address of principal (Zip Code) executive offices) Issuer's telephone number, including area code: (973) 465-9495 Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock (no par value) Check whether the Issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B not contained in this form, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] State Issuer's revenues for its most recent fiscal year: $1,602,150 As of May 15, 1998, the aggregate market value of the Common Stock held by non-affiliates of the Issuer (5,030,631 shares) was approximately $1,559,495. The number of shares outstanding of the Common Stock (no par value) of the Issuer as of the close of business on May 15, 1998 was 11,586,555. Documents Incorporated by Reference: None PART I Item 1. Description of Business. Introduction Epolin Inc. ("Epolin" or the "Company") is a manufacturing and research and development company which was incorporated in the State of New Jersey on May 8, 1984. The Company is engaged in commercial production and sale of specialty chemicals, especially certain dyes which management believes are useful materials because they have the capability to absorb near infrared radiation. Its principal offices are located at 358-364 Adams Street, Newark, New Jersey 07105 and its telephone number is (973) 465-9495. In April 1989, Epolin successfully completed an initial public offering of its securities pursuant to a public offering generating net proceeds of approximately $1,950,000. Simultaneously, upon closing of the offering, Epolin acquired 100% of the stock of Accort Labs, Inc. ("Accort"), then an affiliated entity. Commencing upon completion of the Company's public offering through January 1990, the Company's efforts were primarily devoted to the renovation and completion of its 17,000 square foot manufacturing and office facility. The principal product(s) that the Company developed were expanding polymeric coatings. The Company has since curtailed this effort due primarily to the high cost of the product and the lower price commanded by similar products now sold into this maturing market. The Company has more recently established itself as a supplier of near infrared dyes as well as other specialty chemical products. It sells its dyes primarily to lens manufacturers who serve as the suppliers to the laser protection eyewear market as well as the welding market. Since completion of the Company's public offering, the Company's revenues had been primarily generated through the synthesis and sale of specialty organic chemical products. Building upon this base, the Company singled out near infrared dye technology as a most promising product line and has emphasized the development, manufacture and sale of these dyes to the optical industry. The Company's prior emphasis on the expanding monomer technology has been significantly modified. The expanding monomers failed to reach any significant level of sales and sales growth because the price of UV coatings, a major application for the technology, had fallen dramatically and the market could not sustain the higher pricing for the Company's product. Research and development on expanding monomer applications was therefore curtailed and the Company became fully committed to specialty chemical manufacture especially to near infrared dye development, manufacture and sales. This part of the product line has proven to be a successful one to pursue in that the sales of these dyes have averaged at a growth rate of approximately 15% to 20% per year for the last five years. No assurance can be given that such trend will continue. The Company believes that its future lies with dye technology and is formulating long range plans to exploit new applications for both the near infrared dyes as well as other dyes. Paralleling the growth of the dye business, the Company has maintained a level of production and sales of specialty products made on a custom basis. These include additives for plastics, thermochromic materials for use in paints as well as other specialty chemicals made in low volume to sell at prices that reflect the value of the product. A discussion of this market is described in the first subsection that follows. Thereafter the current market for dyes are described as well as the newer applications which will be the basis for new markets for dyes. In July 1997, the Board of Directors of Epolin approved a plan of merger (the "Plan") wherein Epolin's wholly-owned subsidiary, Accort, would merge into Epolin. The effective date of the Plan was deemed to have occurred as of the beginning of fiscal 1998. The merger is currently pending approval with the State of New Jersey. As a result, Accort's assets, liabilities and stockholders' equity as of March 1, 1997 were transferred to Epolin. Accort had no transactions for the year ended February 28, 1998. The Company's wholly-owned subsidiary, Epolin Holding Corp. ("Epolin Holding"), was incorporated in the State of New Jersey as a real estate holding company. Prior to being acquired by the Company in January 1998, it was owned and controlled by Murray S. Cohen and James Ivchenko (officers and directors of the Company). (See Part III, Item 12). This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs and assumptions made by the Company's management as well as information currently available to the management. When used in this document, the words "anticipate", "believe", "estimate", and "expect" and similar expressions, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated or expected. The Company does not intend to update these forward-looking statements. Specialty Chemical Products Although the Company is heavily engaged in the manufacture and sale of dyes, specialty chemical manufacture continues to constitute approximately 22% of its sales. It is currently working on the preparation and sale of a variety of specialty chemical products on behalf of companies that sell into the adhesives, plastics, aerospace, pharmaceutical and flavors and fragrance industries. The Company's products primarily serve as intermediates, additives and processing aids for complex chemical formulations. The Company markets its products to other companies who are in need of low level quantities of unique chemicals which provide specialized functions and are necessary elements in complex chemical mixtures manufactured by the Company's respective customers. These products are produced on a low volume basis in chemical production equipment ranging from 50 liter size flasks to two hundred gallon reactors. The Company sustains this business because its customers find it economically inefficient to manufacture such low volume specialty chemicals for their own use. Raw materials utilized in connection with the preparation of specialty chemical products are either available from chemical suppliers or made by the Company in its own facilities. This segment of the Company's business is manufactured on an individual basis to meet each customers respective needs. Presently, the Company provides products used as components in plastics, adhesives and coatings, flavors and odorant mixtures, pharmaceutical and medical products and aerospace materials. Although the specialty chemical business currently commands approximately 22% of total sales, the Company does not expect this segment of its business to grow. It has, instead, made a strong research and development commitment to the growth of the specialty dye business. This market is described in segments in the following subsections. Dyes for Laser Protection The Company has sold near infrared dyes since 1990 to customers who manufacture and sell eyewear to protect personnel from the harmful effects of laser light. In the first stages of the Company's marketing efforts, the Company sold dyes that had a special capability to absorb the emissions of the neodynium-YAG laser. This laser was and is used by the military for range finders carried by tanks. Following the Company's success in selling dyes for military usage, new markets were developed selling to manufacturers of safety eyewear for personnel who worked with lasers or were exposed to very strong sources of infrared radiation. The Company sells dyes into a market that requires the use of absorptive dyes for face shields, helmets and goggles to protect personnel from the harmful effects of radiation from welding. Nationally prescribed specifications now state that welding shields must absorb specific levels of the infrared generated by the welding arc in order to protect personnel from eye damage. The specifications have come about because a number of studies had shown that excessive infrared radiation can cause the development of premature cataracts. Thus, for different levels of protection, a specific reduction of ultraviolet, visible and infrared emissions are now required. As a result, the Company now offers a line of dyes for welding that absorb the entire range of welding radiation. Management believes many welding customers and potential customers are attracted to the Company's dyes because they had been tied to dye suppliers who would only sell the dyes if the customer were to purchase the suppliers resin or formulated resin. Freedom to formulate any resin and do in plant injection molding of lenses or shields, has significant cost implications for these customers. The availability of the Company's dyes has allowed the Company to gain new customers. The Company expects to see this welding market grow in the future not only because of increased sensitivity to the health effects of conventional welding methods but also because of the increasing use of lasers for welding. These instruments will require closer monitoring for exposure of personnel to laser light but will also require personnel peripheral to the welding operation to be protected. Dyes for Sun Protection There have been various reports that near infrared radiation causes slow but long term damage to the eye leading to premature cataracts. Certain customers incorporate the Company's dyes into premium sunglasses to sell at premium pricing. An additional value in sunglasses containing near infrared dyes is that there is a noticeable heat reduction on the eye which allows long term use in the sun. Management believes that this reduces problems associated with discomfort due to perspiration around the eye. Dyes for Filters A smaller but not well characterized market exists for filters that block certain frequencies in the near infrared and visible spectrum. Most of the inquiries come from instrument makers who purchase glass filters containing rare earth oxides. These filters are expensive and are subject to chipping, shattering and other breakage. Management believes the use of a clear plastic filter containing the Company's dyes would lower cost and increase reliability. This high value added market is under development. No assurance can be given that the Company will be able to successfully develop this market. Dyes for Heat Shields It has been shown in experimental and theoretical studies that a window containing near infrared dyes is capable of reducing the internal heat load of a structure by 40 to 50 percent. This type of application of infrared dyes is reported in use for sun roofs of automobiles in Japan. The specific advantage offered by near infrared dyes is heat reduction coupled with good visible transparency. This allows high visibility while, at the same time, effectively blocking the frequencies responsible for transporting heat. Management believes near infrared dyes can be effectively used in a wide variety of applications as heat shields. The Company has set its sights on this potential market by initiating research and development studies leading to dyes or dye combinations that can meet the tight requirements demanded by this market. Of particular concern to the Company is the need for long term performance which, at a minimum, requires a working lifetime of seven years exposure to direct sunlight. By developing dyes of greatly improved thermal and ultraviolet stability, the Company believes it can meet the long term exposure requirements for heat shields. The Company further believes that of particular importance is the ability of these new dyes to be used in the manufacture of extruded engineering plastic products. Known near infrared dyes do not possess the thermal stability to survive processing of large extruded structures. The Company believes that it can demonstrate that these new dyes offer a degree of freedom in plastics processing and that this can represent an important developing market. No assurance can be given, however, that the foregoing can be demonstrated, or if demonstrated, that the Company will be able to successfully develop this market. Dyes for Security Inks Certain of the near infrared dyes absorb very little of the visible spectrum. These can be used at low concentration in inks and paints and not be visually detected. However, when viewed by reflection of an infrared laser or lamp, the presence of dye is easily seen as a black marking. Mechanical "readers" can be used to detect the presence of dyes by responding with a simple "go, no-go" signal. Management believes that the industrial security and currency marking is potentially a large volume application for these dyes. No assurance can be given that the Company will be able to successfully develop this market. Dyes for Interlayer and Laminates One of the most abrasion resistant surfaces is that of glass. The Company has found that the interlayer used for glass to glass laminates can incorporate dyes and bond to the glass strongly. These laminated glass structures can perform like the plastic heat shields described above. The Company believes that such laminated glass structures have the added advantage of abrasion resistance and in automotive applications, are shatter-proof. The Company is pursuing markets for laminates as shatter- proof windshield and sun roofs. No assurance can be given that the Company will find a successful developer in this market. Licensing Agreement The Company's Expanding Monomer technology (which was previously emphasized by the Company but has since been curtailed) was developed by the late Dr. William Bailey, a former director of the Company. In June 1983, Dr. Bailey was issued U.S. Patent 4,387,215 which granted Dr. Bailey broad generic claims in regard to the Expanding Monomer and polymer systems. Pursuant to a licensing agreement dated January 31, 1986 (which terminated and replaced a previous agreement with the Company), and as amended in 1988, the Company was granted until the expiration of the patent (June 2000) the exclusive right to exploit the patent and to manufacture, produce, market, use and sell products and materials derived thereunder. Pursuant to the agreement, the Company is required to pay a percentage royalty (based on various levels of sales) and a fixed royalty fee of $50,000 per year (reduced by percentage royalties, if any, paid during that year). Fixed royalties have not been paid since 1990 because the Company decided to postpone payments under the licensing agreement pending receipt of orders for Expanding Monomer products. Since then, and as described above, the Company has curtailed this technology. As provided in the agreement, Dr. Bailey's sole remedy for non-payment of fixed royalties shall be the cancellation of the licensing agreement without further recourse against the Company. Although the Company has not received any notification from Dr. Bailey's estate regarding termination or cancellation of the licensing agreement, any such notice that the Company would receive would have no material impact on the Company's business since the Company has previously decided to curtail the development of Expanding Monomer technology. 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. (See also Part I, Item 3 for information on a legal proceeding settled in August 1997). However, no assurances can be given that future regulations will not be adopted, compliance with which will result in substantial expense to, and otherwise adversely affect the Company's business. In addition, the Company is subject to the State of New Jersey Industrial Site Recovery Act (ISRA), which, among other requirements, requires the Company to obtain prior approval before relocating its facilities or consummating a transaction that would result in a change in control of the Company. The Company's facilities are subject to inspection to ascertain whether the Company has complied with State environmental regulations. While the Company believes it has complied with such regulations, there can be no assurance that the Company will not be required to incur expenses to remedy any future environmental violations discovered. The Company is in the process of registering certain new and proprietary products with the Toxic Substances Control Agency (TSCA) which is required in order for the Company to offer for sale any new chemical product. No assurances can be given that such registrations will be approved. Research and Development The Company has made a commitment of resources to research and development for new dyes and for improvement of the Company's capability to provide technical services to its dye customers. In this regard, the Company has undertaken a dye synthesis effort to develop and produce dyes with greatly improved thermal stability. These dyes are now a part of the Company's product line and sales have started to grow. There are also plans to make available to the Company the plastic processing equipment similar to that used by the Company's customers to extrude and injection mold plastic-dye formulations. Management expects that this will allow the Company to better understand its customer's problems and to design solutions. Competition The Company generally experiences significant competition in all areas of its business from numerous other companies many of which are larger and better financed. At the present time, however, the Company believes that it has a unique position as a supplier of near infrared dyes. Management believes that the only other suppliers of these dyes use them as a vehicle to sell other products. Management believes that these companies will only sell the dye to purchasers of their resins or to those who buy their formulated resin or their finished lenses. Such companies do not sell the pure dye which is done by the Company. Insofar as the major profit incentive comes from the manufacture and sale of finished product, Management believes those companies that have the capability to formulate dyes in resin and injection mold the formulated resin, have a strong incentive to purchase the dye without any other requirements. However, in the future, other dye manufacturers may change their policy and sell dye directly. This will present the Company with a challenge to its pricing structure. However, because of the Company's low overhead, it is believed that such a challenge can be met successfully. The Company has also invested resources in improved processes for the manufacture of dyes so that the Company can consider itself a low cost producer. The research and development program has introduced a new family of near infrared dyes that show a marked improvement in thermal and light stability over existing dyes. The Company believes that this new family of dyes will allow it to maintain a strong position as a dye supplier for laser safety and welding optical wear. Technological Obsolescence The chemical and plastics industry is characterized by rapid technological changes. Although the near infrared dyes that form the major portion of the Company's product line have been used in protective eyewear since 1976, the field has proven to be an active one for other applications and the Company must anticipate competition to develop. To remain competitive, the Company has committed itself to make capital investments to maintain its position as a key dye supplier in this field. There can be no assurance that the Company's dye technology will not be rendered less competitive, or obsolete, by the development by others of new methods to achieve laser safety and other forms of eye protection. Furthermore, to remain competitive, the Company may be required to make large, ongoing capital investments to develop and produce dyes at competitive prices. There is no assurance that can be given that the funds for such investments will be available to the Company. Patents and Proprietary Protection The Company does not rely upon patents for protection of its dye business. It has, however, anticipated the need for such proprietary protection and has acted by applying for patents on a class of new dyes that it has developed. In connection therewith, a patent was recently granted by the U.S. Patent Office (U.S. Patent 5,686,639) for a new class of quinone diimmonium salts in November 1997. Other patent disclosures have been submitted and the Company intends to prepare appropriate applications as it deems necessary in the future. No assurance can be given that other patents with regard to the foregoing will be issued. The Company has allowed its patent position on two patents it owns on Expanding Monomers to lapse by not paying the maintenance fees. This will have no material impact on the Company's business since the Company decided previously to curtail the development of this technology. The Company intends to continue an intensive patent program on new dyes, especially in those instances where composition of matter claims can be obtained. There can be no assurance that these patents will be of commercial benefit to the Company, or otherwise offer the Company protection from competing products. Although the issuance of a patent entitles the owner to a statutory presumption of validity, the presumption is not conclusive as to validity or the scope of enforceability of the claims therein. The enforceability and validity of a patent can be challenged by litigation after its issuance and, if the outcome of litigation is adverse to the owner of the patent, other parties may be free to use the subject matter covered by the patent. Moreover, the cost of defending these patents against infringement could require substantial expenditures which the Company may decide it is unable to afford. In addition, persons or entities may have filed patent applications and may have been issued patents on inventions or otherwise possess proprietary rights to technologies potentially useful to the Company. There can be no assurance that others may not independently develop the same, similar or alternative technologies or otherwise obtain access to the Company's proprietary technologies. Marketing and Sales The marketing of the Company's dye products is primarily the responsibility of Mr. Chester Swasey, an executive officer of the Company. The marketing of specialty products which primarily include flavors and fragrances, polymer additives and process aids is handled primarily by Mr. James Ivchenko, President of the Company, and Dr. Murray Cohen, Chairman of the Board and Chief Executive Officer of the Company. These specialty products are marketed to companies who need low volume amounts of unique chemicals usually used in small amounts in complex chemical formulations. A material portion of the Company's business is dependent on certain customers, the loss of which could have a material effect on operations. During fiscal 1998, approximately 76.6% of sales were to seven customers, two of which totaled 31.0%. Three of these customers comprised 61.3% of accounts receivable at February 28, 1998. Employees The Company presently employees approximately eight persons, all on a full time basis of which approximately four are employed in manufacturing and production, two in research and development, one in sales and marketing and one in administration and supervision. The Company's employees are not represented by labor unions. Item 2. Description of Property. The Company presently occupies approximately 19,500 square feet of manufacturing, warehouse and administrative space in Newark, New Jersey which property the Company has occupied since June 1989. Prior to October 1996, the Company occupied approximately 17,000 square feet of such space. During fiscal 1996, Management decided to explore the possibility of purchasing said property from its then owner, a non-affiliated entity which purchase would include such additional space of approximately 2,500 square feet. In order to finance the purchase, the Company was advised by its proposed lender that the members of the Company's Board of Directors would be required to guarantee the repayment of any financing. At a meeting of the Board of Directors held in June 1996, only Murray S. Cohen and James Ivchenko, each an officer and director of the Company, agreed to participate in any such arrangement. It was agreed that Dr. Cohen and Mr. Ivchenko, or an entity to be formed by them, would purchase the property and lease the property to the Company under a long term arrangement. As a result, Dr. Cohen and Mr. Ivchenko entered into an agreement to purchase the property for the sum of $450,000, which agreement was prior to closing assigned to Epolin Holding Corp. ("Epolin Holding") a company formed by Dr. Cohen and Mr. Ivchenko to acquire the property. Such purchase was completed in October 1996. Simultaneously with the closing, the Company entered into substantially similar leasing arrangements with Epolin Holding as then existed with the former owner of the property. Such new lease expires in October 2001 (with three 5 year options) with annual rent of $97,740 subject to annual adjustments based on increases in the Consumer Price Index. Such rent includes real estate taxes and insurance expenses. In January 1998, Epolin Holding became a wholly-owned subsidiary of Epolin. (See Part III, Item 12). Item 3. Legal Proceedings. In August 1997, the Company settled an action which had been commenced in May 1997 by Passaic Valley Sewerage Commissioners ("PVSC") against the Company in the Superior Court of New Jersey, Essex County. PVSC is a body politic and corporate organized pursuant to the laws of the State of New Jersey for the purpose of collecting and treating wastewater generated in a four-county area along the Passaic Valley river basin. In such action, PVSC alleged that the Company failed to submit certain required forms and reports and a certain completed permit application on time and that the Company had also failed to install certain monitoring equipment. This suit requested that the Company be enjoined from further violations, that the Company be declared a "significant noncomplier" and that the Company be assessed civil penalties. Pursuant to a Settlement Agreement entered into in August 1997, the Company without admitting any fact, liability or fault as to the allegations of the Complaint agreed to pay and has paid PVSC the sum of $1,000 and PVSC has dismissed the Complaint with prejudice and released the Company from any and all claims for civil penalties arising from the allegations in the Complaint. There are no other material pending legal proceedings to which the Company is a party or to which any of its property is subject. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders. PART II Item 5. Market for Common Equity and Related Stockholder Matters. (a) Market Information. The Company's Common Stock is presently being traded in the over-the- counter market under the symbol "EPLN" and is listed on the OTC Bulletin Board. The following chart sets forth the range of the high and low bid quotations for the Company's Common Stock for each period indicated. The quotations represent prices between dealers and do not include retail markups, markdowns, commissions or other adjustments and may not represent actual transactions. Period Bid Prices Fiscal year ended February 28, 1997: High Low March 1, 1996 to May 31, 1996 $.03 $.02 June 1, 1996 to Aug. 31, 1996 $.10 $.03 Sept. 1, 1996 to Nov. 30, 1996 $.15 $.03125 Dec. 1, 1996 to Feb. 28, 1997 $.15 $.0625 Fiscal year ended February 28, 1998: High Low March 1, 1997 to May 31, 1997 $.10 $.07 June 1, 1997 to Aug. 31, 1997 $.12 $.07 Sept. 1, 1997 to Nov. 30, 1997 $.12 $.07 Dec. 1, 1997 to Feb. 28, 1998 $.25 $.09 (b) Holders. As of May 15, 1998 there were approximately 325 record holders of the Company's Common Stock. (c) Dividends. The Company has never declared any cash dividends on its Common Stock and does not anticipate declaring cash dividends in the foreseeable future. Item 6. Management's Discussion and Analysis or Plan of Operation. The following discussion of the Company's financial condition and results of operations is based on the Company's Consolidated Financial Statements and the related notes thereto. Overview Epolin, Inc. is a manufacturing and research and development company which was incorporated in the State of New Jersey in May 1984. The Company is principally engaged in the development, production and sale of near infrared dyes to the optical industry for laser protection and for welding applications and other dyes, specialty chemical products that serve as intermediates and additives used in the adhesive, plastic, aerospace, pharmaceutical, flavors and fragrance industries to a group of customers primarily in the United States, Europe, Australia and the Far East. Results of Operations Fiscal 1998 Compared to Fiscal 1997 During the year ended February 28, 1998, the Company reported sales of approximately $1,602,000 as compared to sales of approximately $1,414,000 during the year ended February 28, 1997, an increase of approximately $188,000 or 13.3%. This increase in sales was primarily attributable to an increase in sales of the Company's near infrared absorbing dyes, and increases in sales of new dyes and additional applications. Operating income for fiscal 1998 increased to approximately $383,000 as compared to operating income of approximately $297,000 for fiscal 1997, an increase of approximately $86,000. This change resulted primarily from increases in sales, partially offset by increases in selling, general and administrative expenses. Cost of sales in fiscal 1998 was approximately $492,000 compared to cost of sales in fiscal 1997 of approximately $501,000. In fiscal 1998, the Company's selling, general and administrative expenses were approximately $727,000 as compared to selling, general and administrative expenses of approximately $616,000 for the fiscal year ended February 28, 1997. This change resulted primarily from increases in salaries, benefits and commissions, and legal and accounting fees. During the fiscal year ended February 28, 1998, the Company realized approximately $22,000 in interest income as compared to approximately $13,000 in interest income for the prior year. This increase resulted primarily from increases in available cash in fiscal 1998. During the fiscal year ended February 28, 1998, the Company reported income before taxes of approximately $406,000 as compared to income before taxes of approximately $332,000 for the fiscal year ended February 28, 1997. Net income after taxes was approximately $305,000 or $.03 per share for fiscal 1998 as compared to net income after taxes of approximately $210,000 or $.02 per share for fiscal 1997. Fiscal 1997 Compared to Fiscal 1996 During the year ended February 28, 1997, the Company reported sales of approximately $1,414,000 as compared to sales of approximately $1,384,000 during the year ended February 29, 1996, an increase of approximately $30,000 or 2%. This increase in sales was primarily attributable to a small increase in sales of the Company's near infrared absorbing dyes. Operating income for fiscal 1997 decreased to approximately $297,000 as compared to operating income of approximately $338,000 for fiscal 1996, a decrease of approximately $41,000. This change resulted primarily from increases in selling, general and administrative expenses, partially offset by a decrease in cost of sales. Cost of sales in fiscal 1997 was approximately $501,000 compared to cost of sales in fiscal 1996 of approximately $614,000. In fiscal 1997, the Company's selling, general and administrative expenses were approximately $616,000 as compared to selling, general and administrative expenses of approximately $433,000 for the fiscal year ended February 29, 1996. This change resulted primarily from increases in salaries, benefits and commissions, and legal and accounting fees. During the fiscal year ended February 28, 1997, the Company realized approximately $13,000 in interest income as compared to approximately $7,500 in interest income for the prior year. This increase resulted from increases in available cash in fiscal 1997. During the fiscal year ended February 28, 1997, the Company reported income before taxes of approximately $332,000 as compared to income before taxes of approximately $342,000 for the fiscal year ended February 29, 1996. Net income after taxes was approximately $210,000 or $.02 per share for fiscal 1997 as compared to net income after taxes of approximately $626,000 or $.05 per share for fiscal 1996. For fiscal 1997, the Company had an income tax expense of approximately $123,000 as compared to an income tax credit (deferred tax benefit) of approximately $284,000 for fiscal 1996. Liquidity and Capital Resources On February 28, 1998, the Company had working capital of approximately $1,046,000, an equity to debt ratio of 8.44 to 1, and stockholders' equity of approximately $1,615,000. On February 28, 1998, the Company had approximately $389,000 in cash and cash equivalents, total assets of approximately $1,807,000 and total liabilities of approximately $191,000. At February 28, 1997, the Company had total assets of approximately $1,442,000. The increase in total assets at February 28, 1998 as compared to February 28, 1997 is primarily due to the inclusion in fiscal 1998 of the property owned by Epolin Holding Corp. which became a wholly-owned subsidiary of the Company in January 1998. The Company believes that its available cash, cash flow from operations and projected revenues will be sufficient to fund the Company's operations for the next 12 months. The Company does not anticipate making any significant additional capital expenditures in the immediate future as it believes its present machinery and equipment will be sufficient to meet its near term needs. Inflation has not significantly impacted the Company's operations. Other Information In March 1998 (subsequent to the end of fiscal 1998), the Board of Directors of the Company authorized a stock repurchase program of up to $150,000 of the Company's outstanding shares of Common Stock. In connection therewith, the Company announced that purchases may be made in the open market or in privately negotiated transactions from time to time, based on market prices and that the repurchase program may be suspended without further notice. Management believes the Company's shares are undervalued at current price levels and this program offers the Company a chance not only to repurchase some of its stock at prices management perceives to be attractive but it also enables the Company to enhance shareholder value although no assurance can be given that any such repurchases will have such effect. To date, the Company has repurchased 25,000 shares of its Common Stock under this program at $.38 per share. Item 7. Financial Statements. See the Consolidated Financial Statements annexed to this report. Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. Set forth below are the present directors and executive officers of the Company. Note that there are no other persons who have been nominated or chosen to become directors nor are there any other persons who have been chosen to become executive officers. There are no arrangements or understandings between any of the directors, officers and other persons pursuant to which such person was selected as a director or an officer. Directors are elected to serve until the next annual meeting of stockholders and until their successors have been elected and have qualified. Officers serve at the discretion of the Board of Directors. Present Position Has Served As Name Age and Offices Director Since Murray S. Cohen 73 Chairman of the 1984 Board, Chief Executive Officer and Director James Ivchenko 58 President 1993 and Director Chester C. Swasey 54 Vice President of 1994 Sales and Marketing, Secretary and Director Claire Bluestein 72 Director 1984 Morris Dunkel 70 Director 1984 Abdelhamid A.H. Ramadan 58 Director 1994 None of the directors and officers is related to any other director or officer of the Company. Set forth below are brief accounts of the business experience during the past five years of each director and executive officer of the Company and each significant employee of the Company. MURRAY S. COHEN has served as Director, Chief Executive Officer and Chairman of the Board of the Company since June 1984. From June 1984 to August 1994, Dr. Cohen was also President. Since May 1983, Dr. Cohen has been an officer of Accort Labs, Inc., a wholly-owned subsidiary of the Company. 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. CHESTER C. SWASEY has served as Director of the Company since 1994 and Vice President of Sales and Marketing since August 1994. From 1992 to 1994, Mr. Swasey was employed as a Director of Marketing at Fairmount Chemical Company. From 1989 to 1992, he was employed as Manager of New Business Development at Union Carbide Corporation. Mr. Swasey has received several United States patents and has published a variety of technical papers related to the performance of plastics additives. Mr. Swasey received a Bachelor of Science degree in Chemistry from the City College of New York in 1965, and a Master of Business Administration degree from Fairleigh Dickinson University in 1973. CLAIRE BLUESTEIN has served as Director of the Company since June 1984. Since 1976, Dr. Bluestein has been president and sole shareholder of Captan Associates, Inc., a company engaged in the development of materials for commercial applications of radiation curing technology. Dr. Bluestein has been issued several patents by the United States Department of Commerce, Trademark and Patent Offices and has published a variety of chemistry related articles. Dr. Bluestein received her Bachelor of Arts Degree from the University of Pennsylvania in 1947. In 1948 she received a Master of Science Degree and in 1950 a Ph.D. in Organic Chemistry from the University of Illinois. MORRIS DUNKEL has served as Director of the Company since June 1984. From 1976 through 1983, Dr. Dunkel was employed by Tenneco Chemicals, Inc., a firm engaged in chemical production activities, in the capacities of manager and director of Tenneco's organic chemicals research and development division. Dr. Dunkel has been issued several United States patents and has published numerous articles relating to chemical processes. He received a Bachelor of Science Degree in 1950 from Long Island University. Dr. Dunkel received a Master of Science Degree from Brooklyn College in 1954 and Ph.D. in Organic Chemistry from the University of Arkansas in 1956. ABDELHAMID A.H. RAMADAN has been a Director of the Company since July 1994, and has served as Manager for Research, Process Development and Quality Assurance of the Company since November 1993. From March 1992 through October 1993, he served as production manager at Celgene Corp., and from 1989 through February 1992, he served as Senior Chemist and Chemical Hygiene Officer of the Company. From 1982 through 1988, Mr. Ramadan served as Production Department Head at Tenneco Chemicals. Mr. Ramadan received a Bachelor of Science Degree in Chemistry in 1963 from Ain Shams University - Cairo - Egypt. Item 10. Executive Compensation. The following summary compensation table sets forth information concerning the annual and long-term compensation for services in all capacities to the Company for the fiscal years ended February 28, 1998, 1997 and 1996, of those persons who were, at February 28, 1998 (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(1) 1998 $89,575 $20,000 Chairman of the 1997 $88,542 $ 7,950 Board and Chief 1996 $48,619 $ 7,500 Executive Officer James Ivchenko(3) 1998 $95,771(4) $15,000 President 1997 $83,125(4) $ 7,950 1996 $79,166(4) $ 7,000 Chester C. Swasey(5) 1998 $89,903 $ 5,000 Vice President of 1997 $82,596 $ 4,300 Sales and Marketing 1996 $57,243 $ 4,000 Summary Compensation Table Long-Term Compensation Restricted Shares Name and Principal Fiscal Stock Underlying Position Year Awards Options Murray S. Cohen(1) 1998 0 0 Chairman of the 1997 0 0 Board and Chief 1996 1,000,000(2) 75,000 Executive Officer James Ivchenko(3) 1998 0 0 President 1997 0 0 1996 0 75,000 Chester C. Swasey(5)1998 0 0 Vice President of 1997 0 0 Sales and Marketing 1996 0 75,000 (1) Dr. Cohen was also President from June 1984 to August 1994. (2) Represents shares issued to Dr. Cohen during fiscal 1996 in lieu of $40,000 of accrued salary. (3) Mr. Ivchenko has been President since August 1994. Prior thereto, he was Technical Director and Vice President of Operations. (4) Does not include $20,799, $19,809 and $3,274 for fiscal 1998, 1997 and 1996, respectively, being deferred pursuant to an Deferred Compensation Agreement entered into in December 1995 with Mr. Ivchenko. (5) Mr. Swasey has been employed by the Company since August 1994. Stock Options Granted in Fiscal 1998 No stock options or other stock appreciation rights were granted to any of the named executive officers during fiscal 1998. Stock Options Exercised in Fiscal 1998; Fiscal Year-End Values During the fiscal year ended February 28, 1998, none of the named executive officers exercised any previously granted stock options. The following table indicates the total number of exercisable and unexercisable stock options held by each named executive officer on February 28, 1998, the last day of fiscal 1998, and the value of "in the money" options held by each named executive officer on such date. NUMBER OF UNEXERCISED VALUE OF UNEXERCISED OPTIONS HELD AT IN-THE-MONEY OPTIONS FEBRUARY 28, 1998 FEBRUARY 28, 1998(1) NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE Murray S. Cohen 75,000 0 $15,000 0 James Ivchenko 75,000 0 $15,000 0 Chester C. Swasey 75,000 0 $15,000 0 (1) Based on the average of the closing bid and asked prices of the Company's Common Stock at February 28, 1998. Compensation of Directors Since inception, no director has received any cash compensation for his services as such. In the past, directors have been and will continue to be reimbursed for reasonable expenses incurred on behalf of the Company. Employment Contracts In December 1995, the Company entered into a Deferred Compensation Agreement with James Ivchenko, President of the Company, pursuant to which annual compensation of $19,645 plus interest will be deferred until Mr. Ivchenko reaches the age of 65 or his employment is terminated. Annual payments of $32,000 for ten consecutive years shall commence the first day of the month following the executive reaching the age of 65 or termination of his employment. Such obligation is being funded with a life insurance policy owned by the Company. Employee Stock Option Plan The Company previously adopted an Employee Stock Option Plan (the "Plan"). As of April 1996, options may no longer be granted under the Plan. Under the terms of the 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, 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 Plan. Such options expire on December 1, 2005. None of such options have been exercised. Item 11. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth, as May 15, 1998, certain information with regard to the record and beneficial ownership of the Company's Common Stock by (i) each stockholder owning of record or beneficially 5% or more of the Company's Common Stock, (ii) each director individually, (iii) all officers and directors of the Company as a group: AMOUNT AND NATURE OF PERCENT NAME BENEFICIAL OWNERSHIP OF CLASS Murray S. Cohen(1)* 2,790,958(2) 23.9% James Ivchenko(1)* 1,644,587 14.1% Chester C. Swasey(1)* 925,822 7.9% Claire Bluestein* 945,155 8.1% Morris Dunkel* 200,000 1.7% Abdelhamid R.H. Ramadan(1)* 349,402 3.0% All Officers and Directors as a Group (6 persons) 6,855,924 57.7% * Indicates a Director of the Company. The address for each is 358-364 Adams Street, Newark, New Jersey 07105. (1) Includes 75,000 which he has the right to acquire within 60 days pursuant to the exercise of stock options. (2) Includes 1,000,000 shares owned by three grandchildren of Dr. Cohen, which shares are held by Dr. Cohen's daughters as custodian. Dr. Cohen holds a proxy with respect to such shares which proxy expires in 2000. As a result, Dr. Cohen may be deemed to be the beneficial owner of such shares. Item 12. Certain Relationships and Related Transactions. See Part I, Item 2 for information on the leasing arrangements entered into between Epolin Holding, a company previously owned and controlled by Murray S. Cohen and James Ivchenko, and the Company. As described therein, in October 1996, Epolin Holding purchased the premises then leased by the Company for $450,000 and simultaneously with the closing entered into a lease with the Company, as tenant. The downpayment of $100,000 was obtained from the Company evidenced by a five year promissory note of $75,565 (after charge for three months security deposit under the terms of the lease) payable in monthly principal payments of $1,541 including interest at an annual rate of 8.25% (the "Downpayment Loan"). The balance of the purchase price was obtained from a bank mortgage in the principal amount of $350,000 which mortgage was personally guaranteed by Murray S. Cohen and James Ivchenko. In January 1998, Dr. Cohen and Mr. Ivchenko transferred all of the shares each of them owned in Epolin Holding to Epolin whereby Epolin Holding became a wholly-owned subsidiary of Epolin. In addition, contemporaneously therewith, the Company paid the remaining balance due (including accrued interest) on the bank mortgage which amounted to the sum of $320,990. At February 28, 1998, the remaining amount due from Epolin Holding on the Downpayment Loan was $71,504. In addition, at February 28, 1998, there is a related party receivable due from Epolin Holding in the amount of $18,166. Such amounts have eliminated in consolidation in the Company's Consolidated Financial Statements annexed to this report. Item 13. Exhibits and Reports on Form 8-K. (a) Exhibits. 3.1 Epolin Inc.'s certificate of incorporation as amended (1) 3.2 Epolin Inc.'s by-laws(1) 4.1 Specimen certificate for common stock(1) ___________________ (1) Filed with the Company's Form S-18 Registration Statement SEC File 33- 25405-NY. (b) Reports on Form 8-K. Listed below are reports on Form 8-K filed during the last quarter of the period covered by this report: None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EPOLIN, INC. (Registrant) By: /s/Murray S. Cohen Murray S. Cohen, Chief Executive Officer Dated: June 8, 1998 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, 06/08/98 Murray S. Cohen Chairman of the Board, Director (Principal Executive Officer and Principal Financial Officer) /s/James Ivchenko President, Director 06/08/98 James Ivchenko /s/Chester C. Swasey Vice President of 06/08/98 Chester C. Swasey Sales and Marketing, Secretary, Director /s/Claire Bluestein Director 06/08/98 Claire Bluestein /s/Morris Dunkel Director 06/08/98 Morris Dunkel /s/Abdelhamid A.H. Ramadan Director 06/08/98 Abdelhamid A.H. Ramadan EPOLIN, INC. AND SUBSIDIARIES FEBRUARY 28, 1998 AND 1997 EPOLIN, INC. AND SUBSIDIARIES FEBRUARY 28, 1998 AND 1997 CONTENTS PAGE Report of Independent Certified Public Accountants 1 Consolidated Financial Statements: Consolidated Balance Sheets 2 - 3 Consolidated Statements of Income 4 Consolidated Statements of Stockholders' Equity 5 Consolidated Statements of Cash Flows 6 - 7 Notes to Consolidated Financial Statements 8 - 16 [LETTERHEAD] I. WEISMANN ASSOCIATES PO BOX 2207 MORRISTOWN, NJ 07962-2207 (973) 984-8900 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders EPOLIN, INC. AND SUBSIDIARIES We have audited the accompanying Consolidated Balance Sheets of Epolin, Inc. and wholly-owned Subsidiaries as of February 28, 1998 and 1997 and the related Consolidated Statements of Income, Stockholders' Equity, and Cash Flows for the years ended February 28, 1998 and 1997 and February 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance as to whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of Epolin Inc. and Subsidiaries as of February 28, 1998 and 1997 and the results of its operations and its cash flows for the years ended February 28, 1998 and 1997 and February 29, 1996 in conformity with generally accepted accounting principles. /s/I. Wessmann Associates CERTIFIED PUBLIC ACCOUNTANTS May 5, 1998 EPOLIN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS FEBRUARY 28, 1998 1997 Current assets: Cash and cash equivalents $ 389,129 252,803 Accounts receivable (Note 3) 214,976 226,524 Inventories (Note 4) 382,276 341,688 Related party receivables (Note 14) - 20,097 Prepaid expenses: Income taxes 32,799 10,145 Other 23,756 14,764 Employee loans 5,866 - Deferred taxes (Note 5) 95,240 100,555 Total current assets 1,144,042 966,576 Property, plant and equipment - at cost (Note 2): Land 77,343 - Building 352,338 - Machinery and equipment 200,162 199,952 Furniture and fixtures 11,036 11,036 Leasehold improvements 432,037 427,743 Total 1,072,916 638,731 Less: Accumulated depreciation and amortization 569,401 495,595 Net depreciated cost 503,515 143,136 Other assets: Loan receivable - related party (Note 14) - 71,504 Deferred taxes (Note 5) 103,684 199,494 Security deposits 12,635 37,070 Cash value - life insurance policy (Note 11) 42,677 23,902 Total other assets 158,996 331,970 Total $1,806,553 1,441,682 The accompanying notes are an integral part of these statements. EPOLIN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) LIABILITIES AND STOCKHOLDERS' EQUITY February 28, 1998 1997 Current liabilities: Accounts payable $ 40,385 18,725 Accrued expenses 55,543 33,214 Taxes payable - payroll and income 1,663 6,347 Total current liabilities 97,591 58,286 Other liabilities - deferred compensation (Note 11) 93,800 23,053 Total liabilities 191,391 81,339 Commitments (Note 11) 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; 11,654,000 shares issued and outstanding at 1998 and 1997 (Note 6) 2,206,984 2,206,984 Common stock unissued (Note 7) 10,000 10,000 Paid-in capital 6,486 6,486 Accumulated deficit (608,308) (863,127) Total 1,615,162 1,360,343 Less: Treasury stock (Note 8) - - Total stockholders' equity 1,615,162 1,360,343 Total $1,806,553 1,441,682 The accompanying notes are an integral part of these statements. EPOLIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years ended February 28, February 29, 1998 1997 1996 Sales (Notes 2 and 3) $ 1,602,150 1,414,226 1,384,410 Cost of sales and expenses: Cost of sales 491,960 500,975 613,879 Selling, general and administrative expenses (Notes 2, 6, 7, 9 & 11) 726,990 616,438 432,783 Total 1,218,950 1,117,413 1,046,662 Operating income 383,200 296,813 337,748 Other income (loss): Interest income 22,487 12,933 7,518 Gain (loss) on disposal of assets 500 22,525 (3,570) Income before taxes 406,187 332,271 341,696 Income tax expense (benefit) (Note 5) 101,420 122,720 (284,467) Net income $ 304,767 209,551 626,163 Per share data: Net income per common share $ 0.03 0.02 0.05 Weighted average number of shares of common outstanding $11,611,555 11,611,555 11,444,888 The accompanying notes are an integral part of these statements. EPOLIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Additional Common Paid-in- Accumulated Stockholders' Stock Capital Deficit Equity Balance - - March 1, 1995 $2,176,984 6,486 (1,698,841) 484,629 Common stock issued in lieu of accrued salary (Note 6) 40,000 - - 40,000 Net income - Year ended February 29, 1996 - - 626,163 626,163 Balance - February 29, 1996 2,216,984 6,486 (1,072,678) 1,150,792 Net income - Year ended February 28, 1997 - - 209,551 209,551 Balance - February 28 , 1997 2,216,984 6,486 (863,127) 1,360,343 Prior period adjustment (Notes 6 & 12) - - (49,948) (49,948) Net income - Year ended February 28, 1998 - - 304,767 304,767 Balance - February 28, 1998 $2,216,984 6,486 (608,308) 1,615,162 The accompanying notes are an integral part of these statements. EPOLIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended February 28, February 29, 1998 1997 1996 Cash flows from operating activities: Net income $304,767 209,551 626,163 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 61,890 65,022 70,677 Deferred tax expense (benefit) 101,125 87,420 (320,995) Loss on disposal of assets - - 3,570 Obligation under deferred compensation agreement 20,799 19,779 3,274 Stock issued in lieu of accrued salary - - 40,000 Changes in assets and liabilities: Accounts receivable 11,548 (62,258) (44,266) Inventories (40,588) (96,262) (145,614) Employee loans (5,866) (4,056) Prepaid expenses (8,992) (3,453) 3,616 Prepaid income taxes (22,654) (10,145) - Accounts payable 21,660 (30,435) 26,183 Accrued expenses 22,329 21,788 2,426 Accrued salaries - - (89,948) Taxes payable: Payroll (4,834) 6,347 (5,179) Income 150 (34,975) 33,328 Net cash provided by operating activities 461,334 168,323 203,235 The accompanying notes are an integral part of these statements. EPOLIN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended February 28, February 29, 1998 1997 1996 Cash flows from investing activities: Related party loans 91,601 (87,545) - Patents (net) - - 7,588 Cash value - life insurance policy (18,775) (17,333) (6,569) Assets from acquisition of subsidiary - net of accumulated depreciation (Note 1) (417,765) - - Payments for equipment (4,504) (18,007) (29,761) Security deposits 24,435 (24,435) - Net cash used by investing activities (325,008) (147,32O) (28,742) Increase in cash 136,326 21,003 174,493 Cash and cash equivalents: Beginning 252,803 231,800 57,307 Ending $389,129 252,803 231,800 Supplemental Disclosure of Cash Flow Information: Income taxes paid $ 22,504 42,050 1,662 Interest paid $ - - 28 The accompanying notes are an integral part of these statements. EPOLIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION: Epolin, Inc. (the "Company") was incorporated in New Jersey to develop, manufacture and market a class of monomer and polymer formulations with applications in the composition and manufacture of a new type of highly protective and durable material. The Company's activities during its development stage from May 8, 1984 (inception) through February 28, 1990 had been substantially devoted to developing its principal products. Active operations in the monomer and polymer technologies have ceased. Prior to March 1, 1997, the Company's wholly-owned Subsidiary, Accort Labs, Inc., was engaged in the development, production and sale of near infrared dyes to the optical industry for laser protection and welding applications and other dyes, specialty chemical products that serve as intermediates and additives used in the adhesive, plastic, aerospace, pharmaceutical, flavors and fragrance industries to customers located in the eastern part of the United States. On July 1, 1997, the Board of Directors approved a plan of merger "Plan" whereas the Company's wholly-owned Subsidiary Accort Labs, Inc. (the merging corporation) would merge into Epolin, Inc. (the surviving corporation). The effective date of the "Plan" was March 1, 1997. The above "Plan" was filed with the State of New Jersey on July 25, 1997 and is pending approval as of February 28, 1998. As a result, the merging corporation's assets, liabilities and stockholder's equity as of March 1, 1997 were transferred to the surviving corporation. The merging corporation had no transactions for the year ended February 28, 1998. The Company's wholly-owned Subsidiary, Epolin Holding, Corp. was incorporated in New Jersey as a real estate holding company. Prior to being acquired on January 29, 1998, it. was controlled by two officers/stockholders of the Company with the majority of its assets consisting of land and a building. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation - The accompanying Consolidated Financial Statements include the accounts of the Company and its Subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. Condensed consolidating financial statements for the year ended February 28, 1998 follows: EPOLIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued) CONDENSED CONSOLIDATING BALANCE SHEET Epolin Epolin Holding Eliminations Consolidated Current assets $1,137,235 24,973 (18,166) 1,144,042 Non-current assets 669,318 437,315 (444,122) 662,511 Total $1,806,553 462,288 (462,288) 1,806,553 Total liabilities 191,391 435,094 (435,094) 191,391 Stockholders' equity: Common stock 2,216,984 - - 2,216,984 Additional paid- in capital 6,486 - - 6,486 Accumulated earnings (deficit) (608,308) 27,194 (27,194) (608,308) Total stockholders' equity 1,615,162 27,194 (27,194) 1,615,162 Total $1,806,553 462,288 (462,288) 1,806,553 CONDENSED CONSOLIDATING STATEMENT OF INCOME Sales $1,602,150 - - 1,602,150 Other revenue - 8,145 (8,145) - Total 1,602,150 8,145 (8,145) 1,602,150 Cost of sales 491,960 - - 491,960 Gross profit 1,110,190 8,145 (8,145) 1,110,190 Selling, general and administrative 725,720 1, 270 - 726,990 Operating income 384,470 6,875 (8,145) 383,200 Other income 29,862 - (6,875) 22,987 Income before taxes 414,332 6,875 (15,020) 406,187 Income tax 101,420 - - 101,420 Net income $ 312,912 6,875 (15,020) 304,767 EPOLIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued) Cash and Cash Equivalents - For purposes of preparing the statement of cash flows, includes cash in bank and money market accounts. Concentrations of Credit Risks - The Company has cash deposits in financial institutions in excess of the amount insured by agencies of the federal government in the amounts of $289,296 and $171,825 at February 28,1998 and 1997, respectively. In evaluating this credit risk, the Company periodically evaluates the stability of these financial institutions. Inventories - Consists of raw materials, work in process, finished goods and supplies valued at the lower of cost or market under the first-in, first-out method. Fair Value of Financial Instruments - The fair values of all reported assets and liabilities which represent financial instruments approximate the carrying values of such amounts. Property, Plant and Equipment - Stated at cost less accumulated depreciation and amortization. Provisions for depreciation are computed on the straight-line and declining balance methods, based upon the estimated useful lives of the assets. Depreciation and amortization expense totaled $61,890, $68,396 and $70,053 for the fiscal years 1998, 1997 and 1996, respectively. Income taxes -The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income taxes", wherein the asset and liability method is used in accounting for income taxes. Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The temporary differences relate primarily to different accounting methods used for depreciation and amortization of property and equipment, goodwill, allowance for doubtful accounts and net operating loss carry forwards. A valuation allowance is recorded for deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized through future operations. 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. EPOLIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 NOTE 3 - 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, 1998, approximately 76.6% of sales were to seven customers, two of which totaled 31.0%. Three of these customers with locations in the Eastern United States comprised 61.3% of accounts receivable at February 28, 1998. During the year ended February 28, 1997, approximately 66.5% of sales were to five customers, one of which totaled 18.9%. Two of these customers comprised 48.8% of accounts receivable at February 28, 1997 with locations in the Eastern United States. NOTE 4 - INVENTORIES: 1998 1997 Raw materials and supplies $ 21,907 19,887 Work in process 2,741 6,781 Finished goods 357,628 315,020 Total $382,276 341,688 NOTE 5 - INCOME TAXES: 1998 1997 Deferred tax assets include the following: Net operating loss carry forwards $ 88,905 204,159 Temporary differences - principally accelerated amortization of leasehold improvements for book purposes 110,019 95,890 $198,924 300,049 Total - deferred tax assets $198,924 413,263 Less: valuation allowance - 113,214 198,924 300,049 Current portion 95,240 100,555 Non-current portion $103,684 199,494 EPOLIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 NOTE 5 - INCOME TAXES (Continued): Income tax expense (benefit) consists of the following components: 1998 1997 1996 Current - State $ 295 35,300 36,528 Deferred: Federal 66,924 90,625 (318,053) State 34,201 (3,205) (2,942) Total deferred 101,125 87,420 (320,995) Total $101,420 122,720 (284,467) Reconciliation of income tax at the statutory rate to the Company's effective rate: Computed at the statutory rate $231,300 112,972 116,177 State income taxes (net) 295 23,298 24,108 Decrease in deferred tax asset valuation allowance (113,214) - (418,763) Non-deductible items (16,961) (13,550) (5,989) Total provision for taxes $101,420 122,720 (284,467) For Federal tax purposes, the Company has available approximately $121,400 of net operating loss carryforwards as of February 28, 1998, which expire in the years 2005 through 2007. In addition, there are State net operating loss carryforwards of approximately $742,100 which expire in the years 1998 through 2004. NOTE 6 - ACCRUED SALARIES: Four officers and one former employee previously elected to defer a portion of their salaries to preserve the Company's cash position. Salaries of three officers and the former employee were waived and removed from the books during 1996 and 1995 and credited to income. On April 25, 1995, the Board of Directors authorized the issuance of 1,000,000 shares of common stock (market value $.04 per share) to the remaining officer in lieu of $40,000 of his remaining accrued salary of $89,948. The remaining unpaid balance of $49,948 was classified as deferred compensation as of February 28, 1998. (See Note 12.) EPOLIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 NOTE 7 - EMPLOYEE BENEFITS: Simplified Employee Pension Plan - Effective June 1, 1994, covering all eligible participating employees as defined. Employer contributions totaled $12,141, $11,191 and $5,744 for the years ended February 28, 1998, 1997 and 1996 respectfully. Incentive Compensation Plan - On December 1989, the Company approved the 1989 Incentive Compensation Plan for the purpose of attracting and retaining key personnel. All employees of the Company are eligible to participate in the plan whereby incentive bonuses are determined by the Board of Directors and payable in shares of common stock. Shares issued are determined at fifty percent of the closing bid price and vested and delivered over a three-year period. At February 28, 1998, 20,000 vested shares of common stock covering a previously awarded bonus had not been issued to the employee. Management believes that the shares will be issued in the next fiscal year. Employee Stock Option Plan - The Company previously adopted an Employee Stock Option Plan ("Plan"). As of April 1996, options may no longer be granted under the Plan. Under the terms of the Plan, options granted thereunder could be designated as portions which qualify for incentive stock option treatment under Section 422A of the Internal Revenue Code of 1986, as amended, or options which do not qualify. In December 1995, options to acquire up to 490,000 shares of the Company's common stock were granted under the Plan. Such options expire on December 1, 2005. Outstanding Options: Shares allocated as of February 28, 1998 490,000 Option price $ 0.04 All outstanding options are exercisable currently. No options were granted, expired or excercised during the current fiscal year ended February 28, 1998. NOTE 8 - TREASURY STOCK: Represents 42,445 shares returned to Company when shares were deemed to have no market value. EPOLIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 NOTE 9 - RESEARCH AND DEVELOPMENT: Included in selling, general and administrative expenses are costs of $164,724, $170,468 and $152,700 for the years 1998, 1997 and 1996, respectively. NOTE 10 - ACQUISITIONS: On April 5, 1989, the Company acquired Accort Labs, Inc. in a business combination accounted for as a pooling of interests which became a wholly- owned Subsidiary through the exchange of 896,424 shares of common stock for all of its outstanding stock. On January 29, 1998, the Company acquired 100 shares (100% interest) of Epolin Holding, Corp.'s outstanding common stock, thereby becoming a wholly-owned Subsidiary. The Company accounted for this business combination by the purchase method, in accordance with Accounting Principles Board (APB) #16, whereas the excess net book value over cost was used to reduce the basis of the acquired assets principally land and building. NOTE 11 - COMMITMENTS: On October 17, 1996, the premises leased from 350 South Street Partnership was purchased for $450,000 by Epolin Holding Corp., a New Jersey Corporation, controlled by Murray S. Cohen, Ph.D. and Mr. James A. Ivchenko, officers/stockholders of Epolin, Inc. This transaction was approved by the Board of Directors in June 1996 based upon the terms of a $350,000 mortgage obtained from the Broad National Bank wherein personal guarantees of Murray S. Cohen, Ph.D. and Mr. James A. Ivchenko were mandatory. Other directors declined to participate in this transaction. (See Note 10.) The down payment of $100,000 was obtained from Epolin, Inc., evidenced by a five (5) year promissory note of $75,565 (net of a three (3) months security deposit under the terms of a five (5) year lease) payable in monthly payments of $1,541 including interest at an annual rate of 8.25%. The lease, entered into on the same day as the purchase of the property, is for a term of five (5) years with three (3) five (5) year options at annual rentals of $97,740 subject to a Cost of Living Index adjustment from the start of the second year. Rent includes reimbursed real estate taxes and insurance expenses under terms of the lease. Epolin Holding Corp. is a wholly-owned Subsidiary of Epolin, Inc. as of January 28, 1998. EPOLIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 NOTE 11 - COMMITMENTS (continued): The minimum annual rentals under the lease are as follows: Years Ended February 28, Amounts 1999 $97,740 2000 97,740 2001 97,740 2002 65,160 Rental expense charged to operations amounted to $89,595, $90,717 and $90,437 for the years 1998, 1997 and 1996, respectively. Deferred Compensation - On December 29, 1995, the Company entered into a deferred compensation agreement with an officer whereby annual compensation of $19,645 plus interest would be deferred until such time the officer reaches age 65 or is terminated. The obligation is being funded with a life insurance policy. Annual payments of $32,000 for ten consecutive years shall commence the first day of the month following the executive's 65th birthday or termination. Deferred compensation charged to operations were $20,799, $19,809 and $3,274 for the years 1998, 1997 and 1996 respectively. (See Note 12.) Licensing Agreement - The Company entered into a licensing agreement in November 1985 (amended 1988) with one of its stockholders (now deceased) for the exclusive right to manufacture, produce, market, use and sell products and materials under U.S. Patent 4,387,215 related to the Company's now abandoned expanding monomer technology. Included in its terms was a commitment for payment of annual fixed royalties of $50,000 and royalty payments as a percentage of gross sales. Payment due November 30, 1989 was paid over the twelve-month period ending May 1990, with subsequent payments postponed until such time as demand for Expanding Monomer technology commenced. The Company abandoned this technology and has since reversed to income all accruals made in prior years that related to unpaid fixed royalty payments. Under the terms of the agreement, the licensor's only remedy against the Company for non-payment of any prior fixed royalty payment is cancellation of the license agreement. To date, no notification regarding the termination or cancellation of the licensing agreement has been received from the licensor's estate. EPOLIN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 28, 1998 NOTE 12 - PRIOR PERIOD ADJUSTMENT: Deferred compensation to an officer of $49,948 previously eliminated was reinstated, resulting in changes to accumulated deficit as of February 28, 1997: NOTE 13 - SUSEQUENT EVENTS: On April 9, 1998, the Company purchased 25,000 shares of its common stock at $.38 per share on the open market. The Company intends to purchase additional shares of its stock in the near future. NOTE 14 - RELATED PARTY TRANSACTIONS: At February 28, 1997, the Company had advanced Epolin Holding Corp. (controlled by the officers/stockholders of the Company) $4,056 covering expenses related to the purchase of the premises leased by the Company (See Notes 1 and 10.) Loan receivable - related party consists of the remaining amount due from loan by the Company to Epolin Holding Corp. covering the down payment for the purchase of the premises. (See Notes 1 and 10.) EX-27 2 ART. 5 FDS FOR FISCAL YEAR 10-KSB
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EPOLIN, INC.'S ANNUAL REPORT FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR FEB-28-1998 FEB-28-1998 389,129 0 214,976 0 382,276 1,144,042 1,072,916 569,401 1,806,553 97,591 0 2,206,984 0 0 0 1,615,162 1,602,150 1,602,150 491,960 491,960 726,990 0 0 406,187 101,420 304,767 0 0 0 304,767 .03 .03
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