UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ______
Commission file number 000-17741
EPOLIN, INC.
(Exact name of Registrant as Specified in its Charter)
New Jersey 22-2547226
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
358-364 Adams Street
Newark, New Jersey 07105
(Address of principal (Zip Code)
executive offices)
(973) 465-9495
(Registrant's Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 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 [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definition of "large
accelerated filer", "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ X ]
Indicate by check mark whether the registrant is a shell company
(as defined by Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
State the number of shares outstanding of each of the Issuer's
classes of common stock, as of the latest practicable date: no
par value per share: 11,966,355 outstanding as of July 1, 2008.
EPOLIN, INC.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. 3
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations. 3
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 8
Item 4T. Controls and Procedures. 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 9
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds. 9
Item 3. Default upon Senior Securities. 9
Item 4. Submission of Matters to a Vote of Security
Holders. 9
Item 5. Other Information. 9
Item 6. Exhibits. 9
SIGNATURES 10
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
See the Consolidated Financial Statements annexed to this
report.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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.
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 under the caption "Uncertainties and
Risk Factors" in Part I, Item 1 "Description of Business" of the
Company's Form 10-KSB for the year ended February 29, 2008. The
Company does not intend to update these forward-looking
statements.
Executive Overview
Epolin, Inc. (the "Company", "we", "us" and "our") is a
specialized chemical company primarily engaged in the
manufacturing, marketing, research and development of infrared
dyes, laser absorbing dyes and infrared dye formulations. Our
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. We also manufacture specialty chemicals for
certain chemical manufacturers.
We have succeeded in growing over the last decade based on
the development, application and manufacture of near infrared
dyes. In recent years, we have embarked on an aggressive
campaign to make our dyes easier to use. In this regard, we
offer technical service support for extrusion and injection
molding of our dyes with a variety of resin substrates. Our dyes
can now be uniquely formulated to each customer's specifications
and manufactured in our own facility. In addition, we hold a
broad range of dyes in inventory for immediate sale.
We sell our products to manufacturers of plastics/resins,
credit cards, electronics, glass and other basic materials. Our
customers are located in all regions of the world, although a
material portion of our 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, we now offer our
customers added service in the form of formulated inks and
resins. This has resulted in increasing our worldwide sales of
these products and, we believe, lessens the threat of competition
from lower cost dyes manufactured abroad. During the three
months ended May 31, 2008, approximately 31.8% of sales were to
three customers. During the three months ended May 31, 2007,
approximately 37.4% of sales were to three customers. The loss
of one or more key customers could have a material adverse effect
on the Company.
Results of Operations
The following tables set forth operations data for the three
months ended May 31, 2008 and 2007.
Three Months Ended May 31,
2008 2007 % change
Sales $912,791 $842,001 8.4%
Gross profit 522,729 513,345 1.8%
Gross profit percentage 57.3% 61.0% -3.7%
Selling, general
& administrative 293,647 295,999 -0.8%
Operating income 229,082 217,346 5.4%
Other Income 17,005 14,940 13.8%
Income before taxes 246,087 232,286 5.9%
Income taxes 96,935 79,510 21.9%
Net income
(after taxes) $149,152 $157,776 -5.5%
Sales
For the three months ended May 31, 2008, sales were $913,000
as compared to $842,000 for the three months ended May 31, 2007,
an increase of 71,000 or 8.4%.
The increase in sales is primarily due to an increase in
sales in the light management market which increased by $69,000
for the quarter ended May 31, 2008 compared to the prior year
period. Our custom dye market also increased by $5,000 during
the three months ended May 31, 2008 compared to May 31, 2007.
Sales in the eye protection market, which represents our oldest
and traditional market, showed no change in the three months
ended May 31, 2008 compared to the prior year period, and sales
in the ink and coating market decreased by $5,000 in the same
periods. The decrease in sales in the ink and coating market is
primarily due to reduced sales in the security inks business,
which had been a key area of our growth from 2005 to 2007, but
has declined since then to approximately the level of sales we
achieved in this market in fiscal 2005.
Sales overseas increased in Asia and Europe for the three
months ended May 31, 2008 while sales decreased in the United
States for the three months ended May 31, 2008 compared to the
prior year period. For the three months ended May 31, 2008,
sales in Asia increased to $201,000 from $155,000 while in
Europe, sales increased to $85,000 for the three months ended May
31, 2008 from $22,000 for the prior year period. In the United
States, sales decreased to $626,000 in the three months ended May
31, 2008 from $661,000 in the three months ended May 31, 2007.
Gross Profit
Gross profit, defined as sales less cost of sales, was
$523,000 or 57.3% of sales for the three months ended May 31,
2008 compared to $513,000 or 61.0% of sales for the three months
ended May 31, 2007.
Cost of sales was $390,000 for the three months ended May
31, 2008 which represented 42.7% of sales compared to $329,000
for the three months ended May 31, 2007 which represented 39.0%
of sales. Total cost of materials increased $51,000 in the three
months ended May 31, 2008 compared to the prior year period,
while total factory overhead increased $10,000 in the three
months ended May 31, 2008 compared to the three months ended May
31, 2007.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to
$294,000 or 32.2% of sales for the three months ended May 31,
2008 compared to $296,000 or 35.2% of sales for the three months
ended May 31, 2007, a decrease of $2,000. Such decrease in
absolute dollars was primarily due to a decrease in officers'
salaries (primarily from the
Chairman of the Board's decision to
become a part-time employee effective in September 2006 with a
corresponding reduction in his base salary) and a decrease in
directors and officers insurance in the three months ended May
31, 2008 offset by an increase in administrative salaries,
payroll taxes and employer contributions to our SEP Plan. In
addition, we incurred a placement fee of $12,000 in the three
months ended May 31, 2007 for which there was no comparable item
in the three months ended May 31, 2008.
Operating Income
Operating income, in terms of absolute dollars, increased to
$229,000 for the three months ended May 31, 2008 from $217,000
for the three months ended May 31, 2007, an increase of $12,000.
Operating income increased primarily due an increase in sales
together with a slight decrease in selling, general and
administrative expenses offset by an increase in cost of sales.
As a percentage of sales, operating income was 25.1% of sales for
the three months ended May 31, 2008 compared to 25.8% of sales
for the three months ended May 31, 2007.
Other Income
Total other income for the three months ended May 31, 2008
was $17,000 as compared to $15,000 for the three months ended May
31, 2007. We realized rental income of $4,500 for the three
months ended May 31, 2008 compared to no rental income for the
three months ended May 31, 2007. Our interest income was $13,000
for the three months ended May 31, 2008 compared to $15,000 for
the prior year period.
Net Income
During the three months ended May 31, 2008, we reported
income before taxes of $246,000 as compared to income before
taxes of $232,000 for the three months ended May 31, 2007, an
increase of $14,000. Income taxes were $97,000 for the three
months ended May 31, 2008 compared to $80,000 for the three
months ended May 31, 2007, an increase of $17,000. As a
percentage of our income, the amount of income taxes for the
three months ended May 31, 2008 increased compared to the prior
year period primarily due to tax depreciation deductions
resulting from the purchase of certain computer hardware and
software taken in the prior fiscal year which are not available
to us in the current fiscal year. Net income after taxes was
$149,000 or $0.01 per share for the three months ended May 31,
2008 compared to net income after taxes of $153,000 or $0.01 per
share for the three months ended May 31, 2007.
Net income in the future will be dependent upon our ability
to increase revenues faster than increases, if any, in our
selling, general and administrative expenses, research and
development expenses and other expenses. Prior to fiscal 2007,
sales had grown for a number of consecutive years. In fiscal
2007, however, sales decreased by $91,000 compared to fiscal 2006
and, in fiscal 2008, sales decreased by $17,000 compared to
fiscal 2007. While sales have decreased, net income did improve
in fiscal 2008 by $101,000 compared to fiscal 2007 and net income
increased by $29,000 in fiscal 2007 compared to fiscal 2006.
During the first three months of fiscal 2009, we achieved an
increase in sales of $71,000 compared to the prior year period,
while our net income (although less by $4,000) was substantially
the same.
Operations Outlook
Since fiscal 2005, we have been going through a period of
reassessing our direction in order to increase value for our
shareholders. Our business, though reasonably healthy, did not
grow to the degree management anticipated from 2002 to 2005.
While the sales level of $2,880,000 reached during fiscal 2005
was at the time an all time high for the Company, it was not
significantly more than the sales level we achieved in 2004
($2,734,000), 2003 ($2,690,000) or 2002 ($2,550,000). The plateau
of sales during that four years was in contrast to the greater
sales growth the Company experienced in certain years prior to
2002. Based upon these observations, we tried to learn what
could be done to stimulate growth and recapture the promise of
our early years. As a result, we assembled a business plan and
began to make changes consistent with such plan. The plan showed
us that developments coming out of our R&D were not reaching the
marketplace and therefore, not commanding their proper attention.
Through this teamwork of R&D with marketing, we revamped our web
site, streamlined our pricing structure and reached out to our
key customers and agents. We believe the business plan made clear
the necessity of hiring a Sales/Marketing executive along with
back up technical service help, both of which have been
accomplished. In order to cover the cost of these additional
personnel and place a greater emphasis on company growth, we
suspended in fiscal 2005 the cash dividends program which we had
been in place during fiscal 2002, 2003 and 2004 in order to place
greater emphasis on business growth. All of the foregoing
resulted in strong sales growth and we achieved $3,701,000 in
sales for fiscal 2006 which was $821,000 or 28.5% greater than
the prior year. Nevertheless, in fiscal 2007, sales decreased to
$3,610,000, a decrease of 2.5% from the prior year, and in fiscal
2008, sales decreased to $3,593,000, a decrease of 0.5% from the
prior year, although for the first three months of fiscal 2009,
we achieved an increase of $71,000 in sales compared to the first
three months of fiscal 2008. During these periods of reduced
sales, we had a major decline in sales of security inks for the
credit card market which had been a key area of our growth in
recent periods. While this market remains a major source of
business for us, we may not be able achieve the same type of
growth in the security inks market in the future. Nevertheless,
we are confident that with our core group of products, we will be
able to maintain sales in our principal markets while always
seeking new areas for the use of our dyes.
Liquidity and Capital Resources
Our primary source of funds is cash flow from operations in
the normal course of selling products. On May 31, 2008, we had
working capital of $2,913,000, a debt to equity ratio of 0.13 to
1, and stockholders' equity of $3,821,000 compared to working
capital of $2,599,000, a debt to equity ratio of 0.19 to 1, and
stockholders' equity of $3,565,000 on May 31, 2007. On May 31,
2008, we had $1,907,000 in cash and cash equivalents, total
assets of $4,305,000 and total liabilities of $484,000, compared
to $1,686,000 in cash and cash equivalents, total assets of
$4,230,000 and total liabilities of $665,000 on May 31, 2007.
Net cash provided by operating activities for the three
months ended May 31, 2008 was $195,000 which was primarily the
result of net income of $149,000, plus decreases in accounts
receivable of $50,000, inventories of $33,000 and prepaid
expenses of $17,000, and increases in taxes payable of $56,000,
offset by a decrease in accrued expenses of $145,000. Net cash
provided by operating activities for the three months ended May
31, 2007 was $219,000 which was primarily the result of net
income of $153,000, plus decreases in prepaid expenses of $20,000
and increases in accrued expenses of $63,000 and taxes payable of
$68,000, offset by increases in accounts receivable of $50,000
and decreases in accounts payable of $29,000. Net cash used by
investing activities for the three months ended May 31, 2008 was
$29,000 compared to $46,000 for the three months ended May 31,
2007 which change was primarily due to a decrease in equipment
purchases. For the three months ended May 31, 2008 and May 31,
2007, net cash used by financing activities was $239,000 which
was primarily due to the payment of dividends which occurred in
both the first three months of fiscal 2009 and the first three
months of fiscal 2008.
We anticipate, based on currently proposed plans and
assumptions relating to our operations, that our 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. Our contemplated cash requirements for the balance of
fiscal 2009 and beyond will depend primarily upon level of sales
of our products, inventory levels, product development, sales and
marketing expenditures and capital expenditures.
Inflation has not significantly impacted our 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 - We have adopted disclosure-only
provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123." 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.
In December 2004, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment".
SFAS 123R revises SFAS No. 123 and supersedes APB 25 to require
companies to measure and recognize in operations the cost of
employee services received in exchange for an award of equity
instruments based on the grant-date fair value. That cost will
be recognized over the vesting period during which an employee is
required to provide service in exchange for the award. On
April 14, 2005, the Securities and Exchange Commission issued a
ruling that amended the effective date for SFAS 123R. As a
result, we did adopt SFAS 123R on March 1, 2006.
Other Information
Subsequent to the end of fiscal 2006, the Board of Directors
approved the adoption of a dividend policy under which we will
issue a regular annual cash dividend on shares of our Common
Stock. The amount of the dividend, record date and payment date
will be subject to approval every year by the Board of Directors.
In accordance with the new dividend policy, a regular annual cash
dividend of $0.02 per share was paid in each of May 2006, May
2007 and May 2008. In addition, since of the adoption of the
dividend policy in fiscal 2007, a special cash dividend of $0.02
per share has been paid in each of January 2007 and January 2008.
In addition to the foregoing, and considering our cash
position, the Board of Directors has recently declared a
supplemental special cash dividend of $0.04 per share which will
be payable on August 7, 2008 to shareholders of record of our
Common Stock at the close of business on July 24, 2008. Although
there can be no assurance, it is anticipated that we will pay
another special cash dividend in January 2009 similar to the
special cash dividends we have paid in January of prior years.
In August 2001, our Board of Directors 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. There were no
repurchases made by the Company of shares of its Common Stock
during the fiscal year ended February 29, 2008 and the first
three months of fiscal 2009. In prior years, since the adoption
of the program, a total of 331,500 shares were repurchased at a
cumulative cost of $195,766.
In September 2007, Murray S. Cohen advised the Board of
Directors that beginning as of October 1, 2007 and in accordance
with his employment agreement he will reduce the time he devotes
to Company business to approximately 25% of his time. Dr. Cohen
had been devoting approximately 50% of his time to the business
since September 2006. Dr. Cohen has been and will remain
Chairman of the Board and Chief Scientist of the Company.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements as defined
in Item 303(c) of Regulation S-B.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
We are a smaller reporting company as defined by Rule 12b-2
of the Securities Exchange Act of 1934 and are not required to
provide the information under this item.
Item 4T. Controls and Procedures.
Under the supervision and with the participation of our
management, including the Principal Executive Officer and
Principal Financial Officer, we have evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-
15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of
the period covered by this report. Based on that evaluation, our
Principal Executive Officer and Principal Financial Officer have
concluded that, as of May 31, 2008, these disclosure controls and
procedures were effective to ensure that all information required
to be disclosed by us in the reports that we file or submit
under the Exchange Act is: (i) recorded, processed, summarized
and reported, within the time periods specified in the
Commission's rule and forms; and (ii) accumulated and
communicated to our management, including our Principal Executive
Officer and Principal Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
There have been no significant changes in our internal
controls over financial reporting that occurred during the fiscal
quarter covered by this report that have materially affected, or
are reasonably likely to materially affect, our internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material pending legal proceedings to which we
are a party or to which any of our property is subject.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
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)
SIGNATURES
Pursuant to the requirements 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)
Dated: July 11, 2008 By: /s/ Greg Amato
Greg Amato,
Chief Executive Officer
Dated: July 11, 2008 By: /s/ James Ivchenko
James Ivchenko,
President
(Principal Financial Officer)
EPOLIN, INC. AND SUBSIDIARY
FINANCIAL STATEMENTS
THREE MONTHS ENDED
MAY 31, 2008 AND 2007
CONTENTS
Page
------
Review Report of Independent Registered Accounting Firm 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
Notes to Consolidated Financial Statements 7 - 20
REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
EPOLIN INC. AND SUBSIDIARY
Newark, New Jersey
We have reviewed the accompanying Consolidated Balance Sheets of Epolin
Inc. and Subsidiary as of May 31, 2008 and 2007 and the related Consolidated
Statements of Income, Stockholders' Equity, and Cash Flows for the three-month
periods then ended. These interim financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying interim financial statements for them to be
in conformity with U.S. generally accepted accounting principles.
/s/ Weismann Associates LLC
- ---------------------------
Weismann Associates LLC
Branchburg, NJ 08865
1
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
May 31,
---------------------------
2008 2007
----------- ---------
Current assets:
Cash and cash equivalents $ 1,906,536 1,685,540
Accounts receivable 568,800 596,625
Inventories 609,687 656,249
Prepaid expenses 43,655 57,781
Prepaid taxes
- 470
Deferred tax assets-current portion 20,212 10,542
----------- ---------
Total current assets 3,148,890 3,007,207
----------- ---------
Plant, property and equipment - at cost:
Land 81,000 81,000
Building and improvements 734,578 710,758
Laboratory equipment 189,300 280,368
Furniture and office equipment 217,795 195,388
Leasehold improvements 458,495 456,790
----------- ---------
Total 1,681,168 1,724,304
Less: Accumulated depreciation and amortization 825,826 878,166
----------- ---------
Net plant, property and equipment 855,342 846,138
----------- ---------
Other assets:
Deferred tax assets-non current portion 96,626 146,111
Cash value - life insurance policy 204,389 230,667
----------- ---------
Total other assets 301,015 376,778
----------- ---------
Total $ 4,305,247 4,230,123
=========== =========
The accompanying notes are an integral part of these statements.
2
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
May 31,
---------------------------
2008 2007
----------- ---------
Current liabilities:
Accounts payable $ 13,742 23,112
Accrued expenses 126,208 308,322
Taxes payable:
Payroll 1,889 1,889
Income 93,835 75,194
----------- ---------
Total current liabilities 235,674 408,517
Other liabilities - Deferred compensation 248,359 256,450
----------- ---------
Total liabilities 484,033 664,967
----------- ---------
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;
12,915,000 shares issued, and 11,966,355
shares outstanding at 2008 and 2007, respectively 2,364,693 2,364,693
Additional paid-in capital 76,820 62,111
Retained earnings 1,730,783 1,489,434
----------- ---------
Total 4,172,296 3,916,238
Less: Treasury stock - at cost 351,082 351,082
----------- ---------
Total stockholders' equity 3,821,214 3,565,156
----------- ---------
Total $ 4,305,247 4,230,123
=========== =========
The accompanying notes are an integral part of these statements.
3
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MAY 31, 2008 AND 2007
2008 2007
-------------- ---------
Sales $ 912,791 842,001
-------------- ----------
Cost of sales and expenses:
Cost of sales 390,062 328,656
Selling, general and administrative 293,647 295,999
-------------- ----------
Total 683,709 624,655
-------------- ----------
Operating income 229,082 217,346
-------------- ----------
Other income:
Rental income 4,500 -
Interest 12,505 14,940
-------------- ----------
Total 17,005 14,940
-------------- ----------
Income before taxes 246,087 232,286
Income taxes 96,935 79,510
-------------- ----------
Net income $ 149,152 152,776
============== ==========
Per share data:
Basic earnings per common share $ 0.01 0.01
============== ==========
Fully diluted earnings per common share $ 0.01 0.01
============== ==========
Weighted average number of common shares outstanding 11,966,355 11,964,806
============== ==========
Fully diluted number of common shares outstanding 12,006,791 12,003,424
============== ==========
The accompanying notes are an integral part of these statements.
4
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MAY 31, 2008 AND 2007
Number of Additional
Outstanding Common Paid-in- Retained Treasury Treasury Stockholders'
Shares Stock Capital Earnings Shares Costs Equity
----------- ----------- ---------- --------- -------- -------- -------------
Balance - March 1, 2007 12,915,000 $ 2,364,693 62,111 1,575,985 948,645 (351,082) 3,651,707
Dividends paid - - - (239,327) - - (239,327)
Net income - - - 152,776 - - 152,776
----------- ----------- ---------- --------- -------- -------- -------------
Balance - May 31, 2007 12,915,000 $ 2,364,693 62,111 1,489,434 948,645 (351,082) 3,565,156
=========== =========== ========== ========= ======== ======== =============
Balance - March 1, 2008 12,915,000 $ 2,364,693 76,820 1,820,958 948,645 (351,082) 3,911,389
Dividends paid - - - (239,327) - - (239,327)
Net income - - - 149,152 - - 149,152
----------- ----------- ---------- --------- -------- -------- -------------
Balance - May 31, 2008 12,915,000 $ 2,364,693 76,820 1,730,783 948,645 (351,082) 3,821,214
=========== =========== ========== ========= ======== ======== =============
The accompanying notes are an integral part of these statements.
5
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MAY 31, 2008 AND 2007
2008 2007
----------- -----------
Cash flows from operating activities:
Net income $ 149,152 152,776
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 25,233 19,315
Deferred tax expense 3,317 6,060
Obligation under deferred compensation agreement 1,676 (29,414)
(Increase) decrease in:
Accounts receivable 49,645 (49,673)
Inventories 32,842 (4,601)
Prepaid expenses 16,757 19,986
Prepaid taxes - 1,450
Increase (decrease) in:
Accounts payable 4,082 (28,670)
Accrued expenses (144,547) 63,417
Taxes payable 56,435 68,658
----------- -----------
Net cash provided by operating activities 194,592 219,304
----------- -----------
Cash flows from investing activities:
(Increase) decrease in cash value - life insurance policy (3,020) (3,409)
Payments for equipment (25,851) (42,374)
----------- -----------
Net cash used by investing activities (28,871) (45,783)
----------- -----------
Cash flows from financing activities:
Dividends paid (239,327) (239,327)
----------- -----------
Net cash used by financing activities (239,327) (239,327)
----------- -----------
Increase (decrease) in cash (73,606) (65,806)
Cash and cash equivalents:
Beginning 1,980,142 1,751,346
----------- -----------
Ending $ 1,906,536 1,685,540
=========== ===========
Supplemental disclosures of cash flows:
Income taxes paid $ 337,842 3,242
=========== ===========
The accompanying notes are an integral part of these statements.
6
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
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 Corporation, was
incorporated in New Jersey as a real estate holding company whose assets consist
of land and a building. On January 29, 1998, the Company acquired 100% of the
stock in Epolin Holding Corporation. Prior to acquisition, two
officers/stockholders of the Company controlled it.
NOTE B - Summary of Significant Accounting Policies:
Basis of Presentation - The interim Consolidated Financial Statements presented
herein are unaudited and should be read in conjunction with the Consolidated
Financial Statements presented in the Company's Annual Report on Form 10-KSB for
the fiscal year ended February 28, 2008. Such interim Consolidated Financial
Statements reflect all normal and recurring adjustments that, in the opinion of
management, are necessary for a fair presentation of the financial position,
results of operations and cash flows of the Company for the periods presented.
All significant intercompany accounts and transactions have been eliminated.
The results of operations for the three-month interim period ended May 31,
2008 and 2007 are not necessarily indicative of the results of operations for
the fiscal year ending February 29, 2009.
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 at various times
of the year had cash deposits in financial institutions and a brokerage house in
excess of the amount insured by the agencies of the federal government. In
evaluating this credit risk, the Company periodically evaluates the stability of
the financial institution and brokerage house.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of accounts receivable.
Generally, the Company does not require collateral or other securities to
support its accounts receivable. Three customers represented 33.9% of the
Company's trade receivables at May 31, 2008.
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.
7
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008
NOTE B - Summary of Significant Accounting Policies (continued):
Principles of Consolidation - The accompanying Consolidated Financial Statements
include the accounts of the Company and Subsidiary. Inter-company transactions
and balances have been eliminated in consolidation. Condensed consolidating
financial statements as of May 31, 2008 and for the three months then ended are:
CONDENSED CONSOLIDATING BALANCE SHEET
Epolin Epolin
Inc. Holding, Corp. Eliminations Consolidated
----------- -------------- ------------ ------------
Current assets $ 2,834,373 314,517 - 3,148,890
Non-current assets 1,468,704 642,718 (955,065) 1,156,357
----------- -------------- ------------ ------------
Total $ 4,303,077 957,235 (955,065) 4,305,247
=========== ============== ============ ============
Total liabilities $ 481,863 26,605 (24,435) 484,033
----------- -------------- ------------ ------------
Stockholders' equity:
Common stock 2,364,693 - - 2,364,693
Additional paid-in capital 76,820 - - 76,820
Retained earnings 1,730,783 930,630 (930,630) 1,730,783
Treasury stock (351,082) - - (351,082)
----------- -------------- ------------ ------------
Total stockholders' equity 3,821,214 930,630 (930,630) 3,821,214
----------- -------------- ------------ ------------
Total $ 4,303,077 957,235 (955,065) 4,305,247
=========== ============== ============ ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Epolin Epolin
Inc. Holding, Corp. Eliminations Consolidated
----------- -------------- ------------ ------------
Sales $ 912,791 - - 912,791
Rental income - 28,935 (24,435) 4,500
----------- -------------- ------------ ------------
Total 912,791 28,935 (24,435) 917,291
----------- -------------- ------------ ------------
Cost of sales 390,062 - - 390,062
Selling, general and administrative 311,363 6,719 (24,435) 293,647
----------- -------------- ------------ ------------
Total 701,425 6,719 (24,435) 683,709
----------- -------------- ------------ ------------
Operating income 211,366 22,216 - 233,582
Other income - interest 11,956 549 - 12,505
----------- -------------- ------------ ------------
Income before taxes 223,322 22,765 - 246,087
Income taxes 94,767 2,168 - 96,935
----------- -------------- ------------ ------------
Net income $ 128,555 20,597 - 149,152
=========== ============== ============ ============
8
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
NOTE B - Summary of Significant Accounting Policies (continued):
Accounts Receivable - Accounts receivable are stated at the amount management
expects to collect from outstanding balances. Management provides for probable
uncollectible amounts though a charge to earnings and a credit to a valuation
allowance based on its assessment of the status of individual accounts. This
allowance is an amount estimated by management to be adequate to absorb possible
losses. Balances that are still outstanding after management has used reasonable
collection efforts are written off through a charge to the valuation allowance
and a credit to accounts receivable.
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.
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:
Years
-------
Building and improvements Straight Line 39
Laboratory equipment Straight Line 5 - 7
Furniture and office equipment Straight Line 5 - 7
Leasehold Improvements Straight Line 10 - 39
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 $25,233 and $19,315 for the
three months ended May 31, 2008 and 2007, 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.
9
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
NOTE B - Summary of Significant Accounting Policies (continued):
Use of Estimates - The preparation of the Company's financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
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 are in nonconformity with
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.
Regulations - The Company expended approximately $3,600 through May 31, 2008 and
$9,702 through May 31, 2007, 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 $5,860 and $1,769 for the
three months ended May 31, 2008 and 2007, respectively.
10
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
NOTE B - Summary of Significant Accounting Policies (continued):
Stock-Based Compensation - Prior to March 1, 2006 the Company accounted for
stock based compensation under Statement of Financial Accounting Standards No.
123 Accounting for Stock-Based Compensation (FAS 123). As permitted under this
standard, compensation cost was recognized using the intrinsic value method
described in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). Effective March 1, 2006, the Company has adopted
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment". SFAS 123R revises SFAS No. 123 and supersedes APB 25 to require
companies to measure and recognize in operations the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value. In accordance with the provisions of the Securities and Exchange
Commission Staff Accounting Bulletin No. 107, the Company has adapted the
modified-prospective transition method. Prior periods were not restated to
reflect the impact of adopting the new standard. As a result of the adoption of
FAS 123R, stock-based compensation expense recognized for the period ended May
31, 2008 includes compensation expense for all share-based payments granted on
or prior to, but not yet vested as of March 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of FAS 123, and
compensation cost for all share-based payments granted on or subsequent to March
1, 2006, based on the grant date fair value estimated in accordance with the
provisions of FAS 123R.
During the three months ended May 31, 2007, the Company recognized
stock-based compensation expenses of $5,688, related to outstanding stock
options according to the provisions of FAS 123R, using the modified-prospective
transition method.
Prior to the adoption of FAS 123R and for the year ended February 28,
2007, no tax benefits from the exercise of stock options have been recognized.
Any future excess tax benefits derived from the exercise of stock options will
be recorded prospectively and reported as cash flows from financing activities
in accordance with FAS 123R.
Deferred charges for options granted to non-employees are determined in
accordance with FAS No. 123 and EITF 96-18 "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" 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 three months ended May 31, 2008 and 2007 was $.18,
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:
Three Months Ended
May 31,
------------------
2008 2007
------- ------
Weighted average expected life in years 3 4
Dividends per share 0.04 0.04
Volatility 7.0% 6.0%
Risk-free interest rate 4.9% 4.9%
11
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
NOTE C - Income Taxes:
1. Federal and State deferred tax assets include:
2008 2007
-------- -------
Temporary differences:
Accelerated amortization $ 7,750 24,990
Deferred compensation 93,034 129,217
Stock-based compensation 16,054 2,446
-------- -------
Total 116,838 156,653
Current portion 20,212 10,542
-------- -------
Non-current portion $ 96,626 146,111
======== =======
2. Income tax expense:
2008 2007
-------- -------
Current:
Federal $ 73,400 59,300
State 20,218 14,150
-------- -------
Total current 93,618 73,450
-------- -------
Deferred:
Federal 1,640 4,460
State 1,677 1,600
-------- -------
Total deferred 3,317 6,060
-------- -------
Total $ 96,935 79,510
======== =======
12
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
NOTE D - Treasury Stock:
Consists of 948,645 shares at a net cost of $351,082, as of May 31, 2008 and
2007, respectively.
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 three months ended May 31, 2008, approximately 31.8% of
sales were to three customers. During the three months ended May 31, 2007,
approximately 37.4% of sales were to three customers, two of these customers,
located in the Eastern United States, accounted for 30.5% of sales.
NOTE F - Rental Income Under Sublease:
The Company entered into an agreement with a non-related party effective
September 1, 2005 for a term ending October 31, 2007. Under the terms of the
agreement, the tenant is to pay a base rent of $18,000 per year.
NOTE G - 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 $105,692 and
$79,594 were included in cost of sales for the three months ended May 31, 2008
and 2007, respectively. Expenditures for fiscal year 2009 are projected to
remain at approximately the same level as in fiscal 2008.
NOTE H - 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 five percent after
completion of one year of service. Employer contributions totaled $16,836 and
$11,750 for the three months ended May 31, 2008 and 2007, respectively.
13
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
NOTE H - Employee Benefits (continued):
Stock Option Plan - 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 various vesting periods as follows: (1) none exercisable prior to
the first anniversary of the date of grant, and (2) certain 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 (3) certain options will become
exercisable as to 50% of the shares underlying the option on each of the second
and fourth anniversaries of the date granted. From inception through May 31,
2008, options granted totaled 1,242,000, options exercised totaled 686,000,
options cancelled or expired for all years totaled 240,000. All cancelled or
expired options are available for future grants.
A summary of the status of the Company's 1998 stock option plan as of May
31, 2008, and the changes during the three months ended May 31, 2008 is
presented below:
Weighted-Average
Fixed Options: Shares Exercise Price
- --------------------------- -------- ----------------
Balance - February 29, 2008 316,000 $ .50
========
Balance - May 31, 2008 316,000 $ .50
========
Exercisable at May 31, 2008 316,000
========
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. In connection with this
agreement, compensation in the amount of $33,000 was charged to selling,
general and administrative expenses for the year ended February 28, 2007.
14
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
NOTE H - Employee Benefits (continued):
Stock Option Plans - The following table summarizes information about fixed
stock options outstanding at May 31, 2008:
Outstanding Options Exercisable Options
- --------------------------------------------- -----------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Exercisable Weighted-Average
Exercise Price at 5/31/08 Contractual Life at 5/31/08 Exercise Price
- -------------- ----------- ---------------- ----------- ----------------
$ .41 116,000 6.0 116,000 .41
.51 100,000 1.7 100,000 .51
.54 200,000 2.3 200,000 .54
There are 498,000 options attributable to future grants.
NOTE I - Inventories:
May 31,
----------------------
2008 2007
---------- -------
Raw materials and supplies $ 162,222 66,132
Work in process 50,550 217,501
Finished goods 396,915 372,616
Total $ 609,687 656,249
========== =======
15
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
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.
Sales by geographic area are as follows:
Three Months Ended
May 31,
----------------------
2008 2007
---------- -------
United States $ 626,360 661,267
Asia 201,059 154,946
Europe 85,372 22,288
Other nations - 3,500
---------- -------
Total $ 912,791 842,001
---------- -------
One customer, located in Asia, accounted for more than 10% of revenues
from continuing operations. This customer accounted for 15.2% of sales. All
sales to this customer were near infrared dies.
Long-lived assets include net plant, property and equipment. The Company
had long-lived assets of $855,342 and $846,138 located in the United States at
May 31, 2008 and 2007, respectively.
NOTE K - Accrued Expenses:
Accrued expenses consisted of the following as of May 31, 2008 and 2007,
respectively:
2008 2007
---------- -------
Salaries and wages $ 20,712 16,104
Employment agreement 73,023 273,150
Purchases 11,073 -
Professional fees 10,500 19,068
Pension contribution 10,900 -
Total accrued expenses $ 126,208 308,322
========== =======
16
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
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:
Three Months Ended
May 31,
-------------------------
2008 2007
------------ -----------
Basic Earnings Per Common Share:
Net income $ 149,152 152,776
============ ===========
Average common shares
outstanding 11,966,355 11,964,806
------------ -----------
Basic earnings per
common share $ 0.01 0.01
------------ -----------
Diluted Earnings Per Common Share:
Net income $ 149,152 152,776
------------ -----------
Average common shares
outstanding 11,966,355 11,964,806
Common shares issuable with respect
to options issued to employees
with a dilutive effect 40,436 38,618
Total diluted common shares
outstanding 12,006,791 12,003,424
============ ===========
Diluted earnings per
common share $ 0.01 0.01
------------ -----------
17
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
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
$24,435 for the three months ended May 31, 2008 and 2007, respectively.
Future minimum payments for the current option period:
Fiscal Years Ending February:
-----------------------------
2009 $ 73,305
2010 97,740
2011 65,160
Deferred Compensation - On December 29, 1995, the Company entered into a
deferred compensation agreement with James Ivchenko, President, whose additional
annual compensation of $19,645 plus interest is deferred until he reaches age 65
or is terminated. The obligation is funded by the cash value in a life insurance
policy. Commencing on December 2005, annual payments will be made to the officer
in the amount of $32,000 for ten consecutive years.
On January 1, 1996, the Company entered into a deferred compensation
agreement with Dr. Murray S. Cohen, PhD, Chairman of the Board, 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.
18
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
NOTE M - Commitments and Contingencies (continued):
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 - 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. Dr. Cohen is to receive 2.00% on gross annual sales of no
more than $3,000,000, effective with the year ended February 28, 2000,
increasing by 0.25% a year during the term of the agreement. In the event of
partial retirement, (50% employment), Dr. Cohen will receive fifty percent
salary and 100% additional compensation. In the event of substantial retirement,
(25% employment), Dr. Cohen will receive 25% percent salary and 100% additional
compensation. In the event of full retirement, Dr. Cohen will receive 50%
additional compensation. In the event of death or disability, while fully
employed during the fiscal year, Dr. Cohen or his estate will receive 100% of
his annual salary plus additional compensation as described above, and 50% of
his annual salary plus additional compensation each subsequent year for the
remainder of the ten-year term. If at the time of death or disability Dr. Cohen
was retired, then other percentage rates are provided for based upon his
retirement status.
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, 2000, increasing by 0.25% a year
during the term of the agreement. In the event of death or disability during the
fiscal year, Mr. Ivchenko or his estate will receive 100% of his annual salary
plus additional compensation as described above, and 50% of his annual salary
plus additional compensation each subsequent year for the remainder of the
ten-year term.
Accrued compensation included in selling, general and administrative as of
May 31, 2008 and 2007 was $73,023 and $63,150, respectively.
Bonus Agreement - Effective for the year ending February 28, 2006, the company
shall pay Gregory Amato, CEO, bonus compensation in an amount equal to ten
percent of the increase, if any, in the Company's current year consolidated net
income as compared to the consolidated net income for the fiscal year ending
February 28, 2006. The term net income shall mean consolidated net income after
taxes but before any extraordinary items. For subsequent fiscal years, the
employee shall be eligible for cash bonuses in such amounts as determined by the
Compensation Committee.
19
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2008 AND 2007
NOTE N - Dividends:
In April 2008, the Company's Board of Directors declared a cash dividend of
$0.02 per share on all common shares outstanding. The dividend, in the amount of
$239,327 was paid on May 14, 2008 to shareholders of record at the close of
business on April 30, 2008.
In April 2007, the Company's Board of Directors declared a cash dividend of
$0.02 per share on all common shares outstanding. The dividend, in the amount of
$239,327 was paid on May 14, 2007 to shareholders of record at the close of
business on April 30, 2007.
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.