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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 NOVEMBER 30, 2009
[ ] 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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section
232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes [ ] 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: 12,166,355
outstanding as of January 1, 2010.
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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. 9
Item 4T. Controls and Procedures. 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 10
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 10
Item 3. Default upon Senior Securities. 10
Item 4. Submission of Matters to a Vote of Security Holders. 10
Item 5. Other Information. 10
Item 6. Exhibits. 10
SIGNATURES 11
2
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 in Part I, Item 1A "Risk Factors" of the Company's Form 10-K for the
year ended February 28, 2009. The Company does not intend to update these
forward-looking statements.
EXECUTIVE OVERVIEW
Epolin, Inc. (the "Company", "we", "us" and "our") which was incorporated
in the State of New Jersey in May 1984, is a specialized chemical company
primarily engaged in the manufacturing, marketing, research and development of
dyes and dye formulations. 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. Paralleling
the growth of the dye business, we maintain 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.
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. During the nine months ended November 30, 2009, approximately 38.0%
of sales were to three customers. During the nine months ended November 30,
2008, approximately 31.0% 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 and nine
months ended November 30, 2009 and 2008.
3
THREE MONTHS ENDED NOVEMBER 30,
2009 2008 % change
---------- ---------- --------
Sales $ 805,913 $ 733,045 9.9%
Gross profit 460,974 415,891 10.8%
Gross profit percentage 57.2% 56.7% 0.5%
Selling, general & administrative 262,402 321,330 -18.3%
---------- ----------
Operating income 198,572 94,561 110.0%
Other Income 5,893 9,372 -37.1%
---------- ----------
Income before taxes 204,465 103,933 96.7%
Income taxes 77,457 28,952 167.5%
---------- ----------
Net income (after taxes) $ 127,008 $ 74,981 69.4%
========== ==========
NINE MONTHS ENDED NOVEMBER 30,
2009 2008 % change
---------- ---------- --------
Sales $2,240,660 $2,497,516 -10.3%
Gross profit 1,289,528 1,413,855 -8.8%
Gross profit percentage 57.6% 56.6% 1.0%
Selling, general & administrative 814,658 945,395 -13.8%
---------- ----------
Operating income 474,870 468,460 1.4%
Other Income 25,017 49,381 -49.3%
---------- ----------
Income before taxes 499,887 517,841 -3.5%
Income taxes 185,533 187,021 - 0.8%
---------- ----------
Net income (after taxes) $ 314,354 $ 330,820 - 5.0%
========== ==========
SALES
For the three months ended November 30, 2009, sales were $806,000 as
compared to $733,000 for the three months ended November 30, 2008, an increase
of $73,000 or 9.9%. Sales decreased to $2,241,000 for the nine months ended
November 30, 2009 from $2,498,000 for the nine months ended November 30, 2008, a
decrease of $257,000 or 10.3%.
Such increases in sales for the three months ended November 30, 2009 are
primarily due to increased sales in the eye protection market which sales
increased by $85,000 and light management market which sales increased by
$68,000 compared to the prior year period, offset by reduced sales in the ink
and coating market which decreased by $76,000. For the nine months ended
November 30, 2009, decreases in sales are primarily due to a reduced sales in
the ink and coating market which decreased by $253,000 compared to the prior
year period and reduced sales in the custom market which sales decreased by
$72,000, offset by an increase in sales in the eye protection market which sales
increased by $53,000 and an increase in sales in the light management market
which sales increased by $19,000.
4
For the three and nine months ended November 30, 2009, sales in the custom
market were $23,000 and $64,000 compared to $29,000 and $136,000 for the three
and nine months ended November 30, 2008. Sales in the eye protection market were
$428,000 and $1,155,000 for the three and nine months ended November 30, 2009
compared to $343,000 and $1,102,000 for the nine months ended November 30, 2008.
With regard to the ink and coating market, sales were $97,000 and $425,000 for
the three and nine months ended November 30, 2009 compared to $173,000 and
$678,000 for the three and nine months ended November 30, 2008. For the light
management market, sales were $256,000 and $591,000 for the three and nine
months ended November 30, 2009 compared to $188,000 and $572,000 for the three
and nine months ended November 30, 2008.
Categorized by geographic area, sales in the United States increased for
the nine months ended November 30, 2009 while sales decreased in Europe and Asia
compared to the prior year period. For the nine months ended November 30, 2009
compared to the prior year period, sales increased in the United States to
$1,869,000 from $1,725,000, while in Europe sales decreased to $206,000 from
$336,000, and in Asia, sales decreased to $161,000 from $436,000.
GROSS PROFIT
Gross profit, defined as sales less cost of sales, was $461,000 or 57.2%
of sales for the three months ended November 30, 2009 compared to $416,000 or
56.7% of sales the three months ended November 30, 2008. For the nine months
ended November 30, 2009, gross profit was $1,290,000 or 57.6% of sales compared
to $1,414,000 or 56.6% of sales for the nine months ended November 30, 2008. In
terms of absolute dollars, gross profit increased $45,000 for the three months
ended November 30, 2009 compared to the prior year period, and decreased
$124,000 for the nine months ended November 30, 2009 compared to the nine months
ended November 30, 2008.
Cost of sales was $345,000 for the three months ended November 30, 2009
which represented 42.8% of sales compared to $317,000 for the three months ended
November 30, 2008 which represented 43.3% of sales. For the nine months ended
November 30, 2009, cost of sales was $951,000 which represented 42.4% of sales,
compared to $1,084,000 which represented 43.4% of sales for the nine months
ended November 30, 2008. In terms of absolute dollars, cost of sales increased
$28,000 for the three months ended November 30, 2009 compared to the prior year
period and decreased $132,000 for the nine months ended November 30, 2009
compared to the prior year period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $262,000 for the
three months ended November 30, 2009 compared to $321,000 for the three months
ended November 30, 2008, a decrease of $59,000, while selling, general and
administrative expenses decreased to $815,000 for the nine months ended November
30, 2009 from $945,000 for the nine months ended November 30, 2008, a decrease
of $130,000. Such decrease in absolute dollars was primarily due to a decrease
in officers' salaries and administrative salaries, and decreases in commission
and consulting fees offset by increases in professional fees primarily resulting
from costs associated with the potential sale of the Company as previously
disclosed and described below. As a percentage of sales, selling, general and
administrative expenses were 32.5% of sales for the three months ended November
30, 2009 compared to 43.8% for the three months ended November 30, 2008, while
for the nine months ended November 30, 2009, selling, general and administrative
expenses were 36.4% of sales compared to 37.8% for the nine months ended
November 30, 2008.
OPERATING INCOME
Operating income, in terms of absolute dollars, increased to $199,000 for
the three months ended November 30, 2009 from $95,000 for the three months ended
November 30, 2008, an increase of $104,000, while operating income increased to
$475,000 for the nine months ended November 30, 2009 from $468,000 for the nine
months ended November 30, 2008, an increase of $7,000. For the three month
periods, such change was primarily due to an increase in sales together with a
decrease in cost of sales to sales ratio and a decrease in selling, general and
administrative expenses. With regard to the nine month periods, while sales did
decrease for the first nine months of fiscal 2010, such decrease was offset by a
greater decrease in selling, general and administrative expenses as well as a
decrease in cost of sales to sales ratio compared to the prior year period.
5
OTHER INCOME
Total other income was $6,000 and $25,000 for the three and nine months
ended November 30, 2009 compared to $9,000 and $49,000 for the three and nine
months ended November 30, 2008. We realize rental income of $0 and $4,500 for
the three and nine months ended November 30, 2009 compared to rental income of
$4,500 and $13,500 for the three and nine months ended November 30, 2008. Our
interest income was $6,000 and $20,000 for the three and nine months ended
November 30, 2009 compared to $5,000 and $36,000 for the prior year periods.
NET INCOME
During the three months ended November 30, 2009, we reported income before
taxes of $204,000 as compared to income before taxes of $104,000 for the three
months ended November 30, 2008, an increase of $100,000. During the nine months
ended November 30, 2009, we reported income before taxes of $500,000 as compared
to income before taxes of $518,000 for the nine months ended November 30, 2008,
a decrease of $18,000. Income taxes were $77,000 and $186,000 for the three and
nine months ended November 30, 2009 while income taxes were $29,000 and $187,000
for the comparable periods of 2008. The changes in income taxes were generally
attributed to changes from period to period in sales and expenses. Net income
after taxes was $127,000 or $0.01 per share for the three months ended November
30, 2009 as compared to net income after taxes of $75,000 or $0.01 per share for
the three months ended November 30, 2008. For the nine months ended November 30,
2009, net income after taxes was $314,000 or $0.03 per share as compared to net
income after taxes of $331,000 or $0.03 per share for the nine months ended
November 30, 2008. As a percentage of sales, net income after taxes was 15.8% of
sales for the three months ended November 30, 2009 compared to 10.2% of sales
for the three months ended November 30, 2008, while for the nine months ended
November 30, 2009, net income after taxes was 14.0% of sales compared to 13.3%
of sales for the nine months ended November 30, 2008.
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. The largest
reduction in sales in recent years occurred in fiscal 2009 with sales decreasing
by $501,000 compared to fiscal 2008. While over the first nine months of fiscal
2010 sales decreased 10.0% compared to the prior year period, we did achieve an
increase in sales of 10.0% for the quarter ended November 30, 2009 compared to
the quarter ended November 30, 2008. Our level of sales for the three months
ended November 30, 2009 of $806,000 was our largest quarterly sales volume since
the quarter ended August 31, 2008 when we had sales of $852,000. While it is
certainly too soon to place any significance on this development, we are
encouraged with this increase in sales to $806,000 for the most recently
completed quarter compared to the previous four consecutive quarters in which we
had sales of $709,000, $726,000, $594,000 and $733,000.
Unlike fiscal 2008 and 2007, however, in which net income did improve in
each year compared to the prior year, net income in fiscal 2009 decreased by
$396,000 compared to fiscal 2008. While such decrease in net income has
continued into the first nine months of fiscal 2010, such decrease has been much
less with net income decreasing by $17,000 in the nine months ended November 30,
2009 compared to the nine months ended November 30, 2008.
OPERATIONS OUTLOOK
Following a period of readjustment in our business priorities, we were
able to achieved $3,701,000 in sales for fiscal 2006 which was $821,000 or 28.5%
greater than the prior fiscal year. In fiscal 2007, however, 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 fiscal 2007. This continued
into fiscal 2009 in which sales decreased at a much greater rate to $3,092,000
or 14.0% compared to fiscal 2008. During the first nine months of fiscal 2010,
sales have decreased 10.3% compared to the comparable period of fiscal 2009.
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
from 2005 to 2007. While this market remains a source of business for us, we
will likely not be able to achieve the same level of sales in the future which
we achieved from 2005 to 2007 in the security inks market. Nevertheless, we are
confident that with our core group of products, we will be able to maintain
sales in our principal markets, such as the eye protection market and the light
management market, while always seeking new areas for the use of our dyes.
6
As a result of expressions of interest received, management began in
fiscal 2009 to explore strategic alternatives for the Company. In February 2009,
the Company retained Millburn Capital Group as its financial advisor in
connection with the Board's decision to explore strategic alternatives for the
Company, including the potential sale of the Company. In May 2009, the Company
announced that it has entered into a non-binding letter of intent whereby all of
the outstanding capital stock of the Company would be acquired by a strategic
purchaser. Pursuant to an amendment entered into in September 2009, the Company
had agreed to negotiate exclusively with such strategic purchaser until December
15, 2009. In November 2009, such proposed purchaser terminated the non-binding
letter of intent as a result of which the Company's obligation to negotiate
exclusively with such purchaser was terminated as well. The Company is
continuing to pursue strategic and financial options which it believes are in
the best interests of its shareholders including but not limited to the
potential sale to a third party. There can be no assurance that any such
transaction can or will be completed.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of funds is cash flow from operations in the normal
course of selling products. On November 30, 2009, we had working capital of
$2,969,000, a debt to equity ratio of 0.10 to 1, and stockholders' equity of
$3,883,000 compared to working capital of $2,561,000, a debt to equity ratio of
0.15 to 1, and stockholders' equity of $3,549,000 on February 28, 2009. On
November 30, 2009, we had $1,811,000 in cash and cash equivalents, total assets
of $4,269,000 and total liabilities of $386,000, compared to $1,545,000 in cash
and cash equivalents, total assets of $4,096,000 and total liabilities of
$547,000 on February 28, 2009.
Net cash provided by operating activities for the nine months ended
November 30, 2009 was $259,000 which was primarily the result of net income of
$314,000, plus a decrease in prepaid taxes of $227,000, and an increase in taxes
payable of $63,000, offset by increases in accounts receivable of $176,000 and
inventories of $32,000, and a decrease in accrued expenses of $237,000. Net cash
provided by operating activities for the nine months ended November 30, 2008 was
$445,000 which was primarily the result of net income of $331,000, plus
decreases in accounts receivable of $187,000 and increases in accounts payable
of $23,000, offset by increases in inventories of $73,000 and prepaid taxes of
$90,000, and decreases in accrued expenses of $11,000 and taxes payable of
$37,000.
Net cash provided by investing activities for the nine months ended
November 30, 2009 was $7,000 due a decrease in cash value of a life insurance
policy of $35,000 offset by payments for property and equipment of $28,000,
compared to net cash used by investing activities of $82,000 for the nine months
ended November 30, 2008 due to an increase in cash value of a life insurance
policy of $9,000 and payments for property and equipment of $74,000.
For the nine months ended November 30, 2009, there were no cash flows from
or used in financing activities compared to $718,000 used in financing
activities in the nine months ended November 30, 2008 due to dividends paid to
shareholders. There were no comparable dividends paid in the nine months ended
November 30, 2009.
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 2010 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.
7
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 - Effective March 1, 2006, we have adopted
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment". SFAS 123R requires 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, we have adapted the modified-prospective transition method. Prior
periods were not restated to reflect the impact of adopting the new standard. We
determine the fair value of stock-based compensation using the Black-Scholes
option-pricing model, which requires us to make assumptions regarding future
dividends, expected volatility of our stock, and the expected lives of the
options. Under SFAS 123R we also make assumptions regarding the number of
options and the number of shares of restricted stock and performance shares that
will ultimately vest. As a result of the adoption of FAS 123R, stock-based
compensation expense recognized 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.
RECENTLY ADOPTED ACCOUNTING STANDARDS
On March 1, 2008, we adopted Statement of Financial Accounting Standard
("SFAS") No. 157, "Fair Value Measurements" ("FAS 157") for financial assets and
liabilities, which clarifies the meaning of fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements.
Fair value is defined under FAS 157 as the exchange price that would be received
for an asset or paid to transfer a liability in the principal or most
advantageous market for the assets or liabilities in an orderly transaction
between market participants on the measurement date. Subsequent changes in fair
value of these financial assets and liabilities are recognized in earnings or
other comprehensive income when they occur. The effective date of the provisions
of FAS 157 for non-financial assets and liabilities, except for items recognized
at fair value on a recurring basis, was deferred by Financial Accounting
Standards Board ("FASB") Staff Position FAS 157-2 ("FSP FAS 157-2") and are
effective for the fiscal year beginning March 1, 2009. We are currently
evaluating the impact of the provisions for non-financial assets and
liabilities. The adoption of FAS 157 for financial assets and liabilities did
not have an impact on our consolidated financial position or results of
operations.
Also, effective March 1, 2008, we adopted SFAS No. 159 "The Fair Value
Option for Financial Assets and Financial Liabilities" ("FAS 159") which allows
an entity the irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and liabilities on a
contract-by-contract basis. As of February 28, 2009, we have not elected the
fair value option for any additional financial assets and liabilities beyond
those already prescribed by accounting principles generally accepted in the
United States.
8
In October 2008, the FASB issued Staff Position No. FAS 157-3,
"Determining the Fair Value of a Financial Asset in a Market That Is Not Active
("FSP FAS 157-3")." FSP FAS 157-3 clarifies the application of FAS 157 in a
market that is not active and defines additional key criteria in determining the
fair value of a financial asset when the market for that financial asset is not
active. FSP FAS 157-3 applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurements in accordance with
FAS 157. FSP FAS 157-3 was effective upon issuance and the application of FSP
FAS 157-3 did not have a material impact on our consolidated financial
statements.
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 was paid in each of January 2007 and
January 2008, and a supplemental special cash dividend of $0.04 per share was
paid in August 2008. No further dividends have been paid since August 2008
primarily due to the Company's decision to seek strategic alternatives. The
Board determined to postpone any action regarding the declaration of the regular
annual cash dividend for 2009 and beyond pending the outcome of this process.
In August 2001, the Board of Directors of the Company authorized a 500,000
share stock repurchase program. Pursuant to the repurchase program, the Company
may purchase up to 500,000 shares of its common stock in the open market or in
privately negotiated transactions from time to time, based on market prices. The
Company indicated that the timing of the buyback of the Company's shares will be
dictated by overall financial and market conditions and other corporate
considerations. The repurchase program may be suspended without further notice.
There were no repurchases made by the Company of shares of its Common Stock
during the fiscal years ended February 29, 2008 and February 29, 2009, and
during the first nine months of fiscal 2010. In prior years, since the adoption
of the program in August 2001, a total of 331,500 shares were repurchased at a
cumulative cost of $195,766.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
and results of operations, liquidity or capital expenditures.
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
November 30, 2009, 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.
9
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.
Pursuant to the Epolin, Inc. 2008 Stock Incentive Plan, each director
shall receive a stock award annually of 25,000 shares of Common Stock. On
October 21, 2009, a total of 100,000 shares of Common Stock were granted to the
Company's four directors. All of such securities were issued in reliance upon
the exemption from registration pursuant to Section 4(2) of the Securities Act
of 1933, as amended, for "transactions by the issuer not involving any public
offering".
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)
10
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: January 13, 2010 By: /s/ Greg Amato
---------------- --------------
Greg Amato,
Chief Executive Officer
Dated: January 13, 2010 By: /s/ James Ivchenko
---------------- ------------------
James Ivchenko,
President
(Principal Financial Officer)
11
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NINE MONTHS ENDED
NOVEMBER 30, 2009 AND 2008
CONTENTS
PAGE
------
Consolidated Financial Statements:
Consolidated Balance Sheets (Unaudited) 2 - 3
Consolidated Statements of Income Nine Months Ended
(Unaudited) 4
Consolidated Statements of Income Three Months Ended
(Unaudited) 5
Consolidated Statements of Stockholders' Equity (Unaudited) 6
Consolidated Statements of Cash Flows (Unaudited) 7
Notes to Consolidated Financial Statements (Unaudited) 8 - 24
1
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
NOVEMBER 30,
2009 FEBRUARY 28,
(UNAUDITED) 2009
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,811,055 1,544,966
Accounts receivable 547,438 371,443
Inventories 698,982 667,184
Prepaid expenses 58,629 56,298
Prepaid taxes 1,100 228,346
Deferred tax assets-current portion 11,804 18,377
------------ ------------
Total current assets 3,129,008 2,886,614
------------ ------------
PLANT, PROPERTY AND EQUIPMENT - AT COST:
Land 81,000 81,000
Building and improvements 767,300 767,300
Laboratory equipment 191,549 191,549
Furniture and office equipment 260,962 233,387
Leasehold improvements 532,131 532,131
------------ ------------
Total 1,832,942 1,805,367
Less: Accumulated depreciation and amortization 981,142 905,242
------------ ------------
Net plant, property and equipment 851,800 900,125
------------ ------------
OTHER ASSETS:
Deferred tax assets-non current portion 110,044 95,504
Cash value - life insurance policy 178,443 213,452
------------ ------------
Total other assets 288,487 308,956
------------ ------------
Total $ 4,269,295 4,095,695
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
2
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
NOVEMBER 30,
2009 FEBRUARY 28,
(UNAUDITED) 2009
------------ ------------
CURRENT LIABILITIES:
Accounts payable $ 48,029 38,698
Accrued expenses 47,168 284,424
Taxes payable:
Income 62,900 --
Payroll 2,208 2,208
------------ ------------
Total current liabilities 160,305 325,330
OTHER LIABILITIES - Deferred compensation 225,659 221,388
------------ ------------
Total liabilities 385,964 546,718
------------ ------------
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; 13,115,000 and 13,015,000
shares issued, and 12,166,355 and 12,066,355 shares outstanding at
November 30, 2009 and February 28, 2009, repectively 2,364,693 2,364,693
Additional paid-in capital 124,820 104,820
Retained earnings 1,744,900 1,430,546
------------ ------------
Total 4,234,413 3,900,059
Less: Treasury stock - at cost 351,082 351,082
------------ ------------
Total stockholders' equity 3,883,331 3,548,977
------------ ------------
Total $ 4,269,295 4,095,695
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
NINE MONTHS ENDED NOVEMBER 30, 2009 AND 2008
2009 2008
--------------- --------------
SALES $ 2,240,660 2,497,516
--------------- --------------
COST OF SALES AND EXPENSES:
Cost of sales 951,132 1,083,661
Selling, general and administrative 814,658 945,395
--------------- --------------
Total 1,765,790 2,029,056
--------------- --------------
OPERATING INCOME 474,870 468,460
--------------- --------------
OTHER INCOME:
Rental income 4,500 13,500
Interest 20,517 35,881
--------------- --------------
Total 25,017 49,381
--------------- --------------
INCOME BEFORE TAXES 499,887 517,841
INCOME TAXES 185,533 187,021
--------------- --------------
NET INCOME $ 314,354 330,820
=============== ==============
PER SHARE DATA:
Basic earnings per common share $ 0.03 0.03
=============== ==============
Fully diluted earnings per common share $ 0.03 0.03
=============== ==============
Weighted average number of common shares outstanding 12,080,847 11,999,446
=============== ==============
Fully diluted number of common shares outstanding 12,083,747 12,039,882
=============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
4
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30, 2009 AND 2008
2009 2008
--------------- --------------
SALES $ 805,913 733,045
--------------- --------------
COST OF SALES AND EXPENSES:
Cost of sales 344,939 317,154
Selling, general and administrative 262,402 321,330
--------------- --------------
Total 607,341 638,484
--------------- --------------
OPERATING INCOME 198,572 94,561
--------------- --------------
OTHER INCOME:
Rental income -- 4,500
Interest 5,893 4,872
--------------- --------------
Total 5,893 9,372
--------------- --------------
INCOME BEFORE TAXES 204,465 103,933
INCOME TAXES 77,457 28,952
--------------- --------------
NET INCOME $ 127,008 74,981
=============== ==============
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 12,109,834 12,066,355
=============== ==============
Fully diluted number of common shares outstanding 12,112,734 12,106,791
=============== ==============
The accompanying notes are an integral part of these consolidated
financial statements.
5
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED NOVEMBER 30, 2009 AND 2008
ADDITIONAL
NUMBER OF COMMON PAID-IN- RETAINED TREASURY TREASURY STOCKHOLDERS'
SHARES ISSUED STOCK CAPITAL EARNINGS SHARES STOCK EQUITY
------------- ----------- ------------ ---------- -------- --------- -------------
BALANCE - March 1, 2008 12,915,000 $ 2,364,693 76,820 1,820,958 948,645 (351,082) 3,911,389
DIVIDENDS PAID -- -- -- (717,981) -- -- (717,981)
STOCK-BASED COMPENSATION 100,000 -- 28,000 -- -- -- 28,000
NET INCOME -- -- -- 330,820 -- -- 330,820
------------- ----------- ------------ ---------- -------- --------- -------------
BALANCE - November 30, 2008 13,015,000 $ 2,364,693 104,820 1,433,797 948,645 (351,082) 3,552,228
============= =========== ============ ========== ======== ========= =============
BALANCE - March 1, 2009 13,015,000 $ 2,364,693 104,820 1,430,546 948,645 (351,082) 3,548,977
STOCK-BASED COMPENSATION 100,000 -- 20,000 -- -- -- 20,000
NET INCOME -- -- -- 314,354 -- -- 314,354
------------- ----------- ------------ ---------- -------- --------- -------------
BALANCE - November 30, 2009 13,115,000 $ 2,364,693 124,820 1,744,900 948,645 (351,082) 3,883,331
============= =========== ============ ========== ======== ========= =============
The accompanying notes are an integral part of these consolidated
financial statements.
6
EPOLIN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED NOVEMBER 30, 2009 AND 2008
2009 2008
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 314,354 330,820
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 75,900 77,579
Deferred tax expense (7,967) 6,638
Stock-based compensation 20,000 28,000
Obligation under deferred compensation agreement 4,271 5,029
(Increase) decrease in:
Accounts receivable (175,995) 186,538
Inventories (31,798) (72,909)
Prepaid expenses (2,331) (538)
Prepaid taxes 227,246 (90,450)
Increase (decrease) in:
Accounts payable 9,331 22,722
Accrued expenses (237,256) (11,407)
Taxes payable 62,900 (37,400)
----------- ---------
Net cash provided by operating activities 258,655 444,622
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in cash value - life insurance policy 35,009 (8,603)
Payments for property and equipment (27,575) (73,713)
----------- ---------
Net cash provided (used) in investing activities 7,434 (82,316)
----------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES -
Dividends paid -- (717,981)
----------- ---------
INCREASE (DECREASE) IN CASH 266,089 (355,675)
CASH AND CASH EQUIVALENTS:
Beginning 1,544,966 1,980,142
----------- ---------
Ending $ 1,811,055 1,624,467
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
Income taxes paid $ 129,700 273,398
=========== =========
The accompanying notes are an integral part of these consolidated
financial statements.
7
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 unaudited interim consolidated financial statements
as of and for the three months and nine months ended November 30, 2009 have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC") for interim financial reporting and should
be read in conjunction with the Consolidated Financial Statements presented in
the Company's Annual Report on Form 10-K for the fiscal year ended February 28,
2009. 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 consolidated balance sheets, consolidated operating
results and consolidated cash flows for the periods presented in accordance with
accounting principles generally accepted in the United States of America. All
significant intercompany accounts and transactions have been eliminated.
The results of operations for the nine-month interim period ended November
30, 2009 and 2008 are not necessarily indicative of the results of operations
for the fiscal year ending February 28, 2010.
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. Four customers represented 49.7% of the
Company's trade receivables at November 30, 2009.
SOURCE OF RAW MATERIALS - The Company purchases chemicals from several large
chemical manufacturers, further processing them into its saleable products.
Although the Company limits itself to a relatively small number of suppliers, it
is not restricted to such suppliers, and availability of such raw materials is
widespread.
8
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
PRINCIPLES OF CONSOLIDATION - The accompanying Unaudited Consolidated Financial
Statements include the accounts of the Company and Subsidiary. Inter-company
transactions and balances have been eliminated in consolidation. Condensed
Unaudited Consolidating Financial Statements as of November 30, 2009 and for the
nine months then ended are:
CONDENSED CONSOLIDATING BALANCE SHEET
EPOLIN EPOLIN
INC. HOLDING, CORP. ELIMINATIONS CONSOLIDATED
----------- -------------- ------------ ------------
Current assets $ 2,681,165 447,843 -- 3,129,008
Non-current assets 1,588,130 633,509 (1,081,352) 1,140,287
----------- -------------- ------------ ------------
Total $ 4,269,295 1,081,352 (1,081,352) 4,269,295
=========== ============== ============ ============
Total liabilities $ 385,964 24,435 (24,435) 385,964
----------- -------------- ------------ ------------
Stockholders' equity:
Common stock 2,364,693 -- -- 2,364,693
Additional paid-in capital 124,820 -- -- 124,820
Retained earnings 1,744,900 1,056,917 (1,056,917) 1,744,900
Treasury stock (351,082) -- -- (351,082)
----------- -------------- ------------ ------------
Total stockholders' equity 3,883,331 1,056,917 (1,056,917) 3,883,331
----------- -------------- ------------ ------------
Total $ 4,269,295 1,081,352 (1,081,352) 4,269,295
=========== ============== ============ ============
CONDENSED CONSOLIDATING STATEMENT OF INCOME
EPOLIN EPOLIN
INC. HOLDING, CORP. ELIMINATIONS CONSOLIDATED
----------- -------------- ------------ ------------
Sales $ 2,240,660 -- -- 2,240,660
Rental income -- 77,805 (73,305) 4,500
----------- -------------- ------------ ------------
Total 2,240,660 77,805 (73,305) 2,245,160
----------- -------------- ------------ ------------
Cost of sales 951,132 -- -- 951,132
Selling, general and administrative 865,130 22,833 (73,305) 814,658
----------- -------------- ------------ ------------
Total 1,816,262 22,833 (73,305) 1,765,790
----------- -------------- ------------ ------------
Operating income 424,398 54,972 -- 479,370
Other income - interest 14,933 5,584 -- 20,517
----------- -------------- ------------ ------------
Income before taxes 439,331 60,556 -- 499,887
Income taxes 180,733 4,800 -- 185,533
----------- -------------- ------------ ------------
Net income $ 258,598 55,756 -- 314,354
=========== ============== ============ ============
9
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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.
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:
ESTIMATED 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 $75,900 and $77,579 for the
nine months ended November 30, 2009 and 2008, 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.
FASB Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES --
AN INTERPRETATION OF FASB STATEMENT NO. 109 (FIN 48), clarifies the accounting
for uncertainty in income tax positions, as defined. FIN 48 requires, among
other matters, that the Company recognize in its financial statements, the
impact of a tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. The Company
became subject to the provisions of FIN 48 as of March 1, 2007, the beginning of
fiscal year ended 2008, and analyzed the filing positions in all of the federal
and state jurisdictions where it is required to file income tax returns, as well
as all open tax years in these jurisdictions. The adoption of FIN 48 had no
impact on the Company's financial statements for fiscal year ended 2009. As of
November 30, 2009 and 2008, the Company did not record any unrecognized tax
benefits. The Company's policy, if it had unrecognized benefits, is to recognize
accrued interest and penalties related to unrecognized tax benefits as interest
expense and other expense, respectively.
10
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 $33,669 and $24,822 through
November 30, 2009 and 2008, respectively, to maintain compliance with certain
Federal, 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.
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.
ADVERTISING COSTS - Advertising costs, included in operating expenses, are
expensed as incurred. Advertising expenses amounted to $13,096 and $13,356 for
the nine months ended November 30, 2009 and 2008, respectively.
11
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
STOCK-BASED COMPENSATION - Effective March 1, 2006, the Company has adopted
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment". SFAS 123R requires 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. The Company determines the fair value of stock-based compensation
using the Black-Scholes option-pricing model, which requires the Company to make
assumptions regarding future dividends, expected volatility of its stock, and
the expected lives of the options. Under SFAS 123R the Company also makes
assumptions regarding the number of options and the number of shares of
restricted stock and performance shares that will ultimately vest. As a result
of the adoption of FAS 123R, stock-based compensation expense recognized
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.
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 nine months ended November 30, 2009 and 2008 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:
YEARS ENDED
-----------------------
NOVEMBER 30,
-----------------------
2009 2008
---------- ----------
Weighted average expected life in years 2 3
Dividends per share -- 0.06
Volatility 7.0% 7.0%
Risk-free interest rate 2.8% 4.3%
12
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
RECENTLY ADOPTED ACCOUNTING STANDARDS - On March 1, 2008, the Company adopted
Statement of Financial Accounting Standard ("SFAS") No. 157, "Fair Value
Measurements" ("FAS 157") for financial assets and liabilities, which clarifies
the meaning of fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. Fair value is defined under
FAS 157 as the exchange price that would be received for an asset or paid to
transfer a liability in the principal or most advantageous market for the assets
or liabilities in an orderly transaction between market participants on the
measurement date. Subsequent changes in fair value of these financial assets and
liabilities are recognized in earnings or other comprehensive income when they
occur. The effective date of the provisions of FAS 157 for non-financial assets
and liabilities, except for items recognized at fair value on a recurring basis,
was deferred by Financial Accounting Standards Board ("FASB") Staff Position FAS
157-2 ("FSP FAS 157-2") and are effective for the fiscal year beginning March 1,
2009. The Company is currently evaluating the impact of the provisions for
non-financial assets and liabilities. The adoption of FAS 157 for financial
assets and liabilities did not have an impact on the Company's consolidated
financial position or results of operations. For additional information on the
fair value of financial assets and liabilities, see Note N - Fair Value
Measurements.
Also, effective March 1, 2008, the Company adopted SFAS No. 159 "The Fair
Value Option for Financial Assets and Financial Liabilities" ("FAS 159") which
allows an entity the irrevocable option to elect fair value for the initial and
subsequent measurement for certain financial assets and liabilities on a
contract-by-contract basis. As of November 30, 2009, the Company has not elected
the fair value option for any additional financial assets and liabilities beyond
those already prescribed by accounting principles generally accepted in the
United States.
In October 2008, the FASB issued Staff Position No. FAS 157-3,
"Determining the Fair Value of a Financial Asset in a Market That Is Not Active
("FSP FAS 157-3")." FSP FAS 157-3 clarifies the application of FAS 157 in a
market that is not active and defines additional key criteria in determining the
fair value of a financial asset when the market for that financial asset is not
active. FSP FAS 157-3 applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurements in accordance with
FAS 157. FSP FAS 157-3 was effective upon issuance and the application of FSP
FAS 157-3 did not have a material impact on our consolidated financial
statements.
13
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE C - INCOME TAXES:
1. Federal and State deferred tax assets include:
NOVEMBER 30,
-------------------
2009 2008
--------- -------
Temporary differences:
Accelerated amortization $ 8,761 11,877
Deferred compensation 97,033 85,586
Stock-based compensation 16,054 16,054
--------- -------
Total 121,848 113,517
Less: Current portion 11,804 18,770
--------- -------
Non-current portion $ 110,044 94,747
========= =======
2. Income tax:
NOVEMBER 30,
-------------------
2009 2008
--------- -------
Current:
Federal $ 150,200 142,776
State 43,300 37,607
--------- -------
Total current 193,500 180,383
--------- -------
Deferred:
Federal (8,590) 4,179
State 623 2,459
--------- -------
Total deferred (7,967) 6,638
--------- -------
Total $ 185,533 187,021
========= =======
14
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE D - TREASURY STOCK:
Consists of 948,645 shares at a net cost of $351,082, as of November 30, 2009
and February 28, 2009, respectively. There were no purchases of treasury shares
made during the nine months ended November 30, 2009 and the year ended February
28, 2009, 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 nine months ended November 30, 2009, approximately 38.0%
of sales were to three customers. During the nine months ended November 30,
2008, approximately 31.0% of sales were to three customers.
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, and continuing on a
month-to-month basis thereafter through May 31, 2009. Under the terms of the
agreement, the tenant is to pay a base rent of $18,000 per year. The tenant is
currently in arrears.
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 $293,030 and
$342,611 were included in cost of sales for the nine months ended November 30,
2009 and 2008, respectively. Expenditures for the fiscal year ended 2010 are
projected to remain at approximately the same level as in fiscal 2009.
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 $34,586 and
$40,905 for the nine months ended November 30, 2009 and 2008, respectively.
15
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 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 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 November
30, 2009, options granted totaled 1,242,000, options exercised totaled 686,000;
options cancelled or expired for all years totaled 311,000.
A summary of the status of the Company's 1998 stock option plan as of
November 30, 2009, and the changes during the nine months ended November 30,
2009 and 2008 is presented below:
WEIGHTED-AVERAGE
FIXED OPTIONS: SHARES EXERCISE PRICE
- -------------- ------- ----------------
Balance - February 28, 2009 316,000 $.50
=======
Balance - November 30, 2009 245,000 $.49
=======
Exercisable at November 30, 2009 245,000 $.49
=======
STOCK OPTION PLANS - The following table summarizes information about fixed
stock options outstanding at November 30, 2009:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
- ----------------------------------------------- ------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICE AT 11/31/09 CONTRACTUAL LIFE AT 11/31/09 EXERCISE PRICE
- -------------- ----------- ---------------- ----------- ----------------
$.41 95,000 4.2 95,000 .23
.54 150,000 0.6 150,000 .68
16
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE H - EMPLOYEE BENEFITS (CONTINUED):
STOCK OPTION AND STOCK-BASED COMPENSATION PLAN - On June 18, 2008, the Company's
Board of Directors approved and adopted the Epolin, Inc. 2008 Stock Incentive
Plan (the "2008 Plan"), and authorized us to issue up to 1,500,000 shares of our
Common Stock under the 2008 Plan (subject to adjustment to take account of stock
dividends, stock splits, recapitalizations and similar corporate events). Under
the 2008 Plan, the Company will have the right to issue stock options, stock
appreciation rights, restricted stock, Common Stock or convertible securities
that may or may not be subject to restrictions or forfeiture, restricted stock
units, performance shares and performance units. With the adoption of the new
2008 Plan, the 1998 Plan will terminate, and the Company will no longer be able
to grant options under it. However, options that have already been granted under
the 1998 Plan will continue to be outstanding.
The purpose of the Plan is to provide officers, other employees and
directors of, and consultants to, the Company, an incentive to (a) enter into
and remain in the Company's service or to provide services to the Company, (b)
enhance the Company's long-term performance, (c) acquire a proprietary interest
in the Company.
The Compensation Committee or another committee of our Board of Directors
(or if there is no committee, the Board of Directors itself) will administer the
Plan. It will determine the persons to whom awards will be made, the types of
awards that will be made to particular persons, the numbers of shares to which
awards will relate, the dates when awards will vest in whole or in part and the
other terms of awards, including the payments, if any, that participants will
have to make to benefit from awards.
The 2008 Plan provides that on September 1 of each year, commencing
September 1, 2008, each person who serves as a Director on such date shall
automatically receive a stock award of 25,000 shares of Common Stock. The dollar
value of the shares of Common Stock granted on September 1 of each year is
calculated based upon the fair market value of our Common Stock at the date of
grant. Stock-based compensation in the amount of $20,000 and $28,000 was charged
to selling, general and administrative expenses were for the nine months ended
November 30, 2009 and 2008, respectively.
17
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE I - 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:
NINE MONTHS ENDED
NOVEMBER 30,
------------------------
2009 2008
----------- ----------
United States $ 1,869,034 1,724,971
Asia 161,395 435,500
Europe 205,576 336,445
Other nations 4,655 600
----------- ----------
Total $ 2,240,660 2,497,516
----------- ----------
Three customers, located in the United States and Asia, accounted for more
than 10% of revenues from continuing operations. These customers accounted for
38.0% of sales of infrared dies.
Long-lived assets include net plant, property and equipment. The Company
had long-lived assets of $851,800 and $900,125 located in the United States at
November 30, 2009 and February 28, 2009, respectively.
18
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE J - ACCRUED EXPENSES:
Accrued expenses consisted of the following as of November 30, 2009 and
2008, respectively:
NOVEMBER 30, FEBRUARY 28,
2009 2009
------------ ------------
Salaries and wages $ 22,248 --
Purchases 4,060 10,980
Commissions 6,715 8,444
Rent 8,145 --
Employment agreement -- 240,000
Professional fees 6,000 25,000
------------ ------------
Total accrued expenses $ 47,168 284,424
------------ ------------
NOTE K - INVENTORIES:
NOVEMBER 30, FEBRUARY 28,
2009 2009
------------ ------------
Raw materials and supplies $ 150,752 138,730
Work in process 132,379 117,314
Finished goods 415,851 411,140
Total $ 698,982 667,184
------------ ------------
19
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------------- ------------------------
2009 2008 2009 2008
----------- ---------- ---------- ----------
BASIC EARNINGS PER COMMON SHARE:
Net income $ 127,008 74,981 314,354 330,820
----------- ---------- ---------- ----------
Average common shares
outstanding 12,109,834 12,066,355 12,080,847 11,999,446
----------- ---------- ---------- ----------
Basic earnings per
common share $ 0.01 0.01 0.03 0.03
----------- ---------- ---------- ----------
DILUTED EARNINGS PER COMMON SHARE:
Net income $ 127,008 74,981 314,354 330,820
----------- ---------- ---------- ----------
Average common shares
outstanding 12,109,834 12,066,355 12,080,847 11,999,446
Common shares issuable with respect
to options issued to employees
with a dilutive effect 2,900 40,436 2,900 40,436
----------- ---------- ---------- ----------
Total diluted common shares
outstanding 12,112,734 12,106,791 12,083,747 12,039,882
----------- ---------- ---------- ----------
Diluted earnings per
common share $ 0.01 0.01 0.03 0.03
----------- ---------- ---------- ----------
20
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
$73,305 for the nine months ended November 30, 2009 and 2008, respectively.
Future minimum payments for the current option period:
FISCAL YEARS ENDING FEBRUARY:
-----------------------------
2010 $24,435
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.
In connection with this agreement, deferred compensation in the amount of
$4,270 and $5,031 was charged to selling, general and administrative expenses
for the nine months ended November 30, 2009 and 2008, respectively.
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.
21
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
November 30, 2008 was $199,801.
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.
22
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE N - FAIR VALUE MEASUREMENTS:
Effective March 1, 2008, the Company adopted FAS 157, which defines fair
value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants at the measurement date. FAS 157 establishes a three-level fair
value hierarchy that prioritizes the inputs used to measure fair value. This
hierarchy requires entities to maximize the use of observable inputs and
minimize the use of unobservable inputs. The three levels of inputs used to
measure fair value are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included in Level 1,
such as quoted prices for similar assets and liabilities in active
markets; quoted prices for identical or similar assets and liabilities
in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data.
Level 3 - Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities. This includes certain pricing models, discounted cash
flow methodologies and similar techniques that use significant
unobservable inputs.
All financial assets that are measured at fair value on a recurring basis (at
least annually) have been segregated into the most appropriate level within the
fair value hierarchy based on the inputs used to determine the fair value at the
measurement date. These assets measured at fair value on a recurring basis are
summarized below:
NOVEMBER 30, 2009 FEBRUARY 28, 2009
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
ASSETS:
Cash and cash equivalents $1,811,055 1,811,055 1,544,966 1,544,966
Other assets:
Cash value - life insurance 178,443 178,443 213,452 213,452
---------- ---------- ---------- ----------
Total assets at fair value $1,989,498 1,989,498 1,758,418 1,758,418
========== ========== ========== ==========
LIABILITIES:
Deferred compensation $ 225,659 225,659 221,388 221,388
========== ========== ========== ==========
23
EPOLIN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE N - DIVIDENDS:
In July 2008, the Company's Board of Directors declared a cash dividend of
$0.04 per share on all common shares outstanding. The dividend, in the amount of
$478,654 was paid on August 7, 2008 to shareholders of record at the close of
business on July 24, 2008.
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.
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.
24