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Epolin, Inc., (the "Company") is a manufacturing and research and development company which was incorporated In the State of New Jersey in May 1984. The Company is principally engaged in the development, production and sale of near infrared dyes to the optical industry for laser protection and for welding applications and other dyes, specialty chemical products that serve as intermediates and additives used in the adhesive, plastic, aerospace, pharmaceutical, flavors and fragrance industries to a group of customers primarily in the United States, Europe, Australia and the Far East.
The Company's products primarily serve as intermediates, additives and processing aids for complex chemical formulations. The Company markets its products to other companies who are in need of low level quantities of unique chemicals which provide specialized functions and are necessary elements in complex chemical mixtures manufactured by the Company's respective customers. These products are produced on a low volume basis in chemical production equipment ranging from 50 liter size flasks to two hundred gallon reactors. The Company sustains this business because its customers find it economically inefficient to manufacture such low volume specialty chemicals for their own use. Raw materials utilized in connection with the preparation of specialty chemical products are either available from chemical suppliers or created by the Company in its own facilities.
This segment of the Company's business is manufactured on an individual basis to meet each customers respective needs. Presently, the Company provides products used as components in plastics, adhesives and coatings, flavors and odorant mixtures, pharmaceutical and medical products and aerospace materials.
Although the specialty chemical business currently commands approximately 22% of total sales, the Company does not expect this segment of its business to grow. It has, instead, made a strong research and development commitment to the growth of the specialty dye business. This market is described in segments in the following subsections.
Dyes for Laser Protection
The Company has sold near infrared dyes since 1992 to customers who manufacture and sell eyewear to protect personnel from the harmful effects of laser light. In the first stages of the Company's marketing efforts, the Company sold dyes that had a special capability to absorb the emissions of the neodymium-YAG laser. This laser was and is used by the military for range finders carried by tanks. Following the Company's success in selling dyes for military usage, new markets were developed selling to manufacturers of safety eyewear for personnel who worked with lasers or were exposed to very strong sources of infrared radiation.
The Company sells dyes into a market that requires the use of absorptive dyes for face shields, helmets and goggles to protect personnel from the harmful effects of radiation from welding. Nationally prescribed specifications now state that welding shields must absorb specific levels of the infrared generated by the welding arc in order to protect personnel from eye damage. The Company expects to see this welding market grow significantly in the future not only because of increased sensitivity to the health effects of conventional welding methods but also because of the increasing use of lasers for welding. These instruments will require closer monitoring for exposure of personnel to laser light but will also require personnel peripheral to the welding operation to be protected.
Dyes for Filters
A smaller but not well characterized market exists for filters that block certain frequencies in the near infrared and visible spectrum. Most of the inquiries come from instrument makers who purchase glass filters containing rare earth oxides. These filters are expensive and are subject to chipping, shattering and other breakage. Management believes the use of a clear plastic filter containing the Company's dyes would lower cost and increase reliability. This high value added market is under development. No assurance can be given that the Company will be able to successfully develop this market.
Dyes for Heat Shields
It has been shown in experimental and theoretical studies that a window containing near infrared dyes is capable of reducing the internal heat load of a structure by 40 to 50 percent. This type of application of infrared dyes is reported in use for sun roofs of automobiles in Japan. The specific advantage offered by near infrared dyes is heat reduction coupled with good visible transparency. This allows high visibility while, at the same time, effectively blocking the frequencies responsible for transporting heat. Management believes near infrared dyes can be effectively used in a wide variety of applications as heat shields. The Company has set its sights on this potential market by initiating research and development studies leading to dyes or dye combinations that can meet the tight requirements demanded by this market.
Dyes for Security Inks
Certain of the near infrared dyes absorb very little of the visible spectrum. These can be used at low concentration in inks and paints and not be visually detected. However, when viewed by reflection of an infrared laser or lamp, the presence of dye is easily seen as a black marking. Mechanical "readers" can be used to detect the presence of dyes by responding with a simple "go, no-go" signal. Management believes that the industrial security and currency marking is potentially a large volume application for these dyes. No assurance can be given that the Company will be able to successfully develop this market.
Dyes for Hard Coatings
There are a number of transparent plastics that are difficult to process with near infrared dyes because they are formed at temperatures that exceed the dye's thermal stability. As a result, some of the dye is destroyed in the process. For example, a number of lens manufacturers cannot extrude or injection mold polycarbonate pellets with these dyes. However, they still want to incorporate the dyes in their lenses. Since all polycarbonate lenses and panels have a very soft surface, they must be protected from abrasion by using a hard cost on the surface. The Company believes that a successful way to incorporate the dye would be to place it in the hard coating. Another, larger scale application, is to use the dye in a coating on shatterproof windows to act as a heat shield. In this application the structure to be molded is too large for incorporating most near infrared dyes because such large structures have to be heated to too high a temperature and remain at too high a temperature for the dye to survive. Management believes coatings, in the form of a hard coat, is a practical solution for the use of near infrared dyes. The Company has formed a cooperative partnership with the Exxene Corporation, a leader in the hard coat field, and both companies plan to pursue this market vigorously.
Brief Fundamental Analysis
Our analysis will deal with estimated values for fiscal 99 commencing on April 1, 1998. Upon review of Select Financial Data Box A, we calculated certain valuations based upon certain sales and earnings figures generated from management. In our opinion, if one considers the estimated revenue growth over fiscal 98, that is almost 100% and the earnings growth by 125%, we must assign a PE valuation that at least offers a small reward for such tempting numbers. Since we are very conservative in nature and realize that EPLN is very small and most definitely under all radar screens and is shunned by most, we will assign an estimate PE multiple of 13x. If EPLN earns .09, as management anticipates, and in order to be valued with a PE of 13, then our share price should be at least $1.17 - a far cry from the initial recommended price of 33¢/share. By the end of fiscal 99 with an estimated book value of24¢, in our opinion EPLN could trade at 4x book or 96¢. Using price to cash flow, EPLN should trade at 10x cash flow or $1.00.
Finally, PSR estimate for fiscal 99 is 1.2x. In our opinion, the valuation of 3x could be considered appropriate. If EPLN was to trade at 3x sales, it would have a valuation of 99¢. Please remember, S.A. Advisory is very conservative and strict in our evaluation of micro-mini caps. Many would assume that our parameters are too low. That may be the case, but we would rather be conservative than overly optimistic. Remember that investing in micro-mini cap or even large caps, risk is always present.
Why We Like it
epolin, Inc., in our opinion, has all the ingredients of a solidly run growth oriented mini-micro cap that is extremely unique, not only for the nature of its business, but for the pristine condition of its balance, as well as income statement.
We believe that certain investor types will migrate towards EPLN, that is, ones that favor solid fundamentals consistent sales and earnings, ample cash, no debt and sizable NOL.
One must also be impressed by the relatively small salaries that management receives. EPLN has a unique business that, as mentioned earlier in this report, is currently being reviewed by two potential suitors. This we find is very unusual for such a small public entity. This alone indicates that smart money sees something unique and promising. A final element to the EPLN story that we find extremely positive is the announcement of a stock buy back program dated March 4, 1998.
If you are looking for a strong mini-micro investment opportunity for your diverse portfolio with limited downside risk and promising upside potential over the long term, EPLN might be for you.
We intend to monitor this opportunity in our Summer Portfolio 1997 #1 and #2 for percentage gain performance.For more information: Corporate #201-465-9495 or email@example.com. Broker Contact: Mike Chesler at 1-800-331-1355.
Chart A - Select Financial Data (Year ended Feb) 9 months 1995A 1996A 1997A 1998A 1998E 1999E Revenue $889K $1,384,410 $1,414,226 $1,233,301 $1.6 mil $3 mil Net income $11,322 $626,163 $209,551 $288,509 $465K $1.05 mil Net income/sh (loss) -- .05 .02 .02 .04 .09 Shares outstanding 10.6 mil 11.4 mil 11.6 mil 11.6 mil 11.6 mil 11.6 mil Cash 57K 232K 252K 598K 774K 1.7 mil Book value .045 .10 .12 .14 .15 .24 Cash flow 80K $696,840 $274,573 $332,996 $533,509 $1.1 mil Price to cash flow NM .83x 5x NM 7.1x 3.5x PE valuation NM 1x 5x NM 8.25x 3.6x Value used for share price .03 .05 .10 .33 .33 .33 A=actual E=estimate NM = not meaningful
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