U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1996.
[ ] 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 0-7441
-------------------------------------------------------
SIERRA MONITOR CORPORATION
(Name of small business issuer in its charter)
California 95-2481914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1991 Tarob Court
Milpitas, California 95035
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 262-6611
-------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
-------------------------------------------------------
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Registrant's revenues for the fiscal year ended December 31, 1996 were
$5,040,177. The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 15, 1997 was approximately
$1,230,978 based upon the last reported sale. For purposes of this disclosure,
Common Stock held by persons who hold more than 5% of the outstanding voting
shares and Common Stock held by officers and directors of the Registrant have
been excluded in that such persons may be deemed to be "affiliates" as that term
is defined under the rules and regulations promulgated under the Securities Act
of 1933. This determination is not necessarily conclusive.
The number of shares of the Registrant's Common Stock outstanding as of March
15, 1997 was 10,332,513.
DOCUMENTS INCORPORATED BY REFERENCE
Items 9, 10 & 11 of Part III of this Annual Report on Form 10-KSB incorporate
information by reference from the Registrant's Information Statement for the
Annual Shareholders' Meeting to be held on May 14, 1997.
Transitional Small Business Disclosure Format Yes ; No X
--- ---
<PAGE>
PART I
Item 1. Description of Business.
Sierra Monitor Corporation ("SMC" or the "Company") was founded in 1978 to
design and develop hazardous gas monitoring devices for the protection of
personnel and facilities in industrial work places.
Products manufactured by the Company are sold primarily to oil and gas
drilling and refining companies, chemical plants, waste-water treatment plants,
telecommunications companies, parking garages and landfill rehabilitation
projects.
Because all of the Company's products are marketed to all such industries,
the Company considers that these are one business segment. Substantially all of
the revenues reported in Part II Item 6 are attributable to sales to that
segment.
The Company designs, manufactures and markets products which detect
combustible and toxic gases for the protection of personnel and facilities.
Gases which create a hazard to people and facilities are those manufactured or
that occur naturally in a wide variety of locations in the workplace, commercial
areas and homes. Although the need to monitor gases at very low concentrations
has been recognized for many years in industries such as mining, the need for
monitoring devices continues to expand as more hazards are identified and as
more stringent government regulations have been passed. The motivation for
installation of gas detection devices is driven by Occupational Safety and
Health Administration (OSHA), state and local governing bodies, insurance
companies and industry safety professionals.
Gas monitoring instruments are usually categorized for fixed or portable
applications. Most manufacturers tend to specialize in only one of these
categories because manufacturing methods are different and the channels of
distribution are different. The Company participates primarily in the fixed
installation market which characteristically requires higher levels of technical
capability to develop and sell the products.
The Company capitalizes on its expertise in microprocessor based control
hardware to develop products which incorporate functions not found in many
competitive instruments. In this respect, the Company markets products under the
concept of "Gas Risk Management". Gas Risk Management utilizes features such as
recorded event information, and graphical displays on central computers, to
allow users to identify hazards and problems before they evolve into incidents
which, at a minimum, could cause production delays, evacuation of personnel and
potentially even damage and injury.
The Company maintains research and development programs to enhance
existing products and to develop new products. During the last three fiscal
years, the research and development expenses, which include costs for sustaining
engineering, have averaged approximately 8% of sales. In 1996, research and
development expenses totaled $439,017 compared to $406,278 in 1995 and $368,738
in 1994.
The Company's products are sold through a network of sales representatives
managed by regional managers. There are currently 30 authorized representatives
with a total of 37 sales offices in the United States. The majority of the
Company's representatives have exclusive territories and the sales agreements
with each representative restricts them from representing competing lines. The
Company's internal sales organization includes a Sales Manager, four Regional
Sales Managers, an Inside Sales Manager and support personnel. In addition to
its primary factory and office facility in California, the Company maintains
regional sales offices in Illinois, Pennsylvania and Texas.
-1-
<PAGE>
At December 31, 1996, the Company had 34 employees, of whom 5 were in
research and development; 10 were in marketing, sales and service; 3 were in
general administration; and 16 were in operations and manufacturing. At that
date, 31 of the Company's employees were located in Milpitas, California, 1 was
located in Chicago, Illinois, 1 was located in Philadelphia, Pennsylvania, and 1
was located in HoustonTexas. None of the Company's employees are represented by
a labor union. The Company believes that its relationship with its employees is
satisfactory.
The demand for gas monitoring instruments is not seasonal and there are no
customers to whom sales exceed 10% of total annual sales. Within the market
sector, the telecommunications industry and the petrochemical industry each
account for up to approximately 20% of the Company's sales and, as such,
economic factors or labor problems in those industries could affect Company
sales to those industries.
The commercial order backlog for the Company' products at December 31,
1996 was $539,694 compared with $659,184 at December 31, 1995. The backlog
includes orders for which the Company has not yet received engineering release
from the customer. Since the Company generally ships its products within the
same month that it receives a purchase order and engineering release from the
customer for such products, the Company believes that its backlog at any
particular time is generally not indicative of the level of future sales.
In February 1993, the Company was awarded a prime contract for development
and manufacture of gas monitoring systems to be installed aboard U.S. Navy
aircraft carriers (the "Navy Contract"). The total contract was at a fixed price
of approximately $2,400,000. Shipment of the systems was completed in 1994 and
none of the reported year end backlog for 1995 and 1996 is attributable to the
Navy Contract.
Representatives in foreign countries have various agreements to promote
the Company's products but no formal international marketing program exists. In
both 1995 and 1996, sales to international customers were less than 10% of total
sales in each year. The Company has no assets in any foreign countries.
The gas detection and monitoring industry is highly competitive. Most of
the Company's competitors have far greater financial, marketing and
manufacturing resources than the Company by virtue of their relationships with
larger companies as divisions or subsidiaries. The principal competitive factors
in the industry are reliability, ease of use, product support, and price. The
Company's products compete with systems offered by Bacharach Inc., Detector
Electronics Corporation, National Draeger, Gastech Inc., General Monitors Inc.,
Mine Safety Appliance Company, Seiger, Ltd., and Sensidyne Inc.
Selected Financial Data (Not covered by Independent Auditors' Report).
The following table sets forth the required financial data for each of the
last five fiscal periods ended December 31, 1992 through 1996:
<TABLE>
Years Ended December 31
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net sales $5,040,177 $4,773,464 $5,831,324 $4,921,271 $3,475,514
Net income $149,430 $18,024 $516,463 $749,628 $21,016
Net income per share $0.01 $0.00 $0.05 $0.08 $0.00
Total assets $2,924,132 $2,800,251 $2,665,097 $2,137,065 $1,455,620
Long term liabilities $ - $ - $ - $ - $ -
Cash distributions per common share none none none none none
-2-
</TABLE>
<PAGE>
Certain Factors That May Affect Future Results
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below and elsewhere in this report. The Company's future operating results
may be affected by a number of factors, including general economic conditions in
both foreign and domestic markets, cyclical factors affecting the Company's
industry, lack of growth in the Company's end-markets, and the Company's ability
to develop, manufacture, and sell both new and existing products at a profitable
yet competitive price.
The industry in which the Company competes is highly competitive and the
Company expects such competition to continue in the future. Most of the
Company's competitors are larger than the Company and have substantially greater
financial, technical, marketing and manufacturing resources. While the Company
has invested in new products, there can be no assurance that it can continue to
introduce new products on a timely basis or that certain of its products will
not be rendered non competitive or obsolete by its competitors.
Item 2. Description of Property.
The Company's principal executive, administrative, manufacturing and
engineering operations are located in a 15,000 square foot leased facility in
Milpitas, California. This facility is occupied under a lease expiring March 31,
2001. Management considers that the current facility is adequate for the present
level of operations and that additional office and factory space is available in
the immediate vicinity. The Company also leases sales offices near Chicago,
Illinois; Philadelphia, Pennsylvania; and Houston, Texas.
Item 3. Legal Proceedings.
To the knowledge of the Company's management, there are no legal
proceedings pending to which the Company is a party or to which the Company's
property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters to a vote of security holders
during the fourth quarter of the fiscal year ended December 31, 1996.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
(a) There is not an active market for the Company's stock and the
Company's stock is currently traded solely on the Nasdaq over-the-counter
Bulletin Board. To the Company's knowledge, there is only infrequent trading in
limited volume. The Company understands that trades in Common Stock from
September 1996 to December 1996 have been effected at prices ranging from $0.34
to $0.44 per share. Because trading of the Company's stock is so infrequent, the
Company is unable to provide historic price information.
(b) As of March 15, 1997 there were approximately 357 holders of record of
the Company's Common Stock.
(c) The Company has never paid cash dividends on its Common Stock. The
Company presently intends to retain any future earning to finance operations and
the further development of the Company's business and does not presently intend
to disperse any cash dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
Fiscal 1996 vs. Fiscal 1995
For the year ended December 31, 1996, the Company reported net sales of
$5,040,177 compared to net sales of $4,773,464 in the prior year. Income before
income taxes was $139,930 in 1996 compared to $30,524 in the previous year. Net
income in 1996 was $149,430 due to the effect of an income tax benefit of
$9,500. The components of the income tax benefit are described in note 7 to the
financial statements incorporated in this report as Part IV, Item 13 (a). The
increase in net income was primarily due to the higher level of sales without
substantial increases in fixed costs.
Sales increased by 5.6% over the prior year. There were no significant
changes in selling prices. The increase in net sales is primarily the result of
the improved volume of sales of gas detection products used by telephone
companies. There were no significant sales of the company's new environment
controller for telephone company applications. Sales of other gas detection
products remained approximately the same as the prior year.
Gross profit as a percent of sales was 61.6% compared to 61.2% in the
prior year. Manufacturing labor costs and materials costs, as a percent of
sales, remained constant compared with the previous year's commercial sales.
Research and development expenses, which include sustaining engineering
for existing products, were $439,017, or 8.7% of net sales, in the year ended
December 31, 1996 compared to $406,278, or 8.5% of sales, in the year ended
December 31, 1995. Research and development expenses in, 1996 and 1995, include
costs of approximately $75,300 and $48,400, respectively, for outside
consultants and other purchased services used in the development of a new
product which was released for sale in telephone company applications late in
the second half of 1996.
Selling and marketing expenses decreased in 1996 to $1,662,602 or 33.0% of
net sales, from $1,668,079, or 34.9% of net sales, in the prior year. There were
no significant changes in selling and marketing expenses in 1996 compared to
1995 except that commissions paid to independent representatives
-4-
<PAGE>
were 8.5% of sales compared to 9.1% in the prior year. Commissions to
independent representatives vary as a percent of sales due to product mix and
channels of distibution used to sell products.
General and administrative expenses increased to $891,197 in 1996 from
$844,929 in 1995. The increase is primarily due to higher salary, wage and
benefit expenses which were incurred to support increased material control and
accounting activities.
Net interest income in 1996 was $28,417 compared with net interest income
of $30,479 in 1995. Due to the fact that the Company did not have any
outstanding long-term debt during 1996, the Company did not incur any interest
expense for the year.
An income tax benefit of $9,500 in 1996 resulted from changes in deferred
tax assets and liabilities and a change in the valuation allowance, compared to
tax a expense of $12,500 in 1995.
Fiscal 1995 vs. Fiscal 1994
For the year ended December 31, 1995, the Company reported net sales of
$4,773,464 compared to net sales of $5,831,324 in the prior year. Income before
income taxes was $30,524 in 1995 compared to $661,463 in the previous year. The
sales reported for 1994 included revenue from the Navy Contract of $1,870,367.
In 1995 there were no revenues from the Navy Contract but follow-on sales
contributed $245,100. The Company anticipates sales at approximately the same
level in future years as the Navy purchases spare parts, replacement sensors and
individual monitoring systems.
Sales of commercial products in the year ended December 31, 1995, after
exclusion of the Navy Contract, increased by 20.5% over the prior year. There
were no significant changes in selling prices and the increase is the result of
growth of sales of the Company's primary commercial product, the Sentry
microprocessor based system, combined with a return to normal sales levels of
gas monitors used in telephone company applications. During 1995, the Company
focused sales efforts on Sentry sales through increased advertising, various
incentives to representatives, and internal promotion programs.
Gross profit as a percent of sales was 61.2% in 1995 compared to 57.7% in
1994. The lower margins in 1994 were due to the Navy Contract. The results for
1995 reflect margin levels for sales of commercial products. Manufacturing labor
costs and materials costs, as a percent of sales, remained constant in
1995compared with the previous year's commercial sales.
Research and development expenses, which include sustaining engineering
for existing products, were $406,278, or 8.5% of net sales, in the year ended
December 31, 1995 compared to $386,738, or 6.6% of sales, in the year ended
December 31, 1994. Research and development expenses in both years, 1994 and
1995, include costs for outside consultants and other purchased services used in
the development of a new product which was not released for sale by the end of
1995.
Selling and marketing expenses increased in 1995 to $1,668,079 or 34.9% of
net sales, from $1,500,614, or 25.7% of net sales, in the prior year. In 1994
there were no significant selling expenses associated with revenues from the
Navy Contract. After adjustment for commercial products only, the selling and
marketing expenses for 1994 were 37.8% of sales. The lower selling and marketing
cost as a percentage of commercial sales in 1995 was due to economies of scale.
As sales increased, commission costs also increased but most other categories of
expenses tended to remain constant. The Company believes that the level of
selling and marketing expense for 1995 was necessary to continue sales growth.
-5-
<PAGE>
General and administrative expenses increased to $844,929 in 1995 from
$825,838 in 1994. There were no significant changes in general and
administration expenses.
Net interest income in 1995 was $30,479 compared with net interest income
of $7,223 in 1994. During 1995, the Company maintained higher levels of short
term investments which earned more interest income than 1994. The Company did
not incur any interest expense for the year ended December 31, 1995.
Income tax expense for 1995 was $12,500 compared to $145,000 in 1994. The
lower taxes are due to lower income before tax and tax expense timing
differences.
Liquidity and Capital Resources
The Company's working capital increased $164,895 in 1996 compared to an
increase of $32,164 in 1995. Working capital was $ 2,179,034 at December 31,
1996 compared to $2,014,140 at December 31, 1995.
Inventory levels increased 18.6% during 1996. Inventory on hand was
$717,865 at December 31, 1996. The increase in inventory is necessary to support
higher production levels due to increased sales and also to support production
of the Company's new product for telephone company applications.
The Company had no long term liabilities and no bank borrowing at December
31, 1996.
The Company maintains a $250,000 line of credit, secured by accounts
receivable, with its commercial bank. There were no borrowings against the line
of credit in 1996. The Company is in full compliance with the terms of the line
of credit and currently anticipates that it will be renewed upon its expiration
in June 1997.
At December 31, 1996 the balance sheet reflected $478,910 of cash and cash
equivalents, $246,781 of short term investments and $1,040,989 of net accounts
receivable. Total cash, cash equivalents and short term investments of $725,691
at the end of 1996 were $161,987 lower than the end of 1995. The reduction is
primarily the result of increases in inventory and accounts receivable due to
the higher level of sales during the fourth quarter of 1996. The short term
investments consist of certain certificates of deposit with original maturities
greater than 90 days. Management believes that its present resources, including
cash, cash equivalents, bank line of credit and accounts receivable, are
sufficient to fund its anticipated level of operations through December 31,
1997.
Future Results
The Company's future operating results may be affected by a number of
factors, including general economic conditions in both foreign and domestic
markets, cyclical factors affecting the Company's industry, lack of growth in
the Company's end-markets, and the Company's ability to develop, manufacture,
and sell both new and existing products at a profitable but competitive price.
Item 7. Financial Statements and Supplementary Data.
Reference is made to the financial statements and supplementary data set
forth in this Form 10-KSB report, as indexed in Item 13 of Part IV, and by such
reference, such information is incorporated herein.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exhange Act.
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of December 31, 1996, based
upon information furnished by such persons:
<TABLE>
Director or
------------
Name Principal Occupation or Employment Age Officer Since
- ---- ---------------------------------- --- -------------
<S> <C> <C> <C>
Gordon R. Arnold President, Chief Executive Officer and Secretary 51 1984
Michael C. Farr Vice President of Operations 39 1986
Stephen R. Ferree Vice President of Marketing 49 1992
C. Richard Kramlich Director of the Company; 61 1980
General Partner of New Enterprise Associates
a venture capital firm.
Jay T. Last Director of the Company; 66 1977
President, Hillcrest Press (Publisher).
Business and technical consultant for more than the
last five years.
</TABLE>
All officers of the Company serve at the discretion of the Board of
Directors. There are no family relationships between any of the directors and
officers of the Company.
Gordon R. Arnold joined Sierra Monitor Corporation, a California
corporation ("Old Sierra") in December 1979 as Operations Manager and Vice
President. He became President in 1984 and Chief Executive Officer in 1985. In
September 1989, Old Sierra merged into UMF Systems, Inc., a California
corporation ("UMF"), and UMF changed its name to "Sierra Monitor Corporation."
Mr. Arnold has served as the Company's President and Chief Financial Officer
since the merger and as the Company's Secretary since February 1993. Mr. Arnold
was also a director of Old Sierra from 1984 until the merger with UMF.
Michael C. Farr joined Old Sierra in December 1983 as Operations Manager.
He became Vice President, Operations in May, 1997. Since the merger Mr. Farr has
served as Vice President, Operations of the Company.
Stephen R. Ferree joined the Company as Marketing Manager in January 1990.
He became Vice President, Marketing in May, 1992.
With respect to the other information required by this item, the sections
entitled "Election of Directors Nominees" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's Information Statement pursuant
to Section 14(c) of the Securities Exchange Act of 1934 ("Information
Statement") for the Company's Annual Meeting of Shareholders to be held on May
14, 1997 and to be filed with the SEC within 120 days of December 31, 1996 are
incorporated by reference herein.
Item 10. Executive Compensation.
The sections entitled "Compensation of Executive Officers" and
"Compensation of Directors" in the Company's Information Statement are
incorporated by reference herein.
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<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Information Statement is incorporated by reference
herein.
Item 12. Certain Relationships and Related Transactions.
None.
Item 13. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) Financial Statements and Schedule. The following documents are
filed as part of this report:
Independent Auditors' Report.
Financial Statements and Schedules:
Balance Sheets at December 31, 1996 and 1995.
Statements of Operations for the years ended December 31, 1996,
1995, and 1994.
Statements of Shareholders' Equity for the years ended December 31,
1996, 1995, and 1994.
Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994.
Notes to Financial Statements.
Schedule II - Valuation and Qualifying Accounts.
All schedules omitted are not applicable, not required or the required
information is included in the financial statements or notes thereto.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
fourth quarter ended December 31, 1996.
(c) Exhibits.
Exhibit Number Description
-------------- -----------
3.0 Articles of Incorporation of the Registrant. (Incorporated
by reference to Exhibit 3 of Registrant's annual report on
Form 10-K for the fiscal year ended December 31, 1989 (the
"1989 Form 10-K"))
3.1 Bylaws of Registrant. (Incorporated by reference to Exhibit
3.1 of the 1989 Form 10-K)
10.1 1986 Stock Option Plan of Registrant as amended December 1,
1987. (Incorporated by reference to Exhibit 10.1 of the
1989 Form 10-K)
10.2 1996 Stock Option Plan of Registran. (Incorporated by
references to Exhibit 4.1 of Registrant's Registration
Statement on S-8 (File No. 333-18241) filed with the SEC on
December 19, 1996)
10.3 Standard Industrial Lease dated January 29, 1986, by and
between Geomax and Registrant, with amendment thereto dated
3/30/90. (Incorporated by reference to Exhibit 10.3 of the
1990 Form 10-K)
-8-
<PAGE>
11.1 Computation of net income per share.
23.1 Consent of Independent Auditors.
27.0 Financial Data Schedule.
-9-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized, on March 24, 1997.
SIERRA MONITOR CORPORATION
(Registrant)
By /s/ Gordon R. Arnold
--------------------------
Gordon R. Arnold
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date Title Signature
----- ----- ---------
March 24, 1997 Chief Executive Officer, Chief
Financial Officer and Director
(Principal Executive, Financial
and Accounting Officer) By /s/ Gordon R. Arnold
------------------------
Gordon R. Arnold
March 24, 1997 Director By /s/ C. Richard Kramlich
------------------------
C. Richard Kramlich
March 24, 1997 Director By /s/ Jay T. Last
------------------------
Jay T. Last
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<PAGE>
SIERRA MONITOR CORPORATION
Financial Statements
December 31, 1996, 1995, and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Sierra Monitor Corporation:
We have audited the accompanying balance sheets of Sierra Monitor Corporation as
of December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sierra Monitor Corporation as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
February 21, 1997
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Balance Sheets
December 31, 1996 and 1995
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 478,910 310,554
Short-term investments 246,781 577,124
Trade receivables, less allowance for doubtful accounts
of $45,598 and $61,156, respectively 1,040,989 898,496
Inventories 717,865 605,480
Prepaid expenses 51,556 40,200
Deferred income taxes 211,000 188,000
------------- -------------
Total current assets 2,747,101 2,619,854
Property and equipment, net 84,653 101,463
Other assets 92,378 78,934
------------- -------------
$ 2,924,132 2,800,251
============= =============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 291,371 305,693
Accrued compensation expenses 214,408 265,565
Other current liabilities 38,741 23,342
Income taxes payable 23,547 11,115
------------- -------------
Total current liabilities 568,067 605,715
Commitments
Shareholders' equity:
Common stock; 20,000,000 shares authorized; 10,332,513
and 10,276,888 shares issued and outstanding,
respectively 2,912,493 2,903,270
Accumulated deficit (546,701) (696,131)
Notes receivable from shareholders (9,727) (12,603)
------------- -------------
Total shareholders' equity 2,356,065 2,194,536
------------- -------------
$ 2,924,132 2,800,251
============= =============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Operations
Years ended December 31, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
-------------- --------------- --------------
<S> <C> <C> <C>
Net sales $ 5,040,177 4,773,464 5,831,324
Cost of goods sold 1,935,848 1,854,133 2,463,894
-------------- --------------- --------------
Gross profit 3,104,329 2,919,331 3,367,430
-------------- --------------- --------------
Operating expenses:
Research and development 439,017 406,278 386,738
Selling and marketing 1,662,602 1,668,079 1,500,614
General and administrative 891,197 844,929 825,838
-------------- --------------- --------------
2,992,816 2,919,286 2,713,190
-------------- --------------- --------------
Income from operations 111,513 45 654,240
Interest expense -- -- (1,273)
Interest income
28,417 30,479 8,496
-------------- --------------- --------------
Income before income tax (benefit)
expense 139,930 30,524 661,463
Income tax (benefit) expense (9,500) 12,500 145,000
-------------- --------------- --------------
Net income $ 149,430 18,024 516,463
============== =============== ==============
Net income per share $ .01 .00 .05
============== =============== ==============
Weighted average common shares outstanding 10,730,682 10,498,734 10,414,256
============== =============== ==============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Shareholders' Equity
Years ended December 31, 1996, 1995, and 1994
<CAPTION>
Notes
receivable Total
Common Stock Accumulated from shareholders'
Shares Amount Deficit shareholders equity
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances as of December 31, 1993 9,778,888 $2,804,070 (1,230,618) (12,111) 1,561,341
Exercise of stock options 217,500 43,500 -- -- 43,500
Exercise of warrant 250,000 50,000 -- -- 50,000
Proceeds from notes receivable -- -- -- 50 50
Net income -- -- 516,463 -- 516,463
---------- ---------- ---------- ---------- ----------
Balances as of December 31, 1994 10,246,388 2,897,570 (714,155) (12,061) 2,171,354
Exercise of stock options 30,500 5,700 -- (5,000) 700
Proceeds from notes receivable -- -- -- 4,458 4,458
Net income -- -- 18,024 -- 18,024
---------- ---------- ---------- ---------- ----------
Balances as of December 31, 1995 10,276,888 2,903,270 (696,131) (12,603) 2,194,536
Exercise of stock options 55,625 9,223 -- -- 9,223
Proceeds from notes receivable -- -- -- 2,876 2,876
Net income -- -- 149,430 -- 149,430
---------- ---------- ---------- ---------- ----------
Balances as of December 31, 1996 10,332,513 $2,912,493 (546,701) (9,727) 2,356,065
========== ========== ========== ========== ==========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 149,430 18,024 516,463
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 127,014 130,673 119,528
Loss on disposal of fixed assets 334 -- --
Allowance for doubtful accounts (15,558) 10,283 5,963
Deferred income taxes (23,000) 10,000 54,000
Changes in operating assets and liabilities:
Trade receivables (126,935) (310,220) 50,568
Costs and estimated earnings in excess of billings
on uncompleted contract -- -- 154,067
Inventories (112,385) 48,572 9,938
Prepaid expenses (11,356) (6,001) (18,531)
Accounts payable (14,322) 80,151 (7,035)
Accrued compensation expenses (51,157) 94,143 (87,240)
Other current liabilities 15,399 (32,320) 10,387
Income taxes payable 12,432 (30,002) 1,907
--------- --------- ---------
Net cash (used in) provided by operating activities (50,104) 13,303 810,015
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (77,189) (77,618) (142,676)
Short-term investments 330,343 (577,124) --
Other assets (46,793) (44,073) --
--------- --------- ---------
Net cash provided by (used in) investing activities 206,361 (698,815) (142,676)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from notes receivable 2,876 4,458 50
Proceeds from exercise of stock options and
warrant, net of notes receivable 9,223 700 93,500
--------- --------- ---------
Net cash provided by financing activities 12,099 5,158 93,550
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 168,356 (680,354) 760,889
Cash and cash equivalents at beginning of year 310,554 990,908 230,019
--------- --------- ---------
Cash and cash equivalents at end of year $ 478,910 310,554 990,908
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year - income taxes $ -- 37,361 86,842
========= ========= =========
Noncash financing activity - common stock issued
in exchange for notes from shareholders $ -- 5,000 --
========= ========= =========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1996, 1995, and 1994
(1) Summary of the Company and Significant Accounting Policies
The Company
Sierra Monitor Corporation (the Company) was incorporated in September
1989 to effect the merger of UMF Systems, Inc. (UMF) and Sierra Holdings
Corporation (SHC), which was originally incorporated as Sierra Monitor
Corporation in 1978. The Company's principal line of business is the
design, manufacture, and marketing of instruments that detect and
monitor hazardous gases. The Company conducts its business within one
industry segment.
Use of Estimates
The Company's management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
Revenue Recognition
Generally, sales are recorded when products are shipped or services are
rendered. Revenues from government contracts are recognized utilizing
the percentage-of-completion method. Contract revenues are recorded as
the related costs (including certain general and administrative costs),
which contribute to contract performance, are incurred.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit with banks and
highly liquid money market instruments with original maturities of 90
days or less. Certain certificates of deposits with original maturities
greater than 90 days are classified as short-term investments.
Inventories
Inventories are stated at the lower of cost (first in, first out) or
market.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is provided on the straight-line method
over the estimated useful lives of the respective assets, generally two
to three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the lease term or the useful
life of the related asset.
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be recorded
on the date of grant only if the current market price of the underlying
stock exceeded the exercise price.
On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma net income per share disclosures for employee stock
option grants made in 1995 and future years as if the fair value-based
method defined in SFAS No. 123 had been applied. The Company has elected
to continue to apply the provisions of APB Opinion No. 25 and provide
the pro forma disclosure provisions of SFAS No. 123.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Net Income Per Share
Net income per share is computed using the weighted-average number of
common shares outstanding and common share equivalents, including stock
options and warrants.
(2) Inventories
A summary of inventories as of December 31, 1996 and 1995, follows:
1996 1995
-------- --------
Raw materials $275,024 264,754
Work in process 324,042 244,959
Finished goods 118,799 95,767
-------- --------
$717,865 605,480
======== ========
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
(3) Property and Equipment
A summary of property and equipment as of December 31, 1996
and 1995, follows:
1996 1995
-------- --------
Machinery and equipment $272,821 284,371
Furniture, fixtures, and leasehold improvements 567,597 522,645
-------- --------
840,418 807,016
Less accumulated depreciation and amortization 755,765 705,553
-------- --------
$ 84,653 101,463
======== ========
(4) Common Stock
During 1996, the Company's 1986 Incentive Stock Option Plan
expired. Subsequently, the shareholders adopted the 1996 Stock
Plan and reserved 600,000 shares of common stock for issuance.
Under this plan, options may be granted at the fair market value
of the Company's common stock at the grant date, vest ratably
over 4 years, and expire 10 years from the grant date.
Stock options granted were -0- and 215,000 during 1996 and 1995,
respectively. The per share weighted-average fair value of stock
options granted during 1995 was $.13 on the date of grant using
the Black-Scholes option pricing model with the following
weighted-average assumptions: 1995 - expected dividend yield
0.0%, risk-free interest rate of 6.63%, and an expected life of
10 years.
The Company applies APB Opinion No. 25 in accounting for its
plan and, accordingly, no compensation cost has been recognized
for its stock options in the financial statements. Had the
Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma
amounts indicated below:
1996 1995
---- ----
Net income:
As reported $ 149,430 18,024
Pro forma 142,443 15,114
Net income per share:
As reported $ .01 .00
Pro forma .01 .00
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
Pro forma net income reflects only options granted in 1995. Therefore,
the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the
options' vesting period of four years and compensation cost for options
granted prior to January 1, 1995, is not considered.
A summary of stock option transactions as of December 31, 1996 and
1995, follows:
Option
Options price
---------- ---------
Balance as of December 31, 1994 535,000 $ .10 - .30
Granted 215,000 .22
Exercised (30,500) .20
Canceled (14,500) .23
----------
Balance as of December 31, 1995 705,000 .10 - .22
Exercised (55,625) .16
Canceled (6,875) .20
----------
Balance as of December 31, 1996
(476,250 exercisable) 642,500 .10 - .22
==========
(5) Lease Commitments
The Company leases its facilities under a noncancelable operating
lease. As of December 31, 1996, future minimum payments are as follows:
Year ending
December 31,
------------
1997 $138,000
1998 133,000
1999 133,000
2000 133,000
2001 33,000
--------
$570,000
========
Rent expense was approximately $136,000, $134,000, and $137,000 in
1996, 1995, and 1994, respectively.
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
(6) Bank Borrowings
As of December 31, 1996, the Company had a $250,000 bank line of credit
agreement, secured by eligible accounts receivable, that bears interest
at the prime rate (8.25% as of December 31, 1996) plus 1/2%. The line
of credit agreement expires June 4, 1997, and contains certain
financial covenants with which the Company was in compliance as of
December 31, 1996.
(7) Income Taxes
The components of income taxes (benefit) were as follows:
1996 1995 1994
-------- -------- --------
Current:
Federal $ -- -- 10,000
State 13,500 2,500 81,000
-------- -------- --------
Total current 13,500 2,500 91,000
-------- -------- --------
Deferred
Federal 8,000 9,000 40,000
State (31,000) 1,000 14,000
-------- -------- --------
Total deferred (23,000) 10,000 54,000
-------- -------- --------
$ (9,500) 12,500 145,000
======== ======== ========
The provision for income taxes differs from the amounts computed by
applying the statutory federal income tax rate of 34% as follows:
1996 1995 1994
-------- -------- --------
Computed tax expense $ 48,000 10,000 225,000
State taxes, net of federal benefit 8,900 2,300 63,000
Decrease in valuation allowance (48,000) -- (14,000)
Benefit of utilization of net operating loss
carryforward -- -- (134,000)
Other (18,400) 200 5,000
-------- -------- --------
$ (9,500) 12,500 145,000
======== ======== ========
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
The tax effects of temporary differences that gave rise to significant
portions of deferred tax assets are as follows:
1996 1995
--------- ---------
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 20,000 26,000
Inventories, principally due to additional
costs inventoried for tax purposes 76,000 57,000
State tax expense on temporary differences (8,000) (5,000)
Accruals for financial statement purposes
not currently deductible 35,000 25,000
Federal net operating loss carryforward 61,000 130,000
Property and equipment, principally due to
differences in depreciation 41,000 32,000
Tax credit carryforwards 87,000 80,000
Other (1,000) (9,000)
--------- ---------
Total gross deferred tax assets 311,000 336,000
Less valuation allowance 100,000 148,000
--------- ---------
Net deferred tax assets $ 211,000 188,000
========= =========
In assessing the reliability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowance as of December 31, 1996.
The Company has a net operating loss carryforward for federal income tax
purposes of approximately $178,000. The net operating loss carryforward will
expire in 1997 through 2007. The Company also has federal tax credit
carryforwards of approximately $87,000, which can be used to offset against
future taxable income after use of the loss carryforward. The credit
carryforwards will expire in 1997 through 2009.
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
(8) Fair Value of Financial Instruments
The Financial Accounting Standards Board's SFAS No. 107, Disclosures About
Fair Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. All financial instruments
included in the accompanying financial statements approximate fair value
because of the short maturity of those instruments.
<PAGE>
<TABLE>
SCHEDULE II
SIERRA MONITOR CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Additions
Balance at Charged to Deductions Balance
Beginning Costs and From at End
Description of Period Expenses Reserves of Period
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful receivables $ 61,156 $ 7,000 ($22,558) $ 45,598
======== ======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful receivables $ 50,873 $ 23,000 ($12,717) $ 61,156
======== ======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful receivables $ 44,910 $ 9,000 ($ 3,037) $ 50,873
======== ======== ======== ========
</TABLE>
<TABLE>
EXHIBIT 11
SIERRA MONITOR CORPORATION
NET INCOME PER SHARE COMPUTATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<CAPTION>
(All amounts in thousands except per share)
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Weighted average shares outstanding
Common Stock 10,333 10,266 10,246
Common Stock equivalents - options 398 232 168
------- ------- -------
Total weighted average shares outstanding 10,731 10,499 10,414
======= ======= =======
Net income $ 149 $ 18 $ 517
======= ======= =======
Net income per share $ 0.01 $ 0.00 $ 0.05
======= ======= =======
</TABLE>
EXHIBIT 23.1
Report on Financial Statement Schedule
and Consent of Independent Auditors
The Board of Directors and Shareholders
Sierra Monitor Corporation:
The audits referred to in our report dated February 21, 1997, included the
related financial statement schedule as of December 31, 1996, and for each of
the years in the three-year period ended December 31, 1996, included in the
annual report on Form 10-KSB. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
We consent to incorporation by reference in the registration statement on Form
S-8 of Sierra Monitor Corporation of our report dated February 21, 1997,
relating to the balance sheets of Sierra Monitor Corporation as of December 31,
1996 and 1995, and the related statements of operations, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1996, and the related financial statement schedule, which report appears in this
December 31, 1996, annual report on Form 10-KSB of Sierra Monitor Corporation.
/s/ KPMG Peat Marwick LLP
San Jose, California
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 479
<SECURITIES> 248
<RECEIVABLES> 1087
<ALLOWANCES> 46
<INVENTORY> 718
<CURRENT-ASSETS> 2747
<PP&E> 840
<DEPRECIATION> 756
<TOTAL-ASSETS> 2924
<CURRENT-LIABILITIES> 568
<BONDS> 0
<COMMON> 2912
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2924
<SALES> 5042
<TOTAL-REVENUES> 5042
<CGS> 1936
<TOTAL-COSTS> 1936
<OTHER-EXPENSES> 2993
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (28)
<INCOME-PRETAX> 140
<INCOME-TAX> (9)
<INCOME-CONTINUING> 149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
