U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10 - QSB
(Mark One)
( X ) Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1998.
or
( ) 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
(Exact name of small business issuer as specified in its charter)
California 95-2481914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
Number)
1991 Tarob Court
Milpitas, California 95035
(address and zip code of principal executive offices)
(408) 262-6611
(Registrant's telephone number, including area code)
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 and 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 _____
The number of shares of the issuer's common stock outstanding, as of September
30, 1998 was: 10,967,588.
Transitional Small Business Disclosure Format: Yes___ No _ x _
Page 1 of 10
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SIERRA MONITOR CORPORATION
Balance Sheets
<CAPTION>
September 30, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Assets (Unaudited)
Current assets
Cash and cash equivalents $ 267,102 297,485
Short-term investments 446,440 441,833
Trade receivables, less allowance for doubtful accounts 1,107,498 833,344
of $42,271 in 1998 and $41,003 in 1997
Notes receivable 36,757 39,422
Inventories 990,040 797,546
Prepaid expenses 109,339 138,210
Deferred income taxes 299,172 299,172
----------------- -----------------
Total current assets 3,256,348 2,847,012
Property and equipment, net 256,305 137,914
Other assets 342,773 47,562
----------------- -----------------
$ 3,855,426 3,032,488
================= =================
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 361,451 153,916
Accrued expenses 251,709 224,762
Other current liabilities 58,473 54,804
Income taxes payable 135,814 43,855
----------------- -----------------
Total current liabilities 807,447 477,337
----------------- -----------------
Shareholders' equity
Common stock 3,159,944 2,937,035
Accumulated deficit (55,840) (357,497)
Notes receivable from shareholders (56,125) (24,387)
----------------- -----------------
Total shareholders' equity 3,047,979 2,555,151
----------------- -----------------
$ 3,855,426 3,032,488
================= =================
<FN>
See the accompanying notes to the financial statements.
</FN>
</TABLE>
Page 2 of 10
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Operations
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
----------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $1,732,956 1,474,040 5,330,495 3,805,016
Cost of goods sold 655,452 521,627 2,191,764 1,404,488
----------- --------------- --------------- ---------------
Gross profit 1,077,504 952,413 3,138,731 2,400,528
----------- --------------- --------------- ---------------
Operating expenses
Research and development 187,117 115,625 476,948 296,446
Selling and marketing 525,859 424,587 1,472,365 1,262,372
General and administrative 260,351 217,204 816,687 688,049
----------- --------------- --------------- ---------------
973,327 757,416 2,766,000 2,246,867
----------- --------------- --------------- ---------------
Income from operations 104,177 194,997 372,731 153,661
Other Income - - 38,349 -
Interest income 10,209 9,331 26,103 20,958
----------- --------------- --------------- ---------------
Income before income taxes 114,386 204,328 437,183 174,619
Income tax expense 35,459 16,239 135,526 16,239
----------- --------------- --------------- ---------------
Net income $ 78,927 188,089 301,657 158,380S
=========== =============== =============== ===============
Net income per share - basic $ 0.01 0.02 0.03 0.02
Net income per share - diluted $ 0.01 0.02 0.03 0.01
=========== =============== =============== ===============
Weighted average number of shares
used in per share computations
Basic: 10,690,038 10,556,263 10,700,038 10,436,402
Diluted: 11,124,810 10,745,878 11,099,772 10,721,562
=========== =============== =============== ===============
<FN>
See the accompanying notes to the financial statements.
</FN>
</TABLE>
Page 3 of 10
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Cash Flows
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 78,927 188,089 301,657 158,380
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation & amortization 40,253 29,754 96,427 86,937
Allowance for doubtful accounts (2,938) (1,476) 1,268 1,844
Changes in items affecting operations:
Trade receivables and notes receivable 52,125 (252,919) (272,757) 11,835
Inventories (46,635) (4,928) (192,494) (105,988)
Prepaid expenses 122,763 (43,582) 28,871 (58,819)
Accounts payable (38,331) 24,497 207,536 (2,195)
Accrued expenses (12,634) 43,792 26,947 36,213
Other current liabilities (12,354) 23,232 3,669 13,334
Income taxes payable 35,747 16,160 91,958 4,891
------------- ------------- ------------- -------------
Net cash provided by
operating activities 216,923 22,619 293,082 146,432
------------- ------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures (160,071) (27,208) (324,363) (80,637)
Short term investments (4) (293,962) (4,607) (293,449)
Other assets (457) - (757) -
------------- ------------- ------------- -------------
Net cash used in
investing activities (160,532) (321,170) (329,727) (374,086)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from exercise of stock options,
net of notes receivable 3,343 1,968 6,262 8,346
------------- ------------- ------------- -------------
Net cash provided by financing
activities 3,343 1,968 6,262 8,346
------------- ------------- ------------- -------------
Net increase (decrease) in
cash and cash equivalents 59,734 (296,583) (30,383) (219,308)
Cash and cash equivalents at beginning of period 207,369 556,185 297,485 478,910
------------- ------------- ------------- -------------
Cash and cash equivalents at end of period $ 267,103 259,602 267,102 259,602
============= ============= ============= =============
<FN>
See the accompanying notes to the financial statements.
</FN>
</TABLE>
Page 4 of 10
<PAGE>
SIERRA MONITOR CORPORATION
Notes to the Financial Statements
September 30, 1998
Basis of Presentation
The unaudited financial statements have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such SEC rules and regulations; nevertheless, the Company
believes that the disclosures are adequate to make the information presented not
misleading. These financial statements and the notes hereto should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997
which was filed March 30, 1998. In the opinion of the Company, all adjustments,
consisting of normal recurring adjustments necessary to present fairly the
financial position of Sierra Monitor Corporation as of September 30, 1998 and
the results of its operations and cash flows for the quarter then ended, have
been included. The results of operations for the interim period are not
necessarily indicative of the results for the full year.
Accounting Policies
There have been no changes in accounting policies used by the Company during the
quarter ended September 30, 1998, except as discussed below:
Effective January, 1 1998, the Company adopted the provisions of the Financial
Accounting Standards Board's (FASB) Statement of Financial Accounting Standards
(SFAS) No. 130, Reporting of Comprehensive Income. SFAS No. 130 establishes
standards for the display of comprehensive income and its components in a full
set of financial statements. Comprehensive income includes all changes in equity
during a period except those resulting from the issuance of shares of stock and
distributions to shareholders. There were no differences between net income and
comprehensive income during the quarters ended September 30, 1998 and 1997.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way public business enterprises report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS No. 131 is effective for financial statements for periods
beginning after December 31, 1997. The Company does not anticipate it will
change its reporting methodology as a result of this pronouncement.
The FASB recently issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 addresses the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts. Under SFAS No. 133, entities are required to carry all derivative
instruments in the balance sheet at fair value. The accounting for changes in
the fair value (i.e. gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and, if so, the reason for holding it. The Company must adopt SFAS No. 133 by
October 1, 1999. The Company does not anticipate that SFAS No. 133 will have an
impact on its financial statements.
Page 5 of 10
<PAGE>
Summary of Business
Sierra Monitor Corporation ("SMC" or the "Company) was founded in 1978 to design
and develop hazardous gas monitoring devices for 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.
Inventories
A summary of inventories follows:
September 30, December 31,
1998 1997
--------- ---------
Raw materials $ 340,474 $ 323,237
Work-in-process 444,720 338,631
Finished goods 204,846 135,678
--------- ---------
$ 990,040 $ 797,546
========= =========
<TABLE>
Net Income per share
Basic net income per share is computed using the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed using the weighted-average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of common stock issuable upon exercise of stock options using the
treasury stock method. No adjustments to net income were made for purposes of
per share calculations. The following is a reconciliation of the shares used in
the computation of basic and diluted net income for the three and nine month
periods ending September 30, 1998 and 1997 respectively:
<CAPTION>
3 months 9 months 3 months 9 months
ended 9/30/98 ended 9/30/98 ended 9/30/97 ended 9/30/97
<S> <C> <C> <C> <C>
Basic net income per share - weighted-average 10,690,038 10,700,038 10,556,263 10,436,402
number of common shares outstanding
Effect of dilutive common equivalent shares - stock
options outstanding
434,772 399,734 189,615 285,160
---------- ---------- ---------- -----------
Diluted net income per share - weighted-average of
common shares and common equivalent shares
outstanding 11,124,810 11,099,772 10,745,878 10,721,562
---------- ---------- ---------- -----------
</TABLE>
Page 6 of 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
For the three months ended September 30, 1998, Sierra Monitor Corporation (the
"Company") reported net sales of $1,732,956 compared to $1,474,040 for the three
months ended September 30, 1997. For the nine-month period ended September 30,
1998, net sales were $5,330,495 compared with $3,805,016 in the prior year
nine-month period. The results for the third quarter of 1998 represent an 18%
increase from the same period in the prior year. The results for the first nine
months of 1998 represent a 40% increase from the same period in the prior year.
The level of sales of Sentry systems, the Company's primary product group, was
higher than the third quarter in the prior year, and higher for the year to date
period. Sales of Sentry systems can be influenced by release of large orders for
construction projects. Such projects accounted for a significant portion of the
increase in Sentry sales in 1998. Sales of products for telephone company
applications increased in both the quarter and year to date periods primarily
due to the shipment of a single large order to an international customer.
Gross profit of $1,077,504 for the three-month period ended September 30, 1998
was 62% of sales compared to $952,413 or 65% of sales, in the same period in the
previous year. The gross profit for the nine-month period ended September 30,
1998 was $3,138,731 or 59% of sales, compared to $2,400,528, or 63% of sales, in
the same period in the previous year. The gross margin for the year to date
period is lower than the comparable period last year primarily due to a discount
applied to a large international order which was shipped in the second quarter
of the year.
Expenses for research and development, which include new product development and
engineering to sustain existing products, were $187,117 or 11% of sales, for the
three-month period ending September 30, 1998 compared to $115,625, or 8% of
sales, in the comparable period in 1997. In the nine-month periods ending
September 30, 1998 and September 30, 1997, research and development expenses
were $476,948 or 9% of sales, and $296,446, or 8% of sales, respectively. By the
end of the third quarter of 1998, a total of six new products and an additional
eight product options have been released for manufacture and sale. In
comparison, the Company normally releases less than six new products or options
in a full year. The new products released include devices which increase the
potential applications for the Sentry system and add to the number of gases
which can be detected by certain sensor module types. In addition, extensive
engineering time was invested into the development of a new hardware platform
for the Communications Bridge which is described later in this report.
Selling and marketing expenses for the three-month period ended September 30,
1998 were $525,859 or 30% of sales, compared to $424,587, or 29% of sales, in
the comparable period in the prior year. For the nine-month periods ending
September 30, 1998 and September 30, 1997, selling and marketing expenses were
$1,472,365 or 28% of sales, and $1,262,372, or 33% of sales, respectively. Sales
commissions to independent representatives and to sales managers increased in
both periods. Staffing expenses also increased due to an increase in the number
of professional sales employees.
General and administrative expenses increased to $260,351 or 15% of sales, for
the three-month period ended September 30, 1998 from $217,204, or 15% of sales,
in the three-month period ended September 30, 1997. General and administrative
expenses increased to $816,687, or 15% of sales, for the nine-month period ended
September 30, 1998 from $688,049, or 18% of sales, in the nine-month period
ended September 30, 1997.
Page 7 of 10
<PAGE>
Net income, after interest and provision for income taxes, for the three months
ended September 30, 1998 was $78,927, or 4.6% of net sales, compared with
$188,089, or 12.8% of net sales, in the three months ended September 30, 1997.
Net income for the nine-month period ended September 30, 1998 was $301,657, or
5.7% of net sales, compared with $158,380, or 4.2% of net sales, in the same
period in the prior year. The decrease in income for the three month period is
due to the lower gross profit combined with significant increases in engineering
and selling expenses. The increase in income in the year to date period is due
to the higher sales level combined with lower fixed expenses as a percent of
sales.
On September 23, 1998 the Company acquired the rights to manufacture and sell a
product known as the Communications Bridge (the "Bridge"). The rights were
acquired from Edward Hague, the Company's current Vice President of Engineering
who had developed the product prior to his employment. The Bridge provides
connectivity between various industrial control systems which would otherwise be
incompatible due to their unique communications protocols. As an example, a gas
monitoring system may not be able to deliver information to a plant wide
information system if the communication protocols are incompatible, but the
Bridge enables data transfer between the two systems.
A unique aspect of the Bridge is the software program which enables cost
effective development of Protocol Drivers. The Company intends to develop a
library of Protocol Drivers. A Bridge sale will include a hardware package which
is a single board computer with the Bridge software and one or more Protocol
Drivers which are software add-ons. During the negotiation period, the Company
developed an improved hardware platform for the Bridge which enables use of the
product on Ethernet based wide area computer networks. The Company believes that
the Bridge has the potential to become an important product family which could
enhance the Company's ability to sell gas monitoring devices and also generate
sales in markets outside the gas monitoring industry.
In consideration for the acquisition of the Bridge, the Company paid Mr. Hague
$130,000 cash and issued 211,325 shares of unregistered common stock.
Liquidity and Capital Resources
During the period ended September 30, 1998, the Company's working capital
increased by $79,226 compared to December 31, 1997. At September 30, 1998 cash
and cash equivalents and short-term investments, totaled $713,542 compared to
$739,318 at December 31, 1997. As a result of the higher sales level, trade
accounts receivable have increased $274,154 since the beginning of the year, and
inventories have increased $192,494. In addition to these increases $324,363 has
been invested in capital assets, mainly computer hardware and software, during
the same time period.
Short-term investments consist of certain Federal Agency Securities with
original maturities greater than 90 days. The Company has not drawn on its line
of credit with its commercial bank. The Company believes that its current
capital resources are sufficient to support existing and anticipated levels of
business.
Year 2000 Planning
Prior to December 31, 1997, management implemented an enterprise-wide program to
prepare for the year 2000. The program includes verification of the Company's
Information Technology ("IT") system, all microprocessor based products, vendor
capabilities and various internal systems. Because the IT system was already
scheduled to be replaced in 1998, and was not accelerated, the Company is not
considering the cost a separate year 2000 expense. The cost of confirmation of
the new IT system,
Page 8 of 10
<PAGE>
implemented in September 1998 is a year 2000 expense. The Company believes that
it will be ready for year 2000 and it has completed most of the necessary
testing and verification.
The total cost of the preparation and implementation of the verification program
and corrective action is estimated to be less than $100,000 and is being funded
through operating cash flows. A significant proportion of these costs are not
likely to be incremental costs to the Company, but rather will represent
redeployment of existing technical and personnel resources.
As a result of testing the Company anticipates that its IT system will operate
correctly through the year 2000 transition, and that none of its products will
cause a year 2000 problem for users. As the Company's products are frequently
employed as components in larger monitoring and control systems it is not
possible for the Company to test customer systems for compatibility. The Company
has advised its customers that system level testing is beyond the scope of the
Company's verification and that customers should perform independent
verification testing.
Although there are presently no known year 2000 events which would have an
impact on the Company's ability to continue its current operations, there are
unknown factors, such as loss of utility supplies or banking problems, which
could have a broad impact on the Company and its customers. The Company does not
believe it practical to develop contingency plans related to these risks.
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.
Page 9 of 10
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings - N/A
Item 2. Changes in Securities - N/A
Item 3. Defaults Upon Senior Securities - N/A
Item 4. Submission of Matters to a Vote of Security Holders - N/A
Item 5. Other Information - N/A
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
10.4 Assignment of Intellectual Property and
Transfer of Rights
27.0 Financial Data Schedule
b. Reports on Form 8-K - None
SIGNATURE
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.
SIERRA MONITOR CORPORATION
Registrant
Date: November 12, 1998 By: /S/ GORDON R. ARNOLD
--------------------------
Gordon R. Arnold
President
Chief Financial Officer
Page 10 of 10
Exhibit 10.4
ASSIGNMENT OF INTELLECTUAL PROPERTY AND TRANSFER OF RIGHTS AGREEMENT
This Assignment of Intellectual Property and Transfer of Rights Agreement (this
"Agreement") is made and entered into as of September 23, 1998 (the
"Effective Date") by and between Sierra Monitor Corporation, a California
corporation with principal offices at 1991 Tarob Court, Milpitas, CA 95035
(the "Company") and Edward Hague, an individual ("Seller") who is a
California resident. Each of the Company and Seller is sometimes
hereinafter referred to as a "Party" and, collectively, they are sometimes
hereinafter referred to as "the Parties".
RECITALS:
WHEREAS, Seller now owns a line of products known as the
"Communications Bridge", as more fully described on the List of Assets attached
hereto as Exhibit A (the "Communications Bridge.")
WHEREAS, for purposes of this Agreement, the product and the term
"Communications Bridge" shall include all right, title and interest in and to
the Communications Bridge, including, but not limited to, all related computer
programs (including the underlying source code and object code), software,
customer lists, intellectual property and all other rights developed by, owned
by, or otherwise granted to, Seller;
WHEREAS, the Company now desires to acquire all rights from Seller to
the Communications Bridge, so that the Company can manufacture, distribute and
sell the Communications Bridge as well as to further develop such products and
related products;
WHEREAS, the Company now desires to purchase, and Seller desires to
sell, the Communications Bridge in exchange for a cash payment and unregistered
shares of the Company's common stock; and
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and promises contained herein and for other good and valuable
consideration, the Company and Seller agree, as follows:
Page 1 of 6
<PAGE>
Exhibit 10.4
AGREEMENT:
1. Sale, Assignment and Transfer of the Communications Bridge.
(a) Intellectual Property and Rights Transferred. Seller
hereby grants and irrevocably assigns all right, title and interest whatsoever,
throughout the world, in and to the computer programs, software, source and
object code, documentation, and all other rights owned by, or otherwise granted
to, Seller known as the Communications Bridge, including, without limitation,
the rights and works specifically listed on Exhibit A hereto as well as all
intellectual property rights, including but not limited to, copyrights, patents,
trademarks and trade secrets associated with the Communications Bridge, to the
Company, its successors and assigns, for the full duration of all such rights,
and any renewals and extensions thereof. The Parties agree that the
Communications Bridge to be transferred shall include all related support
materials, work-in-progress and documentation owned by Seller including notes,
records, sketches, drawings, specifications, and any other material related to
the Communications Bridge. Such transferred Communications Bridge, including all
such support materials and documentation, will remain the sole property of the
Company.
(b) Computer Programs and Software Transferred. The Parties
agree that such computer programs and software transferred as part of the
Communications Bridge assigned to the Company shall include the underlying
source code as written in the programming language used by Seller in its
original development. In addition, the Parties agree that, except for the
representations, warranties, agreements and covenants contained in this
Agreement, Seller is providing such computer programs and software to the
Company on an "as is" basis with no warranty that such programs are error-free
and without any express or implied warranty of merchantability or fitness for a
particular purpose and with no ongoing maintenance or support obligations.
Seller further agrees that the Company shall have the right to alter, modify or
combine the transferred computer programs, software and other portions of the
Communications Bridge with other works, and hereby waives any claim that any new
versions, developments or derivative works involving the Communications Bridge
constitutes a violation of any "moral rights" or a distortion, mutilation or
disparagement or contains unauthorized variations of the same. As of the
Effective Date, the Company shall assume all costs of the further development
and support of the Communications Bridge, including those related, but not
limited to, salaries, consulting services and equipment; however, nothing herein
shall require or otherwise obligate the Company to assume any obligations or
liabilities of Seller, or to continue the production, sales and/or development
of the Communications Bridge.
(c) Cooperation in Securing Rights. Seller hereby covenants
and agrees that he will assist and cooperate with the Company, or its designee,
in every proper way to further secure the Company's rights in the Communications
Bridge hereby assigned to the Company together with any copyrights, patents,
trademarks, trade secrets or other intellectual property rights relating thereto
in any and all countries. Such cooperation and assistance of Seller shall
include, but not be limited to, the giving of testimony and the prompt execution
of all applications, specifications, oaths, assignments and all other
instruments which the Company deems necessary in order to apply for, perfect,
obtain and sustain such intellectual property rights and in order to assign and
convey to the Company, its successors, assigns, and nominees the sole and
exclusive right, title and interest in and to such transferred Communications
Bridge and any copyrights, patents, trademarks, trade secrets or other
intellectual property rights relating thereto, including the filing and
prosecution of substitute, divisional, continuing or additional applications
covering said intellectual property rights, including without limitation,
reissues and reexaminations, opposition proceedings, cancellation proceedings,
priority contests, public use proceedings, infringement actions and court
actions; provided, however, that if Seller is not then employed by the Company,
the Company shall reimburse Seller for his reasonable time, on the basis of
Seller's then current standard consulting rates as determined by reference to
the rates actually charged by Seller to his other then current clients, and
expenses in connection with providing such cooperation.
(d) Validity of the Transfer of Communications Bridge. Seller
represents and warrants (i) that Seller has not previously granted any rights in
the Communications Bridge to any third party (which have not otherwise been
reacquired in full by Seller prior to the Effective Date); and (ii) that Seller
currently has the full power and authority to make and enter into this Agreement
and to make the present assignment of the
Page 2 of 6
<PAGE>
Exhibit 10.4
Communications Bridge to the Company as contemplated by this Agreement. The
Company represents and warrants to Seller (i) that the Company has the right,
power and authority to enter into and fully perform its obligations hereunder;
and (ii) the making of this Agreement by the Company does not violate any other
agreement between the Company and any third party.
2. Consideration. Upon the execution of this Agreement and
contemporaneous with the transfer of the Communications Bridge to the Company,
the Company will simultaneously, or as soon as practical thereafter, deliver to
Seller (i) a certificate registered in Seller's name representing Two Hundred
Eleven Thousand Three Hundred and Twenty-Five (211,325) unregistered shares of
the Company's common stock (the "Shares") and (ii) a check (or checks) payable
to Seller for a total of One Hundred and Thirty Thousand and Three Hundred
Dollars (U.S. $130,300, the "Payment"). Such Payment shall be inclusive of all
applicable taxes, fees or other assessments, if any, involved with this
transfer. In addition, such Payment shall be inclusive of any expenses or fees
of any nature whatsoever, claimed or to be claimed by Seller in connection with
the preparation of this Agreement or involved with the transfer of such
Communications Bridge to the Company.
3. Representations. The Seller agrees that he will execute any proper
oath or verify any proper document required to carry out the terms of this
Agreement. The Seller agrees that his performance of all the terms of this
Agreement will not breach any other agreement to keep in confidence proprietary
information acquired by him in confidence or in trust prior to his employment by
the Company. The Seller hereby agrees, represents and warrants that he has not
entered into, and will not enter into, any oral or written agreement in conflict
with this Agreement.
4. Acquisition of Shares of Common Stock. In connection with his
acquisition of the Shares of common stock of the Company, Seller hereby
represents to the Company the following:
(a) Seller is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the securities. Seller
is acquiring the Shares for investment purposes only for his own account only
and not with a view to, or for resale in connection with, any "distribution"
thereof within the meaning of the Securities Act of 1933, as amended (the
"Securities Act").
(b) Seller understands that the Shares have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of his investment intent as expressed herein. In this connection, Seller
understands that, in the view of the Securities and Exchange Commission (the
"SEC"), the statutory basis for such exemption may be unavailable if his
representation was predicated solely upon a present intention to hold these
Shares for the minimum capital gains period specified under tax statutes, for a
deferred sale, for or until an increase or decrease in the market price of the
securities, or for a period of one year or any other fixed period in the future.
(c) Seller further understands that the Shares must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available. Moreover, Seller
understands that the Company is under no obligation to register the Shares. In
addition, Seller understands that the certificate evidencing the Shares will be
imprinted with a legend which prohibits the transfer of such Shares unless they
are registered or such registration is not required in the opinion of counsel
for the Company.
(d) Seller is familiar with the provisions of Rules144 and
701, each promulgated under the Securities Act, which, in substance, permit the
limited public resale of "restricted securities" acquired, directly or
indirectly, from the issuer thereof (or from an affiliate of such issuer), in a
non-public offering subject to the satisfaction of certain conditions. In the
event that the Company remains subject to the reporting requirements of
Section13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act"),
any securities exempt under Rule 701 may be resold by the Seller ninety (90)
days thereafter, subject to the satisfaction of certain of the conditions
specified by Rule 144, including amount other things: (i) the sale being made
through a broker in an unsolicited "broker's transaction" or in transactions
directly with a market maker (as said term is defined under the Exchange Act);
and (ii) in the case of an affiliate, the availability of certain public
information about the Company, and the
Page 3 of 6
<PAGE>
Exhibit 10.4
amount of securities being sold during any three month period not exceeding the
limitations specified in Rule 144(e), if applicable.
If the Shares of the Company do not qualify under Rule 701 at the time of
acquisition, then such Shares may be resold by the Seller in certain
limited circumstances subject to the provisions of Rule 144, which
requires among other things: (i) the availability of certain public
information about the Company; (ii) the resale occurring not less than
one year after the Seller has acquired, and made full payment for (within
the meaning of Rule 144), the Shares to be sold; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than
two years, (iii) the sale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker
(as said term is defined under the Exchange Act) and the amount of
securities being sold during any three-month period not exceeding the
specified limitations stated therein, if applicable.
(e) Seller further understands that while a public market
currently exists for shares of the Company's common stock, the Shares that
Seller is acquiring pursuant to the terms of this Agreement have not been
registered under the Securities Act and, further, that at the time that Seller
wishes to sell the Shares, there may be no public market upon which to make such
a sale. Even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144 or 701, and
that, in such event, Seller would be precluded from selling the Shares under
Rule 144 or 701 even if the one-year minimum holding period had been satisfied.
(f) Seller further understands that in the event all of the
applicable requirements of Rule 144 or 701 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the SEC has expressed its opinion that
persons proposing to sell private placement securities other than in a
registered offering and otherwise than pursuant to Rule 144 or 701 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales, and that such persons and their
respective brokers who participate in such transactions do so at their own risk.
(g) The address set forth below is the Seller's true and
correct address of residence, and the Seller has no present intention of
becoming a resident of any other state or jurisdiction.
10. Legends. Each certificate or instrument representing the Shares and
securities issuable upon conversion thereof will be endorsed with the following
legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN
CONNECTION WITH THE SALE OR DISTRIBUTION THEREOF. NO
SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATE RELATED THERETO OR AN
OPINION OF COUNSEL FOR THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. THIS CERTIFICATE MUST BE
SURRENDERED TO THE CORPORATION OR ITS TRANSFER AGENT
AS A CONDITION PRECEDENT TO THE TRANSFER OF ANY
INTEREST IN THE SECURITIES REPRESENTED BY THIS
CERTIFICATE."
(b) Any other legends required by California law or other
applicable state blue sky laws.
11. General Provisions.
(a) Entire Agreement. This Agreement represents the entire
agreement and understanding between the Company and Seller and supersedes,
merges and replaces any and all prior oral and written agreements and
understandings relating to the subject matter of this Agreement. Each Party
represents that it has had the opportunity to consult with an attorney and has
carefully read and understands the scope and effect of the provisions of this
Agreement. There are no representations, agreements, arrangements or
understandings, oral or written, among the Parties relating to the subject
matter of this Agreement that are not fully expressed in this Agreement and
Page 4 of 6
<PAGE>
Exhibit 10.4
neither Party has relied upon any representation or statement made by the other
Party in entering into this Agreement that is not specifically set forth in this
Agreement.
(b) Modification. No modification of or amendment to this
Agreement, nor any waiver of any rights under this Agreement, shall be effective
unless in writing and signed by both the Company and Seller.
(c) Authority. Each of the Parties hereto represents and
warrants that the undersigned has the authority to act on behalf of such Party
and to bind such Party and all who may claim through it to the terms and
conditions of this Agreement. Each of the Parties further represents and
warrants that there are no liens or claims of lien or assignments in law or
equity or otherwise of or against any of the claims or causes of action released
in this Agreement.
(d) Execution and Validity of Agreement. Each of the Parties
hereto agrees to execute any proper oath or verify any proper document required
to carry out the terms of this Agreement. Each of the Parties hereto hereby
represents and warrants that its performance of all the terms of this Agreement
will not breach any other agreements to keep in confidence proprietary
information acquired by it in confidence or in trust from an outside third party
and each of the Parties further covenants and agrees that they will not enter
into, any oral or written agreements in conflict herewith.
(e) Waiver. No failure or delay by either of the Parties in
exercising any right, power or privilege under this Agreement will operate as a
waiver thereof. The waiver by either of the Parties of a breach of any provision
of this Agreement will not operate or be construed as a waiver of any other or
subsequent breach.
(f) Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, the remaining provisions of this Agreement shall
continue in full force and effect without said provision and the Parties agree
to amend this Agreement and to substitute and replace such void or unenforceable
provision with a new enforceable provision negotiated in good faith which most
nearly effects the Parties original intent upon entering into this Agreement.
(g) Assignment. Neither of the Parties to this agreement may
assign its rights or delegate its duties hereunder without the prior written
consent of the other Party.
(h) Successors and Assigns. This Agreement shall be binding
upon, and inure to the benefit of, the respective legal representatives,
successors and permitted assigns of the Parties.
(i) Notices. Any notice required or permitted by this
Agreement shall be in writing and shall be deemed given upon actual receipt or
(i) upon delivery, if personally delivered, (ii) after three days upon deposit
in the mail if sent by prepaid registered or certified mail, return receipt
requested, or (iii) the next business day after delivery to a commercial
overnight courier service, unless upon appropriate investigation such courier's
records indicate a latter date. All such notices shall be addressed to the other
Party at the appropriate address set forth below or at other such address for
which such Party has previously provided the other under the terms of notice
hereunder.
(j) Costs. Except as otherwise specifically provided herein,
the Parties shall each bear their own costs, attorneys' fees and other fees
incurred in connection with the preparation and execution of this Agreement.
(k) Disputes. In the event of a dispute between the Parties
arising from or related to this Agreement, the Parties agree that the prevailing
party in such dispute shall be entitled to reimbursement of reasonable
attorneys' fees and expenses, in addition to any other rights and remedies that
it may have.
(l) Governing Law. This Agreement will be governed by and
construed in accordance with the laws of the State of California as such laws
are applied to agreements entered into and to be performed entirely in
California by California residents.
Page 5 of 6
<PAGE>
Exhibit 10.4
(m) Consent to Jurisdiction. Each of the Parties hereto hereby
expressly agrees and consents that the California state courts located within
the County of Santa Clara, California shall be the exclusive jurisdiction and
venue in which to adjudicate any dispute arising from or relating to this
Agreement (unless, if there is exclusive federal jurisdiction, then the United
States District Court for the Northern District of California shall be the
exclusive jurisdiction and venue for such matters.) Furthermore, each of the
Parties hereby expressly consents to (i) personal jurisdiction of the federal
and state courts within California, (ii) service of process being effected upon
it by registered mail sent to the appropriate address first set forth at the
beginning of this Agreement or at other such address for which such Party has
previously provided under the terms of notice hereunder, and (iii) the
uncontested enforcement of a final judgment from such court in any other
jurisdiction wherein such Party or any of its assets are present.
(n) Counterparts. This Agreement may be executed in
counterparts, each of which when so executed and delivered shall be deemed to be
an original, and all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, each of the Parties hereto have caused this
Assignment of Intellectual Property and Transfer of Rights Agreement to be
executed and delivered as of the Effective Date first set forth above.
COMPANY: SELLER:
SIERRA MONITOR CORPORATION
By: /S/ Gordon R. Arnold By: /S/ Edward Hague
----------------------------- ---------------------------
Gordon R. Arnold, President Edward Hague
Address: 1991 Tarob Court Address: Resident of
Milpitas, CA 95035 California
Page 6 of 6
<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>
<CIK> 0000100625
<NAME> Sierra Monitor Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<EXCHANGE-RATE> 1
<CASH> 267
<SECURITIES> 446
<RECEIVABLES> 1,150
<ALLOWANCES> 42
<INVENTORY> 990
<CURRENT-ASSETS> 3,256
<PP&E> 1,521
<DEPRECIATION> 950
<TOTAL-ASSETS> 3,855
<CURRENT-LIABILITIES> 807
<BONDS> 0
0
0
<COMMON> 3,160
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,855
<SALES> 5,330
<TOTAL-REVENUES> 5,330
<CGS> 2,192
<TOTAL-COSTS> 2,192
<OTHER-EXPENSES> 2,766
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (26)
<INCOME-PRETAX> 437
<INCOME-TAX> 136
<INCOME-CONTINUING> 302
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 302
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
