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, 1999.
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, 1999 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
(Unaudited)
<CAPTION>
September 30, December 31,
Assets 1999 1998
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 178,201 393,667
Short-term investments -- 245,522
Trade receivables, less allowance for doubtful accounts 1,329,328 1,123,073
of $133,236 in 1999 and $125,488 in 1998
Notes receivable 28,956 35,002
Inventories 1,108,463 945,189
Prepaid expenses 122,838 94,107
Deferred income taxes 205,372 179,636
----------- -----------
Total current assets 2,973,158 3,016,196
Property and equipment, net 206,204 232,600
Deferred income taxes 113,216 113,635
Other assets 435,792 345,776
----------- -----------
$ 3,728,370 3,708,207
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 551,601 295,274
Accrued expenses 301,814 281,426
Other current liabilities 30,766 56,522
Income taxes payable -- 105,052
----------- -----------
Total current liabilities 884,181 738,274
----------- -----------
Shareholders' equity
Common stock 3,159,944 3,159,944
Accumulated deficit (272,420) (136,771)
Notes receivable from shareholders (43,335) (53,240)
----------- -----------
Total shareholders' equity 2,844,189 2,969,933
----------- -----------
$ 3,728,370 3,708,207
=========== ===========
<FN>
See the accompanying notes to the financial statements.
</FN>
Page 2 of 10
</TABLE>
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Operations
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 1,814,432 1,732,956 4,985,171 5,330,495
Cost of goods sold 718,637 655,452 1,941,429 2,191,764
----------- ----------- ---------- ----------
Gross profit 1,095,795 1,077,504 3,043,742 3,138,731
----------- ----------- ---------- ----------
Operating expenses
Research and development 188,508 187,117 591,788 476,948
Selling and marketing 565,888 525,859 1,704,989 1,472,365
General and administrative 321,205 260,351 941,892 816,687
----------- ----------- ---------- ----------
1,075,601 973,327 3,238,669 2,766,000
----------- ----------- ---------- ----------
Income (loss) from operations 20,194 104,177 (194,927) 372,731
Other Income -- -- -- 38,349
Interest income 2,641 10,209 15,289 26,103
----------- ----------- ---------- ----------
Income (loss) before income taxes 22,835 114,386 (179,638) 437,183
Income tax expense (benefit) -- 35,459 (43,989) 135,526
----------- ----------- ---------- ----------
Net income (loss) $ 22,835 78,927 (135,649) 301,657
=========== =========== =========== ===========
Net income (loss) per share - basic $ 0.00 0.01 (0.01) 0.03
Net income (loss) per share - diluted $ 0.00 0.01 (0.01) 0.03
=========== =========== =========== ===========
Weighted average number of shares
used in per share computations
Basic: 10,967,588 10,690,038 10,967,588 10,700,038
Diluted: 10,025,745 11,124,810 10,976,588 11,099,772
=========== =========== =========== ===========
<FN>
See the accompanying notes to the financial statements.
</FN>
Page 3 of 10
</TABLE>
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Cash Flows
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 22,835 78,927 (135,649) 301,657
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation & amortization 63,380 40,253 189,269 96,427
Allowance for doubtful accounts 3,210 (2,938) 7,748 1,268
Deferred income taxes -- -- (25,317) --
Changes in operating assets and liabilities:
Trade receivables and notes receivable (353,842) 52,125 (207,957) (272,757)
Inventories (99,509) (46,635) (163,274) (192,494)
Prepaid expenses 3,779 122,763 (28,731) 28,871
Accounts payable 277,191 (38,331) 256,327 207,536
Accrued expenses (14,031) (12,634) 20,388 26,947
Other current liabilities 4,748 (12,354) (25,756) 3,669
Income taxes payable -- 35,747 (105,052) 91,958
--------- --------- --------- ---------
Net cash provided (used in) by
operating activities (92,239) 216,923 (218,004) 293,082
--------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures (15,519) (160,071) (80,252) (324,363)
Short term investments -- (4) 245,522 (4,607)
Acquisition of business assets -- -- (171,282) --
Other assets (500) (457) (789) (757)
--------- --------- --------- ---------
Net cash used in investing activities (16,019) (160,532) (7,367) (329,727)
--------- --------- --------- ---------
Cash flows from financing activities:
Repayment of shareholder notes receivable 3,519 3,343 9,905 6,262
--------- --------- --------- ---------
Net cash provided by financing activities 3,519 3,343 9,905 6,262
--------- --------- --------- ---------
Net increase (decrease) in
cash and cash equivalents (104,739) 59,734 (215,466) (30,383)
Cash and cash equivalents at beginning of period 282,940 207,369 393,667 297,485
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 178,201 267,103 178,201 267,103
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period - income taxes $ -- -- 122,488 27,737
<FN>
See the accompanying notes to the financial statements
</FN>
Page 4 of 10
</TABLE>
<PAGE>
SIERRA MONITOR CORPORATION
Notes to the Financial Statements
September 30, 1999
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, 1998
which was filed March 30, 1999. 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, 1999 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, 1999.
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. In addition to gas monitoring systems,
the Company also manufactures microprocessor based systems used to monitor and
control environmental conditions in small, remote, structures used for cellular
and hard wire telephone equipment. The Company also manufactures a product known
as a Communications Bridge. The Communications Bridge enables electronic control
systems to communicate with each other, generally over Ethernet, even when the
systems use non-compatible data storage and transfer protocols.
Products manufactured by the Company are sold primarily to oil and gas
drilling and refining companies, chemical plants, waste-water treatment plants,
telecommunications companies, building control systems integrators, parking
garages and landfill rehabilitation projects.
Inventories
A summary of inventories follows:
September 30, December 31,
1999 1998
----------- ---------
Raw materials $ 417,224 $ 348,032
Work-in-process 468,801 411,846
Finished goods 222,438 185,311
----------- ---------
$ 1,108,463 $ 945,189
=========== =========
Page 5 of 10
<PAGE>
<TABLE>
Net Income (Loss) per share
In accordance with SFAS No. 128, Earnings Per Share, basic EPS is computed
using the weighted average number of common shares outstanding during the
period. Diluted EPS 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 earnings / (loss)
were made for purposes of per share calculations. The Company has reported a net
loss for the nine month period ended September 30, 1999. As a result 97,656 and
101,040 shares have been excluded from the calculation of diluted loss per share
for the three month period ended June 30, 1999 and the six month period ended
June 30, 1999, respectively. The following is a reconciliation of the shares
used in the computation of basic and diluted EPS for the nine month period
ending September 30, 1999 and 1998, respectively:
<CAPTION>
3 months ended 9 months ended 3 months ended 9 months ended
9/30/99 9/30/99 9/30/98 9/30/98
<S> <C> <C> <C> <C>
Basic EPS - weighted-average number of common
shares outstanding 10,967,588 10,967,588 10,690,038 10,700,038
Dilutive stock options 57,887 - 434,772 399,734
----------------- ---------------- ----------------- -----------------
Diluted EPS - dilutive potential common shares 11,025,745 10,967,588 11,124,810 11,099,772
================= ================ ================= ==================
</TABLE>
For the three month period ended September 30, 1999 options to purchase
300,000 shares of common stock were outstanding but not included in the
computation of diluted EPS because the option exercise price was greater than
the average market price of common shares.
Page 6 of 10
<PAGE>
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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
For the three months ended September 30, 1999, Sierra Monitor Corporation
(the "Company") reported net sales of $1,814,432 compared to $1,732,956 for the
three months ended September 30, 1998. For the nine-month period ended September
30, 1999, net sales were $4,985,171 compared with $5,330,495 in the prior year
nine-month period. The results for the third quarter of 1999 represent a 5%
increase from the same period in the prior year. The increase is primarily due
to an increase in sales of microprocessor based environment controllers to
telephone company applications. The increase in sales of environment controllers
more than offset slower sales of the Company's gas monitoring systems. The lower
sales for the nine month year to date period, compared to the prior year is due
to lower sales of gas monitoring systems and lower sales of spare parts to the
U. S. Navy.
Gross profit of $1,095,795 for the three-month period ended September 30,
1999 was 60% of sales compared to $1,077,504 or 62% of sales, in the same period
in the previous year. The gross profit for the nine-month period ended September
30, 1999 was $3,043,742 or 61% of sales, compared to $3,138,731 or 59% of sales,
in the same period in the previous year. The gross margin for the three and nine
month periods in 1999 are consistent with historical levels. The gross margin
for the nine month period in the 1998 was lower than historical levels primarily
due to a discount applied to a single large international order shipped in the
second quarter of that year.
Expenses for research and development, which include new product
development and engineering to sustain existing products, were $188,508 or 10%
of sales, for the three-month period ending September 30, 1999 compared to
$187,117, or 11% of sales, in the comparable period in 1998. In the nine-month
periods ending September 30, 1999 and September 30, 1998, research and
development expenses were $591,788 or 12% of sales, and $476,948, or 9% of
sales, respectively. The Company intends to continue development of an extensive
library of software products known as Protocol Drivers which are sold in
conjunction with the hardware product known as the Communications Bridge. Due to
the demand for new drivers and the cost of their development, the Company has
begun a program to charge customers
Page 7 of 10
<PAGE>
for some of the cost of the development. Fees paid for the development will
offset some of the Company's current respective engineering costs.
Selling and marketing expenses for the three-month period ended September
30, 1999 were $565,888 or 31% of sales, compared to $525,859, or 30% of sales,
in the comparable period in the prior year. For the nine-month periods ending
September 30, 1999 and September 30, 1998, selling and marketing expenses were
$1,704,989 or 34% of sales, and $1,472,365, or 28% of sales, respectively. The
increase in selling costs in the current nine month period is, in part, due to
the addition, since June 1998, of two sales professionals to allow focused
selling efforts in the telephone industry. Commissions paid to independent sales
representatives were also higher in both periods in 1999. Commissions, as a
percentage of sales, vary periodically based on product mix, level of
discounting and channels of distribution.
General and administrative expenses increased to $321,205 or 18% of sales,
for the three-month period ended September 30, 1999 from $260,351, or 15% of
sales, in the three-month period ended September 30, 1998. General and
administrative expenses increased to $941,892 or 19% of sales, for the
nine-month period ended September 30, 1999 from $816,687, or 15% of sales, in
the nine-month period ended September 30, 1998. Increases in salary and benefit
expenses contributed to the higher general and administrative expenses.
Net income, after interest and provision for income taxes, for the three
months ended September 30, 1999 was $22,835 or 1% of net sales, compared with
$78,927, or 5% of net sales, in the three months ended September 30, 1998. Net
loss for the nine-month period ended September 30, 1999 was $135,649 or 3% of
net sales, compared with net income of $301,657, or 6% of net sales, in the same
period in the prior year. The lower net income in the third quarter of 1999
compared with the same period in 1998 is due, primarily, to higher fixed costs
including certain selling and marketing and administrative expenses. The net
loss in the nine month period, compared with a net profit in the same period in
the previous year is due to lower sales levels combined with higher fixed
expenses. In the first half of 1998 the Company had experienced a significant
increase in net sales without substantial offsetting increases in fixed
expenses. Subsequent additions of new employees, resulting in higher expenses in
the nine months of 1999, were directed toward efforts to generate future
increases in sales. The increase in sales in the third quarter of 1999, compared
with the same period of 1998 is partially a result of those actions.
In August 1999, the Company occupied a newly renovated three thousand
square foot leased office and manufacturing facility located in Ft. Myers,
Florida under a three year lease. The Company had previously occupied a smaller
facility under a month to month lease. All interior improvements to the new
facility were paid by the owner and all costs of the relocation were expensed in
the third quarter. This manufacturing facility is presently underutilized and
will provide the company with future additional factory capacity for the
manufacture of products for telephone company market.
Liquidity and Capital Resources
During the period ended September 30, 1999, the Company's working capital
decreased by $188,945 from December 31, 1998. At September 30, 1999 cash and
cash equivalents and short-term investments, totaled $178,201 compared to
$639,189 at December 31, 1998. Net trade accounts receivable have increased
$206,255 since the beginning of the year, and inventories have increased
$163,274. Working capital also decreased due to the previously reported
acquisition of specified assets
Page 8 of 10
<PAGE>
of Montech Holdings Inc. for $171,828 completed in the first half of 1999 and
due to other capital equipment purchases.
The Company currently has no current or long term balance due on its line
of credit with its commercial bank. The Company believes that its current
capital resources, which include cash, accounts receivable and the line of
credit are sufficient to support existing and anticipated levels of business for
at least the next twelve months.
Year 2000 Planning
Management implemented an enterprise-wide program in 1997 to prepare for
the year 2000 "date change". The program includes verification of the Company's
Information Technology (IT) systems, all microprocessor based products, vendor
capabilities and various internal systems.
The Company's entire IT system was replaced in September 1998. Because
the replacement of the Company's IT system was a planned event, and was not
accelerated, the Company is not considering that cost as a separate year 2000
expense. The cost of validation of the year 2000 compliance of the new IT
system, was a year 2000 expense.
Microprocessor based products manufactured by the Company have been tested
for operation through the data change period. Also, clock chips and related
circuits have been verified by design engineering. As a result of testing, the
Company anticipates that none of its products will cause a year 2000 problem for
users. Since 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.
All materials vendors have been surveyed for their ability to provide
materials and to continue their operations beyond the date change. Vendors
received a questionnaire which was evaluated to determine if further action
should be taken by the Company. The Company presently believes that all of its
materials and services vendors will be able to operate and supply materials
beyond the date change.
Internal systems generally include planning and tracking systems developed
using software packages supplied by third parties. All essential systems have
been tested to insure that they operate and calculate correctly beyond the date
change.
The total cost of the preparation and implementation of the verification
program and corrective actions, all of which are now substantially complete, is
estimated to be less than $100,000 and has been funded through the Company's
operating cash flow. A significant portion of these costs were not incremental
costs to the Company, but rather represented redeployment of existing technical
and personnel resources. The costs of any remaining corrective actions is
estimated to be less than $5,000 which will, likewise, be funded through
operating cash flows.
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
currently does not believe it practical to develop contingency plans related to
these risks.
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.
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, 1999 By: /S/ GORDON R. ARNOLD
-------------------------------------
Gordon R. Arnold
President
Chief Financial Officer
Page 10 of 10
<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>
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<PERIOD-TYPE> 9-MOS
<CASH> 178
<SECURITIES> 0
<RECEIVABLES> 1463
<ALLOWANCES> 133
<INVENTORY> 1109
<CURRENT-ASSETS> 2973
<PP&E> 892
<DEPRECIATION> 686
<TOTAL-ASSETS> 3728
<CURRENT-LIABILITIES> 884
<BONDS> 0
0
0
<COMMON> 3160
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3728
<SALES> 4985
<TOTAL-REVENUES> 4985
<CGS> 1941
<TOTAL-COSTS> 1941
<OTHER-EXPENSES> 3239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (15)
<INCOME-PRETAX> (180)
<INCOME-TAX> (44)
<INCOME-CONTINUING> (136)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (136)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
