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 June 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 August 7,
1999 was: 10,967,588
Transitional Small Business Disclosure Format: Yes ; No x
---- ----
Page 1 of 11
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIERRA MONITOR CORPORATION
<TABLE>
Balance Sheets
(Unaudited)
<CAPTION>
June 30, December 31,
Assets 1999 1998
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 282,940 393,667
Short-term investments -- 245,522
Trade receivables, less allowance for doubtful accounts 976,545 1,123,073
of $130,026 in 1999 and $125,488 in 1998
Notes receivable 31,107 35,002
Inventories 1,008,955 945,189
Prepaid expenses 126,617 94,107
Deferred income taxes 205,372 179,636
----------- -----------
Total current assets 2,631,536 3,016,196
Property and equipment, net 223,757 232,600
Deferred income taxes 113,216 113,635
Other assets 465,600 345,776
----------- -----------
$ 3,434,109 3,708,207
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 274,410 295,274
Accrued expenses 315,845 281,426
Other current liabilities 26,018 56,522
Income taxes payable -- 105,052
----------- -----------
Total current liabilities 616,273 738,274
----------- -----------
Shareholders' equity
Common stock 3,159,944 3,159,944
Accumulated deficit (295,255) (136,771)
Notes receivable from shareholders (46,853) (53,240)
----------- -----------
Total shareholders' equity 2,817,836 2,969,933
----------- -----------
$ 3,434,109 3,708,207
=========== ===========
<FN>
See the accompanying notes to the financial statements.
</FN>
</TABLE>
Page 2 of 11
<PAGE>
SIERRA MONITOR CORPORATION
<TABLE>
Statements of Operations
(Unaudited)
<CAPTION>
Three months ended June 30, Six months ended June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 1,511,452 2,064,115 3,170,740 3,597,539
Cost of goods sold 589,719 967,336 1,222,793 1,536,312
------------ ------------ ------------ ------------
Gross profit 921,733 1,096,779 1,947,947 2,061,227
------------ ------------ ------------ ------------
Operating expenses
Research and development 188,971 165,498 403,279 289,831
Selling and marketing 565,666 494,119 1,139,101 946,505
General and administrative 311,287 283,134 620,687 556,336
------------ ------------ ------------ ------------
1,065,924 942,751 2,163,069 1,792,672
------------ ------------ ------------ ------------
Income (loss) from operations (144,191) 154,028 (215,122) 268,555
Other income -- -- 34 38,349
Interest income 3,820 5,350 12,613 15,894
------------ ------------ ------------ ------------
Income (loss) before income taxes (140,371) 159,378 (202,473) 322,798
Income tax (benefit) expense (43,989) 49,407 (43,989) 100,067
------------ ------------ ------------ ------------
Net income (loss) $ (96,382) 109,971 (158,484) 222,731
============ ============ ============ ============
Net income (loss) per share - basic $ (0.01) 0.01 (0.01) 0.02
Net income (loss) per share - diluted $ (0.01) 0.01 (0.01) 0.02
============ ============ ============ ============
Weighted average number of shares used in per
share computations
Basic: 10,967,588 10,566,263 10,967,588 10,566,263
Diluted: 10,967,588 11,169,202 10,967,588 11,015,498
============ ============ ============ ============
<FN>
See the accompanying notes to the financial statements.
</FN>
</TABLE>
Page 3 of 11
<PAGE>
SIERRA MONITOR CORPORATION
<TABLE>
Statements of Cash Flows
(Unaudited)
<CAPTION>
Three months ended Six months ended
June 30, June 30
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (96,382) 109,971 (158,484) 222,731
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation & amortization 68,461 33,777 125,890 56,173
Allowance for doubtful accounts 2,288 641 4,538 4,206
Deferred income taxes (25,317) -- (25,317) --
Changes in items affecting operations:
Trade receivables and note receivables 142,538 (132,107) 145,885 (324,882)
Inventories (46,220) 92,356 (63,766) (145,859)
Prepaid expenses (37,769) (52,824) (32,510) (93,892)
Accounts payable (68,015) (14,035) (20,864) 245,866
Accrued compensation expenses 11,006 49,666 34,419 39,581
Other current liabilities (57,174) 6,682 (30,504) 16,023
Income taxes payable -- 49,407 (105,052) 56,212
--------- --------- --------- ---------
Net cash provided by (used in)
operating activities (106,584) 143,534 (125,765) 76,159
--------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures (22,376) (129,554) (64,753) (164,292)
Short term investments 24,066 -- 245,522 --
Acquisition of business assets -- -- (171,828) --
Other assets (2,205) 20 (290) (4,903)
--------- --------- --------- ---------
Net cash provided by (used in)
investing activities (515) (129,534) 8,651 (169,195)
--------- --------- --------- ---------
Cash flows from financing activities:
Repayment of bank borrowings (100,000) -- -- --
Repayment of shareholder notes receivable 2,972 1,358 6,387 2,920
--------- --------- --------- ---------
Net cash provided by (used in)
financing activities (97,028) 1,358 6,387 2,920
--------- --------- --------- ---------
Net increase (decrease) in
cash and cash equivalents (204,127) 15,358 (110,727) (90,116)
Cash and cash equivalents at beginning of period 487,067 192,011 393,667 297,485
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 282,940 207,369 282,940 207,369
========= ========= ========= =========
<FN>
See the accompanying notes to the financial statements.
</FN>
</TABLE>
Page 4 of 11
<PAGE>
SIERRA MONITOR CORPORATION
Notes to the Financial Statements
June 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 June 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 June 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, parking garages and
landfill rehabilitation projects.
Page 5 of 11
<PAGE>
Inventories
A summary of inventories follows:
June 30, December 31,
1999 1998
---- ----
Raw materials $ 394,721 $ 348,032
Work-in-process 381,492 411,846
Finished goods 232,742 185,311
----------- ---------
$ 1,008,955 $ 945,189
=========== =========
Net Income (loss) per share
<TABLE>
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 both the three month period ended June 30, 1999 and the six month
period ended June 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 three and six month periods ending
June 30, 1999 and 1998, respectively:
<CAPTION>
3 months 6 months 3 months 6 months
ended ended ended ended
6/30/99 6/30/99 6/30/98 6/30/98
<S> <C> <C> <C> <C>
Basic EPS - weighted-average number of
common shares outstanding 10,967,588 10,967,588 10,566,263 10,566,263
Dilutive stock options -- -- 602,939 449,235
----------------- ---------------- ----------------- ----------------
Diluted EPS - dilutive potential common shares 10,967,588 10,967,588 11,169,202 11,015,498
================= ================ ================= ================
</TABLE>
Page 6 of 11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
For the three months ended June 30, 1999, Sierra Monitor Corporation (the
"Company") reported net sales of $1,511,452 compared to $2,064,115 for the three
months ended June 30, 1998. For the six-month period ended June 30, 1999, net
sales were $3,170,740 compared with $3,597,539 in the prior year six-month
period. During the three month period ended June 30, 1998 a single order for gas
sensor modules to an international customer accounted for approximately 22% of
sales. In the same period in 1999 there were no similar orders, resulting in a
significant decrease in net sales. Additionally, sales of other gas detection
systems were 13% lower in the first six months of 1999, compared to the same
period in 1998, primarily due to lower sales to the Navy. Sales of Environment
Controllers used by telephone companies and sales of the Company's new
Communications Bridge both increased during the three month and six month
periods in 1999 offsetting some of the decline in sales of gas detection
systems.
The Company continues sales and marketing activities aimed at improving
sales of gas detection products while capitalizing on the increasing momentum of
sales of the newer products.
Gross profit of $921,733 for the three-month period ended June 30, 1999
was 61% of sales compared to $1,096,779, or 53% of sales, in the same period in
the previous year. The gross profit for the six-month period ended June 30, 1999
was $1,947,947, or 61% of sales, compared to $2,061,227, or 57% of sales, in the
same period in the previous year. The gross margin for the three and six month
periods in the two periods in 1999 are consistent with historical levels. The
gross margin for the three-month period ended June 30, 1998 was substantially
lower than historical levels primarily due to a discount applied to the large
international order described above.
Expenses for research and development, which include new product
development and engineering to sustain existing products, were $188,971, or
12.5% of sales, for the three-month period ending June 30, 1999 compared to
$165,498, or 8.0% of sales, in the comparable period in 1998. In the six-month
periods ending June 30, 1999 and June 30, 1998, research and development
expenses were $403,279, or 12.7% of sales, and $289,831, or 8.1% of sales,
respectively. The higher research and development expenses were undertaken to
continue development of products and product options identified as key to the
Company's future sales growth. The new products, completed in the first three
months of 1999, included a master controller known as the Sentry Commander, and
specialized gas sensors for use in the semiconductor industry. The product
options are primarily software programs known as Protocol Drivers. Protocol
Drivers are software programs which enable the Company's Communications Bridge
to share data between instruments which communicate using non-compatible
protocols. The Company intends to continue development of an extensive library
of Protocol Drivers and therefore expects engineering expenses to remain, at
least, at their current levels. Engineering expenses also include amortization
of assets purchased in two previously reported transactions completed since June
1998. Amortization, and other depreciation expenses, increased by approximately
$46,000 in the first six months of 1999 compared to the first six months of
1998.
Selling and marketing expenses for the three-month period ended June 30,
1999 were $565,666, or 37.4% of sales, compared to $494,119, or 24% of sales, in
the comparable period in the prior year. For the six-month periods ending June
30, 1999 and June 30, 1998, selling and marketing expenses were $1,139,101, or
35.9% of sales, and $946,505, or 26% of sales, respectively. The increase in
selling costs is, in part, due to the addition, since June 1998, of two sales
professionals to allow focused selling efforts
Page 7 of 11
<PAGE>
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 were $311,287, or 20.6% of sales, for
the three-month period ended June 30, 1999 compared to $283,134, or 14% percent
of sales, in the three-month period ended June 30, 1998. For the six month
periods ending June 30, 1999 and June 30, 1998, general and administrative
expenses were $620,687, or 19.6% of sales, and $556,336, or 15.5% of sales,
respectively. Increases in salary and benefit expenses contributed to the higher
general and administrative expenses.
Net loss, after interest and income tax benefit, for the three months
ended June 30, 1999 was $96,382, compared with net income, after interest and
provision for income taxes, of $109,971 in the three months ended June 30, 1998.
Net loss, after interest and income tax benefit, for the six-month period ended
June 30, 1999 was $158,484 compared with net income of $222,731 in the same
period in the prior year. The losses in both periods of 1999 are due to the
combination of lower sales, the effect of which was partially offset by higher
gross margins, combined with higher fixed expenses for research and development
and selling activities. 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 first half of 1999, were directed toward generating future
increases in sales which have not yet been fully realized.
On February 1, 1999 the Company acquired specified assets of Montech
Holdings Inc., ("Montech") a Florida corporation. The acquired assets include
certain know how, manufacturing designs, customer lists and related
documentation related to a product originally known as the MC-25 Environment
Controller. The MC-25 has been assimilated into the Company's existing line of
Environmental Controllers, which are sold for telephone company applications, as
the Model 2460. Montech and Sierra Monitor served generally the same customer
base. Under the agreement Montech has agreed not to compete for a period of
three years. On the effective date, February 1, 1999, two employees of Montech
became employees of the Company. The total cost of the acquisition, including
consideration paid to Montech and related expenses, was $171,828, all of which
had been paid by June 30, 1999.
Subsequent to the Montech transaction the Company began assembling the
Model 2460 in a rented manufacturing facility in Ft. Myers, Florida. The Company
is in the process of leasing a three thousand square foot manufacturing facility
and intends to move Model 2460 and other selected assembly operations into that
facility upon its occupation in August 1999. At present, the expense of Ft.
Myers operations exceeds the gross profit generated by sales of Model 2460 and
therefore contributes to the net loss reported for the year to date period.
Since acquiring the assets, the Company has been taking action to increase total
sales of Model 2460 and to decrease costs of critical components used in its
manufacture.
Liquidity and Capital Resources
During the six month period ended June 30, 1999, the Company's working
capital decreased by $262,659 from December 31, 1998. The decrease in working
capital is primarily due to the acquisition of assets of Montech as described
above, and is also due to the net loss. At June 30, 1999, cash and cash
equivalents totaled $282,940.
Page 8 of 11
<PAGE>
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 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 are being tested
for operation through the data change period. Also, clock chips and related
circuits are being 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 are being surveyed for their ability to provide
materials and to continue their operations beyond the date change. Vendors
receive a questionnaire which is 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 are
being 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, most of which are now substantially complete, is
estimated to be less than $100,000 and has been funded through operating cash
flow. A significant proportion 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.
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 11
<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
The Company's Annual Meeting of Shareholders was held on May 11 1999.
At the meeting the following directors were elected:
Number of Common Shares Voted
-----------------------------
Directors For Withheld
--------- --- --------
Gordon R. Arnold 7,524,268 0
C. Richard Kramlich 7,524,268 0
Jay T. Last 7,524,268 0
Robert C. Marshall 7,524,268 0
<TABLE>
In addition, the shareholders approved the following proposal:
<CAPTION>
Number of Common Shares Voted
-----------------------------
Proposal For Against Abstain
-------- --- ------- -------
<S> <C> <C> <C>
Ratify the appointment of KPMG LLP as the 7,524,268 0 0
Company's independent public accountants
for the fiscal year ending December 31, 1999
</TABLE>
There were no broker non-votes for any of the proposals.
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.
Page 10 of 11
<PAGE>
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: August 11, 1999 By: /s/ Gordon R. Arnold
---------------------------------
Gordon R. Arnold
President
Chief Financial Officer
Page 11 of 11
<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 NOTE THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<CASH> 283
<SECURITIES> 0
<RECEIVABLES> 1107
<ALLOWANCES> 130
<INVENTORY> 1009
<CURRENT-ASSETS> 2632
<PP&E> 1026
<DEPRECIATION> 803
<TOTAL-ASSETS> 3434
<CURRENT-LIABILITIES> 616
<BONDS> 0
0
0
<COMMON> 3160
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3434
<SALES> 3171
<TOTAL-REVENUES> 3171
<CGS> 1223
<TOTAL-COSTS> 1223
<OTHER-EXPENSES> 2163
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (13)
<INCOME-PRETAX> (202)
<INCOME-TAX> (44)
<INCOME-CONTINUING> (158)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (158)
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
