U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 1998.
[ ] 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
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SIERRA MONITOR CORPORATION
(Name of small business issuer in its charter)
California 95-2481914
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1991 Tarob Court
Milpitas, California 95035
(Address of principal executive offices)
Registrant's telephone number, including area code: (408) 262-6611
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Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Registrant's revenues for the fiscal year ended December 31, 1998 were
$6,981,122. The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 15, 1999 was approximately
$3,392,068 based upon the last reported sale, which occurred on March 4, 1999.
For purposes of this disclosure, Common Stock held by persons who hold more than
5% of the outstanding voting shares and Common Stock held by officers and
directors of the Registrant have been excluded in that such persons may be
deemed to be "affiliates" as that term is defined under the rules and
regulations promulgated under the Securities Act of 1933. This determination is
not necessarily conclusive.
The number of shares of the Registrant's Common Stock outstanding as of March
15, 1999 was 10,967,588.
DOCUMENTS INCORPORATED BY REFERENCE
Items 9, 10, 11 & 12 of Part III of this Annual Report on Form 10-KSB
incorporate information by reference from the Registrant's Information Statement
for the Annual Shareholders' Meeting to be held on May 11, 1999.
Transitional Small Business Disclosure Format Yes ; No X
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<PAGE>
PART I
Item 1. Description of Business.
Sierra Monitor Corporation ("SMC" or the "Company") was founded in 1978 to
design and develop hazardous gas monitoring devices for the protection of
personnel and facilities in industrial work places.
Products manufactured by the Company are sold primarily to oil and gas
drilling and refining companies, chemical plants, waste-water treatment plants,
telecommunications companies, parking garages and landfill rehabilitation
projects.
Because all of the Company's products are marketed to all such industries,
the Company considers that these are one business segment. Substantially all of
the revenues reported in part II Item 6 are attributable to sales to that
segment.
The Company designs, manufactures and markets products which detect
combustible and toxic gases for the protection of personnel and facilities.
Gases which create a hazard to people and facilities are those manufactured or
that occur naturally in a wide variety of locations in the workplace, commercial
areas and homes. Although the need to monitor gases at very low concentrations
has been recognized for many years in industries such as mining, the need for
monitoring devices continues to expand as more hazards are identified and as
more stringent government regulations have been passed. The motivation for
installation of gas detection devices is driven by Occupational Safety and
Health Administration (OSHA), state and local governing bodies, insurance
companies and industry safety professionals.
Gas monitoring instruments are usually categorized for fixed or portable
applications. Most manufacturers tend to specialize in only one of these
categories because manufacturing methods are different and the channels of
distribution are different. The Company participates primarily in the fixed
installation market which characteristically requires higher levels of technical
capability to develop and sell the products.
The Company capitalizes on its expertise in microprocessor based control
hardware to develop products which incorporate functions not found in many
competitive instruments. In this respect, the Company markets products under the
concept of "Gas Risk Management". Gas Risk Management utilizes features such as
recorded event information, and graphical displays on central computers, to
allow users to identify hazards and problems before they evolve into incidents
which, at a minimum, could cause production delays, evacuation of personnel and
potentially even damage and injury.
In addition to gas detection devices, products supplied to the
telecommunications industry include microprocessor based controllers which are
used to manage other environmental and security conditions in remote structures
such as cellular stations and fiber optic booster stations. The environmental
controllers integrate various functions which would otherwise require individual
controls and alarm handling. In 1998, revenue from gas detection instruments and
environment controllers sold to the telecommunications industry was
approximately 14% of the Company's sales.
The Company also manufacturers a line of products known as Industrial
Communication Bridges (Bridges). Many industrial instruments, such as gas
detection systems, programmable logic controllers and various analytical systems
and sensing devices, communicate in different, non-standard, protocols. Bridges
provide a means for reading and writing data into these devices using a common,
standard protocol. In 1998, revenue from Bridge products was less than 5% of the
Company's sales.
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<PAGE>
The Company maintains research and development programs to enhance
existing products and to develop new products. During the last three fiscal
years, the research and development expenses, which include costs for sustaining
engineering, have averaged approximately 8.7% of sales. In 1998, research and
development expenses totaled $638,430 compared to $423,058 in 1997 and $439,017
in 1996.
The Company's products are sold through a network of sales representatives
managed by regional managers. There are currently 29 authorized representatives
with a total of 41 sales offices in the United States. The majority of the
Company's representatives have exclusive territories and the sales agreements
with each representative restricts them from representing competing lines. The
Company's internal sales organization includes a Sales Manager, four Regional
Sales Managers, an Inside Sales Manager and support personnel. In addition to
its primary factory and office facility in California, the Company maintains
separate regional sales offices in California, Illinois, Pennsylvania and Texas.
As a result of the acquisition of certain assets of Montech Holdings, Inc.,
described in Item 6, in February 1999, a sales and manufacturing office was
opened in Florida.
At December 31, 1998, the Company had 40 employees, of whom 7 were in
research and development; 11 were in marketing, sales and service; 4 were in
general administration; and 18 were in operations and manufacturing. At that
date, 36 of the Company's employees were located in Milpitas, California, 1 was
located in Temple City, California, 1 was located in Chicago, Illinois, 1 was
located in Philadelphia, Pennsylvania, and 1 was located in Houston, Texas. None
of the Company's employees are represented by a labor union. The Company
believes that its relationship with its employees is satisfactory.
The demand for gas monitoring instruments is not seasonal and there are no
customers to whom sales exceed 10% of total annual sales. Within the market
sector, the telecommunications industry and the petrochemical industry each
account for up to approximately 20% of the Company's sales and, as such,
economic factors or labor problems in those industries could affect Company
sales to those industries.
The commercial order backlog for the Company's products at December 31,
1998 was $587,156 compared with $454,296 at December 31, 1997. The backlog
includes orders for which the Company has not yet received engineering release
from the customer. Since the Company generally ships its products within the
same month that it receives a purchase order and engineering release from the
customer for such products, the Company believes that its backlog at any
particular time is generally not indicative of the level of future sales.
Representatives in foreign countries have various agreements to promote
the Company's products but no formal international marketing program exists. In
1997 sales to international customers were less than 10% of total sales. In
1998, primarily due to a single large order, sales to international customers
increased to approximately 14% of total sales. The Company has no assets in any
foreign countries.
The gas detection and monitoring industry is highly competitive. Most of
the Company's competitors have far greater financial, marketing and
manufacturing resources than the Company by virtue of their relationships with
larger companies as divisions or subsidiaries. The principal competitive factors
in the industry are reliability, ease of use, product support, and price. The
Company's products compete with systems offered by Bacharach Inc., Detector
Electronics Corporation, National Draeger Inc., Gastech Inc., General Monitors
Inc., Mine Safety Appliance Company, Seiger, Ltd., and Sensidyne Inc.
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<PAGE>
<TABLE>
Selected Financial Data.
The following table sets forth the required financial data for each of the
last five fiscal periods ended December 31, 1994 through 1998:
<CAPTION>
Years Ended December 31
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net sales $6,981,122 5,130,597 5,040,177 4,773,464 5,831,324
Net income $ 220,726 189,204 149,430 18,024 516,463
Net income per share -- basic $ 0.02 0.02 0.01 0.00 $ 0.05
Net income per share -- diluted $ 0.02 0.02 0.01 0.00 0.05
Total assets $3,708,207 3,032,488 2,924,132 2,800,251 2,665,097
Long term liabilities $ -- -- -- -- --
Cash distributions per common share none none none none none
</TABLE>
Certain Factors That May Affect Future Results.
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below and elsewhere in this report. The Company's future operating results
may be affected by a number of factors, including general economic conditions in
both foreign and domestic markets, cyclical factors affecting the Company's
industry, lack of growth in the Company's end-markets, and the Company's ability
to develop, manufacture, and sell both new and existing products at a profitable
yet competitive price.
The industry in which the Company competes is highly competitive and the
Company expects such competition to continue in the future. Most of the
Company's competitors are larger than the Company and have substantially greater
financial, technical, marketing and manufacturing resources. While the Company
has invested in new products, there can be no assurance that it can continue to
introduce new products on a timely basis or that certain of its products will
not be rendered non competitive or obsolete by its competitors.
Item 2. Description of Property.
The Company's principal executive, administrative, manufacturing and
engineering operations are located in a 15,000 square foot leased facility in
Milpitas, California. This facility is occupied under a lease expiring March 31,
2001. Management considers that the current facility is adequate for the present
level of operations and that additional office and factory space is available in
the immediate vicinity. The Company also leases sales offices near Los Angeles,
California; Chicago, Illinois; Philadelphia, Pennsylvania; and Houston, Texas.
Item 3. Legal Proceedings.
To the knowledge of the Company's management, there are no legal
proceedings pending to which the Company is a party or to which the Company's
property is subject.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters to a vote of security holders
during the fourth quarter of the fiscal year ended December 31, 1998.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) There is not an active market for the Company's stock and the
Company's stock is currently traded solely on the NASDAQ over-the-counter
Bulletin Board. To the Company's knowledge, there is only infrequent trading in
limited volume. The Company understands that trades in Common Stock from
September 1998 to December 1998 have been effected at prices ranging from $0.75
to $1.125 per share. Because trading of the Company's stock is so infrequent,
the Company is unable to provide historic price information.
(b) As of March 15, 1999 there were approximately 355 holders of record of
the Company's Common Stock.
(c) The Company has never paid cash dividends on its Common Stock. The
Company presently intends to retain any future earning to finance operations and
the further development of the Company's business and does not presently intend
to disperse any cash dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Fiscal 1998 vs. Fiscal 1997
For the year ended December 31, 1998, the Company reported net sales of
$6,981,122 compared to net sales of $5,130,597 in the prior year. Income before
income taxes was $321,467 in 1998 compared to $141,065 in the previous year. Net
income in 1998 was $220,726. Net income in 1997 was $189,204 and was impacted by
the effect of a net income tax benefit of $48,139. The components of the income
tax benefit are described in note 7 to the financial statements incorporated in
this report as Part IV.
Sales increased by 36.1% over the prior year. There were no significant
changes in selling prices. The level of sales of Sentry systems, the Company's
primary, digital based, product group, was higher in 1998 than in 1997. 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. Also, a single order for analog based gas sensor modules
to an international customer accounted for approximately 6.5% of net sales. In
addition to the increases in sales to commercial accounts, sales to the U.S.
Navy increased due to orders for spare parts and new monitoring systems.
Gross profit as a percent of sales was 58.8% in 1998 compared to 63.0% in
the prior year. Several factors contributed to lower margins, including
discounts allowed for several large orders, and an increase in the volume of
sales of "buy out" products and services, which have lower margins. Buy outs are
products and services which are required to be supplied by the Company as part
of large projects but which are not manufactured by the Company. These include
battery back up systems, specialized controllers and professional services to
integrate those items into gas monitoring systems. Sales of these items are
generally recognized within the Sentry product group and they contributed to the
increase in total sales of that group. Management believes that the selling
activities which caused the lower margins were necessary to maintain competitive
positions in the respective market areas, but intends to take specific actions
to attempt to return future margins to historical levels which are above 60% of
sales.
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<PAGE>
There were no significant increases in manufacturing labor costs and
materials costs, beyond normal inflation, which contributed to the change in
gross profit.
Research and development expenses, which include sustaining engineering
for existing products, were $638,430, or 9.1% of net sales, in the year ended
December 31, 1998 compared to $423,058, or 8.2% of sales, in the year ended
December 31, 1997. The higher research and development expenses were undertaken
to add options and features to several products identified as key to future
sales growth. The new items included optional accessories for the Sentry system,
a "junior" Environment Controller for specific telephone company applications,
and a new hardware platform and additional protocol drivers for the
Communications Bridge. Protocol Drivers are software programs which enable the
Bridge to share data between instruments which communicate in non-compatible
protocols. The Company intends to continue development of an extensive library
of Protocol Drivers.
Selling and marketing expenses increased to $2,091,145, or 30.0% of net
sales, in 1998 from $1,705,671 or 33.2% of net sales, in the prior year. In
1998, sales commissions paid to employees and independent representatives
increased due to the higher level of sales. In June, 1998 an additional regional
sales office was opened in Southern California resulting in additional salary
costs and other related expenses. There were no other significant changes in
selling and marketing expenses in 1998 compared to 1997.
General and administrative expenses increased to $1,082,282 in 1998 from
$992,529 in 1997. The higher general and administrative expenses are the result
of higher wage and salary costs, increased depreciation costs due to the
acquisition of a new integrated business software package and related consulting
costs.
Interest income in 1998 was $31,901 compared with interest income of
$28,050 in 1997. Due to the fact that the Company did not have any outstanding
long-term debt during 1998, the Company did not incur any interest expense for
the year.
Income tax expense in 1998 was $100,741. In 1997 an income tax benefit of
$48,139 resulted from changes in deferred tax assets and liabilities and a
change in the Company's valuation allowance.
Acquisitions.
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.
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<PAGE>
In consideration for the acquisition of the Bridge, the Company paid Mr.
Hague $130,300 cash and issued 211,325 shares of unregistered common stock.
On December 14, 1998 the Company entered into an agreement to acquire
specified assets of Montech Holdings Inc., (Montech) a Florida Corporation. The
assets to be acquired include certain know how, manufacturing designs, customer
lists and related documentation related to a product known as the MC-25
Environment Controller. The MC-25 is a similar product to the Company's existing
line of Environmental Controllers which are sold for telephone company
applications. Montech and Sierra Monitor serve generally the same customer base.
Under the agreement Montech will agree 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.
In consideration for the acquisition of the MC-25, the Company paid
Montech $150,000 cash. Of that amount, $50,000 had been paid as of December 31,
1998.
Fiscal 1997 vs. Fiscal 1996
For the year ended December 31, 1997, the Company reported net sales of
$5,130,597 compared to net sales of $5,040,177 in the prior year. Income before
income taxes was $141,065 in 1997 compared to $139,930 in the previous year. Net
income in 1997 was $189,204 and was impacted by the effect of a net income tax
benefit of $48,139. Net income in 1996 was $149,430 and was impacted by the
effect of a net income tax benefit of $9,500.
In 1997 sales increased by 1.8% over the prior year. There were no
significant changes in selling prices. The increase in net sales was primarily
the result of the improved volume of sales of gas detection products used by
telephone companies including the Company's new Environment Controller. Lower
sales of the Company's primary gas detection product, Sentry, were partially
offset by improved sales of other industrial gas detection products and higher
sales to the U. S. Navy.
Gross profit as a percent of sales was 63.0% in 1997 compared to 61.6% in
the prior year. Manufacturing labor costs and materials costs, as a percent of
sales, remained approximately constant in each of the two years.
Research and development expenses, which include sustaining engineering
for existing products, were $423,058, or 8.2% of net sales, in the year ended
December 31, 1997 compared to $439,017, or 8.7% of sales, in the year ended
December 31, 1996. Research and development expenses in 1997 and 1996, included
costs of approximately $21,578 and $75,300, respectively, for outside
consultants and other purchased services used in the development of new products
including the Environment Controller which was released for sale in telephone
company applications late in the second half of 1996.
Selling and marketing expenses increased in 1997 to $1,705,671 or 33.2% of
net sales, from $1,662,602, or 33.0% of net sales, in the prior year. There were
no significant changes in selling and marketing expenses in 1997 compared to
1996 except that commissions paid to independent representatives were 7.6% of
sales compared to 8.5% in the prior year.
General and administrative expenses increased to $992,529 in 1997 from
$891,197 in 1996. The higher general and administrative expenses were the result
of higher labor expenses, due to employee additions and temporary workers, and
higher professional services expenses.
Interest income in 1997 was $28,050 compared with interest income of
$28,417 in 1996. Due to the fact that the Company did not have any outstanding
long-term debt during 1997, the Company did not incur any interest expense for
the year.
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<PAGE>
An income tax benefit of $48,139 in 1997 resulted from changes in deferred
tax assets and liabilities and a change in the valuation allowance, compared to
a benefit of $9,500 in 1996.
Liquidity and Capital Resources.
The Company's working capital was $2,277,922 at December 31, 1998
essentially unchanged from $2,183,675 at December 31, 1997.
Inventory levels increased 18.5% during 1998 due, in part, to an increase
in the number of manufactured products offered by the Company. Inventory on hand
was $945,189 at December 31, 1998. Inventories are maintained at high levels,
relative to conventional manufacturing norms, to insure the Company's ability to
provide quick delivery of customer orders. The Company believes that its ability
to deliver product with short lead times provides a competitive advantage.
The Company had no long term liabilities and no bank borrowings at
December 31, 1998.
The Company maintains a $250,000 line of credit, secured by accounts
receivable, with its commercial bank. There were no borrowings against the line
of credit in 1998. The Company is in full compliance with the terms of the line
of credit and currently anticipates that it will be renewed on similar terms
upon its expiration in June 1999.
At December 31, 1998 the balance sheet reflected $393,667 of cash and cash
equivalents, $245,522 of short term investments and $1,123,073 of net accounts
receivable. Total cash, cash equivalents and short term investments of were
$639,189 at the end of 1998 compared to $739,318 at the end of 1997. The short
term investments consist of certain Federal Agency Securities with original
maturities greater than 90 days. Management believes that its present resources,
including cash, cash equivalents, bank line of credit and accounts receivable,
are sufficient to fund its anticipated level of operations through at least
January 1, 2000.
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, 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.
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<PAGE>
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.
Recent Accounting Pronouncements.
In March 1998, The American Institute of Certified Public Accounts issued
Statement of Position 98-1 (SOP 98-1) Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires that certain
costs during the design, coding, installation to hardware, and testing be
capitalized. Internal and external costs associated with the preliminary project
stage and the post-implementation/operation stage should be expensed as
incurred. The Company, will adopt this statement in 1999. The adoption of the
SOP 98-1 is not expected to have a material impact on results of operation and
financial condition.
In 1998, the American Institute of Certified Public Accounts issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities". This SOP provides guidance on the financial reporting of start-up
costs and organization costs. The Company, which will adopt SOP 98-5 during
1999, does not anticipate that either statement will have material impact on its
financial position or operating results.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
is effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. SFAS No. 133 requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or there comprehensive income,
depending on whether a derivative is designed as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company does not expect that
the adoption of SFAS No. 133 will have a material impact on its financial
statements.
Item 7. Financial Statements and Supplementary Data.
Reference is made to the financial statements and supplementary data set
forth in this Form 10-KSB report in Part IV, as indexed in Part III, Item 13,
and by such reference such information is incorporated herein.
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
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<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
<TABLE>
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of December 31, 1998, based
upon information furnished by such persons:
<CAPTION>
Director or
Name Principal Occupation or Employment Age Officer Since
- ---- ---------------------------------- --- -------------
<S> <C> <C> <C>
Gordon R. Arnold Director of the Company; 53 1984
President, Chief Executive Officer and Secretary
Michael C. Farr Vice President of Operations 41 1986
Stephen R. Ferree Vice President of Marketing 51 1992
Edward K. Hague Vice President of Engineering 37 1997
C. Richard Kramlich Director of the Company; 63 1980
General Partner of New Enterprise Associates
a venture capital firm.
Jay T. Last Director of the Company; 69 1977
President, Hillcrest Press (Publisher), and
business and technical consultant.
Robert C. Marshall Director of the Company; 67 1998
Principal of Selby Venture Partners
a venture capital firm.
</TABLE>
All officers of the Company serve at the discretion of the Board of
Directors. There are no family relationships between any of the directors and
officers of the Company.
Gordon R. Arnold joined Sierra Monitor Corporation, a California
corporation ("Old Sierra") in December 1979 as Operations Manager and Vice
President. He became President in 1984 and Chief Executive Officer in 1985. In
September 1989, Old Sierra merged into UMF Systems, Inc., a California
corporation ("UMF"), and UMF changed its name to "Sierra Monitor Corporation."
Mr. Arnold has served as the Company's President and Chief Financial Officer
since the merger and as the Company's Secretary since February 1993. Mr. Arnold
was also a director of Old Sierra from 1984 until the merger with UMF.
Michael C. Farr joined Old Sierra in December 1983 as Operations Manager.
He became Vice President, Operations in May, 1986. Since the merger Mr. Farr has
served as Vice President, Operations of the Company.
Stephen R. Ferree joined the Company as Marketing Manager in January 1990.
He became Vice President, Marketing in May, 1992.
Edward K. Hague joined the Company as Engineering Manager in July, 1997.
He became Vice President, Engineering, in October 1997. Mr. Hague has consulted
in the field of industrial communications for more than 10 years, initially
consulting to Intellution, Inc., a leading process control software company,
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<PAGE>
then to various companies, working on communication architecture design for IBM,
Marin Municipal Water District, U.S. Postal Service, PG&E, Boeing and the U. S.
Navy.
With respect to the other information required by this item, the sections
entitled "Election of Directors - Nominees" and "Section 16(a) Beneficial
Ownership Reporting Compliance" of the Company's Information Statement pursuant
to Section 14(c) of the Securities Exchange Act of 1934 ("Information
Statement") for the Company's Annual Meeting of Shareholders to be held on May
11, 1999 and to be filed with the SEC within 120 days of December 31, 1998 are
incorporated by reference herein.
Item 10. Executive Compensation.
The sections entitled "Compensation of Executive Officers" and
"Compensation of Directors" in the Company's Information Statement are
incorporated by reference herein.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's Information Statement is incorporated by reference
herein.
Item 12. Certain Relationships and Related Transactions.
The section entitled "Certain Relationships and Related Transactions" in
the Company's Information Statement is incorporated by reference herein.
Item 13. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a) Financial Statements and Schedule. The following documents are
filed as part of this report:
Independent Auditors' Report.
Financial Statements and Schedules:
Balance Sheets at December 31, 1998 and 1997.
Statements of Operations for the years ended December 31,
1998, 1997, and 1996.
Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997, and 1996.
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996.
Notes to Financial Statements.
Schedule II - Valuation and Qualifying Accounts.
All schedules omitted are not applicable, not required or the
required information is included in the financial statements or
notes thereto.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
fourth quarter ended December 31, 1998.
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<PAGE>
(c) Exhibits.
Exhibit Number Description
-------------- -----------
3.0 Articles of Incorporation of the Registrant. (Incorporated by
reference to Exhibit 3 of Registrant's annual report on Form
10-K for the fiscal year ended December 31, 1989 (the "1989
Form 10-K"))
3.1 Bylaws of Registrant. (Incorporated by reference to Exhibit
3.1 of the 1989 Form 10-K)
10.1 1986 Stock Option Plan of Registrant as amended December 1,
1987. (Incorporated by reference to Exhibit 10.1 of the 1989
Form 10-K)
10.2 1996 Stock Option Plan of Registrant. (Incorporated by
reference to Exhibit 4.1 of Registrant's Registration
Statement on S-8 (File No. 333-18241) filed with the SEC on
December 19, 1996)
10.3 Standard Industrial Lease dated January 29, 1986, by and
between Geomax and Registrant, with amendment thereto dated
3/30/90. (Incorporated by reference to Exhibit 10.3 of the
Company's annual report on Form 10-K for the fiscal year ended
December 31, 1990) 10.4 Assignment of Intellectual Property
and Transfer of Rights. (Incorporated by reference to the
Company's quarterly report on Form 10QSB for the quarter ended
September 30, 1998)
23.1 Report on Financial Statement Schedule and Consent of
Independent Auditors. (See page 14)
27.0 Financial Data Schedule.
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized, on March 26, 1999.
SIERRA MONITOR CORPORATION
(Registrant)
By /s/ Gordon R. Arnold
----------------------------------
Gordon R. Arnold
Chief Executive Officer
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<CAPTION>
Date Title Signature
---- ----- ---------
<S> <C> <C>
March 26, 1999 Chief Executive Officer, Chief
Financial Officer and Director
(Principal Executive, Financial
and Accounting Officer) By /s/ Gordon R. Arnold
------------------------
Gordon R. Arnold
March 26, 1999 Director By /s/ C. Richard Kramlich
------------------------
C. Richard Kramlich
March 26, 1999 Director By /s/ Jay T. Last
------------------------
Jay T. Last
March 26, 1999 Director By /s/ Robert C. Marshall
------------------------
Robert C. Marshall
</TABLE>
-12-
<PAGE>
PART IV
SIERRA MONITOR CORPORATION
Financial Statements
December 31, 1998, 1997, and 1996
(With Independent Auditors' Report Thereon)
-13-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Sierra Monitor Corporation:
We have audited the accompanying balance sheets of Sierra Monitor Corporation as
of December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sierra Monitor Corporation as
of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/S/KPMG LLP
Mountain View, California
February 19, 1999
-14-
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Balance Sheets
December 31, 1998 and 1997
<CAPTION>
Assets 1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents 393,667 297,485
Short-term investments 245,522 441,833
Trade receivables, less allowance for doubtful accounts of
$125,488 and $41,003 in 1998 and 1997, respectively 1,123,073 833,344
Notes receivable 35,002 39,422
Inventories 945,189 797,546
Prepaid expenses 94,107 138,210
Deferred income taxes 179,636 113,172
----------- -----------
Total current assets 3,016,196 2,661,012
Property and equipment, net 232,600 137,914
Deferred income taxes 113,635 186,000
Other assets 345,776 47,562
----------- -----------
$ 3,708,207 3,032,488
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 295,274 153,916
Accrued compensation expenses 281,426 224,762
Other current liabilities 56,522 54,804
Income taxes payable 105,052 43,855
----------- -----------
Total current liabilities 738,274 477,337
Commitments
Shareholders' equity:
Common stock; 20,000,000 shares authorized; 10,967,588 and
10,566,263 shares issued and outstanding in 1998 and
1997, respectively 3,159,944 2,937,035
Accumulated deficit (136,771) (357,497)
Notes receivable from shareholders (53,240) (24,387)
----------- -----------
Total shareholders' equity 2,969,933 2,555,151
----------- -----------
$ 3,708,207 3,032,488
=========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
-15-
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Operations
Years ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales $ 6,981,122 5,130,597 5,040,177
Cost of goods sold 2,875,221 1,896,324 1,935,848
------------ ------------ ------------
Gross profit 4,105,901 3,234,273 3,104,329
------------ ------------ ------------
Operating expenses:
Research and development 638,430 423,058 439,017
Selling and marketing 2,091,145 1,705,671 1,662,602
General and administrative 1,082,282 992,529 891,197
------------ ------------ ------------
3,811,857 3,121,258 2,992,816
------------ ------------ ------------
Income from operations 294,044 113,015 111,513
Interest income 31,901 28,050 28,417
Other expense (4,478) -- --
------------ ------------ ------------
Income before income tax
expense (benefit) 321,467 141,065 139,930
Income tax expense (benefit) 100,741 (48,139) (9,500)
------------ ------------ ------------
Net income $ 220,726 189,204 149,430
============ ============ ============
Net income per share:
Basic $ 0.02 0.02 0.01
============ ============ ============
Diluted $ 0.02 0.02 0.01
============ ============ ============
Weighted-average number of shares used in per share computations:
Basic 10,700,038 10,466,919 10,313,044
============ ============ ============
Diluted 11,084,058 10,728,834 10,731,161
============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
-16-
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Shareholders' Equity
Years ended December 31, 1998, 1997, and 1996
<CAPTION>
Notes
Common stock receivable Total
----------------------- Accumulated from shareholders'
Shares Amount deficit shareholders equity
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balances as of
December 31, 1995 10,276,888 $2,903,270 (696,131) (12,603) 2,194,536
Exercise of stock options 55,625 9,223 -- -- 9,223
Proceeds from notes receivable -- -- -- 2,876 2,876
Net income -- -- 149,430 -- 149,430
---------- ---------- ---------- ---------- ----------
Balances as of
December 31, 1996 10,332,513 2,912,493 (546,701) (9,727) 2,356,065
Exercise of stock options 233,750 24,542 -- (21,946) 2,596
Proceeds from notes receivable -- -- -- 7,286 7,286
Net income -- -- 189,204 -- 189,204
---------- ---------- ---------- ---------- ----------
Balances as of
December 31, 1997 10,566,263 2,937,035 (357,497) (24,387) 2,555,151
Exercise of stock options 190,000 38,000 -- (37,000) 1,000
Proceeds from notes receivable -- -- -- 8,147 8,147
Issuance of common stock
for technology rights 211,325 184,909 -- -- 184,909
Net income -- -- 220,726 -- 220,726
---------- ---------- ---------- ---------- ----------
Balances as of
December 31, 1998 10,967,588 $3,159,944 (136,771) (53,240) 2,969,933
========== ========== ========== ========== ==========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
-17-
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 220,726 189,204 149,430
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 140,820 122,024 127,014
Loss on disposal of fixed assets -- -- 334
Allowance for doubtful accounts 84,485 (4,595) (15,558)
Deferred income taxes 5,901 (88,172) (23,000)
Changes in operating assets and liabilities:
Trade receivables (374,214) 212,240 (126,935)
Notes receivable 4,420 (39,422) --
Inventories (147,643) (79,681) (112,385)
Prepaid expenses 44,103 (86,654) (11,356)
Accounts payable 141,357 (137,455) (14,322)
Accrued compensation expenses 56,664 10,354 (51,157)
Other current liabilities 1,718 16,063 15,399
Income taxes payable 61,197 20,308 12,432
--------- --------- ---------
Net cash provided by (used in)
operating activities 239,534 134,214 (50,104)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (235,504) (125,340) (77,189)
Short-term investments, net 196,311 (195,052) 330,343
Other assets (113,306) (5,129) (46,793)
--------- --------- ---------
Net cash (used in) provided by
investing activities (152,499) (325,521) 206,361
--------- --------- ---------
Cash flows from financing activities:
Proceeds from notes receivable 8,147 7,286 2,876
Proceeds from exercise of stock options and
warrant, net of notes receivable 1,000 2,596 9,223
--------- --------- ---------
Net cash provided by financing activities 9,147 9,882 12,099
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 96,182 (181,425) 168,356
Cash and cash equivalents at beginning of year 297,485 478,910 310,554
--------- --------- ---------
Cash and cash equivalents at end of year $ 393,667 297,485 478,910
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year-- income taxes $ 27,737 19,800 --
========= ========= =========
Noncash financing activities:
Common stock issued in exchange for notes
from shareholders $ 37,000 21,946 --
========= ========= =========
Common stock issued for technology rights $ 184,909 -- --
========= ========= =========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
-18-
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1998, 1997, and 1996
(1) Summary of the Company and Significant Accounting Policies
(a) The Company
Sierra Monitor Corporation (the Company) was incorporated in
September 1989 to effect the merger of UMF Systems, Inc. (UMF) and
Sierra Holdings Corporation (SHC), which was originally
incorporated as Sierra Monitor Corporation in 1978. The Company's
principal line of business is the design, manufacture, and
marketing of instruments that detect and monitor hazardous gases.
(b) Segment Reporting
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 131 establishes standards for the manner in
which public companies report information about operating segments
in annual and interim financial statements. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. The method for determining
what information to report is based on the way management
organizes the operating segments within the Company for making
operating decisions and assessing financial performance. The
Company's chief operating decision-maker is considered to be the
Company's chief executive officer (CEO). The CEO reviews financial
information presented on an entity level basis accompanied by
desegregated information about revenues by product type and
certain information about geographic regions for purposes of
making operating decisions and assessing financial performance.
The entity level financial information is identical to the
information presented in the accompanying statements of
operations. Therefore, the Company has determined that it operates
in a single operating segment: gas detection and monitoring
devices.
(c) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(d) Revenue Recognition
Generally, sales are recorded when products are shipped or
services are rendered. Revenues from government contracts are
recognized utilizing the percentage-of-completion method. Contract
revenues are recorded as the related costs (including certain
general and administrative costs), which contribute to contract
performance, are incurred.
-19-
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1998, 1997, and 1996
(e) Cash, Cash Equivalents, and Short-Term Investments
Cash and cash equivalents consist of cash on deposit with banks
and highly liquid money market instruments with purchased
maturities of 90 days or less. Certain certificates of deposits
with purchased maturities greater than 90 days are classified as
short-term investments, and are stated at fair value (approximates
cost).
(f) Inventories
Inventories are stated at the lower of cost (first in, first out)
or market.
(g) Property and Equipment
Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is provided on the
straight-line method over the estimated useful lives of the
respective assets, generally two to three years. Leasehold
improvements are amortized using the straight-line method over the
shorter of the lease term or the useful life of the related asset.
The Company reviews property and equipment for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
property and equipment is measured by comparison of its carrying
amount, including the unamortized portion of any goodwill
allocated to the property and equipment to future undiscounted
operating cash flows the property and equipment are expected to
generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the property and equipment exceeds its fair
market value. To date, the Company has made no adjustments to the
carrying values of its long-lived assets.
(h) Stock Based Compensation
The Company uses the intrinsic value method of accounting for
stock-based compensation.
(i) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
-20-
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1998, 1997, and 1996
(j) Net Income Per Share
Basic earnings per share (EPS) is computed using the
weighted-average number of shares of common stock outstanding
during the period. Diluted EPS is computed using the
weighted-average number of shares of common stock outstanding
during the period, plus dilutive common equivalent shares
including stock options using the treasury stock method.
<TABLE>
The following is a reconciliation of the shares used in the
computation of basic and diluted EPS for the years ended December
31, 1998, 1997, and 1996, respectively:
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic EPS - weighted-average
number of shares of common
stock outstanding 10,700,038 10,466,919 10,313,044
Effect of dilutive common
equivalent shares - stock
options outstanding 384,020 261,915 418,117
---------- ---------- ----------
Diluted EPS - weighted-average of
shares of common stock and
common equivalent shares
outstanding 11,084,058 10,728,834 10,731,161
========== ========== ==========
</TABLE>
For purposes of calculating diluted EPS, there were no adjustments
to net income.
For the years ended December 31, 1998 and 1997, options to
purchase 275,000 and 120,000 shares of common stock at an average
price of $0.56 and $0.38, respectively, per share were not
included in the computation of diluted EPS because the options'
exercise price was greater than the average market price of the
shares and the effect would have been antidilutive.
(k) Comprehensive Income
The Company has no significant components of other comprehensive
income and, accordingly, comprehensive income is the same as net
income for all periods.
(l) Other Assets
Other assets consisted primarily of $299,449, net of $15,760 of
accumulated amortization, related to the purchase of technology
rights on September 23, 1998 (see Note 9). Such amount is being
amortized on a straight-line basis over five years.
(m) Reclassification
Certain amounts in the accompanying 1997 financial statements have
been reclassified in order to conform with the presentation of the
1998 financial statements.
-21-
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1998, 1997, and 1996
(2) Inventories
A summary of inventories as of December 31, 1998 and 1997, follows:
1998 1997
-------- --------
Raw materials $348,032 323,237
Work in process 411,846 338,631
Finished goods 185,311 135,678
-------- --------
$945,189 797,546
======== ========
(3) Property and Equipment
A summary of property and equipment as of December 31, 1998 and 1997,
follows:
1998 1997
-------- --------
Machinery and equipment $206,328 278,708
Furniture, fixtures, and leasehold improvements 603,484 591,443
-------- --------
809,812 870,151
Less accumulated depreciation and amortization 577,212 732,237
-------- --------
$232,600 137,914
======== ========
(4) Stock Compensation Plan
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock compensation plan. As
the exercise price of the Company's employee stock options generally
equals the market price of the underlying stock on the date of grant, no
compensation cost has been recognized for its stock options in the
accompanying financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have been
reduced to the pro forma amounts indicated below:
1998 1997
----------- ----------
Net income:
As reported $ 220,726 189,204
Pro forma 191,576 187,683
Net income per share:
As reported (basic and diluted) 0.02 0.02
Pro forma (basic and diluted) 0.02 0.02
During 1996, the Company's 1986 Incentive Stock Option Plan expired.
Subsequently, the shareholders adopted the 1996 Stock Plan and reserved
600,000 shares of common stock for issuance. Under this plan, options may
be granted at the fair market value of the Company's common stock at the
grant date, vest ratably over 4 years, and expire 10 years from the grant
date.
-22-
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1998, 1997, and 1996
Stock options granted were 275,000, 120,000, and -0- during 1998, 1997,
and 1996, respectively. The per share weighted-average fair value of
stock options granted during 1998 and 1997 was $0.58 and $0.20,
respectively, on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions for 1998 and 1997:
expected dividend yield of 0.0% for each year; volatility of 50% for each
year; risk-free interest rate of 5.35% and 5.83%, respectively; and an
expected life of 10 years.
<TABLE>
A summary of stock option transactions for the three years ended December
31, 1998, follows:
<CAPTION>
Weighted-
Weighted- average
average remaining
Range of exercise contractual
Options prices price life (years)
---------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Balance as of 705,000 $ 0.10 - 0.22 0.17 4.3
December 31, 1995
(435,104 exercisable)
Exercised (55,625) 0.10 - 0.22 0.17
Canceled (6,875) 0.10 - 0.22 0.20
--------
Balance as of
December 31, 1996
(476,250 exercisable) 642,500 0.10 - 0.22 0.17 3.6
Granted 120,000 0.34 - 0.38 0.38
Exercised (233,750) 0.10 - 0.22 0.10
Canceled (3,750) 0.20 - 0.22 0.22
--------
Balance as of
December 31, 1997
(323,854 exercisable) 525,000 0.10 - 0.38 0.25 5.5
Granted 275,000 0.56 - 0.75 0.56
Exercised (190,000) 0.20 0.20
Canceled (15,000) 0.20 - 0.22 0.21
--------
Balance as of
December 31, 1998
(204,583 exercisable) 595,000 0.10 - 0.22 0.41 8.3
========
</TABLE>
-23-
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1998, 1997, and 1996
(5) Lease Commitments
The Company leases its facilities under a noncancelable operating lease.
As of December 31, 1998, future minimum payments are as follows:
Year ending
December 31,
------------
1999 $138,824
2000 139,104
2001 37,344
--------
$315,272
========
Rent expense was approximately $146,000, $143,000, and $136,000 in 1998,
1997, and 1996, respectively.
(6) Bank Borrowings
As of December 31, 1998, the Company had a $250,000 bank line of credit
agreement, secured by eligible accounts receivable, that bears interest
at the prime rate (7.75% as of December 31, 1998) plus 1/2%. The line of
credit agreement expires June 5, 1999, and contains certain financial
covenants with which the Company was in compliance as of December 31,
1998. No amounts were outstanding under the credit facility as of
December 31, 1998.
(7) Income Taxes
The components of income taxes (benefit) were as follows:
1998 1997 1996
--------- --------- ---------
Current:
Federal $ 75,435 23,533 --
State 19,405 16,500 13,500
--------- --------- ---------
Total current 94,840 40,033 13,500
--------- --------- ---------
Deferred:
Federal 5,450 (79,972) 8,000
State 451 (8,200) (31,000)
--------- --------- ---------
Total deferred 5,901 (88,172) (23,000)
--------- --------- ---------
$ 100,741 (48,139) (9,500)
========= ========= =========
-24-
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1998, 1997, and 1996
The provision for income taxes (benefit) differs from the amounts
computed by applying the statutory federal income tax rate of 34% as follows:
1998 1997 1996
--------- --------- ---------
Computed tax expense $ 109,299 48,000 48,000
State taxes, net of federal benefit 13,105 5,300 8,900
Decrease in valuation allowance -- (100,000) (48,000)
Other (21,663) (1,439) (18,400)
--------- --------- ---------
$ 100,741 (48,139) (9,500)
========= ========= =========
<TABLE>
The tax effects of temporary differences that gave rise to significant
portions of deferred tax assets are as follows:
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 49,982 18,000
Inventories, principally due to additional costs
inventoried for tax purposes 83,096 72,000
State tax expense on temporary differences 11,844 (9,000)
Accruals for financial statement purposes
not currently deductible 34,714 32,000
Property and equipment, principally due to
differences in depreciation 59,755 80,000
Tax credit carryforwards 53,880 106,000
Other -- 172
-------- --------
Total gross deferred tax assets $293,271 299,172
======== ========
</TABLE>
In assessing the reliability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the projected future taxable income and
tax planning strategies in making this assessment. Based upon the level
of historical taxable income and projections for future taxable income
over the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits
of these deductible differences.
The Company has federal tax credit carryforwards of approximately
$53,880, which can be used to offset against future income taxes. The
credit carryforwards will expire beginning in 2004.
-25-
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1998, 1997, and 1996
(8) Fair Value of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
defines the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between
willing parties. All financial instruments included in the accompanying
financial statements approximate fair value because of the short maturity
of those instruments.
Financial instruments that potentially subject the Company to
concentrations of credit risk are accounts receivable, cash equivalents,
and short-term investments, which the Company places with high credit
qualified financial institutions. The Company sells its products to
companies located primarily in the United States, Brazil, and Taiwan. The
Company's credit risk is concentrated primarily in the United States and
Brazil. The Company does not have a significant concentration of credit
risk with any single customer. Sales to international customers in 1998
were approximately 14% of total sales. The Company performs ongoing
credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Company maintains an
allowance for doubtful accounts to cover potential credit losses.
(9) Acquisitions
In September 1998, the Company entered into an asset purchase agreement
to purchase certain technology rights in exchange for the issuance of
211,325 shares of the Company's common stock and payment of $130,300 in
cash.
In December 1998, the Company signed a letter of intent with Montech
Holdings, Inc. to purchase certain assets for cash consideration of
approximately $150,000. Pursuant to an Asset Purchase Agreement, the
acquisition became effective February 1, 1999.
-26-
<PAGE>
Schedule II
SIERRA MONITOR CORPORATION
Valuation and Qualifying Accounts
Additions
Balance at charged to Deductions Balance
beginning costs and from at end
Description of year expenses reserves of year
----------- ------- -------- -------- -------
Year ended December 31,
1998, allowance for
doubtful accounts $41,003 91,750 (7,265) 125,488
======= ======= ======= =======
Year ended December 31,
1997, allowance for
doubtful accounts $45,598 11,603 (16,198) 41,003
======= ======= ======= =======
Year ended December 31,
1996, allowance for
doubtful accounts $61,156 7,000 (22,558) 45,598
======= ======= ======= =======
-27-
<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-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<PERIOD-TYPE> 12-MOS
<CASH> 394
<SECURITIES> 246
<RECEIVABLES> 1249
<ALLOWANCES> 125
<INVENTORY> 945
<CURRENT-ASSETS> 3016
<PP&E> 810
<DEPRECIATION> 577
<TOTAL-ASSETS> 3078
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0
0
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</TABLE>
