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, 1999.
[ ] 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
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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. [X]
The Registrant's revenues for the fiscal year ended December 31, 1999 were
$6,759,192. The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 15, 2000 was approximately
$4,569,778 based upon the last reported sale, which occurred on March 7, 2000.
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, 2000 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 16, 2000.
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 1999, revenue from gas detection instruments and
environment controllers sold to the telecommunications industry was
approximately 29% of the Company's sales.
The Company also manufactures 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 1999, revenue from Bridge products was approximately 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. Over the last three fiscal years,
the research and development expenses, which include costs for sustaining
engineering, have averaged approximately 9.7% of sales. In 1999, research and
development expenses totaled $797,057 compared to $638,430 in 1998 and $423,058
in 1997.
The Company's products are sold through a network of sales representatives
supervised by regional managers. There are currently 28 authorized
representatives with a total of 43 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, two Product Specialists 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. In connection with the acquisition
of certain assets of Montech Holdings, Inc., described in Part II Item 6, in
February 1999, a sales and manufacturing office was opened in Florida.
At December 31, 1999, the Company had 44 employees, of whom 6 were in
research and development; 12 were in marketing, sales and service; 4 were in
general administration; and 22 were in operations and manufacturing. At that
date, 37 of the Company's employees were located in Milpitas, California, 3 were
located in Fort Myers, Florida, 1 was located in Temple City, California, 1 was
located in Chicago, Illinois, 1 was located in Philadelphia, Pennsylvania, and 1
was located in Corpus Christi, 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 devices and other industrial 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
is expected to account for up to 50% of the Company's sales and, as such,
economic factors or labor problems could affect Company sales to that industry.
The commercial order backlog for the Company's products at December 31,
1999 was $731,337 compared with $587,156 at December 31, 1998. 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
1999 and 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 were 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 EIT Inc., Detector
Electronics Corporation, Draeger Inc., Gastech Inc., General Monitors Inc., Mine
Safety Appliance Company, Seiger, Ltd., and Sensidyne Inc.
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<PAGE>
Selected Financial Data.
<TABLE>
The following table sets forth the selected financial data for each of the
last five fiscal periods ended December 31, 1995 through 1999:
<CAPTION>
Years Ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net sales $ 6,759,192 $ 6,981,122 5,130,597 5,040,177 4,773,464
Net income (loss) $ (77,669) $ 220,726 189,204 149,430 18,024
Net income (loss) per share - $ (0.01) $ 0.02 0.02 0.01 0.00
basic
Net income (loss) per share - $ (0.01) $ 0.02 0.02 0.01 0.00
diluted
Total assets $ 3,633,683 $ 3,708,207 3,032,488 2,924,132 2,800,251
Long term liabilities $ -- $ -- -- -- --
Cash distributions per none none none none none
common share
</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. The Company also leases a 3,000 square foot sales and manufacturing
facility in Fort Myers, Florida under a lease expiring July 31, 2002. The
Company has agreed to lease an additional, contiguous 2,000 square feet at the
Fort Myers facility with an anticipated occupancy date of April 1, 2000. At that
time, the lease will be extended to a period of three years from date of
occupancy. Management considers that the current facilities are 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.
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<PAGE>
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, 1999.
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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 1999 to December 1999 have been effected at prices ranging from $0.25
to $1.00 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, 2000 there were approximately 349 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 1999 vs. Fiscal 1998
For the year ended December 31, 1999, the Company reported net sales of
$6,759,192 compared to net sales of $6,981,122 in the prior year. Loss before
income taxes was $112,430 in 1999 compared to income before income taxes of
$321,467 in the previous year. Net loss in 1999 was $77,669. Net income in 1998
was $220,726.
Sales decreased by approximately 3% compared to the prior year. Although
there were no significant changes in selling prices, there were several
significant changes in product mix. The level of sales of Sentry systems, the
Company's primary, digital based, product group, was lower in 1999 than in 1998.
Sales of Sentry systems can be influenced by release of large orders for
construction projects. Few such projects were shipped in 1999 compared to the
number shipped in 1998. Sales of analog based gas sensor modules returned to
historical levels after a single order to an international customer had
contributed to a higher level in 1998. Sales to the U.S. Navy also returned to
historical levels in 1999 compared to a higher sales level in 1998. Offsetting
most of the reductions of sales of gas detection products, sales of environment
controllers and gas monitors for use in telephone company applications increased
to approximately 29% of the Company's sales in 1999 compared to approximately
14% in 1998. In addition, sales of the Company's Communications Bridge increased
from less than 1% of sales in 1998 to approximately 5% of sales in 1999.
Gross profit as a percent of sales was 61.6% in 1999 compared to 58.8% in
the prior year. In 1998, several factors contributed to lower margins than
historical levels, 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.
In 1999, management took specific actions to return margins to historical levels
which have been above 60% of sales. Those actions included modification of
compensation plans, management review of sales discount
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<PAGE>
proposals and selective price increases. 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, increased to $797,057 or 11.8% of net sales, in the year
ended December 31, 1999 compared to $638,430, or 9.1% of sales, in the year
ended December 31, 1998. The Company has continued to make significant
investments in the development of an improved 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 $2,234,387 or 33.1% of net
sales in 1999, from $2,091,145, or 30.0% of net sales, in the prior year. The
changes in product mix in 1999, described above, resulted in a higher percentage
of sales for which sales commissions were paid to employees and to independent
representatives compared to 1998. In addition, the full year effect of the
addition of a regional sales office in 1998 and an additional sales office in
Florida resulted in increased salary and benefit expenses.
General and administrative expenses increased to $1,250,414 in 1999 from
$1,082,282 in 1998. The higher general and administrative expenses are the
result of higher wage and salary costs due to the addition of administrative
personnel in both the California and the Florida offices.
Interest income in 1999 was $18,967 compared with interest income of
$31,901 in 1998. Interest expense in 1999 was $2,884 compared with no interest
expense in 1998.
Due to the loss from operations, a 1999 income tax benefit of $34,761 was
realized, compared to income tax expense in 1998 of $100,741.
Acquisition of Assets.
On February 1, 1999 the Company acquired specified assets of Montech
Holdings Inc., (Montech) a Florida Corporation. The assets acquired include
certain know how, manufacturing designs, customer lists and documentation
related to a product known as the MC-25 Environment Controller. The MC-25, which
is now marketed as a Sierra Monitor Model 2460 Controller, is a similar product
to the Company's original line of Environmental Controllers, marketed as Models
2440 and 2450, which are sold for telephone company applications. Montech and
Sierra Monitor served generally the same customer base in these areas. Under the
asset purchase agreement, Montech 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.
In consideration for the acquisition of the MC-25 and related assets, the
Company paid Montech $150,000 cash. In addition selected items of inventory were
purchased at cost and certain office and factory equipment were purchased as
used capital equipment.
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.
Sales for 1998 increased by 36.1% over the prior year. 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
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<PAGE>
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. 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.
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.
Liquidity and Capital Resources.
The Company's working capital at December 31, 1999, was $2,189,339 which
was essentially unchanged from $2,277,922 at December 31, 1998.
Inventory levels increased 28% during 1999 following an 18.5% increase in
the prior year. The increases are due, in part, to an increase in the number of
manufactured products offered by the Company.
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<PAGE>
The increased number also includes the acquired products known as the
Communications Bridge and the Model 2460. Inventory on hand was $1,166,648 at
December 31, 1999. 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, 1999.
The Company maintains a $250,000 line of credit, secured by accounts
receivable, with its commercial bank. At December 31, 1999 there were no
outstanding borrowings against the line of credit. The Company currently
anticipates that it will be renewed on similar terms upon its expiration in June
2000.
At December 31, 1999 the balance sheet reflected $606,939 of cash and
$801,593 of net accounts receivable. At December 31, 1998, total cash, cash
equivalents and short term investments were $639,189 and net accounts receivable
were $1,123,073. The reduction in cash and net receivables is due, primarily, to
the use of cash for the acquisition described above, and for the increase in
inventories. Management believes that its present resources, including cash,
bank line of credit and accounts receivable, are sufficient to fund its
anticipated level of operations through at least January 1, 2001.
Year 2000 Preparation and Results.
As a result of its planning and preparation, the Company experienced no
adverse impact of the year 2000 roll-over. The Company does not anticipate any
further expense related to this event.
Recent Accounting Pronouncements.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the Company expects that the adoption of SFAS No. 133
will not have a material impact on its financial position, results of
operations, or cash flows. The Company will be required to adopt SFAS No. 133,
as amended, in fiscal 2001.
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, 1999, 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; 54 1984
President, Chief Executive Officer and Secretary
Michael C. Farr Vice President of Operations 42 1986
Stephen R. Ferree Vice President of Marketing 52 1992
Edward K. Hague Vice President of Engineering 38 1997
C. Richard Kramlich Director of the Company; 64 1980
General Partner of New Enterprise Associates
a venture capital firm.
Jay T. Last Director of the Company; 70 1977
President, Hillcrest Press (Publisher), and
business and technical consultant.
Robert C. Marshall Director of the Company; 68 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
16, 2000 and to be filed with the SEC within 120 days of December 31, 1999 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, 1999 and 1998.
Statements of Operations for the years ended December 31,
1999, 1998, and 1997.
Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998, and 1997.
Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997.
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, 1999.
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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 the
Exhibit 3.1 of Company's quarterly report on Form 10QSB
for the quarter ended June 30, 1998)
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)
10.5 Assignment of Intellectual Property, Transfer of Rights,
and Asset Purchase Agreement. (Incorporated by reference
to the Company's quarterly report on Form 10QSB for the
quarter ended March 31, 1999)
23.1 Report on Financial Statement Schedule and Consent of
Independent Auditors.
27.0 Financial Data Schedule.
<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 28, 2000.
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 28, 2000 Chief Executive Officer, Chief
Financial Officer and Director
(Principal Executive, Financial
and Accounting Officer) By /s/ Gordon R. Arnold
---------------------
Gordon R. Arnold
March 28, 2000 Director By /s/ C. Richard Kramlich
------------------------
C. Richard Kramlich
March 28, 2000 Director By /s/ Jay T. Last
----------------
Jay T. Last
March 28, 2000 Director By /s/ Robert C. Marshall
-----------------------
Robert C. Marshall
</TABLE>
- 12 -
<PAGE>
PART IV
SIERRA MONITOR CORPORATION
Financial Statements
December 31, 1999, 1998, and 1997
(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
(the Company) as of December 31, 1999 and 1998, and the related statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1999. 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, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/S/ KPMG LLP
Mountain View, California
February 25, 2000
- 14 -
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Balance Sheets
December 31, 1999 and 1998
<CAPTION>
Assets 1999 1998
------------------- -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 606,939 393,667
Short-term investments -- 245,522
Trade receivables, less allowance for doubtful accounts of
$138,572 and $125,488 in 1999 and 1998, respectively 801,593 1,123,073
Notes receivable 27,084 35,002
Inventories 1,166,648 945,189
Prepaid expenses 103,849 94,107
Deferred income taxes 212,311 179,636
------------------- -------------------
Total current assets 2,918,424 3,016,196
Property and equipment, net 198,657 232,600
Deferred income taxes 97,850 113,635
Other assets 418,752 345,776
------------------- -------------------
Total assets $ 3,633,683 3,708,207
=================== ===================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 411,540 295,274
Accrued compensation expenses 273,733 281,426
Other current liabilities 43,812 56,522
Income taxes payable -- 105,052
------------------- -------------------
Total current liabilities 729,085 738,274
Commitments
Shareholders' equity:
Common stock; 20,000,000 shares authorized;
10,967,588 shares issued and outstanding 3,159,944 3,159,944
Accumulated deficit (214,440) (136,771)
Notes receivable from shareholders (40,906) (53,240)
------------------- -------------------
Total shareholders' equity 2,904,598 2,969,933
------------------- -------------------
Total liabilities and shareholders' equity $ 3,633,683 3,708,207
=================== ===================
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
- 15 -
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Operations
Years ended December 31, 1999, 1998, and 1997
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
<S> <C> <C> <C>
Net sales $ 6,759,192 6,981,122 5,130,597
Cost of goods sold 2,602,910 2,875,221 1,896,324
------------------- ------------------- -------------------
Gross profit 4,156,282 4,105,901 3,234,273
------------------- ------------------- -------------------
Operating expenses:
Research and development 797,057 638,430 423,058
Selling and marketing 2,234,387 2,091,145 1,705,671
General and administrative 1,250,412 1,082,282 992,529
------------------- ------------------- -------------------
4,281,856 3,811,857 3,121,258
------------------- ------------------- -------------------
(Loss) income from operations (125,574) 294,044 113,015
Interest income 16,083 31,901 28,050
Other expense (2,939) (4,478) --
------------------- ------------------- -------------------
(Loss) income before income tax
(benefit) expense (112,430) 321,467 141,065
Income tax (benefit) expense (34,761) 100,741 (48,139)
------------------- ------------------- -------------------
Net (loss) income $ (77,669) 220,726 189,204
=================== =================== ===================
Net (loss) income per share:
Basic $ (0.01) 0.02 0.02
=================== =================== ===================
Diluted $ (0.01) 0.02 0.02
=================== =================== ===================
Weighted-average number of shares used in
per share computations:
Basic 10,967,588 10,700,038 10,466,919
=================== =================== ===================
Diluted 10,967,588 11,084,058 10,728,834
=================== =================== ===================
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
- 16 -
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Shareholders' Equity
Years ended December 31, 1999, 1998, and 1997
<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, 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
Repayment of 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
Repayment of 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
Repayment of notes receivable -- -- -- 12,334 12,334
Net loss -- -- (77,669) -- (77,669)
---------------- ---------------- --------------- --------------- -----------------
Balances as of
December 31, 1999 10,967,588 $ 3,159,944 (214,440) (40,906) 2,904,598
================ ================ =============== =============== =================
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
- 17 -
<PAGE>
<TABLE>
SIERRA MONITOR CORPORATION
Statements of Cash Flows
Years ended December 31, 1999, 1998, and 1997
<CAPTION>
1999 1998 1997
----------------- ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (77,669) 220,726 189,204
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization 150,185 140,820 122,024
Loss on disposal of fixed assets 2,415 -- --
Allowance for doubtful accounts 13,084 84,485 (4,595)
Deferred income taxes (35,561) 5,901 (88,172)
Changes in operating assets and liabilities:
Trade receivables 308,396 (374,214) 212,240
Notes receivable 7,918 4,420 (39,422)
Inventories (221,459) (147,643) (79,681)
Prepaid expenses 8,929 44,103 (86,654)
Accounts payable 116,266 141,357 (137,455)
Accrued compensation expenses (7,693) 56,664 10,354
Other current liabilities (12,710) 1,718 16,063
Income taxes payable (105,052) 61,197 20,308
----------------- ------------------ ------------------
Net cash provided by operating activities 147,049 239,534 134,214
----------------- ------------------ ------------------
Cash flows from investing activities:
Capital expenditures (118,658) (235,504) (125,340)
Short-term investments, net 245,522 196,311 (195,052)
Other assets (72,975) (113,306) (5,129)
----------------- ------------------ ------------------
Net cash provided by (used in)
investing activities 53,889 (152,499) (325,521)
----------------- ------------------ ------------------
Cash flows from financing activities:
Repayment of notes receivable 12,334 8,147 7,286
Proceeds from exercise of stock options and
warrant, net of notes receivable -- 1,000 2,596
----------------- ------------------ ------------------
Net cash provided by financing activities 12,334 9,147 9,882
----------------- ------------------ ------------------
Net increase (decrease) in cash and cash equivalents 213,272 96,182 (181,425)
Cash and cash equivalents at beginning of year 393,667 297,485 478,910
----------------- ------------------ ------------------
Cash and cash equivalents at end of year $ 606,939 393,667 297,485
================= ================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the year for income taxes $ 105,052 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, 1999, 1998, and 1997
(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.
The Company's headquarters are located in California, with
additional operations located in Florida.
(b) Segment Reporting
Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures about Segments of an Enterprise and Related
Information, established standards for the manner in which public
companies report information about operating segments in annual
and interim financial statements. It also established 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 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.
(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
- 19 -
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1999, 1998, and 1997
at fair value (approximates cost). Cash equivalents consisted of
money market instruments in the amount of $159,248 and $275,629 as
of December 31, 1999 and 1998, respectively.
(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) Employee Stock Based Compensation
The Company uses the intrinsic value method of accounting for
employee 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.
(j) Net (Loss) 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.
- 20 -
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1999, 1998, and 1997
The following is a reconciliation of the shares used in the
computation of basic and diluted net (loss) income per share for
the years ended December 31, 1999, 1998, and 1997, respectively:
1999 1998 1997
------------- ------------ -------------
Basic EPS - weighted-average
number of shares of common
stock outstanding 10,967,588 10,700,038 10,466,919
Effect of dilutive stock options -- 384,020 261,915
------------- ------------ -------------
Diluted EPS - dilutive potential
common shares 10,967,588 11,084,058 10,728,834
============= ============ =============
For purposes of calculating diluted net (loss) income per share,
there were no adjustments to net (loss) income.
The Company has reported a net loss for the year ended December
31, 1999. As a result, options to purchase 690,000 shares of
common stock have been excluded from the calculation of diluted
net loss per share. In addition, for the years ended December 31,
1999, 1998, and 1997, options to purchase 30,000, 275,000, and
120,000 shares of common stock at an average price of $0.75,
$0.56, and $0.38, respectively, per share were not included in the
computation of diluted EPS because the options' exercise prices
were greater than the average market price of the shares and the
effect would have been antidilutive.
(k) Comprehensive (Loss) Income
The Company has no significant components of other comprehensive
income and, accordingly, comprehensive (loss) income is the same
as net (loss) income for all periods.
(l) Other Assets
As of December 31, 1999 and 1998, other assets consisted primarily
of $381,053 and $299,449, respectively, net of accumulated
amortization of $106,156 and $15,760, respectively, related to the
purchase of certain assets and technology rights in 1999 and 1998
(see Note 9). Such amounts are being amortized on a straight-line
basis over five years.
(m) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and
hedging activities related to those instruments, as well as other
hedging activities. Because the Company does not currently hold
any derivative instruments, and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133
will not have material impact on its financial position, results
of operations, or cash flows. The Company will be required to
adopt SFAS No. 133, as amended, in 2001.
- 21 -
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1999, 1998, and 1997
(2) Inventories
<TABLE>
A summary of inventories as of December 31, 1999 and 1998, follows:
<CAPTION>
1999 1998
--------------- --------------
<S> <C> <C>
Raw materials $ 403,338 348,032
Work in process 520,220 411,846
Finished goods 243,090 185,311
--------------- --------------
$ 1,166,648 945,189
=============== ==============
(3) Property and Equipment
A summary of property and equipment as of December 31, 1999 and 1998,
follows:
1999 1998
--------------- --------------
Machinery and equipment $ 266,501 206,328
Furniture, fixtures, and leasehold improvements 637,077 603,484
--------------- --------------
903,578 809,812
Less accumulated depreciation and amortization 704,921 577,212
--------------- --------------
$ 198,657 232,600
=============== ==============
</TABLE>
(4) Employee Stock Compensation Plan
<TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its employee 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 employee 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 in accordance with SFAS No. 123, the Company's net
(loss) income would have been adjusted to the pro forma amounts indicated
below:
<CAPTION>
1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net (loss) income:
As reported $ (76,869) 220,726 189,204
Pro forma (129,045) 191,576 187,683
Net (loss) income per share:
As reported (basic and diluted) (0.01) 0.02 0.02
Pro forma (basic and diluted) (0.01) 0.02 0.02
</TABLE>
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.
- 22 -
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1999, 1998, and 1997
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.
The per share weighted-average fair value of stock options granted during
1999, 1998, and 1997, was $0.24, $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 1999, 1998, and 1997: expected
dividend yield of 0.0% for each year; volatility of 50% for each year;
risk-free interest rate of 5.09%, 5.35%, and 5.83%, respectively; and an
expected life of 4 years in 1999, 1998 and 1997.
<TABLE>
A summary of stock option transactions for the three years ended December
31, 1999, follows:
<CAPTION>
Weighted-
Weighted- average
average remaining
Range of exercise contractual
Options prices price life (years)
---------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance as of
December 31, 1996 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 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 595,000 0.10 - 0.75 0.41
Granted 125,000 0.50 - 0.75 0.55 8.3
----------------
Balance as of
December 31, 1999 720,000 0.22 - 0.75 0.43 7.7
================
Options exercisable
as of December 31, 390,208 0.35
1999 ================
</TABLE>
- 23 -
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1999, 1998, and 1997
(5) Commitments and Contingencies
The Company leases its facilities under noncancelable operating leases.
As of December 31, 1999, future minimum payments are as follows:
Year ending
December 31,
------------
2000 $ 158,184
2001 56,424
2002 11,130
----------
$ 225,738
==========
The Company has entered into an addendum to an existing facilities lease
which increases the space leased and will extend the lease term by three
years from the date the additional space is available. As a result,
future minimum lease payments will increase by approximately $42,000 upon
effectiveness of this addendum. Rent expense was approximately $157,000,
$146,000, and $143,000, in 1999, 1998, and 1997, respectively.
The Company is subject to certain legal actions that have arisen in the
ordinary course of business. The Company believes the ultimate outcome of
these actions will not have a material effect on the Company's financial
position or results of operations although there can be no assurance as
to the outcome of such litigation.
(6) Bank Borrowings
As of December 31, 1999, the Company had a $250,000 bank line of credit
agreement, secured by eligible accounts receivable, that bears interest
at the prime rate (8.5% as of December 31, 1999) plus 1/2%. The line of
credit agreement expires June 5, 2000, and contains certain financial
covenants with which the Company was out of compliance as of December 31,
1999. The Company has obtained a waiver from the bank related to this
event of noncompliance. No amounts were outstanding under the credit
facility as of December 31, 1999.
- 24 -
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1999, 1998, and 1997
(7) Income Taxes
<TABLE>
The components of income tax (benefit) expense were as follows:
<CAPTION>
1999 1998 1997
------------------- ------------------- ------------------
<S> <C> <C> <C>
Current:
Federal $ -- 75,435 23,533
State 800 19,405 16,500
------------------- ------------------- ------------------
Total current 800 94,840 40,033
------------------- ------------------- ------------------
Deferred:
Federal (24,120) 5,450 (79,972)
State (11,441) 451 (8,200)
------------------- ------------------- ------------------
Total deferred (35,561) 5,901 (88,172)
------------------- ------------------- ------------------
$ (34,761) 100,741 (48,139)
=================== =================== ==================
</TABLE>
<TABLE>
The provision for income tax (benefit) expense differs from the amounts
computed by applying the statutory federal income tax rate of 34% as
follows:
<CAPTION>
1999 1998 1997
------------------- ------------------- ------------------
<S> <C> <C> <C>
Computed tax (benefit) expense $ (38,226) 109,299 48,000
State taxes, net of federal benefit (4,373) 13,105 5,300
Decrease in valuation allowance -- -- (100,000)
Other 7,838 (21,663) (1,439)
------------------- ------------------- ------------------
$ (34,761) 100,741 (48,139)
=================== =================== ==================
</TABLE>
- 25 -
<PAGE>
SIERRA MONITOR CORPORATION
Notes to Financial Statements
December 31, 1999, 1998, and 1997
<TABLE>
The tax effects of temporary differences that gave rise to significant
portions of deferred tax assets are as follows:
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts $ 55,200 49,982
Inventories, principally due to additional costs
inventoried for tax purposes 114,082 83,096
State tax expense on temporary differences 347 11,844
Accruals for financial statement purposes
not currently deductible 42,580 34,714
Property and equipment, principally due to
differences in depreciation 15,969 59,755
Tax credit carryforwards 81,983 53,880
------------------- -------------------
Total deferred tax assets $ 310,161 293,271
=================== ===================
</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 and California tax credit carryforwards of
approximately $65,950 and $16,033, respectively, which can be used to
offset against future income taxes. The credit carryforwards will expire
beginning in 2004.
- 26 -
<PAGE>
(8) Fair Value of Financial Instruments
The carrying value of 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. The Company places its cash equivalents and
short-term investments 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. Sales to international customers were not significant in
1999 and 1997. 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 February 1999, the Company acquired specified assets of Montech
Holdings, Inc. (Montech) including manufacturing designs, customer lists,
and documentation related to a Montech product in exchange for payment of
$150,000 in cash.
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.
- 27 -
<PAGE>
<TABLE>
Schedule II
SIERRA MONITOR CORPORATION
Valuation and Qualifying Accounts
<CAPTION>
Additions
Balance at charged to Deductions Balance
beginning costs and from at end
Description of year expenses reserves of year
-----------
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Year ended December 31,
1999, allowance for
doubtful accounts $ 125,488 14,217 (1,133) 138,572
================== ================== ================== ==================
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
================== ================== ================== ==================
</TABLE>
- 28 -
REPORT ON FINANCIAL STATEMENT SCHEDULE
AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Sierra Monitor Corporation:
The audits referred to in our report dated February 25, 2000, included the
related financial statement schedule for each of the years in the three-year
period ended December 31, 1999, included in the annual report on Form 10- KSB.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly, in all material respects, the information set forth
therein.
We consent to incorporation by reference in the registration statement on Form
S-8 (No. 333-18241) of Sierra Monitor Corporation of our report dated February
25, 2000, relating to the balance sheets of Sierra Monitor Corporation as of
December 31, 1999 and 1998, and the related statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999, and our report on the related financial
statement schedule, which reports appear in the December 31, 1999, annual report
on Form 10-KSB of Sierra Monitor Corporation.
/s/ KPMG LLP
Mountain View, California
March 28, 2000
<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>
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<S> <C>
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<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
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0
0
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</TABLE>
