<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1997
------------------
Commission File Number 0-18238
TEXAS MICRO INC.
----------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 04-2738973
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
5959 Corporate Drive, Houston, Texas 77036
- ------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (713) 541-8200
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Indicate by check mark whether 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 31, 1997
----- -------------------------------
Common Stock, $.40 par value 13,508,476
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<CAPTION>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS TEXAS MICRO INC. AND SUBSIDIARIES
(in thousands)
ASSETS September 28, June 30,
1997 1997
(unaudited)
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<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 5,558 $ 8,386
Accounts receivable, net of allowance for doubtful accounts
of $842 at September 28, 1997 and $833 at June 30, 1997 9,957 9,108
Inventories 11,005 9,636
Other current assets 2,764 3,062
----------------------------
Total current assets 29,284 30,192
----------------------------
Equipment and Improvements, at cost:
Computer equipment 3,857 3,781
Machinery and equipment 4,255 4,014
Furniture and fixtures 1,043 1,005
Leasehold improvements 968 968
----------------------------
10,123 9,768
Less - Accumulated depreciation and amortization 6,475 6,113
----------------------------
3,648 3,655
----------------------------
Other Assets 150 177
----------------------------
Total Assets $ 33,082 $ 34,024
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,789 $ 5,115
Accrued expenses 4,779 4,940
----------------------------
Total current liabilities 9,568 10,055
----------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.40 par value:
Authorized--12,500 shares at September 28, 1997 and June 30, 1997
Issued--none -- --
Common stock, $.40 par value:
Authorized--35,000 shares at September 28, 1997 and June 30, 1997
Issued--15,643 shares at September 28, 1997 and June 30, 1997 6,257 6,257
Additional paid-in capital 80,314 80,314
Accumulated deficit (58,068) (57,566)
Treasury stock, at cost, 2,134 shares at September 28, 1997, and
2,157 shares at June 30, 1997 (4,884) (4,938)
Cumulative translation adjustment (105) (98)
----------------------------
Total stockholders' equity 23,514 23,969
----------------------------
Total Liabilities and Stockholders' Equity $ 33,082 $ 34,024
============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS TEXAS MICRO INC. AND SUBSIDIARIES
(unaudited)
For the three months ended,
September 28, 1997 September 29, 1996
------------------ ------------------
(in thousands, except per share data)
<S> <C> <C>
Revenues
Product $16,037 $15,107
Service and Other - 3,542
------------- --------------
Total revenues 16,037 18,649
Cost of Revenues
Product 11,093 10,253
Service and Other - 1,648
------------- --------------
Total cost of revenues 11,093 11,901
Gross profit 4,944 6,748
Research and Development Expenses 1,951 3,076
Selling, General and Administrative Expenses 3,575 4,882
------------- --------------
Total operating expenses 5,526 7,958
Income (loss) from operations (582) (1,210)
Interest Income 91 95
Other Income, net 21 11
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Income (loss) before provision for income taxes (470) (1,104)
Provision for Income Taxes 19 26
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Net income (loss) ($489) ($1,130)
============= ==============
Net Income (Loss) Per Common and Common Share Equivalent ($0.04) ($0.07)
============= ==============
Weighted Average Number of Common and Common Share
Equivalents Outstanding 13,505 15,597
============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS TEXAS MICRO INC. AND SUBSIDIARIES
(unaudited)
For the three months ended,
September 28, September 29,
1997 1996
-----------------------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($489) ($1,130)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities--
Depreciation 366 591
Amortization 27 88
Provisions for inventories (54) 589
Provisions for bad debts 27 -
Changes in assets and liabilities:
Accounts receivable (883) 2,742
Inventories (1,323) 339
Other current assets 298 122
Accounts payable (327) (36)
Accrued expenses (160) (1,031)
Deferred revenue - 111
-----------------------------
Net cash provided by (used in) operating activities (2,518) 2,385
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements (360) (127)
Increase in other assets - (499)
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Net cash used in investing activities (360) (626)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of obligations under capital leases - (33)
Proceeds from issuance of common stock 45 132
Purchase of treasury stock - (458)
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Net cash provided by (used in) financing activities 45 (359)
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Effect of exchange rates on cash 5 13
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,828) 1,413
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,386 12,287
-----------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,558 $ 13,700
=============================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ - $ 2
Income taxes paid (refunds received) 10 (101)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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Notes to Consolidated Financial Statements
Texas Micro Inc. and Subsidiaries
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The financial statements included herein have been prepared by Texas Micro Inc.
(the "Company") pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. The Company believes, however, that the
disclosures made are adequate to make the information not misleading. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's latest audited
financial statements, which are contained in the Company's Annual Report on Form
10-K for the year ended June 30, 1997, filed with the Commission on September
23, 1997.
This information includes all adjustments (consisting of normal, recurring
adjustments) which the Company considers necessary for a fair presentation of
such information. The results of operations for the three months ended
September 28, 1997 are not necessarily indicative of results to be expected for
the entire year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain 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 revenues and expenses during the
reporting period. Actual results could differ from these estimates.
NOTE 2 - DISPOSITION OF ASSETS
On October 11, 1996, the Company completed the sale of substantially all of the
net assets of its Sequoia Enterprise Systems business unit ("SES") to General
Automation, Inc. for approximately $11,000,000 of consideration in General
Automation, Inc. common stock, warrants and deferred payments. Results of
operations, assets, and liabilities related to the operations sold are included
in the Company's consolidated financial statements through October 11, 1996.
The effects of this transaction are reflected in other current assets.
The net book value of the net assets sold and the expenses incurred related to
the transaction approximates $5,140,000. The amount of consideration exceeding
$5,140,000 has not been recognized as a gain due to the uncertainty of realizing
the deferred payments. As consideration is received exceeding $5,140,000, the
Company will recognize the consideration as a gain related to the disposition.
As of September 28, 1997, deferred cash payments of $1,318,000 were received in
connection with the disposition. In October 1997, the Company received $300,000
in deferred payments from General Automation, Inc. On October 1, 1997, the
asset purchase agreement was amended to revise the timing of the payments owed
by General Automation, Inc.
5
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Notes to Consolidated Financial Statements
Texas Micro Inc. and Subsidiaries
(unaudited)
NOTE 3 - INVENTORIES
Inventories including materials, labor and manufacturing overhead consisted of
the following:
(in thousands)
September 28, June 30,
1997 1997
-----------------------
Raw materials $ 6,929 $6,860
Work-in-process 2,879 1,660
Finished goods 1,197 1,116
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$11,005 $9,636
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NOTE 4 - NET INCOME (LOSS) PER SHARE
Primary and fully diluted earnings per share are not separately stated as they
are substantially the same. Net income (loss) per share was based on the
weighted average number of common and common share equivalents outstanding
during the period, computed in accordance with the treasury stock method. For
loss periods, weighted average common share equivalents are excluded from the
calculation as their effect would be antidilutive.
NOTE 5 - SUBSEQUENT EVENT
In October 1997, the Company entered into a multimillion-dollar agreement to
license the Company's fault tolerant technology to a third party. The
technology licensed, known as "Fulcrum", is intended to bring fault tolerant
technology to Intel-based platforms running industry standard operating systems.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company is a provider of differentiated Intel-based computer systems and
single board computers ("SBCs") for the communications, industrial automation
and mobile computing markets. The Company operates in one segment, computer
systems.
On October 11, 1996, the Company completed the sale of substantially all of the
net assets of SES to General Automation, Inc. for approximately $11,000,000 of
consideration in General Automation, Inc. common stock, warrants and deferred
payments. Results of operations, assets, and liabilities related to the
operations sold are included in the Company's consolidated financial statements
through October 11, 1996. The effects of this transaction are reflected in
other current assets. (See Note 2 to consolidated financial statements).
RESULTS OF OPERATIONS
The following table summarizes the effect of the disposition of SES on
consolidated revenues and gross profit for the three months ended (in
thousands):
September 28, September 29,
1997 1996
--------------------------------
Consolidated Revenues $16,037 $18,649
Less Disposed Operations of SES - 4,921
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Revenues from Ongoing Operations $16,037 $13,728
============ ==========
Consolidated Gross Profit $ 4,944 $ 6,748
Less Disposed Operations of SES - 2,239
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Gross Profit from Ongoing Operations $ 4,944 $ 4,509
============ ==========
REVENUES
The Company's revenues for the first quarter of fiscal 1998, which ended
September 28, 1997, of $16,037,000 decreased 14% from $18,649,000 for the first
quarter of fiscal 1997. The revenue decline was due to the disposition of SES,
partially offset by an increase in revenues from ongoing operations. Revenues
from ongoing operations for the first quarter of 1998 increased 17% from
$13,728,000 for the first quarter of 1997. During the first quarter of 1998,
units shipped from ongoing operations increased 23% and the average unit selling
price declined 5% as compared with the first quarter of 1997. Sales to the top
five customers represented 23% of total revenues from ongoing operations for
both the first quarter of fiscal 1998 and 1997.
Revenues from ongoing operations for the first quarter of fiscal 1998 are higher
than the comparable period a year ago resulting from the recent major `design
wins'--new contracts awarded by original equipment manufacturers for system
products or single-board computers.
7
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Sales from ongoing operations outside the United States for the first quarter of
fiscal 1998 increased to $5,249,000 or 33% of total revenues, from $4,984,000,
or 36% of total revenues from ongoing operations for the first quarter of fiscal
1997.
GROSS MARGIN
Gross margin of 31% for the first quarter of fiscal 1998 reflected a decline of
5 percentage points from 36% in the first quarter of fiscal 1997. The decrease
was attributable to the disposition of the SES business unit, which historically
recorded higher gross margin than the ongoing operations, as well as a decline
in gross margin from ongoing operations.
Excluding the effect of SES, gross margin declined in the first quarter of
fiscal 1998 by 2 percentage points from 33% in the first quarter of fiscal 1997.
This decrease in margin from ongoing operations over the prior year was
substantially caused by a focus on large design wins, which due to competition
generally produce lower gross margins.
The Company provides its customers with systems and SBCs requiring long product
life cycles. Gross margins are generally lower during the start up phase of the
product life cycle and have the potential to improve as volume increases. In
order to achieve its gross margin targets, while providing its customers with
competitive pricing, the Company continuously monitors its costs and makes
appropriate pricing revisions, which usually result in lower prices to its
customers. Continued fluctuations in future margin levels may result from the
timing of large design wins and component cost reductions, product mix, and the
level of production efficiencies.
RESEARCH AND DEVELOPMENT EXPENSES
The Company's research and development expenses of $1,951,000 for the first
quarter of fiscal 1998 decreased 37% from $3,076,000 for the first quarter of
fiscal 1997. As a percent of revenues, research and development expenses
decreased to 12% for the first quarter of 1998, as compared to 16% for the first
quarter of 1997. The decrease in research and development expense from the
prior year period was primarily due to the sale of SES. The Company continues
to invest in new product development, enhancements to existing products and new
customer design wins. In addition, the Company continues its research and
development activities on highly available Intel-based servers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased 27% to $3,575,000, or 22%
of revenues, for the first quarter of fiscal 1998 from $4,882,000, or 26% of
revenues, for the first quarter of fiscal 1997. The significant decline in
spending was primarily a result of the sale of SES.
OPERATING INCOME (LOSS)
The Company reported a loss from operations of $582,000 for the first quarter of
fiscal 1998, compared to loss from operations of $1,210,000 for the first
quarter of fiscal 1997. The decrease in the loss from operations resulted from
the increase in revenues from ongoing operations and the sale of SES.
8
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OTHER INCOME
The Company generated other income, primarily interest income, of $112,000
during the first quarter of fiscal 1998, as compared to $106,000 for the first
quarter of fiscal 1997.
INCOME TAXES
The Company recorded provisions for income taxes, primarily for state income
taxes, of $19,000 for the first quarter of fiscal 1998 compared to $26,000 for
the first quarter of fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 28, 1997, the Company had cash and cash equivalents of $5,558,000
and working capital of $19,716,000. This compared to cash and cash equivalents
of $8,386,000 and working capital of $20,137,000 at June 30, 1997.
Cash used in operations was $2,518,000 for the first quarter of fiscal 1998.
Cash used in operating activities resulted primarily from increases in accounts
receivable and inventories during the quarter.
The Company's capital expenditures during the first quarter of fiscal 1998
increased by $233,000 as compared to the prior year first quarter, primarily due
to expenditures for manufacturing equipment. Capital expenditures for the
remaining portion of fiscal 1998 are expected to continue at the level
experienced in the first quarter of fiscal 1998.
The Company believes that its present cash flow and cash balances are adequate
for its operating needs and capital expenditures through fiscal 1998.
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 128, "Earnings Per Share". The Company intends to adopt this standard in
fiscal year 1998. The Company does not expect the adoption of this standard to
have a material effect on its reported earnings per share. Also in February
1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital
Structures". The Company intends to adopt this standard in fiscal year 1998.
The Company does not expect the adoption of this standard to have a significant
impact on its disclosure.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
The Company intends to adopt this standard in fiscal year 1999. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general-
purpose financial statements. It requires (a) classification of items of other
comprehensive income by their nature in a financial statement and (b) display of
the accumulated balance of other comprehensive income separate from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
9
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In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". The Company intends to adopt this standard
in fiscal 1999. SFAS No. 131 establishes standards for reporting information
about operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This Statement
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", but retains the requirement to report information about major
customers.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements in this Quarterly Report on Form 10-Q that relate to future results
or events are based on the Company's current expectations. There are many
factors that affect the Company's business and the results of its operations and
may cause the actual results to differ materially from those expected, projected
or contained in forward-looking statements. These factors include technological
changes and the ability of the Company to develop new products; the customer
demand and market acceptance of the Company's products; the ability of the
Company to manage its inventory levels to minimize excess inventory, declining
inventory values and obsolescence; the risks and uncertainties relating to the
Company's foreign operations including foreign currency fluctuations and
intellectual property risk. For a discussion of these and other factors
affecting the Company's business, see "ITEM 1. BUSINESS--Certain Factors That
May Affect Future Results" in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1997.
10
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time a party to various lawsuits arising in the
ordinary course of business. The Company knows of no pending litigation which
is reasonably likely to have a material adverse impact on its financial
condition or its results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
None.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TEXAS MICRO INC.
Date: November 10, 1997 By: /s/ J. Michael Stewart
----------------------
J. Michael Stewart
President and Chief Executive Officer
Date: November 10, 1997 By: /s/ Kermit R. Sumrall
----------------------
Kermit R. Sumrall
Secretary and Acting Chief Financial
Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000724621
<NAME> TEXAS MICRO INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-28-1997
<CASH> 5,558
<SECURITIES> 0
<RECEIVABLES> 10,799
<ALLOWANCES> 842
<INVENTORY> 11,005
<CURRENT-ASSETS> 29,284
<PP&E> 10,123
<DEPRECIATION> 6,475
<TOTAL-ASSETS> 33,082
<CURRENT-LIABILITIES> 9,568
<BONDS> 0
0
0
<COMMON> 6,257
<OTHER-SE> 17,257
<TOTAL-LIABILITY-AND-EQUITY> 33,082
<SALES> 16,037
<TOTAL-REVENUES> 16,037
<CGS> 11,093
<TOTAL-COSTS> 11,093
<OTHER-EXPENSES> 5,526
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (470)
<INCOME-TAX> 19
<INCOME-CONTINUING> (489)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (489)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
