<PAGE>
[TEXAS MICRO LOGO APPEARS HERE]
Texas Micro Inc.
5959 Corporate Drive, Houston, Texas 77036
NOTICE OF 1998 ANNUAL MEETING OF STOCKHOLDERS
tO BE HELD THURSDAY, DECEMBER 3, 1998
The Annual Meeting of Stockholders of Texas Micro Inc. (the "Company") will
be held at the Company's headquarters, 5959 Corporate Drive, Houston, Texas on
Thursday, December 3, 1998 at 1:00 p.m., local time, to consider and act upon
the following matters:
1. To elect three Class II Directors to serve until the Company's 2001 Annual
Meeting of Stockholders or until their respective successors have been duly
elected and qualified.
2. To amend the Company's 1993 Employee Stock Purchase Plan by extending its
termination date by two years, from June 30, 1999 until June 30, 2001, and
by permitting employee purchases thereunder until such date.
3. To amend the Company's 1995 Outside Directors' Stock Option Plan by
extending its termination date by three years, from July 1, 1999 until
July 1, 2002.
4. To ratify the appointment of PricewaterhouseCoopers LLP as the Company's
independent accountants for the 1999 fiscal year.
5. To transact such other business as may properly come before the meeting or
any adjournment thereof.
The Board of Directors has fixed the close of business on October 23, 1998 as
the record date for the determination of stockholders entitled to notice of and
to vote at the Annual Meeting and any adjournment or postponement thereof.
You are cordially invited to attend the Annual Meeting in person. However, to
ensure your representation at the Annual Meeting, you are urged to review the
enclosed Proxy Statement and to sign and return the enclosed proxy card in the
enclosed prepaid envelope as promptly as possible. If you attend the meeting
and desire to revoke your proxy and vote in person, you may, of course, do so.
In all cases, a proxy may be revoked at any time before its exercise in the
manner specified herein.
Sincerely,
/s/ Kermit R. Sumrall
-----------------------------
Kermit R. Sumrall
Secretary
Houston, Texas
November 4, 1998
<PAGE>
TEXAS MICRO INC.
5959 CORPORATE DRIVE, HOUSTON, TEXAS 77036
PROXY STATEMENT FOR THE 1998 ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 3, 1998
GENERAL
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors (the "Board") of Texas Micro Inc. (the
"Company" or "Texas Micro") for use at the Annual Meeting to be held on
Thursday, December 3, 1998 at the principal executive offices of the Company,
5959 Corporate Drive, Houston, Texas, commencing at 1:00 p.m., local time, and
at any adjournment or postponement thereof (the "Annual Meeting"). All proxies
will be voted in accordance with the instructions therein, and, if no choice is
specified, the proxies will be voted in favor of the matters set forth in the
accompanying Notice of Meeting. If any other matters are properly presented at
the Annual Meeting for consideration the persons named in the enclosed form of
proxy and acting thereunder will have discretion to vote on such matters in
accordance with their best judgment. The Board is currently unaware of any such
matters. Any proxy may be revoked by a stockholder at any time before it is
exercised by delivery of written revocation to the Secretary of the Company. No
such written revocation will be effective unless it has been received by the
Secretary of the Company prior to the day of the Annual Meeting or by the
inspectors of election at the Annual Meeting.
On October 23, 1998, the record date for the determination of stockholders
entitled to vote at the Annual Meeting, there were outstanding and entitled to
vote 13,423,197 shares of Common Stock, par value $.40 per share, of the Company
("Common Stock"), each share of which is entitled to one vote on each of the
matters to be voted upon at the meeting. Shares of Common Stock may not be
voted cumulatively.
This Proxy Statement and Notice of Annual Meeting and the accompanying form
of proxy are first being mailed to stockholders on or about November 4, 1998.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of October 23, 1998
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock; (ii) each director; (iii) each executive
officer named in the Summary Compensation Table under the heading "Executive
Compensation" and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Name of Number of Shares Percentage of Common
Beneficial Owner Beneficially Owned (1)(2) Stock Outstanding (2)
- ------------------------------------- ------------------------------ -------------------------------------
<S> <C> <C>
Dean C. Campbell 58,004 (3) *
A. Theodore Engkvist 34,500 (4) *
Francis J. Hughes, Jr. 146,553 (5) 1.0%
Dennis M. Malloy 51,000 (6) *
Frank B. Ryan 20,000 (7) *
John F. Smith 24,500 (8) *
J. Michael Stewart 2,075,018 (9) 14.8%
John C. Leonardo, Jr. 410,136 (10) 2.9%
Kermit R. Sumrall 49,586 (11) *
Ronald Groen 66,254 (12) *
Christopher M. Melson 13,479 (13) *
All Directors and Executive Officers
as a group (15 persons) 2,990,961 (14) 21.3%
</TABLE>
_______
* Less than 1%
2
<PAGE>
(1) The inclusion herein of any shares of Common Stock deemed beneficially
owned does not constitute an admission of beneficial ownership of those
shares by the respective stockholders. Unless otherwise indicated, each
stockholder referred to above has sole voting and investment power with
respect to the shares listed.
(2) For purposes of this table, the number of shares of Common Stock of the
Company owned by each director or executive officer is determined under the
rules of the Commission and the information is not necessarily indicative
of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares of Common Stock as to which each
director or executive officer has sole or shared voting or investment power
and also any shares of Common Stock with respect to which any options held
by such director or executive officer are exercisable within 60 days after
October 23, 1998.
(3) Comprised of 25,504 shares owned by Mr. Campbell and 32,500 shares issuable
pursuant to stock options which are exercisable by Mr. Campbell within 60
days after October 23, 1998.
(4) Comprised of 10,000 shares owned by Mr. Engkvist and 24,500 shares issuable
pursuant to stock options which are exercisable by Mr. Engkvist within 60
days after October 23, 1998.
(5) Includes 22,500 shares issuable pursuant to stock options which are
exercisable by American Research and Development II, L.P. ("ARD") of which
Mr. Hughes is a general partner (or a general partner of a general
partner), within 60 days after October 23, 1998, as to which Mr. Hughes
disclaims beneficial ownership. Also includes 26,053 shares held by Mr.
Hughes and 98,000 shares issuable pursuant to stock options which are
exercisable by Mr. Hughes within 60 days after october 23, 1998.
(6) Comprised of 29,000 shares owned by Mr. Malloy and 22,000 shares issuable
pursuant to stock options which are exercisable by Mr. Malloy within 60
days after October 23, 1998.
(7) Comprised of shares issuable pursuant to stock options which are
exercisable by Dr. Ryan within 60 days after October 23, 1998.
(8) Comprised of shares issuable pursuant to stock options which are
exercisable by Mr. Smith within 60 days after October 23, 1998.
(9) Includes 954,043 shares owned by Mr. Stewart's wife, 63,574 shares owned by
his children under the Texas Uniform Gift to Minors Act (as to all of which
he disclaims beneficial ownership), 912,943 owned by Mr. Stewart and
144,458 shares issuable pursuant to stock options which are exercisable by
Mr. Stewart within 60 days after October 23, 1998.
(10) Comprised of 40,000 shares owned by Mr. Leonardo's wife, 2,200 shares owned
by his daughter, 230,000 shares owned by Mr. Leonardo and 137,936 shares
issuable pursuant to stock options which are exercisable by Mr. Leonardo
within 60 days after October 23, 1998.
(11) Comprised of 23,062 shares owned by Mr. Sumrall and 26,524 shares issuable
pursuant to stock options which are exercisable by Mr. Sumrall within 60
days after October 23, 1998.
(12) Comprised of 25,000 shares owned by Mr. Groen and 41,254 shares issuable
pursuant to stock options which are exercisable by Mr. Groen within 60 days
after October 23, 1998.
(13) Comprised of 1,500 shares owned by Mr. Melson and 11,979 shares issuable
pursuant to stock options which are exercisable by Mr. Melson within 60
days after October 23, 1998.
(14) Includes an aggregate of 638,082 shares which all executive officers and
directors have the right to acquire under outstanding stock options
exercisable within 60 days after October 23, 1998. Also includes those
shares listed above the beneficial ownership of which is disclaimed.
3
<PAGE>
QUORUM AND VOTES REQUIRED
The presence, either in person or by proxy, of holders of a majority of the
outstanding shares of Common Stock is necessary to constitute a quorum at the
Annual Meeting. Abstentions and broker non-votes are counted for purposes of
determining whether a quorum is present. A plurality vote is required for the
election of directors. Accordingly, if a quorum is present at the Annual
Meeting, the three persons receiving the greatest number of votes will be
elected to serve as directors. Withholding authority to vote for a director
nominee and broker non-votes in the election of directors will not affect the
outcome of the election of directors. All other matters to be voted on will be
decided by the vote of the holders of a majority of the shares present or
represented at the Annual Meeting and entitled to vote on such matter. On any
such matter, an abstention will have the same effect as a negative vote but,
because shares held by brokers will not be considered entitled to vote on
matters as to which the brokers withhold authority, a broker non-vote will have
no effect on such vote.
All Proxies that are properly completed, signed and returned prior to the
Annual Meeting will be voted. Any Proxy given by a stockholder may be revoked
at any time before it is exercised by the stockholder (i) filing with the
Secretary of the Company an instrument revoking it, (ii) executing and returning
a Proxy bearing a later date or (iii) attending the Annual Meeting and
expressing a desire to vote his shares of Common Stock in person. Votes will be
counted by Boston EquiServe, the Company's transfer agent and registrar.
ITEM 1 - ELECTION OF DIRECTORS
Texas Micro has a classified Board consisting of two Class I Directors, three
Class II Directors and two Class III Directors. Pursuant to Texas Micro's
bylaws, directors are elected for terms ending on the date of the third annual
meeting following the annual meeting at which any given director is elected or
until their successors are duly elected and qualified.
The persons named in the enclosed proxy will vote to elect Francis J. Hughes,
Jr., A. Theodore Engkvist and Dennis M. Malloy (the "Nominees") as Class II
Directors, unless the proxy is marked otherwise. Each Nominee is currently a
director of the Company. Texas Micro has no nominating committee and all
nominations are made by the Texas Micro Board. The Nominees have indicated
their willingness to serve, if elected; however, if any Nominee should be unable
to serve, the proxies may be voted for a substitute nominee designated by the
Board. The Board has no reason to believe that any substitute nominee or
nominees will be required.
There are no family relationships between or among any officers or directors
of Texas Micro.
The following sets forth the name, age, length of service as a director of
each member of the Board, including the Nominees, information given by each
concerning all positions he has held with the Company, his principal occupation
and business experience for the past five years and the names of other publicly
held companies of which he serves as a director:
NOMINEES FOR TERM EXPIRING IN 2001 (CLASS II DIRECTORS)
FRANCIS J. HUGHES, JR.
Mr. Hughes, age 47, has been a director of the Company since 1987. He is
President of American Research & Development Corporation, a venture capital
firm, and has been associated with that firm and its predecessors since 1982.
Since February 1997, Mr. Hughes has been a partner with Egan-Managed Capital, a
venture capital firm. Mr. Hughes is Chairman of the Board, President and Chief
Executive Officer of Remanco International, Inc. Mr. Hughes is also a director
of Ceramics Process Systems Corporation, Fusion Lighting, Inc., UltraFine Powder
Technology Inc. and R. F. Monolithics, Inc.
A. THEODORE ENGKVIST
Mr. Engkvist, age 63, has been a director of the Company since 1994. He has
been President of ENJO Consulting, a management consulting company, since 1992.
He is a retired officer of NYNEX Corporation where he held a number of executive
positions during a lengthy career.
4
<PAGE>
DENNIS M. MALLOY
Mr. Malloy, age 51, has been a director of the Company since 1995. He has
been President of Malloy's Cash Register Company since 1984 and is also a
director of Horizon Capital Bank.
BOARD RECOMMENDATION
The Board recommends that stockholders vote FOR the election of each of the
above named nominees. Proxies solicited hereby will be voted for both nominees
unless stockholders specify otherwise in their Proxies.
DIRECTORS WHOSE TERMS EXPIRE IN 1999 (CLASS III DIRECTORS)
J. MICHAEL STEWART
Mr. Stewart, age 51, became a director of the Company on March 31, 1995.
He has been President and Chief Executive Officer of the Company since January
30, 1996. From March 31, 1995 until he was elected to his present position, he
was Executive Vice President of the Company and President and Chief Operating
Officer of its subsidiary, Texas Microsystems, Inc. Prior to March 31, 1995,
Mr. Stewart was President and Chief Operating Officer of Texas Microsystems,
Inc. since co-founding it in 1975.
FRANK B. RYAN
Dr. Ryan, age 62, was elected a director of the Company on March 12, 1996.
He has been a Professor of Mathematics at Rice University since 1990 and is a
director of America West Airlines, Danielson Holding Corporation and Siena
Holdings, Inc.
DIRECTORS WHOSE TERMS EXPIRE 2000 (CLASS I DIRECTORS)
DEAN C. CAMPBELL
Mr. Campbell, age 48, has been a director of the Company since 1989. He has
been General Partner of Campbell Venture Management, L.P. and has been
associated with that firm and its predecessors since 1982. Mr. Campbell is also
a director of Telco Systems Corp. and R. F. Monolithics, Inc.
JOHN F. SMITH
Mr. Smith, age 63, has been a director of the Company since 1993. He has
been President and a director of PerSeptive Biosystems, Inc. since July 1996 and
was President of Mycos International, Inc. from July 1991 to July 1996. Mr.
Smith retired from Digital Equipment Corporation in 1993 as Senior Vice
President and Chief Operating Officer, after many years in various senior
management positions. Mr. Smith is also a director of Instron Corporation, Hadco
Corporation and Ansys, Inc.
BOARD AND COMMITTEE MEETINGS
The Company has standing Audit and Compensation Committees. The Audit
Committee provides the opportunity for direct contact between the Company's
independent accountants and the Board. The Audit Committee has responsibility
for recommending the appointment of Texas Micro's independent accountants,
reviewing the scope and results of audits and reviewing the Company's internal
accounting control policies and procedures. Since April 16, 1997, the Audit
Committee has consisted of Mr. Smith, Chairman, and Messrs. Engkvist, Hughes and
Malloy. The Audit Committee held four meetings during fiscal 1998.
The Compensation Committee is responsible for recommending to the Board the
policies that govern executive officer compensation and for overseeing the
implementation of those policies. Since April 16, 1997, the Compensation
Committee consisted of Dr. Ryan, Chairman, and Messrs. Campbell, Hughes and
Smith. The Compensation Committee held five meetings during fiscal 1998.
5
<PAGE>
The Board held thirteen meetings during the fiscal year ended June 30,
1998. During fiscal 1998, each director attended at least 75% of the meetings of
the Texas Micro Board and any committee of the Texas Micro Board on which he
served.
EXECUTIVE OFFICERS
Executive officers are elected by the Board annually at its meeting
immediately following the Annual Meeting of Stockholders and hold office until
the next such Annual Meeting unless they sooner resign or are removed from
office.
The following table lists the name, age and position of the current
executive officers of the Company.
Name Age Position
- ------------------------ --- --------------------------------------------
J. Michael Stewart 51 President and Chief Executive Officer
John C. Leonardo, Jr. 59 Executive Vice President; Chief Operating
Officer
Kermit R. Sumrall 47 Secretary and Acting Chief Financial Officer
Michael L. Baudler 34 Controller
Maynard Benwell 62 Vice President, Operations
Ronald Groen 36 Vice President, Sales & Marketing
Gene M. Janiszewski 45 Vice President, Information Systems
Christopher M. Melson 42 Vice President, Product Development
Reva L. Teague 48 Vice President, Human Resources
Information regarding the experience of Mr. Stewart is set forth above
under the heading "Directors".
Mr. Leonardo assumed his current position effective May 1, 1996. He
previously served as Senior Vice President, Marketing and Sales of Texas
Microsystems, Inc. since 1990. He is party to an agreement with the Company
dated May 1, 1996 that provides for a specified salary and bonus formula and
certain benefits in the case of involuntary termination of employment or change
of control.
Mr. Sumrall was appointed to his current position on April 16, 1997. Prior
to that time he was Controller of Texas Microsystems, Inc. since 1986.
Mr. Baudler was appointed to his current position on November 12, 1997.
Previously, Mr. Baudler held several financial management positions at Texas
Microsystems, Inc. since 1995, before which he held several positions with two
public accounting firms, PricewaterhouseCoopers LLP and Arthur Andersen, since
1986.
Mr. Benwell assumed his current position on September 16, 1997. Prior to
joining the company, Mr. Benwell worked as a manager at IBM in both domestic and
international manufacturing facilities, for GTE in Phoenix, Arizona and most
recently for Tandem Computers Incorporated since June 1989.
Mr. Groen was appointed to his current position on April 16, 1997. From
July 1, 1996 until April 16, 1997 he was Vice President, PC Products, Worldwide
of Texas Microsystems, Inc. Prior to that time, he was Managing Director of
Texas Microsystems' international sales operations since 1992, before which he
held several financial management positions with other companies in the computer
industry.
6
<PAGE>
Mr. Janiszewski was appointed to his current position on May 10, 1998. Prior
to that time, he was Managing Director of Information Systems of Texas
Microsystems, Inc. since 1987. Previously, Mr. Janiszewski managed several MIS
departments in manufacturing, legal and oil and gas industries.
Mr. Melson assumed his current position on April 16, 1997. He joined the
Company on December 16, 1996, as Vice President, Engineering of Texas
Microsystems, Inc. Previously, Mr. Melson held a number of increasingly
responsible engineering management positions at Tandem Computers Incorporated
since 1990.
Ms. Teague was appointed to her current position on November 12, 1997. Prior
to that time, she held several human resource management positions within Texas
Microsystems, Inc. since January 1988.
DIRECTORS' COMPENSATION
The Company's non-employee directors are paid a fee of $1,750 for each meeting
attended (up to a maximum of six meetings per year) and are reimbursed for out-
of-pocket expenses incurred in attending Board and Committee meetings. Non-
employee directors also receive annual formula grants of options to purchase
shares of the Company's Common Stock under the Company's 1995 Outside Directors'
Stock Option Plan (the "1995 Directors' Plan"). For the 1998 fiscal year, each
non-employee director then serving as a director received an option under the
1995 Directors' Plan to purchase 2,500 shares of Common Stock at an exercise
price of $3.375 per share.
Under a consulting agreement with the Company, Francis J. Hughes, Jr.,
Chairman of the Board, is eligible to receive $1,000 per day for consulting
services (up to a maximum of $7,500 per month). Mr. Hughes did not provide any
consulting services or receive any payments under this agreement during fiscal
1998. Under a consulting agreement with the Company, John F. Smith, a director
of the Company, is eligible to receive $2,500 per day for consulting services.
Mr. Smith did not provide any consulting services or receive any payments under
this agreement during fiscal 1998.
Directors who are officers or employees of the Company do not receive any
additional compensation for their services as directors.
EXECUTIVE COMPENSATION
The following table sets forth all cash and non-cash compensation for each of
the last three fiscal years awarded to or earned by J. Michael Stewart,
President and Chief Executive Officer and the four other most highly compensated
executive officers of the Company whose cash compensation exceeded $100,000
during the fiscal year ended June 30, 1998 (such executive officers are
collectively referred to herein as the "named executive officers"):
7
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------------- -------------------------------------------------
Restricted
Name and Fiscal Stock All Other
Principal Position Year Salary Bonus Awards Options Compensation(1)
- --------------------------- -------- --------------- ----------- ------------ ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
J. Michael Stewart (2) 1998 $300,000 0 N/A 0 $ 830 (3)
President and Chief 1997 $326,937 0 N/A 75,000 $ 650 (3)
Executive Officer 1996 $211,300 0 N/A 46,000 0
John C. Leonardo, Jr. (4) 1998 $231,017 $32,540 N/A 0 $ 1,600 (3)
Executive Vice President; 1997 $203,616 $10,000 N/A 100,000 $ 1,263 (3)
Chief Operating Officer 1996 $186,656 $59,278 N/A 84,000 0
Kermit R. Sumrall (5) 1998 $116,106 $ 8,442 N/A 0 $ 746 (3)
Secretary and Acting 1997 $103,077 $13,281 N/A 10,900 $ 604 (3)
Chief Financial Officer 1996 $ 98,566 0 N/A 14,500 0
Ronald Groen (5) 1998 $119,775 $48,019 N/A 0 $ 264 (3)
Vice President, Sales & 1997 $139,904 $15,000 N/A 31,850 $ 221 (3)
Marketing 1996 $100,000 $75,818 N/A 22,500 0
Christopher Melson (6) 1998 $168,252 $12,104 N/A 0 $45,577 (7)
Vice President, Product 1997 $ 82,500 $ 5,156 N/A 25,000 $16,624 (7)
Development
</TABLE>
_______
(1) Amounts exclude perquisites and other personal benefits because such
compensation did not exceed the lesser of $50,000 or 10% of the total
annual salary and bonus reported for each executive officer.
(2) Mr. Stewart was elected President and Chief Executive Officer on January
30, 1996 and his base annual salary was increased to $300,000 effective
January 30, 1996. Compensation reported in fiscal 1997 includes $26,927
paid in fiscal 1997 related to his January 30, 1996 increase which was
unpaid as of June 30, 1996.
(3) Represents the value of group term life insurance paid by the Company.
(4) Mr. Leonardo became an executive officer of the Company effective May 1,
1996.
(5) Messrs. Sumrall and Groen became executive officers of the Company
effective April 16, 1997.
(6) Mr. Melson became an executive officer of the Company effective December
16, 1996.
(7) Represents relocation allowance and group term life insurance paid by the
Company.
OPTION GRANTS AND EXERCISES
The following table sets forth information concerning option exercises and
the value of unexercised options held by the President and Chief Executive
Officer and each of the named executive officers of the Company named in the
Summary Compensation Table as of the end of fiscal 1998. There were no options
or stock appreciation rights granted during fiscal 1998 to the following named
executive officers.
8
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Shares Unexercised Options In-the-Money Options
Acquired Value At Fiscal Year End At Fiscal Year End (1)
Name On Exercise Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J. Michael
Stewart - - 133,499 / 37,501 $87,360 / $13,440
John C.
Leonardo, Jr. - - 112,332 / 96,668 $54,779 / $70,256
Kermit R.
Summrall - - 22,169 / 15,731 $ 5,076 / $10,739
Ronald
Groen - - 33,454 / 33,396 $15,348 / $31,035
Christopher
Melson - - 9,375 / 15,625 $12,309 / $20,516
</TABLE>
(1) Computed based on the difference between the last reported sales price of
the Common Stock on the Nasdaq National Market on June 30, 1998 of $3.688
and the exercise price of the options, multiplied by the applicable number
of options. On October 23, 1998, the last reported sales price of the
Common Stock on the Nasdaq National Market was $2.938 per share.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board (the "Compensation Committee")
currently consists of Frank B. Ryan, Francis J. Hughes, Jr., Dean C. Campbell
and John F. Smith, none of whom are officers or employees of the Company. The
Compensation Committee is responsible for recommending to the Board the policies
that govern executive officer compensation and for overseeing the implementation
of those policies. The Compensation Committee has furnished the following
report on executive compensation for the fiscal year ended June 30, 1998.
Executive Compensation Philosophy
The Compensation Committee strives to ensure that executive compensation is
competitive among companies in the computer manufacturing industry that are of
comparable size and complexity. Further, the Committee believes that the
Company's incentive compensation programs should contain the following elements:
. Base compensation levels that attract and retain superior talent;
. Bonus compensation awards that incentivize management's efforts to achieve
Company profitability goals; and
. Long-term equity incentives that align management's interests with those
of the Company's stockholders.
The Compensation Committee believes that the bonus compensation and long-
term equity incentives should be at risk relative to accomplishment of the
Company's profitability goals. Further, the Company should maintain
compensation programs that are competitive within the computer manufacturing
industry and that are constructive towards attainment of the Company's
operational and profitability goals.
9
<PAGE>
Procedure for Establishing Compensation
Each fiscal year the Compensation Committee reviews and approves an annual
compensation plan for the Company's executive officers. The plan is based on
recommendations of the Company's Chief Executive Officer and the Company's Vice
President of Human Resources. In addition, the Compensation Committee proposes
an annual compensation plan for the Chief Executive Officer for Board approval.
The Compensation Committee believes, on the basis of its review of computer
industry data, that the base salaries of the Company's executive officers are
comparable to those of executive officers of similar companies in the computer
manufacturing industry.
In determining appropriate compensation and incentive awards for the
Company's executive officers and for the Chief Executive Officer, the
Compensation Committee relied on reports surveying the industry that were
prepared by an outside consulting firm specializing in compensation programs.
Executive Officer Compensation
Compensation of the Company's executive officers consists of a combination
of base salary, annual bonus incentives keyed to accomplishment of specific
goals and profitability, and long-term incentives in the form of stock options.
In addition, executive officers participate in the Company's employee benefits
program. Bonus and long-term incentive compensation are designed to represent a
substantial portion of the total compensation available to executive officers.
Base Salary. Base salaries are set within the range of salaries of executive
officers with comparable qualifications, experience and responsibilities at
other companies in the same or similar industry and of comparable size and
complexity.
Bonus Compensation. Bonus compensation available to executive officers was
generally keyed to achievement of (1) critical financial goals related to
profitability and (2) specific goals related to job performance.
Long-term Incentive Compensation. The Compensation Committee believes that
stock option grants provide the most significant compensation opportunity for
executive officers and thereby serve the dual objectives of promoting retention
of executives and of ensuring that the interests of those executives are aligned
with those of the Company's stockholders. Stock options are granted at an
option price equal to the fair market value of the Company's Common Stock on the
date of the grant and are generally vested over a four year period.
Benefits. The Company's executive officers receive medical and term life
insurance benefits and participate in the Company's 401(k) savings plan on the
same basis as other full-time employees, with the exception that they are
provided at no cost with additional life insurance in an amount equal to twice
their base salary. The Company's 1993 Employee Stock Purchase Plan, which is
generally available to all employees, including executive officers, allows
participants to purchase up to a maximum of 500 shares of Common Stock per
offering period at a discount of 15% from the fair market value.
The total for benefits provided to executive officers, as determined by the
rules of the Commission Relating to Executive Compensation, did not exceed 10%
of salary of any executive officer for the fiscal year ended June 30, 1998.
Chief Executive Officer Compensation
During the fiscal year ended June 30, 1998, the Company's President and
Chief Executive Officer, J. Michael Stewart, participated in the programs
described above. The performance criteria for Mr. Stewart's annual incentive
program stressed the return to profitability while posturing the Company for
significant future growth. Mr. Stewart received aggregate salary of $300,000
during fiscal 1998. No bonus compensation or stock options were awarded.
10
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Compliance with Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), generally disallows a tax deduction to public companies for
compensation over $1 million paid to a corporation's chief executive officer and
four other most highly compensated executive officers. Qualifying
"performance-based" compensation will not be subject to the deduction limit if
certain requirements are met. Generally stock options will qualify as
"performance-based" compensation. The Compensation Committee has discussed and
considered and will continue to evaluate the potential impact of Section 162(m)
on the Company in making compensation determinations, but has not established a
set policy with respect to future compensation determinations.
The Compensation Committee
Frank B. Ryan, Chairman
Francis J. Hughes, Jr.
Dean C. Campbell
John F. Smith
The report of the Compensation Committee shall not be deemed incorporated
by reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933, as amended, or under
the Exchange Act, except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under such Acts.
11
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COMPARATIVE STOCK PERFORMANCE
The cumulative stock performance graph below compares the cumulative
shareholder return on Common Stock for the last five fiscal years with the
cumulative return on (i) the Nasdaq National Market (U.S. Companies) (the
"Nasdaq Composite Index"), (ii) the Nasdaq Computer Manufacturer Index (the "Old
Peer Group") and (iii) a peer group index based on the common stock of RadiSys
Corporation, SBS Technologies, Inc. and Maxwell Technologies, Inc. (the "New
Peer Group"). The Company has determined to use an index based on the New Peer
Group for future shareholder return comparisons as these companies offer a more
representative group of peers. The cumulative total shareholder return
computations set forth in the Performance Graph assume the investment of $100 in
the Company's Common Stock, the Nasdaq Composite Index and the Old and New Peer
Groups on June 30, 1993, and reinvestment of all dividends. Measurement points
are June 30, 1993 and the last trading days of Texas Micro's fiscal years ended
June 30, 1994, 1995, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
Research Data Group Peer Group Total Return Worksheet
Texas Micro Inc (TEXM)
CUMULATIVE TOTAL RETURN
----------------------------------------------------------------
6/93 6/94 6/95 6/96 6/97 6/98
<S> <C> <C> <C> <C> <C> <C>
TEXAS MICRO INC. 100.00 190.63 212.50 150.00 168.75 184.38
PEER GROUP 100.00 78.76 90.96 180.18 260.53 218.44
NASDAQ STOCK MARKET (U.S.) 100.00 100.96 134.77 173.03 210.38 277.61
NASDAQ COMPUTER MANUFACTURER 100.00 81.93 146.74 208.94 262.98 427.88
</TABLE>
The foregoing stock price performance comparisons shall not be deemed
incorporated by reference by any general statement incorporating by reference
this Proxy Statement into any filing under the Securities Act of 1933, as
amended, or under the Exchange Act, except to the extent that the Company
specifically incorporates this graph by reference, and shall not otherwise be
deemed filed under such acts.
There can be no assurance that the Company's stock performance will continue
into the future with the same or similar trends depicted in the graph above. The
Company will not make or endorse any predictions as to future stock performance.
12
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ITEM 2 - AMENDMENT TO 1993 EMPLOYEE STOCK PURCHASE PLAN
The purpose of the Company's 1993 Employee Stock Purchase Plan (the "ESPP")
is to encourage ownership in the Company by employees, including officers, and
to provide a further incentive to retain and motivate such employees. The ESPP
currently covers 750,000 shares of Texas Micro Common Stock, and its current
six-month offering period will close on December 31, 1998. By its terms, the
ESPP will expire on June 30, 1999. As of October 23, 1998, 256,497 shares had
been issued under the ESPP. On September 17, 1998, the Board voted to amend the
ESPP by extending its termination date by two years until June 30, 2001 and by
permitting employee purchases thereunder until such date, subject to stockholder
approval at the Annual Meeting. Following is a summary of the material
provisions of the ESPP.
The ESPP is administered by the Board of Directors and covers 750,000
shares of Common Stock, subject to adjustment for any dividend, stock split or
other relevant changes in Texas Micro's capitalization ("Shares"). With certain
limited exceptions, all full-time employees, including officers, employed by
Texas Micro for at least three months are eligible to participate in the ESPP.
The ESPP consists of four consecutive six-month offerings of 62,500 Shares
each, commencing July 1, 1999 and ending June 30, 2001. The number of Shares
may be increased at the election of the Board by the number of Shares, if any,
which were made available, but not purchased during an earlier offering. The
proposed amendment to the ESPP will extend its termination date by two years
from June 30, 1999 until June 30, 2001 and permit employee purchases thereunder
until such date. The amendment will make no change to the total number of
Shares available for purchase under the ESPP.
On the first day of a designated six-month offering period, the Company
grants to each eligible employee who has elected to participate in the ESPP an
option to purchase Shares as follows: the employee may authorize an amount (a
whole percentage from 1% to 6%) of such employee's monetary compensation, as
defined in the ESPP, to be deducted from such compensation during the offering
period. On the last day of the offering period, the employee is deemed to have
exercised the option, at the option exercise price, to the extent of accumulated
payroll deductions. Under the terms of the ESPP, the option price is an amount
equal to 85% of the fair market value per Share of the Texas Micro Common Stock
on either the first day or the last day of the offering period, whichever is
lower. In no event, however, may an employee purchase more than 500 Shares in
any one offering period.
FEDERAL INCOME TAX CONSEQUENCES
The ESPP is intended to qualify as an "employee stock purchase plan" as
defined in Section 423 of the Internal Revenue Code of 1986, as amended.
Section 423 provides that a participating employee does not have to pay any
federal income tax when such employee joins the ESPP or when an offering ends
and such employee receives Shares of Texas Micro Common Stock. The employee is
required, however, to pay federal income tax on the difference, if any, between
the price at which he sells the Shares and the price he paid for them.
If the employee has owned the Shares for more than one year and disposes of
them at least two years after the date an offering commenced, he will be taxed
as described below. If the market price of the Shares on the date they are sold
is equal to or less than the price paid for the Shares under the ESPP, the
employee will incur long-term capital loss in the amount equal to the price paid
over the sale price. If the sale price is higher than the price paid under the
ESPP, such employee will have to recognize ordinary income in an amount equal to
the lesser of (i) the market price of the Shares on the date the offering
commenced over the price paid or (ii) the excess of the sale price over the
price paid. Any further gain is treated as a long-term capital gain. Except as
set forth below, Texas Micro will generally not be entitled to a tax deduction
upon the purchase or sale of Shares under the ESPP. If the employee sells before
he has owned them for more than one year or before the expiration of a two-year
period commencing on the date the offering period commenced, the employee will
have to recognize ordinary income in the amount of the difference between the
option price and the market price of the Shares on the date of purchase, and
Texas Micro will receive an expense deduction for the same amount. The employee
will recognize a capital gain or loss for the difference between the sale price
and the fair market value on the date of purchase.
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<PAGE>
BOARD RECOMMENDATION
The Board believes that the adoption of the amendment to the 1993 Employee
Stock Purchase Plan, as described above, is in the best interests of Texas Micro
and its stockholders and therefore recommends a vote FOR this proposal.
ITEM 3 - AMENDMENT TO 1995 OUTSIDE DIRECTORS' STOCK OPTION PLAN
The purpose of the Company's 1995 Directors' Plan is compensate outside
directors for their services as board members and to provide further incentive
for such persons to serve as directors. The 1995 Directors' Plan currently
covers 150,000 shares of Texas Micro Common Stock. By its terms, the 1995
Directors' Plan will expire on July 1, 1999. As of October 23, 1998, 70,000
shares had been issued under the 1995 Directors' Plan. On September 17, 1998,
the Board voted to amend the 1995 Directors' Plan by extending its termination
date by three years until June 30, 2002, subject to stockholder approval at the
Annual Meeting. Following is a summary of the material provisions of the 1995
Directors' Plan.
The 1995 Directors' Plan provides for automatic grants of non-qualified
stock options to members of the Texas Micro Board who are not employees of Texas
Micro. As amended, the 1995 Directors' Plan provides that (i) each person who
becomes an eligible director after June 1994 will be granted an option to
purchase 12,000 shares of Common Stock on the close of business on the date of
his initial election to the Texas Micro Board, and (ii) each then eligible
director will be granted an option to purchase 2,500 shares of Common Stock on
each July 1 from July 1, 1995 through and including July 1, 2002.
The 1995 Directors' Plan is administered and supervised by the Texas Micro
Board. The exercise price of an option granted under the 1995 Directors' Plan
must not be less than 100% of the fair market value of Texas Micro's Common
Stock as of the grant date. The term of each option is ten years, and options
are immediately exercisable upon grant. Directors must exercise their options
while serving as, or within six months after ceasing to be, a director of Texas
Micro. Options are not assignable except to an entity which is a stockholder of
Texas Micro and with which the optionee is affiliated as his principal
occupation.
FEDERAL INCOME TAX CONSEQUENCES
A non-employee director will not recognize any taxable income at the time
an option is granted. Ordinary income will be recognized by a non-employee
director at the time of exercise in an amount equal to the excess of the fair
market value of the shares of Common Stock received over the option price for
such shares. However, if other shares of Common Stock have been purchased by a
non-employee director within six months of the exercise of an option,
recognition of the income attributable to such exercise may under certain
circumstances be postponed for a period of up to six months from the date of
such purchase of such other shares of Common Stock due to liability to suit
under Section 16(b) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"). If applicable, one effect of any such postponement would be to
measure the amount of the non-employee director's taxable income by reference to
the fair market value of such shares at the time such liability to suit under
Section 16(b) of the Exchange Act no longer exists (rather than at the earlier
date of the exercise of the option). The non-employee director will generally
recognize a capital gain or loss upon a subsequent sale of the shares of Common
Stock.
Upon a non-employee director's exercise of an option granted under the 1995
Directors' Plan, the Company may claim a deduction for compensation paid at the
same time and in the same amount as ordinary income is recognized by the non-
employee director.
BOARD RECOMMENDATION
The Board believes that the adoption of the amendment to the 1995
Directors' Stock Option Plan, as described above, is in the best interests of
Texas Micro and its stockholders and therefore recommends a vote FOR this
proposal.
14
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ITEM 4 - RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS
Subject to ratification by the stockholders, the Board, on the
recommendation of its Audit Committee, has selected the firm of
PricewaterhouseCoopers LLP as Texas Micro's independent accountants for the
fiscal year ending June 30, 1999. Representatives of PricewaterhouseCoopers LLP
are expected to be present at the Annual Meeting. They will have the
opportunity to make a statement if they desire to do so and will also be
available to respond to appropriate questions from stockholders. If the
stockholders of Texas Micro do not ratify the selection of
PricewaterhouseCoopers LLP as Texas Micro's independent accountants, the
selection of such accountants will be reconsidered by the Board.
BOARD RECOMMENDATION
The Texas Micro Board believes that the ratification of the selection of
PricewaterhouseCoopers LLP as the Company's independent accountants for the
fiscal year ending June 30, 1999 is in the best interests of the Company and its
stockholders and therefore recommends a vote FOR this proposal.
OTHER MATTERS
The Board does not know of any other matters that may come before the
Annual Meeting. However, if any other matters are properly presented to the
Annual Meeting, it is the intention of persons named in the accompanying proxy
to vote, or otherwise act, in accordance with their judgment on such matters.
All expenses of the Company's solicitation of proxies, including the cost
of preparing and mailing this Proxy Statement, will be borne by the Company. In
addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of the Company in person or by telephone,
telegram or other means of communication. Such directors, officers and
employees soliciting proxies will not be additionally compensated, but may be
reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. Arrangements will be made with custodians, nominees and
fiduciaries for forwarding of proxy solicitation materials to beneficial owners
of shares held of record by such custodians, nominees and fiduciaries, and the
Company will reimburse such persons for reasonable expenses incurred in
connection therewith.
COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and officers, and persons who own more than 10% of the
Common Stock, to file initial reports of ownership and reports of changes in
ownership (Form 3, 4, and 5) of Common Stock with the Securities and Exchange
Commission (the "SEC") and the Nasdaq Stock Market. Officers, directors and
greater than 10% stockholders are required by SEC regulations to furnish the
Company with copies of all such forms that they file. To the Company's
knowledge, based solely on the Company's review of the copies of such reports
received by the Company and on written representations by certain reporting
persons that no reports on Form 5 were required, the Company believes that
during the fiscal year ended June 30, 1998, all Section 16(a) filing
requirements applicable to its officers, directors and 10% stockholders were
complied with in a timely manner.
FINANCIAL INFORMATION
A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1998, as filed with the Securities and Exchange Commission,
except for exhibits, will be furnished without charge to any stockholder upon
written request of the Chief Financial Officer of the Company at 5959 Corporate
Drive, Suite 1600, Houston, Texas 77036.
STOCKHOLDER PROPOSALS
Any proposal of stockholders to be included in the Company's proxy
statement and proxy relating to the Company's 1999 Annual Meeting of
Stockholders must be received by the Company at its principal executive offices
not later than June 30, 1999, and must comply with all the requirements of Rule
14a-8 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Company may exercise discretionary voting authority with respect to
any stockholder proposal made at the 1999 Annual Meeting and not included in the
15
<PAGE>
Company's proxy statement and proxy unless notice of such proposal is received
by the Company not later than September 15, 1999 and is accompanied by a written
statement as required by Rule 14a-4 under the Exchange Act.
By Order of the Board of Directors,
/s/ Kermit R. Sumrall
------------------------------------
Kermit R. Sumrall
Secretary
16
<PAGE>
TEXAS MICRO INC.
Proxy for the Annual Meeting of Stockholders
To Be Held on December 3, 1998
THE PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY
The undersigned, revoking all prior proxies, hereby appoint(s) J. Michael
Stewart and K.R. Sumrall, and each of them, with full power of substitution, as
proxies to represent and to vote as designated herein, all shares of stock of
Texas Micro Inc. (the "Company") which the undersigned would be entitled to vote
if personally present at the Annual Meeting of Stockholders of the Company to be
held at 5959 Corporate Drive, Houston, Texas, on Thursday, December 3, 1998 at
1:00 p.m., local time, and at any adjournment or adjournments thereof.
In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the meeting or any adjournment thereof.
This proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. If no direction is given, this proxy will
be voted for proposals 1, 2, 3 and 4. Attendance of the undersigned at the
meeting or at any adjournment thereof will not be deemed to revoke this proxy
unless the undersigned shall revoke this proxy in writing before it is
exercised.
1. To elect Francis J. Hughes, Jr., A. Theodore Engkvist and Dennis M. Malloy
as Class II Directors as described in the Proxy Statement.
[ ] FOR [ ] WITHHELD
------------------------------------
For all three nominees except as noted above
2. To amend the Company's 1993 Employee Stock Purchase Plan by extending its
termination date by two years, from June 30, 1999 until June 30, 2001, and
by permitting employee purchases thereunder until such date.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. To amend the Company's 1995 Outside Directors' Stock Option Plan by
extending its termination date by three years, from July 1, 1999 until
July 1, 2002.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To ratify the appointment of PricewaterhouseCoopers LLP as the Company's
Independent Accountants.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. To transact such other business as may properly come before the meeting or
any adjournment or adjournments thereof.
Please sign exactly as name appears hereon. When shares are held by joint
owners, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give the full title as such. If a corporation,
please sign in full corporate name by President or other authorized officer. If
a partnership, please sign in partnership name by authorized person.
Signature:____________ Date:_________ Signature:____________ Date:_________
