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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 27, 1998
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-18238
TEXAS MICRO INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 04-2738973
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5959 Corporate Drive, Houston, Texas 77036
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 713-541-8200
-----------
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 [_]
As of November 5, 1998, 13,423,197 shares of the registrant's Common Stock,
$.40 par value, were outstanding.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS TEXAS MICRO INC. AND SUBSIDIARIES
September 27, June 30,
1998 1998
ASSETS (unaudited)
------------- --------
(in thousands)
Current Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 7,506 $ 7,568
Accounts receivable, net of allowance for doubtful accounts
of $1,009 at September 27, 1998 and $888 at June 30, 1998 12,087 11,508
Inventories 11,382 8,291
Other current assets 1,939 1,825
-------- --------
Total current assets 32,914 29,192
======== ========
Equipment and improvements, at cost:
Computer equipment 3,559 3,379
Machinery and equipment 4,489 4,270
Furniture and fixtures 1,056 1,011
Leasehold improvements 1,286 968
Construction in progress 1,283 519
-------- --------
11,673 10,147
Less - Accumulated depreciation and amortization 6,954 6,549
-------- --------
4,719 3,598
-------- --------
Other assets 40 66
-------- --------
Total Assets $ 37,673 $ 32,856
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 6,820 $ 3,886
Accrued expenses 6,531 5,783
-------- --------
Total current liabilities 13,351 9,669
-------- --------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.40 par value:
Authorized--12,500 shares at September 27, 1998 and June 30, 1998
Issued--none - -
Common stock, $.40 par value:
Authorized--35,000 shares at September 27, 1998 and June 30, 1998
Issued--15,643 shares at September 27, 1998 and June 30, 1998 6,257 6,257
Additional paid-in capital 80,326 80,314
Accumulated deficit (56,627) (57,468)
Unrealized loss on securities available for sale (325) (325)
Treasury stock, at cost, 2,220 shares at September 27, 1998 and
2,250 shares at June 30, 1998 (5,326) (5,400)
Cumulative translation adjustment 17 (191)
-------- --------
Total stockholders' equity 24,322 23,187
-------- --------
Total Liabilities and Stockholders' Equity $ 37,673 $ 32,856
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
2
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CONSOLIDATED STATEMENTS OF OPERATIONS TEXAS MICRO INC. AND SUBSIDIARIES
(unaudited)
<TABLE>
<CAPTION>
For the three months ended,
September 27, September 28,
1998 1997
------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C>
Revenues
Product $19,480 $16,037
Service and other 841 -
------- -------
Total revenues 20,321 16,037
Cost of revenues
Product 12,866 11,093
Service and other 247 -
------- -------
Total cost of revenues 13,113 11,093
Gross profit 7,208 4,944
Research and development expenses 2,270 1,951
Selling, general and administrative expenses 4,188 3,575
------- -------
Total operating expenses 6,458 5,526
Income (loss) from operations 750 (582)
Interest income 99 91
Other income (expense) 71 21
------- -------
Income (loss) before provision for income taxes 920 (470)
Provision for income taxes 88 19
------- -------
Net income (loss) $ 832 $ (489)
======= =======
Basic income (loss) per share $ 0.06 $ (0.04)
======= =======
Diluted income (loss) per share $ 0.06 $ (0.04)
======= =======
Average common shares outstanding 13,420 13,505
======= =======
Average common shares assuming dilution 13,642 13,505
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
3
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CONSOLIDATED STATEMENTS OF CASH FLOWS TEXAS MICRO INC. AND SUBSIDIARIES
(unaudited)
<TABLE>
<CAPTION>
For the three months ended,
September 27, September 28,
1998 1997
------------- ------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 832 ($489)
Net income (loss)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities--
Depreciation 384 366
Amortization 27 27
Provision for inventories 564 (54)
Provisions for bad debts 119 27
Changes in assets and liabilities:
Accounts receivable (615) (883)
Inventories (3,610) (1,323)
Other current assets (97) 58
Accounts payable 2,925 (327)
Accrued expenses 737 (160)
------ ------
Net cash provided by (used in) operating activities 1,266 (2,758)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and improvements (1,495) (360)
Proceeds from sale of SES - 240
Increase in other assets (1) -
------ -----
Net cash used in investing activities (1,496) (120)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 95 45
------ -----
Net cash provided by financing activities 95 45
------ -----
Effect of exchange rates on cash 73 5
------ -----
NET DECREASE IN CASH AND CASH EQUIVALENTS (62) (2,828)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,568 8,386
------ ------
CASH AND CASH EQUIVALENTS, END OF PERIOD $7,506 $5,558
====== ======
Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes $ 5 $ 10
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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, 1998, filed with the Commission on September
14, 1998.
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 27, 1998 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 - Inventories
- ------
Inventories including materials, labor and manufacturing overhead consisted of
the following:
(in thousands)
September 27, June 30,
1998 1998
--------------- -----------
Raw materials $ 6,857 $5,682
Work-in-process 3,545 1,899
Finished goods 980 710
--------------- -----------
$11,382 $8,291
---------------- -----------
Note 3 - Net Income (Loss) per Share
- ------
Basic income (loss) per share is based on the weighted average number of common
shares outstanding during the period, while diluted income (loss) per share is
computed to reflect the potential dilution of common stock under the Company's
stock option plans. For loss periods, weighted average common share equivalents
are excluded from the calculation as their effect would be antidilutive.
Note 4 - Comprehensive Income
- ------
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.130,
"Reporting Comprehensive Income" during the first quarter of fiscal 1999. SFAS
No. 130 establishes new rules for the reporting and presentation of
comprehensive income and its components. The Company's comprehensive income is
comprised of net income, foreign currency translation adjustments and unrealized
losses on marketable securities held as available-for-sale investments.
Comprehensive income (loss) was $1,040,000 and ($482,000) for the three-month
periods ended September 27, 1998 and September 28, 1997, respectively.
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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 and industrial automation
markets. The Company operates in one segment, computer systems.
Results of Operations
REVENUES
- --------
The Company's revenues for the first quarter of fiscal 1999, which ended
September 27, 1998, of $20,321,000 increased 27% from $16,037,000 for the first
quarter of fiscal 1998. The product revenue increase was due to new design
wins, the introduction of new products and a ramp up in existing strategic
customer accounts. The increase in service and other revenue is primarily a
result of the Company licensing certain proprietary technology in November 1997
over a one year term. During the first quarter of 1999, units shipped increased
38% and the average unit selling price declined 12% as compared with the first
quarter of 1998. Sales to the top five customers represented 44% of total
revenues for the first quarter of fiscal 1999 and 23% for the first quarter of
fiscal 1998. The Company had one customer that represented 24% of total
revenues for the quarter ended September 27, 1998.
Sales outside the United States for the first quarter of fiscal 1999 increased
to $6,109,000 or 30% of total revenues, from $5,249,000, or 33% of total
revenues for the first quarter of fiscal 1998.
GROSS MARGIN
- ------------
Gross margin of 35% for the first quarter of fiscal 1999 reflected an increase
of four percentage points from 31% in the first quarter of fiscal 1998. This
increase is primarily attributable to an increase in product gross margin of
three percentage points over the prior year period resulting from economies of
scale generated by the growth in product revenues.
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 $2,270,000 for the first
quarter of fiscal 1999 increased 16% from $1,951,000 for the first quarter of
fiscal 1998. As a percent of revenues, research and development expenses
decreased slightly to 11% for the first quarter of 1999, as compared to 12% for
the first quarter of 1998. The increase in research and development expense
over the prior year quarter was due to continued investment in new product
development, primarily CompactPCI, 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 increased 17% to $4,188,000, or 21%
of revenues, for the first quarter of fiscal 1999 from $3,575,000, or 22% of
revenues, for the first quarter of fiscal 1998. The increase in expenses were
primarily due to an increase in enterprise wide computer system implementation
related costs and bad debt reserves.
OPERATING INCOME (LOSS)
- -----------------------
The Company reported income from operations of $750,000 for the first quarter of
fiscal 1999, compared to a loss from operations of $582,000 for the first
quarter of fiscal 1998. The increase in income from operations resulted
6
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from the increase in revenues and a higher gross margin. These increases were
partially offset by a modest increase in operating expenses over the prior year
quarter end.
INTEREST AND OTHER INCOME
- -------------------------
The Company generated interest income of $99,000 during the first quarter of
fiscal 1999, as compared to $91,000 for the first quarter of fiscal 1998. Other
income was $71,000 during the first quarter of fiscal 1999 as compared to
$21,000 for the first quarter of the prior year. The increase in other income
is primarily a result of favorable translation rate gains in the current year
quarter.
INCOME TAXES
- ------------
The Company recorded provisions for income taxes, primarily for alternative
minimum, foreign and state income taxes, of $88,000 for the first quarter of
fiscal 1999 compared to $19,000 for the first quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 27, 1998, the Company had cash and cash equivalents of $7,506,000
and working capital of $19,563,000. This compared to cash and cash equivalents
of $7,568,000 and working capital of $19,523,000 at June 30, 1998.
Cash provided by operations was $1,266,000 for the first quarter of fiscal 1999.
Cash provided by operating activities resulted primarily from increases in
accounts payable and accrued expenses offset by increases in inventories and
accounts receivable.
The Company's capital expenditures during the first quarter of fiscal 1999 were
$1,495,000 an increase of $1,135,000 as compared to the prior year first
quarter. The increase is primarily due to expenditures for a new enterprise
wide computer system and manufacturing equipment. Quarterly capital
expenditures for the remaining portion of fiscal 1999 are expected to be less
than the level experienced in the first quarter of fiscal 1999.
The Company believes that its present cash flow and cash balances are adequate
for its operating needs and capital expenditures through fiscal 1999.
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 the fourth quarter of fiscal year 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. SFAS No. 131 will require additional
disclosure in the Company's consolidated financial statements.
YEAR 2000 COMPLIANCE
Many computer systems and imbedded chips may experience problems handling dates
beyond the year 1999. Therefore, some devices containing imbedded chips and
computer hardware and software will need to be modified prior to the Year 2000
in order to remain functional. In response to these Year 2000 issues, the
Company has assigned a project team to assess the readiness of its internal
business processes, non-financial software and imbedded chip systems, products
sold to customers and external noncompliance by customers and suppliers for
handling the Year 2000. The Company has created a website at www.texasmicro.com
containing additional information about the Year 2000 issue and the Company's
compliance program.
INTERNAL BUSINESS PROCESSES. During fiscal 1999, as part of a business
modernization program intended to reduce cycle time and improve profitability,
the Company purchased an enterprise wide computer system, which the software
vendor has indicated, is Year 2000 compliant. The total estimated hardware,
software and installation cost for this new system is approximately $3 million
of which approximately $1.3 million has been spent to date.
7
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The Company is currently in the implementation phase for this system with full
implementation to be completed by September 1999. Based on this schedule, the
Company expects to be in full compliance with its internal financial systems
before the Year 2000. However, if due to unforeseen circumstances, the
implementation is not completed on a timely basis, the Year 2000 could have a
material impact on the operations of the Company. Contingency plans have been
established in a few areas where the Company believes there is some risk that
the system will not be implemented before Year 2000. Those plans include
adapting or replacing some of the Company's currently existing systems to make
them Year 2000 compliant. The cost of making those adaptations are not expected
to be material and will be expensed in the period incurred.
INTERNAL NON-FINANCIAL SOFTWARE AND IMBEDDED CHIP TECHNOLOGY. The Company is in
the assessment phase with regard to non-financial software and imbedded chip
systems and is currently assessing the impact of the Year 2000 on its non-
financial systems such as manufacturing equipment, security equipment, etc.,
with Year 2000 compliance scheduled for September 1999. The Company does not,
at this time, have sufficient data to estimate the cost of achieving Year 2000
compliance for its major non-financial systems, the Year 2000 could have a
material impact on the operations of the Company. Since the Company is in the
assessment phase, the Company does not currently have a formal contingency plan
in place for its internal non-financial software and imbedded chip systems.
PRODUCTS SOLD TO CUSTOMERS. The Company believes that it has substantially
identified and resolved all potential Year 2000 problems with any of the
hardware products, which it currently develops and markets. However, management
also believes that it is not possible to determine with complete certainty that
all Year 2000 problems affecting the Company's hardware products have been
identified or corrected due to the complexity of these products and the fact
that these products interact with other third party vendor products and operate
with software or in systems which are not under the Company's control.
EXTERNAL NONCOMPLIANCE BY CUSTOMERS AND SUPPLIERS. The Company is also
contacting critical suppliers of products and services to determine that the
suppliers' and service providers' operations and the products and services they
provide are Year 2000 capable or to monitor their progress toward Year 2000
capability. To the extent that responses to Year 2000 readiness are
unsatisfactory, the Company intends to change suppliers or service providers to
those who have demonstrated Year 2000 readiness but cannot be assured that it
will be successful in finding such alternative suppliers and service providers.
The Company does not currently have any formal information concerning the Year
2000 compliance status of its customers but has received indications that many
of its customers are working on Year 2000 compliance. In the event that any of
the Company's significant customers or suppliers do not successfully and timely
achieve Year 2000 compliance, and the Company is unable to replace them with new
customers or alternate suppliers, the Company's business or operations could be
adversely affected.
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, 1998.
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.
8
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
None.
9
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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 5, 1998 By:/s/ J. Michael Stewart
----------------------
J. Michael Stewart
President and Chief Executive Officer
Date: November 5, 1998 By:/s/ Kermit R. Sumrall
---------------------
Kermit R. Sumrall
Secretary and Acting Chief Financial
Officer
Date: November 5, 1998 By:/s/ Michael L. Baudler
----------------------
Michael L. Baudler
Controller
10
<TABLE> <S> <C>
<PAGE>
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<CURRENCY> US DOLLARS
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> SEP-27-1998
<EXCHANGE-RATE> 1
<CASH> 7,506
<SECURITIES> 0
<RECEIVABLES> 13,096
<ALLOWANCES> 1,009
<INVENTORY> 11,382
<CURRENT-ASSETS> 32,914
<PP&E> 11,673
<DEPRECIATION> 6,954
<TOTAL-ASSETS> 37,673
<CURRENT-LIABILITIES> 13,351
<BONDS> 0
0
0
<COMMON> 6,257
<OTHER-SE> 18,065
<TOTAL-LIABILITY-AND-EQUITY> 37,673
<SALES> 19,480
<TOTAL-REVENUES> 20,321
<CGS> 12,866
<TOTAL-COSTS> 13,113
<OTHER-EXPENSES> 6,458
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 920
<INCOME-TAX> 88
<INCOME-CONTINUING> 832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 832
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
