<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 March 29, 1998
--------------
Commission File Number 0-18238
TEXAS MICRO INC.
----------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 04-2738973
- -------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of 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
----- -----
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 May 1, 1998
----- --------------------------
Common Stock, $.40 par value 13,436,173
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS TEXAS MICRO INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(in thousands)
ASSETS March 29 June 30
1998 1997
(unaudited)
---------------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,475 $ 8,386
Accounts receivable, net of allowance for doubtful accounts
of $835 at March 29, 1998 and $833 at June 30, 1997 11,137 9,108
Inventories 9,473 9,636
Other current assets 2,215 3,062
---------------------------------------
Total current assets 29,300 30,192
---------------------------------------
Equipment and Improvements, at cost:
Computer equipment 3,429 3,781
Machinery and equipment 4,630 4,014
Furniture and fixtures 1,026 1,005
Leasehold improvements 1,002 968
---------------------------------------
10,087 9,768
Less - Accumulated depreciation and amortization 6,618 6,113
---------------------------------------
Other Assets 92 177
---------------------------------------
Total Assets $ 32,861 $ 34,024
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,037 $ 5,115
Accrued expenses and other 5,240 4,940
---------------------------------------
Total current liabilities 9,277 10,055
---------------------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.40 par value:
Authorized--12,500 shares at March 29, 1998 and June 30, 1997
Issued--none -- --
Common stock, $.40 par value:
Authorized--35,000 shares at March 29, 1998 and June 30, 1997
Issued--15,643 shares at March 29, 1998 and June 30, 1997 6,257 6,257
Additional paid-in capital 80,314 80,314
Accumulated deficit (57,865) (57,566)
Treasury stock, at cost, 2,117 shares at March 29, 1998, and
2,157 shares at June 30, 1997 (4,886) (4,938)
Cumulative translation adjustment (236) (98)
---------------------------------------
Total stockholders' equity 23,584 23,969
---------------------------------------
Total Liabilities and Stockholders' Equity $ 32,861 $ 34,024
=======================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS TEXAS MICRO INC. AND SUBSIDIARIES
(unaudited)
For the three months ended, For the nine months ended,
March 29, 1998 March 30, 1997 March 29, 1998 March 30, 1997
-------------- --------------- -------------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues
Product $16,146 $14,717 $50,689 $44,374
Service and Other 561 - 986 3,932
-------------- -------------- -------------- --------------
Total revenues 16,707 14,717 51,675 48,306
Cost of Revenues
Product 11,563 10,113 35,765 30,855
Service and Other - - - 1,846
-------------- -------------- -------------- --------------
Total cost of revenues 11,563 10,113 35,765 32,701
Gross profit 5,144 4,604 15,910 15,605
Research and Development Expenses 1,859 1,902 5,717 6,670
Selling, General and Administrative Expenses 3,472 3,263 10,948 11,684
-------------- -------------- -------------- --------------
Total operating expenses 5,331 5,165 16,665 18,354
Income (loss) from operations (187) (561) (755) (2,749)
Interest Income 85 124 245 381
Other Income (Expense) 250 4 288 (9)
-------------- -------------- -------------- --------------
Income (loss) before provision for income taxes 148 (433) (222) (2,377)
Provision for Income Taxes 35 22 82 86
-------------- -------------- -------------- --------------
Net income (loss) $113 ($455) ($304) ($2,463)
============== ============== ============== ==============
Basic Income (Loss) Per Share $0.01 ($0.03) ($0.02) ($0.16)
============== ============== ============== ==============
Diluted Income (Loss) Per Share $0.01 ($0.03) ($0.02) ($0.16)
============== ============== ============== ==============
Common Shares Outstanding 13,536 14,322 13,517 15,018
============== ============== ============== ==============
Common Shares Assuming Dilution 13,872 14,322 13,517 15,018
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS TEXAS MICRO INC. AND SUBSIDIARIES
(unaudited)
<TABLE>
<CAPTION>
For the nine months ended,
March 29, March 30,
1998 1997
--------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (304) $(2,463)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities-
Depreciation 1,086 1,208
Amortization 80 158
Provisions for inventories 340 1,204
Provisions for bad debts 54 5
Changes in assets and liabilities:
Accounts receivable (2,134) 2,199
Inventories (219) 367
Other current assets 958 732
Accounts payable (1,068) 1,438
Accrued expenses and other 306 (2,247)
Deferred revenue -- 510
--------------------------
Net cash provided by (used in) operating activities (901) 3,031
--------------------------
Cash Flows From Investing Activities:
Purchase of equipment and improvements (1,027) (895)
Decrease (increase) in other assets 5 (499)
--------------------------
Net cash used in investing activities (1,022) (1,394)
--------------------------
Cash Flows From Financing Activities:
Repayment of obligations under capital leases -- (33)
Proceeds from issuance of common stock 157 213
Purchase of treasury stock (101) (3,453)
--------------------------
Net cash provided by (used in) financing activities 56 (3,273)
--------------------------
Effect of exchange rates on cash (44) (40)
--------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (1,911) (1,676)
Cash and Cash Equivalents, beginning of period 8,386 12,287
--------------------------
Cash and Cash Equivalents, end of period $ 6,475 $10,611
==========================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ -- $ 2
Income taxes paid (refunds received) 63 (58)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
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 and nine months ended
March 29, 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 - 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. During the three months ended March
29, 1998, the Company began to recognize a gain related to the disposition. The
$150,000 gain recognized during the three months ended March 29, 1998 is
included in other income. As of March 29, 1998, deferred cash payments of
$2,318,000 had been received in connection with the disposition.
5
<PAGE>
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:
<TABLE>
<CAPTION>
(in thousands)
March 29, June 30,
1998 1997
--------- --------
<S> <C> <C>
Raw materials $7,079 $6,860
Work-in-process 1,288 1,660
Finished goods 1,106 1,116
------ ------
$9,473 $9,636
------ ------
</TABLE>
NOTE 4 - INCOME (LOSS) PER SHARE
- ------
In the second quarter of fiscal 1998 the Company adopted the Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". The
adoption of SFAS No. 128 did not have a material effect on the Company's
reported 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.
6
<PAGE>
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 (in thousands).
<TABLE>
<CAPTION>
For the three months ended, For the nine months ended,
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidated Revenues $16,707 $14,717 $51,675 $48,306
Less Disposed Operations of SES -- -- -- 5,585
------- ------- ------- -------
Revenues from Ongoing Operations $16,707 $14,717 $51,675 $47,721
======= ======= ======= =======
Consolidated Gross Profit $ 5,144 $ 4,604 $15,910 $15,605
Less Disposed Operations of SES -- -- -- 2,497
------- ------- ------- -------
Gross Profit from Ongoing Operations $ 5,144 $ 4,604 $15,910 $13,108
======= ======= ======= =======
</TABLE>
REVENUES
- --------
The Company's revenues for the third quarter of fiscal 1998, which ended March
29, 1998, of $16,707,000 increased 14% from $14,717,000 for the third quarter of
fiscal 1997. During the third quarter of 1998, units shipped from ongoing
operations decreased 2%, however the average unit selling price increased 12% as
compared with the third quarter of 1997. Sales to the top five customers
represented 27% of total revenues for the third quarter of fiscal 1998 compared
to 25% of total revenues for the third quarter of fiscal 1997.
The Company's revenues for the first nine months of fiscal 1998 of $51,675,000
increased 7% from $48,306,000 for the first nine months of fiscal 1997. The
revenue increase was due to an increase in revenues from ongoing operations,
partially offset by the disposition of SES. Revenues from ongoing operations for
the first nine months of 1998 were $51,675,000, which increased 21%
from $42,721,000 for the first nine months of 1997. During the first nine months
of 1998, units shipped from ongoing operations increased 25% and the average
unit selling price declined 5% as compared with the first nine months of 1997.
Sales to the top five customers represented 23% of total revenues from ongoing
operations for the first nine months of fiscal 1998 compared to 21% of total
revenues from ongoing operations for the same period a year ago.
Revenues from ongoing operations for both the three and nine months ended March
29, 1998 are higher than the comparable periods a year ago resulting from the
recent major 'design wins' - new contracts awarded by original equipment
manufacturers for system products or SBCs.
7
<PAGE>
Sales from ongoing operations outside the United States for the third quarter of
fiscal 1998 increased to $4,865,000 or 29% of total revenues, from $4,303,000,
or 29% of total revenues from ongoing operations for the third quarter of fiscal
1997. For the nine months ended March 29, 1998, sales from ongoing operations
outside the United States comprised $15,562,000, or 30% of total revenues, as
compared to $13,770,000, or 32%, for the comparable period a year ago.
GROSS MARGIN
- ------------
Gross margin of 31% for the third quarter of fiscal 1998 remained constant with
gross margin recorded in the third quarter of fiscal 1997. Excluding the
effects of the "Fulcrum" license revenue for the third quarter of fiscal
1998, gross margin decreased 3 percentage points from the third quarter a year
ago.
Gross margin of 31% for the first nine months of fiscal 1998 reflected a decline
of 1 percentage point from 32% for the first nine months of fiscal 1997. The
decline in gross margin reflects the disposition of the higher profit margin
revenues associated with the SES business unit. Excluding the effect of SES,
gross margin was 31% for both the first nine months of 1998 and 1997. Excluding
the effects of the "Fulcrum" license revenue for the third quarter of fiscal
1998, gross margin decreased 2 percentage points from the nine month period a
year ago.
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 $1,859,000 for the third
quarter of fiscal 1998 decreased 2% from $1,902,000 for the third quarter of
fiscal 1997. As a percent of revenues, research and development expenses
decreased to 11% for the third quarter of 1998, as compared to 13% for the third
quarter of 1997. 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.
The Company's research and development expenses of $5,717,000 for the first nine
months of fiscal 1998 decreased 14% from $6,670,000 for the first nine months of
fiscal 1997. As a percent of revenues, research and development expenses
decreased to 11% for the nine months of 1998 from 14% for the first nine months
of 1997. The decrease in research and development expense from the prior year
period was primarily due to the sale of SES.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses increased 6% to $3,472,000, or 21%
of revenues, for the third quarter of fiscal 1998 from $3,263,000, or 22% of
revenues, for the third quarter of fiscal 1997. The increase in selling,
general and administrative expenses was primarily a result of the increase in
sales commissions related to higher revenues.
8
<PAGE>
Selling, general and administrative expenses decreased 6% to $10,948,000, or 21%
of revenues, for the first nine months of fiscal 1998 from $11,684,000, or 24%
of revenues, for the first nine months of fiscal 1997. The significant decline
in spending from the prior year period was a result of the sale of SES,
partially offset by the increase in sales commissions related to higher
revenues.
OPERATING INCOME (LOSS)
- -----------------------
The Company reported a loss from operations of $187,000 for the third quarter of
fiscal 1998, compared to a loss from operations of $561,000 for the third
quarter of fiscal 1997. For the first nine months of fiscal 1998 the Company
reported an operating loss of $755,000, compared to a loss from operations of
$2,749,000 for the prior year period. The improved results resulted from
increasing revenues while minimizing the increase in operating expenses.
OTHER INCOME
- ------------
The Company generated other income of $335,000 and $533,000 during the three and
nine months ended March 29, 1998, consisting of a gain related to the sale of
SES, a gain related to the sale of General Automation, Inc. common stock and
interest income. Other income for the three and nine months ended March 30, 1997
was $128,000 and $372,000, respectively, consisting primarily of interest
income. The decrease in interest income from the prior year periods is due
primarily from a decrease in cash and cash equivalents from which interest
income is generated.
INCOME TAXES
- ------------
The Company recorded provisions for income taxes, primarily for state income
taxes, of $35,000 and $82,000 during the three and nine months ended March 29,
1998, as compared to $22,000 and $86,000 for the comparable periods a year ago.
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1998, the Company had cash and cash equivalents of $6,475,000 and
working capital of $20,023,000. 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 $901,000 for the nine months ended March 29, 1998.
Cash used in operating activities resulted primarily from increases in accounts
receivable and inventories and a decrease in accounts payable, partially offset
by deferred cash payments of $1,239,000 received in connection with the
disposition of SES. The Company's capital expenditures during the nine months
ended March 29, 1998 increased by $132,000 as compared to the same period a year
ago, 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 nine months 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 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.
9
<PAGE>
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.
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. The Company does not expect the adoption of this standard to have a
significant impact on its disclosure.
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
<PAGE>
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
10.1 Ninth Amendment to Lease by and between Chevron U.S.A. Inc. and
Texas Micro Inc. dated February 24, 1998.
27 Financial Data Schedule
b) Reports on Form 8-K
None.
11
<PAGE>
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: May 12, 1998 By:/s/ J. Michael Stewart
----------------------
J. Michael Stewart
President and Chief Executive Officer
Date: May 12, 1998 By:/s/ Kermit R. Sumrall
---------------------
Kermit R. Sumrall
Secretary and Acting Chief Financial
Officer
12
<PAGE>
NINTH AMENDMENT TO LEASE
------------------------
EXHIBIT 10.1
THIS NINTH AMENDMENT TO LEASE (this "Amendment") is made by and between
CHEVRON U.S.A. INC., a Pennsylvania corporation ("Landlord") and TEXAS MICRO
INC., a Delaware corporation ("Tenant"), effective the 24th day of February,
1998.
W I T N E S S E T H:
--------------------
WHEREAS, Landlord and Tenant did enter into that certain lease (the "Lease")
dated December 11, 1992, as amended effective February 24, 1993, October 28,
1993, July 10, 1995, July 31, 1995, October 17, 1995, April 28, 1997, November
12, 1997 and December 23, 1997 for certain leased space situated in the Building
known as 5959 Corporate Drive, Houston, Texas; and
WHEREAS, Landlord and Tenant again desire to amend the Lease as set forth
herein;
NOW THEREFORE, Landlord and Tenant in consideration of the premises and the
mutual benefits to be derived therefrom, do hereby covenant, stipulate and
agree, each with the other, to the following terms, covenants, conditions and
obligations as an amendment to the Lease:
1. All terms, covenants, obligations and conditions in this Amendment
which conflict with a like provision in the Lease shall be controlling
over and supersede any like provision in the Lease.
2. All terms, covenants, obligations and conditions in the Lease not
superseded and/or amended by any provision in this Amendment shall
remain in full force and effect. All defined terms in the Lease shall
have the same meaning in this Amendment.
3. Article 1, Section 1.01 of the Lease is amended to include within the
Premises approximately 7,284 square feet of Net Rentable Area ("NRA")
(the "New Expansion Space") within the Northwest Quadrant on the First
Floor of the Building as shown on the floor plan attached hereto as
Exhibit A.
4. The Rental Commencement Date for the New Expansion Space is the
earlier of the date upon which the Tenant occupies the New Expansion
Space for purposes other than construction and build-out or March 1,
1998.
5. The Base Rent for the New Expansion Space is $11.50 per square foot of
NRA beginning upon the Rental Commencement Date.
6. Tenant shall have the right to further expand the New Expansion Space
to include the remaining approximately 7,283 square feet of NRA within
the Northwest Quadrant on the First Floor of the Building shown on the
floor plan attached hereto as Exhibit A at any time before February
28, 1999, upon 30 days advance written notice to Landlord; however,
unless such right is exercised by Tenant and such expansion effected
prior to February 28, 1999, the Lease shall be automatically
<PAGE>
amended effective March l, 1999 to include the aforesaid 7,283 square
feet of NRA in the New Expansion Space.
7. Tenant agrees to take the New Expansion Space "AS IS," and agrees to
the correctness of the square footage measurements recited herein.
8. So long as Tenant is not in default under the Lease, Tenant is granted
a right of first refusal, subordinate to the existing rights or
options of any other Tenant in the Building and subject to the
conditions specified herein, with respect to the remaining vacant
space in the Southwest Quadrant of the Basement Level of the Building
as shown on Exhibit B attached hereto (the "First Refusal Space"). If
Landlord receives an offer to lease the First Refusal Space from a
third party, which is not a corporate affiliate of Landlord, Landlord
shall present in writing the terms of such offer to Tenant. Within 5
business days after receipt of Landlord's notice of said third party
offer, Tenant shall deliver written notice to Landlord if Tenant
wishes to exercise its right hereunder to lease the First Refusal
Space under the same terms and conditions as the third party offer,
except that the term of the Lease with respect to the First Refusal
Space shall be coterminous with the term of the Lease, unless the
offer is within the last 5 years of the Lease, whereupon the term of
the Lease with respect to the First Refusal Space shall be the greater
of the term of said third party offer or the term of the Lease. If
Tenant does not so respond within the said 5 day period, Tenant will
be deemed to have waived its right hereunder, and Landlord may lease
the space to such third party. Nothing herein shall supersede
Landlord's right to dedicate the First Refusal Space for use by itself
or a corporate affiliate or to reserve the First Refusal Space for
such use. The exercise or rejection by Tenant of any offer to lease
First Refusal Space shall not terminate the right of first refusal as
to other portions of the First Refusal Space or as to space leased to
such third party upon expiration of such third party lease.
Made as of the date first written above.
LANDLORD TENANT
-------- ------
CHEVRON U.S.A. INC. TEXAS MICRO INC.
By /s/ Gary Schuman By /s/ Michael Stewart
---------------- -------------------
Its Lease Manager Its C.E.O.
------------- ------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000724621
<NAME> TEXAS MICRO INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> DEC-29-1997
<PERIOD-END> MAR-29-1998
<CASH> 6,475
<SECURITIES> 0
<RECEIVABLES> 11,972
<ALLOWANCES> 835
<INVENTORY> 9,473
<CURRENT-ASSETS> 29,300
<PP&E> 10,087
<DEPRECIATION> 6,618
<TOTAL-ASSETS> 32,861
<CURRENT-LIABILITIES> 9,277
<BONDS> 0
0
0
<COMMON> 6,257
<OTHER-SE> 17,327
<TOTAL-LIABILITY-AND-EQUITY> 32,861
<SALES> 50,689
<TOTAL-REVENUES> 51,675
<CGS> 35,765
<TOTAL-COSTS> 35,765
<OTHER-EXPENSES> 16,665
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (222)
<INCOME-TAX> 82
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<CHANGES> 0
<NET-INCOME> (304)
<EPS-PRIMARY> (0.02)
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</TABLE>
