<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 Quarter Ended Commission File Number
March 31, 1996 0-20706
DATA RACE, Inc.
(Exact name of registrant as specified in its charter)
Texas 74-2272363
(State of Incorporation) (I.R.S. Employer Identification No.)
12400 Network Boulevard
San Antonio, Texas 78249
Telephone 210/558-1900
(Address, including zip code, and telephone number
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
On May 3, 1996, there were 4,718,744 outstanding shares of Common Stock, no par
value.
PAGE 1 OF 10
<PAGE>
DATA RACE, Inc.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
Number
------
PART I. FINANCIAL INFORMATION
- ------------------------------
<S> <C>
Item 1. Interim Financial Statements:
Balance Sheets as of March 31, 1996 and June 30, 1995......... 3
Statements of Operations for the Three Months and Nine Months
Ended March 31, 1996 and 1995.................................. 4
Statements of Cash Flows for the Nine Months
Ended March 31, 1996 and 1995.................................. 5
Notes to Interim Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 7
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.............................................. 10
Item 2. Changes in Securities.......................................... 10
Item 3. Defaults Upon Senior Securities................................ 10
Item 4. Submission of Matters to a Vote of Security Holders............ 10
Item 5. Other Information.............................................. 10
Item 6. Exhibits and Reports on Form 8-K............................... 10
SIGNATURES.............................................................. 10
- ----------
</TABLE>
PAGE 2 OF 10
<PAGE>
DATA RACE, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1996 June 30, 1995
-------------- -------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 8,220,666 $ 6,092,382
Accounts receivable, net of allowance
for doubtful accounts of $136,303
at March 31 and $109,006 at June 30 1,102,645 7,337,533
Inventory 2,438,222 4,335,861
Deferred income taxes 285,591 285,591
Prepaid expenses 135,644 89,890
----------- -----------
Total current assets 12,182,769 18,141,257
Property and equipment, net of
accumulated depreciation of
$3,948,901 at March 31 and
$3,061,289 at June 30 2,304,641 1,861,103
Capitalized software, net of accumulated
amortization of $661,801 at March 31
and $397,745 at June 30 218,905 444,337
Intangible assets, net -- 67,500
Escrow deposit for new facility 468,883 --
Other assets, net 140,415 98,506
----------- -----------
Total assets $15,315,613 $20,612,703
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable 1,467,690 2,645,849
Accrued expenses 1,269,118 1,316,069
Other taxes payable 294,274 294,274
Other current liabilities 356,467 35,102
----------- -----------
Total current liabilities 3,387,549 4,291,294
Deferred income taxes 157,473 157,473
Shareholders' equity:
Preferred stock, 2,000,000 shares
authorized, none outstanding -- --
Common stock - no par value,
20,000,000 shares authorized,
4,716,681 and 4,657,777 shares
issued and outstanding at
March 31 and June 30, respectively 24,312,432 24,269,208
Retained earnings (deficit) (12,541,840) (8,105,272)
----------- -----------
Total shareholders' equity 11,770,591 16,163,936
----------- -----------
Total liabilities and
shareholders' equity $15,315,613 $20,612,703
=========== ===========
</TABLE>
See accompanying notes to financial statements
PAGE 3 OF 10
<PAGE>
DATA RACE, Inc.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------- ---------------------------
1996 1995 1996 1995
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue $ 2,026,358 $8,686,899 $14,178,592 $18,389,777
Cost of revenue 1,301,696 6,149,284 10,526,208 13,145,316
----------- ---------- ----------- -----------
Gross profit (loss) 724,662 2,537,615 3,652,384 5,244,461
Operating expenses:
Engineering and product development 1,255,088 793,606 3,380,931 2,147,380
Sales and marketing 1,057,815 1,032,084 2,941,201 2,590,691
General and administrative 741,311 550,556 2,070,197 1,315,831
----------- ---------- ----------- -----------
Total operating expenses 3,054,214 2,376,246 8,392,329 6,053,902
----------- ---------- ----------- -----------
Operating income (loss) (2,329,550) 161,369 (4,739,943) (809,441)
Other income (expense):
Interest/other income 124,058 68,915 303,377 219,917
Interest (expense) -- (3,865) -- (20,120)
----------- ---------- ----------- -----------
Total other income (expense) 124,058 65,050 303,377 199,797
----------- ---------- ----------- -----------
Income (loss) before income taxes (2,205,492) 226,419 (4,436,566) (609,644)
Income tax benefit (expense) -- -- -- --
----------- ---------- ----------- -----------
Net income (loss) ($2,205,492) $ 226,419 ($4,436,566) ($ 609,644)
=========== ========== =========== ===========
Earnings (loss) per share ($ 0.47) $0.05 ($ 0.95) ($ 0.13)
=========== ========== =========== ===========
Weighted average shares outstanding 4,698,000 4,978,000 4,677,000 4,547,000
</TABLE>
See accompanying notes to financial statements
PAGE 4 OF 10
<PAGE>
DATA RACE, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended March 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($4,436,566) ($ 609,644)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,200,544 1,159,632
Decrease (increase) in
accounts receivable 6,234,888 (1,836,201)
Decrease (increase) in income
taxes receivable -- 1,200,438
Decrease (increase) in
inventory 1,897,638 (260,439)
Decrease (increase) in prepaid
expenses and other assets (556,546) (41,464)
Increase (decrease) in
accounts payable (1,178,159) 1,474,524
Increase (decrease) in accrued
expenses (46,951) (671,126)
Increase (decrease) in
other current liabilities 321,365 (64,881)
----------- -----------
Net cash provided by (used in)
operating activities 3,436,213 350,839
Cash flows from investing activities:
Maturities of short-term investments -- 2,518,145
Capital expenditures (1,331,150) (284,245)
Expenditures for capitalized
software (20,000) (227,583)
----------- -----------
Net cash provided by (used in)
investing activities (1,351,150) 2,006,317
Cash flows from financing activities:
Earnout payments -- (40,000)
Principal payments on debt -- (11,720)
Net proceeds from issuance of stock 43,221 126,936
----------- -----------
Net cash provided by (used in)
financing activities 43,221 75,216
Net increase (decrease) in cash and
cash equivalents 2,128,284 2,432,372
Cash and cash equivalents at beginning
of period 6,092,382 2,706,085
----------- -----------
Cash and cash equivalents at end of
period $ 8,220,666 $ 5,138,457
=========== ===========
Supplementary Cash Flows Information:
Interest paid -- $ 20,120
Income tax refund received -- 1,185,174
</TABLE>
See accompanying notes to financial statements
PAGE 5 OF 10
<PAGE>
DATA RACE, Inc.
NOTES TO INTERIM FINANCIAL STATEMENTS
1) Summary of Significant Accounting Policies
- ----------------------------------------------
The unaudited interim financial statements reflect all adjustments (consisting
of normal recurring accruals) that in the opinion of management are necessary
for a fair presentation of the results for the periods indicated. These
financial statements should be read in conjunction with the Company's financial
statements and notes thereto included in the June 30, 1995 Annual Report on Form
10-K. Interim period results are not necessarily indicative of the results to
be expected for the full year.
Earnings (loss) per share are computed using the weighted average number of
common and common equivalent shares (when dilutive) outstanding during each
period. Common equivalent shares include stock options and warrants. Fully
diluted earnings per share are not less than earnings per common and common
equivalent share.
2) Inventory
- ------------------------
Inventory consists of:
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Finished goods $ 370,536 $ 287,841
Work in process 1,357,888 2,339,161
Raw materials 709,798 1,708,859
---------- ----------
Total Inventory $2,438,222 $4,335,861
========== ==========
</TABLE>
PAGE 6 OF 10
<PAGE>
DATA RACE, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Total revenue in the third quarter of fiscal year 1996 decreased 77% from
the same period of fiscal 1995. This decrease from the comparable period of
last year was chiefly due to a 94% decline in modem revenue, coupled with a 36%
decline in sales of multimedia statistical multiplexers. The steep decline in
modem shipments resulted primarily from the end of the IBM contract, which
accounted for much of the heavy modem sales volume in the comparable quarter of
the prior year, plus the continuing volatility in the notebook computer market
in fiscal 1996. Three custom notebook computer modem contracts won by the
Company during calendar 1995 have failed to produce volume shipments, since the
manufacturers discontinued the related notebooks prior to market introduction.
The decline in multiplexer revenue was partially due to the unusual peak in
sales of these products in the comparable quarter of the prior year.
Year-to-date revenue decreased 23% from the same period of the prior year,
resulting from a 27% decrease in modem revenue and an 18% decrease in multimedia
statistical multiplexer revenue.
For the quarter ended March 31, 1996, gross profit margin was 36% of
revenue, compared to 29% of revenue for the comparable quarter of the prior
year. This improvement in gross margin was mainly due to a higher percentage of
revenue from multiplexer products in the quarter ended March 31, 1996. The
Company's multiplexer products traditionally yield a higher gross margin than
modem products. Gross margins for the third quarter were depressed due to
unfavorable manufacturing variances which resulted mainly from decreased modem
production.
For the nine-month period ended March 31, 1996, gross profit margin was 26%
of revenue, compared to 29% of revenue for the comparable period of the prior
year. This decline in gross profit margin was primarily attributable to
manufacturing variances associated with an overall decline in production volume,
partially offset by an improvement in modem margins in the latter stages of the
IBM contract.
Engineering and product development expenses in the third quarter of fiscal
1996 increased 58% from the same period of last year. Year-to-date expenses
increased 57% from the comparable nine-month period of the prior year. The
increase is primarily due to continued investments in modems and multiplexers,
and in a new product line for the telecommuter market.
Third quarter fiscal year 1996 sales and marketing expenses increased 3%
from the same period of fiscal year 1995. Year-to-date sales and marketing
expenses increased 14% over the prior fiscal year. These increases are
primarily due to increased international sales
PAGE 7 OF 10
<PAGE>
and marketing efforts, increased participation in trade shows, a recently
implemented multiplexer advertising program, and preparation for the market
launch of the telecommuter product line.
General and administrative expenses in the third quarter of fiscal 1996
increased by 34% from the same period in the prior year, primarily due to rises
in legal fees and personnel-related expenses. Year-to-date expenses increased
57% from the same nine-month period of last fiscal year, primarily due to
increased legal expenses and personnel-related expenses for the period, and to
lower than normal expenses incurred in the first quarter of fiscal 1995.
The Company expects the ongoing turmoil in the notebook computer market to
continue to negatively impact results. Three times during calendar 1995 the
Company won contracts to design and build modems for major manufacturers' new
notebook computers, only to have the manufacturers discontinue the notebooks
prior to market introduction. In January 1996, the Company announced the
cancellation of a project won in August 1995, for which the Company had planned
volume shipments starting in the third quarter of fiscal 1996. This
cancellation combined with delays in another notebook contract have resulted in
no significant modem revenue for the third quarter of fiscal year 1996. The
Company continues to be in discussions with several of the world's major
notebook computer manufacturers about the development of custom and semi-custom
advanced technology modems for upcoming notebook products. In April 1996 the
Company began volume shipments on a significant new OEM modem contract.
Unfortunately, modem gross margins are decreasing in general, and profit margins
early in a contract are often lower due to startup costs.
In order to improve its future results in the multiplexer business, the
Company commenced an advertising program and released several product
enhancements during the third quarter. Subsequent to the third quarter, the
Company held its annual distributors conference, and noted renewed enthusiasm
among its multiplexer distributors. No sustained positive impact on bookings
has yet been derived from these actions.
The Company is continuing to invest in its new product line designed for the
telecommuter market. The Company expects to deliver concept demonstration units
to its user-partners in the coming weeks. Despite certain delays in meeting
development schedules, the Company succeeded in showing concept demonstration
equipment to a large user-partner during the third quarter, and received very
encouraging feedback as a result. If the development effort is successful, if
the product meets the needs of the intended market, and if the Company gets its
product to market ahead of major potential competitors, the Company could begin
to realize revenue shipments of these products by the middle of fiscal 1997.
The Company anticipates that it will continue to experience operating losses
unless and until the investments it is making in the three product lines
discussed above produce revenue increases. While the Company believes such
revenue increases will be realized if
PAGE 8 OF 10
<PAGE>
its efforts are successful, no assurances can be given either that the Company
will succeed in its development efforts, or that the market will embrace these
products and provide the Company with increased revenue.
Except for the historical information contained above, the matters discussed
in this section are forward-looking and involve a number of risks and
uncertainties. For example, changing market trends and market needs, rapid or
unexpected technological changes, increased competition, inability to resolve
technical issues or overcome other development obstacles, changing governmental
regulations, rising costs for components or unavailability of components, and
certain additional risks which are described in the Company's SEC filings,
including its Form 10-K for fiscal year 1995 and its Forms 10-Q for the current
fiscal year, all may impede the Company's ability to realize increased revenue
from its marketing efforts and investments in research and engineering, to win
OEM contracts and generate sales under such contracts, to successfully develop
new products, and to position DATA RACE at the forefront of the telecommuter
market.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first nine months of fiscal 1996, the Company financed its
operations by drawing on available cash, cash equivalents and cash generated by
operations. At March 31, 1996, the Company had $8.2 million in cash and cash
equivalents, representing increases of $0.3 million during the third quarter and
$2.1 million during the first nine months of fiscal 1996. During these periods,
there were no significant cash inflows from investing or financing activities,
but the Company did benefit from the one-time collection of cancellation fees
from IBM during the third quarter. Excluding the collection of these
cancellation fees, cash would have decreased during the third quarter by an
amount approximating the operating loss and the increase in inventory
experienced during the quarter. Expenditures for capital equipment were
$1,331,150 during the first nine months of fiscal 1996, mainly due to leasehold
improvements at the new facilities which the Company began occupying subsequent
to the third quarter. As of March 31, 1996, the Company had no short-term
credit facility.
The Company believes that future working capital and capital expenditures
are dependent on existing cash, on the Company becoming profitable from
operations, and on the Company's ability to successfully raise additional debt
or equity capital. The Company anticipates that increases in expenses for
development and market introduction of its telecommuter products will place
increasing demands on working capital. There can be no assurances that the
Company will be able to secure a credit facility or generate positive cash flow
from operations, in which case the Company would be dependent upon the use of
existing cash and its ability (of which there can be no assurance) to raise
additional capital through the debt or equity markets.
PAGE 9 OF 10
<PAGE>
DATA RACE, Inc.
Part II - Other Information
Item 1. Legal proceedings
- --------------------------
There have been no material developments subsequent to those described in
the Company's Form 10-Q for the quarter ended December 31, 1995.
Item 2. Changes in securities
- ------------------------------
None.
Item 3. Defaults upon senior securities
- ----------------------------------------
None.
Item 4. Submission of matters to a vote of security holders
- ------------------------------------------------------------
None.
Item 5. Other information
- --------------------------
None.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
None.
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.
Registrant: DATA RACE, Inc.
-----------------------------------------------
Date: May 9, 1995
-----------------------------------------------
Signature:
-----------------------------------------------
Gregory T. Skalla
Chief Financial Officer
Signing on behalf of the registrant and as the
principal financial officer.
PAGE 10 OF 10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1996
<PERIOD-START> JAN-01-1996 JUL-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1996
<CASH> 8,220,666 8,220,666
<SECURITIES> 0 0
<RECEIVABLES> 1,238,948 1,238,948
<ALLOWANCES> 136,303 136,303
<INVENTORY> 2,438,222 2,438,222
<CURRENT-ASSETS> 12,182,769 12,182,769
<PP&E> 6,253,542 6,253,542
<DEPRECIATION> 3,948,901 3,948,901
<TOTAL-ASSETS> 15,315,613 15,315,613
<CURRENT-LIABILITIES> 3,387,549 3,387,549
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 24,312,432 24,312,432
<TOTAL-LIABILITY-AND-EQUITY> 15,315,613 15,315,613
<SALES> 0 0
<TOTAL-REVENUES> 2,026,358 14,178,592
<CGS> 0 0
<TOTAL-COSTS> 1,301,696 10,526,208
<OTHER-EXPENSES> 3,054,214 8,392,329
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,205,492) (4,436,566)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,205,492) (4,436,566)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,205,492) (4,436,566)
<EPS-PRIMARY> (0.47) (0.95)
<EPS-DILUTED> (0.47) (0.95)
</TABLE>
