<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1997.
REGISTRATION NO. 333-_____________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
DATA RACE, INC.
(Exact name of Registrant as specified in its charter)
12400 NETWORK BOULEVARD
SAN ANTONIO, TEXAS 78249
(210) 263-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
-------------------------
TEXAS 3661 74-2272363
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
-------------------------
DR. W. B. BARKER
DATA RACE, INC.
12400 NETWORK BOULEVARD
SAN ANTONIO, TEXAS 78249
(210) 263-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
MATTHEW R. BAIR, ESQ.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1500 NATIONSBANK PLAZA
300 CONVENT STREET
SAN ANTONIO, TEXAS 78205
-------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
-------------------------
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
-------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(2)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value........................ 3,020,000 $4.59375 $13,873,125 $4,093
=======================================================================================================================
</TABLE>
(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended (the
"Securities Act"), this Registration Statement also covers such
indeterminable additional shares of Common Stock as may become issuable as a
result of decreases in the conversion price of the Company's Series C
Participating Convertible Preferred Stock and any future antidilution
adjustments in accordance with the terms of the Series C Convertible
Participating Preferred Stock and certain warrants, the underlying shares of
which are included for registration.
(2) Pursuant to Rule 457(c), the offering price and registration fee are
computed on the basis of the average of the high and low prices of the
Common Stock, as reported by the Nasdaq National Market on December 5, 1997.
--------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
<PAGE>
********************************************************************************
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
********************************************************************************
Subject to completion
Dated December 12, 1997
UP TO 3,020,000 SHARES
DATA RACE, INC.
COMMON STOCK
This Prospectus relates to (i) an aggregate of up to 3,020,000 shares (the
"Shares") of common stock, without par value (the "Common Stock"), of DATA RACE,
Inc., a Texas corporation (the "Company"), and (ii) in accordance with Rule 416
under the Securities Act of 1933, as amended (the "Securities Act"), such
presently indeterminate number of additional Shares as may be issuable upon
conversion of the Company's Series C Convertible Participating Preferred Stock,
without par value (the "Series C Preferred Stock") and upon exercise of stock
purchase warrants relating to the Series C Preferred Stock (the "Series C
Warrants") as may become issuable as a result of stock splits, stock dividends
and antidilution provisions (including decreases in the conversion price of the
Series C Preferred Stock), which may be offered and sold from time to time by
the selling shareholders named herein (the "Selling Shareholders"). See "Selling
Shareholders." The Shares are issuable from time to time by the Company to the
Selling Shareholders as follows:
(i) Up to 3,020,000 Shares (the "Conversion Shares") are issuable upon
conversion of the Company's Series C Preferred Stock issued and
issuable hereafter to the Selling Shareholders in connection with a
private placement of securities pursuant to a Securities Purchase
Agreement entered into as of November 7, 1997, between the Company and
the Selling Shareholders (the "Series C Purchase Agreement"); as
described herein, the actual number of Conversion Shares that are
issued will depend on the average closing price of the Common Stock
prior to conversion and may be less than or greater than the number of
shares the Selling Shareholders may sell pursuant to this Prospectus;
and
(ii) up to 139,861 Shares (the "Warrant Shares") are issuable upon the
exercise of the Series C Warrants issued and issuable hereafter to the
Selling Shareholders pursuant to the Series C Purchase Agreement.
Pursuant to regulations of the National Association of Securities Dealers,
Inc., in the absence of shareholder approval, the Company may not issue in the
aggregate more than 1,108,335 shares of Common Stock at a discount from market
price upon conversion of the Series C Preferred Stock and the exercise of the
Series C Warrants. The total number of shares covered by this Prospectus
currently exceeds the total number of shares issuable by the Company as limited
by such regulations. The Company is soliciting shareholder approval of the
issuance of in excess of 1,108,335 shares of Common Stock upon conversion of the
Series C Preferred Stock and the exercise of the Series C Warrants.
THE SHARES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 5 FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF
THE SHARES.
The Company will receive proceeds only upon the exercise of the Series C
Warrants and will not receive any of the proceeds from the sale of the Shares by
the Selling Shareholders. See "Use of Proceeds."
<PAGE>
The Shares may be offered and sold from time to time by the Selling
Shareholders, or by pledgees, donees or transferees of, or certain other
successors in interest to, the Selling Shareholders, directly or through
brokers, dealers, underwriters or agents, in transactions on the Nasdaq Stock
Market's National Market (the "Nasdaq National Market"), in privately negotiated
transactions or otherwise, at market prices or at negotiated prices. The
Company will bear certain expenses incident to the registration and sale of the
Shares to the public, and has agreed to indemnify the Selling Shareholders
against certain liabilities. See "Plan of Distribution."
The Common Stock of the Company is listed for trading on the Nasdaq
National Market under the symbol "RACE." On December 9, 1997, the last
reported sale price of the Common Stock was $4.625 per share. As of December 9,
1997, there were 5,569,806 shares outstanding (without giving effect to the
issuance of the Conversion Shares or the Warrant Shares).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING THE ENTRY OF A STABILIZING BID OR A PENALTY BID, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND PASSIVE MARKET MAKING.
THE DATE OF THIS PROSPECTUS IS , 1997.
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<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy statements
and information statements filed by the Company with the Commission pursuant to
the information requirements of the Exchange Act may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549; and at the following Regional Offices of
the Commission: New York Regional Office, Seven World Trade Center, 13th Floor,
New York, New York 10048; and Chicago Regional Office, Citicorp Center, 500 West
Madison Street, 14th Floor, Chicago, Illinois 60661. Copies of such material may
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a site on the World Wide Web at http://www.sec.gov that contains
reports, proxies and information statements and other information regarding
registrants (including the Company) that file electronically. In addition,
reports, proxy statements and other information concerning the Company can be
inspected and copied at the offices of the Nasdaq National Market, Report
Section, 1735 K Street, N.W., Washington, D.C. 20006, on which the Common Stock
of the Company (symbol: "RACE") is listed.
The Company has filed with the Commission a registration statement on Form
S-3 with respect to the Common Stock offered hereby (including all amendments
and supplements thereto, the "Registration Statement"). This Prospectus, filed
as part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement, certain portions of which have been
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
and schedules thereto. Each statement made in the Prospectus as to the content
of any contract, agreement or other document referred to is not necessarily
complete and is qualified in its entirety by reference to the copy of such
contract, agreement or other document filed as an exhibit to the Registration
Statement. The Registration Statement, including exhibits thereto, can be
inspected and copied at the Commission's public reference facilities and
regional offices and at the offices of Nasdaq National Market referred to above
in Washington, D.C., at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated by reference in this Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997;
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997;
(c) The Company's Current Report on Form 8-K, dated November 12, 1997; and
(d) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A, filed October 5, 1992, including
any amendment or report filed hereafter for the purpose of updating
such description.
3
<PAGE>
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act, prior to the filing of a post-effective
amendment to the Registration Statement which indicates that all Common Stock
offered hereby has been sold or that deregisters all Common Stock then remaining
unsold, shall be deemed to be incorporated by reference in this Prospectus and
to be a part hereof from the date of filing such documents. Any statement
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated herein by reference modifies or supersedes such statement. Any
statement modified or superseded shall not be deemed, except as so modified or
superseded, to constitute part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus has been delivered, upon the oral or
written request of such person, a copy of any and all of the documents
incorporated herein by reference (other than exhibits to such documents, unless
specifically incorporated by reference). Such requests for copies should be
directed to DATA RACE, Inc., 12400 Network Blvd., San Antonio, Texas 78249,
Attention: Corporate Secretary; telephone number (210) 263-2000.
THE COMPANY
The Company designs, manufactures and markets a line of communication
products that meet the need for "Remote Access to the Corporate Environment."
The Company's products enable knowledge workers who work at home, in branch
offices, or on the road from hotels or airport lounges to access the various
elements of the corporate communications infrastructure. These products include
the recently launched Be There! personal multiplexer system, a unique
client/server product which allows teleworkers to access the corporate intranet,
LAN and the Internet, while sending and receiving e-mail, faxes and phone calls,
simultaneously over a single phone line. The Company also designs and
manufactures custom modems for manufacturers of notebook computers, and a line
of network multiplexers which carry data, LAN, voice, and fax traffic between a
company's branch and headquarters offices over a broad range of communications
speeds and services. The Company's ability to discern emerging remote access
market requirements and rapidly develop innovative technological solutions, as
well as its ability to rapidly take products into high-volume production, are
key elements of its competitive strategy.
The Company was incorporated in Texas in April 1983. The Company's
principal executive offices are located at 12400 Network Boulevard, San Antonio,
Texas 78249, and its telephone number at such address is (210) 263-2000. The
Company maintains a site on the World Wide Web at http://www.datarace.com.
4
<PAGE>
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. In
addition, this Prospectus and the documents incorporated herein by reference
contain certain "forward-looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. Such forward-looking
statements, which are often identified by words such as "believes,"
"anticipates," "expects," "estimates," "should," "may," "will" and similar
expressions, represent the Company's expectations or beliefs concerning future
events. Numerous assumptions, risks and uncertainties, including the factors set
forth below, could cause actual results to differ materially from the results
discussed in the forward looking statements. Prospective purchasers of the
Shares should carefully consider the factors set forth below, as well as the
other information contained herein or in the documents incorporated herein by
reference.
DEPENDENCE ON SUCCESS OF THE BE THERE! SYSTEM
The Company's goal of returning to profitability and developing a more
dependable revenue base will depend to a large extent on the success of the Be
There! personal multiplexer system. The recently introduced Be There! system
represents a new type of product for the Company which is significantly
different from the Company's custom modem and network multiplexer products, and
presents a unique set of risks and challenges for the Company. Future growth is
dependent on the Company's ability to timely and successfully develop and
introduce new products, such as the Be There! system, establish new distribution
channels, develop affiliations with leading market participants which facilitate
product development and distribution, and market existing and new products with
service providers, resellers, channel partners and others.
In addition to the potential obstacles associated with the introduction of
any new product, in order for the Company to successfully penetrate the emerging
teleworker market, the Company must make significant additions to its sales and
marketing infrastructure, as well as expand its operational systems.
Competition for qualified personnel is intense in the data communications
industry. The Company is in the process of establishing new distribution
channels and developing marketing and competitive pricing strategies to
penetrate those channels which are substantially different from current
marketing strategies. The Company has little experience in marketing the Be
There! system to potential customers or through sales channels for such
products. The Company has little experience in providing customer support and
warranty service for the Be There! system and there can be no assurance that the
Company will be successful in providing adequate customer support and warranty
service. Furthermore, the costs associated with providing customer support and
warranty services cannot be accurately predicted and may have a material adverse
effect on the Company's results of operations or financial condition. In
addition, the Company may be required to enhance the features and performance,
including voice coding characteristics, of the teleworker products in order to
achieve market acceptance of the products.
The Company's success may also be affected by competition from much larger,
more experienced companies, or by the introduction of alternative product
solutions or services. Rapidly changing technology, emerging industry standards
and the broad array of competing remote access solutions may adversely affect
the market acceptance of the Be There! system or cause it to become obsolete.
There can be no assurance that the Company will overcome such obstacles, and the
failure to do so could have a material adverse effect on the Company's business,
results of operations or financial condition.
5
<PAGE>
RECENT OPERATING LOSSES; ADEQUACY OF CAPITAL RESOURCES
The Company has suffered substantial recurring losses and, during fiscal
1997, incurred negative cash flows from operations. There can be no assurance
that the Company will return to profitability or will generate future revenue
levels sufficient to support operations. The Company's independent auditors have
included an explanatory paragraph in their report covering the June 30, 1997
financial statements which expresses substantial doubt about the Company's
ability to continue as a going concern.
The Company's ability to sustain operations, fund the development and
marketing of new products, including the Be There! personal multiplexer, and
make future capital expenditures, are highly dependent upon existing cash and
the ability to raise additional capital, and on some or all of the following:
demands on cash to support the custom modem business, final settlement of a
pending shareholder lawsuit, the cash requirements to fund redemption (if
required) of the 1997 Series A Convertible Preferred Stock (the "Series A
Preferred Stock") or the Series C Preferred Stock, and the Company's return to
profitability. See "Shareholder Lawsuit" and "Potential Redemption of Preferred
Stock" below. On November 12, 1997, the Company closed a $5,000,000 private
placement of Series C Preferred Stock and Series C Warrants to the Selling
Shareholders pursuant to the Series C Purchase Agreement. There can be no
assurance that the Company's existing cash will adequately meet the Company's
capital requirements until the Company achieves positive cash flow. The Company
does not anticipate a return to positive cash flow as long as its expenditures
on the Be There! system remain disproportionate to Be There! related revenues.
As a result, in the future, the Company may require additional financing. The
timing and amount of the Company's future capital requirements can not be
accurately predicted. There can be no assurance that additional financing, if
required, can be obtained on acceptable terms or that, if obtained, the Company
will be able to satisfy conditions restricting the Company's ability to fully
utilize such financing sources. There can be no assurance that the Company will
have cash available in the amounts and at the times needed. The inability to
obtain additional capital when needed would have a material adverse effect on
the Company's business.
RISK OF LOSING NASDAQ NATIONAL MARKET LISTING
Companies with securities listed on the Nasdaq National Market must satisfy
certain maintenance criteria, including minimum net tangible asset requirements.
The Company's recurring losses have had a negative effect on the Company's
shareholder's equity. There can be no assurance that the Company will continue
to satisfy the maintenance criteria of the Nasdaq National Market, the failure
of which could result in the delisting of the Common Stock from such market.
Termination of listing of the Company's Common Stock on the Nasdaq National
Market could have a material adverse effect on the market price and liquidity of
the Common Stock and the Company's ability to raise additional capital.
Moreover, the Company could be liable for certain penalties to the holders of
the Series C Preferred Stock in the event of such a termination of listing.
RAPID TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapidly changing
technology, emerging industry standards, product proliferation and short product
life cycles. The Company believes that its future success will depend upon its
ability to enhance its existing products and to develop and introduce new
products which conform to or support emerging data communications standards,
meet a wide range of evolving user needs, and achieve market acceptance. The
introduction of new or enhanced products requires the Company to manage the
transition from older products in order to minimize disruption in customer
ordering patterns, avoid excessive levels of older
6
<PAGE>
product inventories, and ensure that adequate supplies of new products can be
delivered to meet customer demand. There can be no assurance that the Company
will succeed in developing and marketing such products or that the Company will
be able to respond effectively to technological changes, emerging industry
standards, or new product introductions by others. Furthermore, there can be no
assurance that competitors will not introduce products or services incorporating
technology as advanced or more advanced than the Company's, thereby rendering
the Company's products or technologies uncompetitive or obsolete. In addition,
as the technical complexity of new products increases, it may become
increasingly difficult to introduce new products quickly and according to
schedule. Delays in developing or shipping new or enhanced products, which the
Company has experienced in the past, could adversely affect the Company's
operating results. Conversely, the growth of the market for communications
products has been driven in part by the rapid technological change experienced
by that market. There can be no assurance that such rapid technological change
will continue or that the telecommunications infrastructure will have the
capacity to support such products. Any of these factors could adversely affect
the market for the Company's products and its operating results.
UNPREDICTABILITY OF TELEWORKER MARKET
The teleworker market is rapidly changing. The growth and size of the
teleworker market may be affected by various factors, including changes in
market trends and market needs and changes in technology. There can be no
assurance that the actual rate of growth and size will reach expected levels. In
addition, the Company's teleworker products have not yet achieved market
acceptance. There can be no assurance that the product concept will be accepted
by the market or, if accepted, to what extent it will be accepted, or that the
feature sets and performance of the Company's products are sufficient to meet
customers' needs. The Company's products will compete with a broad array of
remote access solutions and there can be no assurance that the Company will be
able to compete successfully. If the teleworker market does not develop as
expected, or if the Company's strategies for this market are unsuccessful, the
Company's business, results of operations, or financial condition may be
adversely affected.
COMPETITION
The communications industry is intensely competitive. The Company currently
competes principally in the markets for high-speed custom data/fax modems and
network multiplexer products. Many of the Company's existing and potential
competitors (including certain of the Company's customers and suppliers) have
far more extensive financial, engineering, product development, manufacturing
and marketing resources than the Company. Many of these competitors have
greater brand recognition, thereby placing the Company at a competitive
disadvantage. In addition, some competitors, including many foreign
competitors, have a lower cost structure that will allow them a competitive
advantage on the basis of price. The Company's products and services compete on
the basis of a number of factors, including, in the case of the custom modem
business, time to market and delivery risk, price, quality, features and
functions, power consumption, and manufacturing rights, and, in the case of the
network multiplexer business, recommendations of the systems integrators,
features and functions, modularity and expansibility, reliability, service and
support, supplier credibility, and price.
In addition to many of the competitive factors inherent to both the custom
modem and the network multiplexer businesses, the Company's teleworker products
will compete in areas in which the Company may not have the experience or
resources to address. With the introduction of the Be
7
<PAGE>
There! personal multiplexer system, the Company expects to compete with
competitors with whom the Company has had little or no experience. There can be
no assurance that competitors will not introduce products or services
incorporating technology as advanced or more advanced than the Company's or that
changes in the communications environment will not render competitors' product
solutions more attractive to the customer than the Company's solutions.
Competitive pressures often necessitate price reductions which the Company
may not be able to achieve or which could adversely affect profit margins and
operating results. In addition, the Company expects to encounter an increased
number of well-established competitors, many of whom have far greater financial,
marketing, technical and other resources and experience, as it enters new areas
of the communications market. As a result, these competitors may be able to
respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion, and
sale of their products and services than the Company. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to address the needs of the
Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. There can be no assurance that the Company will be
able to compete successfully with existing or new competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, results of operations or financial condition.
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS; FLUCTUATIONS IN PERIOD TO PERIOD
OPERATING RESULTS
Historically, custom modem shipments to a small number of customers that
change from year to year have represented a large portion of the Company's total
revenue. For example, revenue from custom modem shipments to NEC and Texas
Instruments, the Company's two largest customers in fiscal 1997, accounted for
approximately 67% of the Company's total revenues for such fiscal year.
However, shipments under contracts with NEC and Texas Instruments were
substantially completed during fiscal 1997. The Company believes that its
custom modem business will, for the foreseeable future, continue to be
characterized by a small number of contracts, each typically with the bulk of
volume deliveries over a six month period or less. The Company has experienced
gaps between the expiration of one contract and the commencement of another. To
the extent such gaps continue, the Company anticipates large fluctuations in the
Company's revenue from custom modems. As long as the custom modem business
continues to dominate the Company's revenue, the Company anticipates continued
fluctuations between periods of profit and loss from custom modem products.
Additionally, although the Company has not yet recorded significant revenue from
its teleworker products, the Company is currently targeting large corporations
as potential users of its teleworker products in addition to smaller potential
users. If the Company is successful in attracting such large customers (as to
which there can be no assurance), the Company could experience fluctuations in
revenue similar to those experienced as a result of the custom modem business. A
reduction or delay in orders or a delay or default in payment by a major
customer, or the loss of such a customer, could have a material adverse effect
on the Company's results of operations.
In addition to the factors set forth above, the results for a particular
quarter or other period may vary due to the overall state of the communications
products market, pricing and other competitive conditions, market acceptance of
the Company's products or its OEM customers' products, the timing of the
announcement and introduction of new products by the Company and its
competitors, variations in the Company's product mix and component costs (which
may vary
8
<PAGE>
substantially between the Company's product lines), the financial stability of
the Company's customers, the timing of expenditures in anticipation of future
sales, the timing of product development costs, and economic conditions
generally. The Company expects that its operating results will continue to
fluctuate from period to period in the future as a result of the factors
described herein and other factors. Any of these factors could materially
adversely affect the Company's results of operations.
SHAREHOLDER LAWSUIT
On November 28, 1995, Guy and Carolyn Caspary and Tarik Hussain filed a
class action shareholder lawsuit against the Company and certain of its officers
- -- Herbert T. Hensley, former Chairman of the Board, Dr. W. B. Barker, President
and Chief Executive Officer, Gregory T. Skalla, Vice President-Finance and Chief
Financial Officer, and Leven E. Staples, former Vice President and Chief
Technical Officer. The lawsuit was filed in the United States District Court in
San Antonio, Texas. The plaintiffs allege that the defendants violated certain
provisions of the federal securities laws, including Rule 10b-5 under the
Exchange Act. The plaintiffs claim that during a class period of January 26,
1995 through October 13, 1995, the Company issued misleading and incomplete
information to the investing public for the purpose of raising the price of the
Company's stock, thereby permitting some of the defendants to profit from this
rise by selling their stock at artificially inflated prices. The plaintiffs
claim that public statements made during the class period noting the growth of
the Company's backlog were misleading because the Company did not also disclose
that orders included in its backlog were subject to cancellation and that
revenues were likely to be short-lived due to the limited duration of shipments
under the contract. On December 15, 1995, a lawsuit was filed with identical
allegations by Sylvio L. Marcoccia, on behalf of himself and all others
similarly situated. On February 23, 1996, the Caspary and Marcoccia cases were
consolidated, and the style of the case was changed to In re Data Race, Inc.
Securities Litigation.
On July 29, 1997, the Company and the plaintiffs agreed to settle the In re
Data Race Securities Litigation. If the lawsuit were settled in accordance with
this agreement, the Company's insurance carrier would pay $800,000 in cash and
the Company would contribute 10,000 shares of Common Stock. The Company
believes that the case is absolutely without merit, and that neither the Company
nor any of the other defendants committed any of the alleged wrongdoings. The
Company decided to accept the settlement agreement based upon the advice of
counsel that the costs to the Company of defending the lawsuit could exceed the
cost to the Company of the proposed settlement, and based upon the unpredictable
results of jury trials. The settlement is contingent upon execution of a
definitive settlement agreement, U.S. District Court approval and certain other
conditions. There can be no assurance that all such conditions will be
satisfied. In the event final settlement is not reached, the Company intends to
continue to vigorously defend against the claims made in the lawsuit. The
Company is unable, however, to predict the costs to be incurred to resolve the
lawsuit in the event settlement is not reached on the terms set forth in the
preliminary settlement agreement. The Company is required under certain
circumstances to indemnify the named officers against losses incurred as a
result of the lawsuit.
9
<PAGE>
DEPENDENCE ON KEY EMPLOYEES
The Company's ability to implement its strategies depends upon its ability
to retain and continue to attract highly talented managerial and technical
personnel. The Company is especially dependent on its key technical personnel to
remain in the forefront of technological advances, its custom modem sales
executives to maintain close relationships with the Company's OEM customers and
on its teleworker products sales executives to develop and implement its sales
strategies for the teleworker products. Competition for qualified personnel is
intense in the data communications industry. All of the Company's senior
executives, including Dr. W. B. Barker, the Company's Chief Executive Officer,
are employed on an "at-will" basis. There can be no assurance that the Company
will retain its key managerial and technical employees or that it will attract
and assimilate such employees in the future. The loss of key management or
technical personnel could materially and adversely affect the Company's
business, results of operations, and financial condition.
DEPENDENCE ON SUPPLIERS
The Company manufactures its products using components or subassemblies
procured from third party suppliers. Certain of these components, including
certain critical microchips, are available only from a single source, and others
are available only from a limited number of sources. A substantial majority of
the Company's sales have been from products containing one or more components
which are available from single supply sources. The Company has no guaranteed
supply arrangements. In addition, the Company is dependent on worldwide
conditions in the semiconductor market. If the Company were unable to obtain a
sufficient supply of such components from its current sources, it could
experience difficulties in obtaining alternative sources or in altering product
designs to use alternative components. In the past, the Company has experienced
supply shortages that have delayed product shipments. From time to time, the
Company is subject to allocation arrangements with certain of its suppliers by
which it receives a portion of its orders for components which are in short
supply. In addition, due to the Company's dependence on third party suppliers,
the Company is not always able to control the quality and reliability of the
components it uses to manufacture its products. Supply shortages or
deficiencies in the quality or reliability of components may result in delays or
reductions in product shipments. Such delays or reductions could adversely
affect the Company's operating results and damage customer relationships.
Further, a significant increase in the price of one or more of these components
could adversely affect the Company's operating results.
DEPENDENCE ON MANUFACTURERS
The Company utilizes the services of third party manufacturers in the
assembly of certain of its products. Due to this reliance on third party
manufacturers, the Company is not always able to exercise direct control over
quality and manufacturing costs. In addition, from time to time, the Company
may experience difficulties in scheduling production of its products due to
other demands placed upon the third party manufacturers. Delays in scheduling
production or deficiencies in quality may adversely affect the Company's
operating results and damage customer relationships. Furthermore, a significant
increase in manufacturing costs attributable to the foregoing factors could
adversely affect the Company's operating results.
SALES CHANNEL RISKS
The Company has derived a significant amount of its revenue from sales to
its national, regional and international distributors, resellers, and other
strategic marketing partners. In addition,
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<PAGE>
the Company anticipates that the success of the Be There! products will depend,
in large part, on its ability to market through distributors, resellers, and
other strategic marketing partners. Independent distributors, resellers, and
other strategic marketing partners are not contractually committed to future
purchases of the Company's products and therefore could discontinue carrying the
Company's products at any time in favor of a competitor's products or for any
other reason. The loss of any of the Company's major distributors or resellers
could have a significant adverse effect on the Company's operating results. The
Company has also derived a significant amount of its revenue from sales to
notebook computer manufacturers. Such manufacturers have significantly different
requirements from independent distributors and resellers. Notebook computer
manufacturers may also require special distribution arrangements and product
pricing. The Company's relationships with notebook computer manufacturers exist
on a contract-by-contract basis. The loss of certain of the Company's key custom
modem sales and marketing employees could adversely affect the Company's ability
to maintain such relationships and enter into new contracts with notebook
computer manufacturers. There can be no assurance that the Company will be
successful in developing products for sales to notebook computer manufacturers
or maintaining or increasing sales to such manufacturers. Failure of the Company
to successfully develop, manufacture and market its products for any of these
sales channels could have a material adverse effect on the Company's results of
operations.
INVENTORY MANAGEMENT
From time to time, the Company has experienced significant increases in its
levels of inventory, in order to meet production requirements of existing or
anticipated orders, or as the result of delays in receiving certain components,
such as critical chipsets, from suppliers and the concurrent accumulation of
other inventory. Increased levels of inventory could adversely affect the
Company's liquidity, increase the risk of inventory obsolescence (from
cancellation of orders, failure to receive anticipated orders or otherwise), or
increase the risk of a decline in market value of such inventory or losses from
theft, fire, or other similar occurrences. The failure of the Company to
effectively manage its purchasing activities and inventory levels could have a
material adverse effect on the Company's financial condition and results of
operations.
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends in part upon its technological expertise and
proprietary product designs. The Company relies upon its trade secret
protection efforts and, to a lesser extent, upon patents and copyrights to
protect its proprietary technologies. There can be no assurance that these steps
will be adequate to deter misappropriation or infringement of its proprietary
technologies or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States, and there can be no assurance that United States or foreign laws will be
adequate to protect such proprietary rights.
The Company expects that remote access technologies and know-how in general
will become increasingly valuable intellectual properties as competition
intensifies. The Company believes this increasing value may produce a
competitive environment where intellectual property disputes are likely to
arise. Intellectual property disputes may be initiated against the Company for
tactical purposes to gain competitive advantage or overcome competitive
disadvantage, even if the merits of a specific dispute are doubtful. In certain
cases, the Company grants, or may grant certain licenses of its intellectual
property rights. In the future, the Company may be required to bring or defend
against
11
<PAGE>
litigation to enforce any patents issued or assigned to the Company, to protect
trademarks, trade secrets, and other intellectual property rights owned by the
Company, to defend the Company against claimed infringement of the rights of
others, to resolve disputes under technology license arrangements, and to
determine the scope and validity of the proprietary rights of others. Any
litigation could be costly and a diversion of management's attention, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's limited resources may limit
its ability to bring or defend against any such litigation. Adverse
determinations in litigation could result in the loss of the Company's
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company is currently required to obtain licenses for various
technologies used in many of the Company's products. There can be no assurance
that the Company will continue to be able to obtain such licenses on
commercially reasonable terms. Finally, the Company's ability to purchase
components could be adversely affected in the event infringement claims are
brought against the Company's suppliers.
REGULATORY STANDARDS
The Company's products are subject to regulation by the Federal
Communications Commission (the "FCC"), and each of the Company's products must
typically be tested before it can be introduced into the market. In addition,
each OEM notebook computer that utilizes one of the Company's custom modems may
also be required to be certified for conformance to FCC regulations before any
sale of such product. The inability of the Company's products to conform to FCC
regulations or the failure of the Company's products to meet FCC testing
requirements could delay the introduction of the Company's products into the
market, damage the Company's relationships with its OEMs, and otherwise
adversely affect the Company. Foreign authorities often establish
telecommunications standards different from those in the United States, making
it difficult and more time consuming to obtain the required regulatory
approvals. A significant delay in obtaining such regulatory approvals could have
an adverse effect on the Company's operating results. Furthermore, changes in
such laws, regulations, policies, or requirements could affect the demand for
the Company's products or result in the need to modify products, which might
involve substantial costs or delays in sales and could have an adverse effect on
the Company's future operating results.
POTENTIAL REDEMPTION OF PREFERRED STOCK
As of December 9, 1997, 4,295 shares of the originally issued 5,000 shares
of Series A Preferred Stock had been converted into 598,968 shares of Common
Stock. In addition, 5,000 shares of Series C Preferred Stock were issued and
outstanding. Pursuant to regulations of the National Association of Securities
Dealers, Inc., in the absence of shareholder approval, the Company may not issue
in the aggregate more than 965,625 shares of Common Stock upon conversion of the
5,000 shares of Series A Preferred Stock and the exercise of the common stock
purchase warrants issued in connection therewith (the "Series A Warrants") or
more than 1,108,335 shares of Common Stock upon conversion of the 5,000 shares
of Series C Preferred Stock and the exercise of the Series C Warrants. The
actual number of shares of Common Stock to be issued upon conversion of such
Series A Preferred Stock and Series C Preferred Stock will depend on the average
closing price of the Common Stock prior to conversion. See "Selling
Shareholders." The Company is obligated to redeem any shares of such Series A
Preferred Stock or Series C Preferred Stock which may not be converted and
12
<PAGE>
any Series A Warrants or Series C Warrants which may not be exercised as a
result of such regulatory limitation. The cash requirements to fund such a
redemption may adversely affect the Company's ability to sustain operations,
fund the development and marketing of new products, including the Be There!
personal multiplexer, and make future capital expenditures. Although the Company
is seeking shareholder approval of the issuance of in excess of 1,108,335 shares
of Common Stock upon conversion of the Series C Preferred Stock, there can be no
assurance that such shareholder approval will be obtained.
POTENTIAL DILUTION; SHARES ELIGIBLE FOR FUTURE SALES; POSSIBLE EFFECT ON
ADDITIONAL EQUITY FINANCING
A substantial number of shares of Common Stock are or will be issuable by
the Company upon the conversion of the Series A and Series C Preferred Stock and
upon the exercise of the Series A and Series C Warrants which could result in
dilution to a shareholder's percentage ownership interest in the Company and
could adversely affect the market price of the Common Stock. Under the
applicable conversion formulas of the Series A and Series C Preferred Stock, the
number of shares of Common Stock issuable upon conversion is inversely
proportional to the market price of the Common Stock at the time of conversion
(i.e., the number of shares increases as the market price of the Common stock
decreases); and except with respect to certain redemption rights of the Company
for the Series A and C Preferred Stock and the limitation under the NASD rules,
subject to shareholder approval which is being requested by the Company with
respect to the Series C Preferred Stock, there is no cap on the number of shares
of Common Stock which may be issued. In addition, the number of shares issuable
upon the exercise of the Series A and Series C Warrants is subject to adjustment
upon the occurrence of certain dilutive events. For a complete description of
the rights of holders of Series A Preferred Stock, see the Statement of
Designations, Preferences and Rights of 1997 Series A Convertible Preferred
Stock of DATA RACE, Inc. filed as an Exhibit to the Registration Statement. For
a complete description of the rights of holders of Series C Preferred Stock, see
the Statement of Designations, Preferences and Rights of Series C Convertible
Participating Preferred Stock of DATA RACE, Inc. filed as Exhibit to the
Registration Statement.
On December 9, 1997, there were 5,569,806 shares of Common Stock issued and
outstanding. As of December 9, 1997, a total of 1,665,378 additional shares of
Common Stock could have been issued if all the shares of Series A and Series C
Preferred Stock then outstanding were converted into shares of Common Stock and
if all the Series A and Series C Warrants then outstanding were exercised. Upon
the effectiveness of the Registration Statement of which this Prospectus forms a
part, the Company will have 3,386,659 shares of Common Stock registered for
resale as contemplated in this Prospectus and the prospectus dated April 10,
1997, pertaining to the shares of Common Stock issuable upon the conversion of
the Series A Preferred Stock and the exercise of the Series A Warrants. The
sale or availability for sale of a significant number of shares of Common Stock
in the public market could adversely affect the market price of the Common
Stock. In addition, certain holders of outstanding securities of the Company
have rights to approve and/or participate in certain types of future equity
financing by the Company. Such rights could have an adverse effect on the
Company's ability to obtain additional equity financing.
ANTI-TAKEOVER MEASURES
The Company has adopted a shareholder rights plan in an effort to guard
against abusive tactics which could deprive shareholders of the opportunity to
realize the long-term value of their investment in the Company. In addition,
certain provisions of the Company's Articles of Incorporation
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<PAGE>
may have the effect of discouraging unsolicited proposals for acquisition of
control of the Company. The Company's Board of Directors can, without obtaining
shareholder approval, issue shares of no par value preferred stock of the
Company having rights that could adversely affect the voting power of holders of
the Common Stock, including the right to vote as a class on any proposed change
of control. Such an issuance could have the effect of delaying, deferring, or
preventing a change of control of the Company and might make it difficult to
replace incumbent management.
Certain provisions of Texas corporate law, including the recently enacted
"Business Combination Law," could also have the effect of hindering or delaying
a takeover bid for the Company. Such provisions may inhibit takeover bids and
decrease the chance of shareholders realizing a premium to the then market price
of the Common Stock as a result of a takeover bid. In general, the Business
Combination Law prohibits a Texas "issuing public corporation" from engaging in
a "business combination" with an "affiliated shareholder," or an affiliate or
associate thereof, for a period of three years after the date of the transaction
in which the person became an affiliate shareholder, unless the business
combination is approved in a prescribed manner. "Business Combinations" include
mergers, asset sales and other transactions resulting in a financial benefit to
the affiliated shareholder. An "affiliated shareholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
20% or more of the corporation's voting stock.
PRICE VOLATILITY
The market price of the Company's Common Stock has been, and may continue
to be, highly volatile. The Company believes that factors such as quarterly
fluctuations in results of operations, adverse circumstances affecting the
introduction or market acceptance of new products offered by the Company,
changes in or cancellations under existing contracts, changes in the market
success of notebook computers and other products which utilize or incorporate
the Company's products, announcements of new products by competitors, changes in
earnings estimates by analysts, changes in accounting principles, sales by
existing shareholders (including sales from time to time of Common Stock issued
upon conversion of the Convertible Preferred Stock), short selling, loss of key
personnel, and other factors will continue to cause the market price of the
Company's Common Stock to fluctuate substantially. In addition, stock prices for
many technology companies, including the Company, fluctuate widely for other
reasons (such as market perception of high technology industries) unrelated to
operating results or the Company. These fluctuations as well as general
economic, political and market conditions, such as recessions or military
conflicts, may adversely affect the market price of the Company's Common Stock.
Changes in the price of the Company's Common Stock could affect the Company's
ability to successfully attract and retain qualified personnel or complete other
transactions in the future. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been instituted against companies with fluctuating stock prices. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect on the
Company's operating results and financial condition.
USE OF PROCEEDS
If the Series C Warrants (with an exercise price of $6.435 per share) are
exercised in full, the Company will receive gross proceeds of approximately
$900,000. Such proceeds will be added to the working capital of the Company and
used for general corporate purposes. The Company will not receive any proceeds
from the sale of the Shares by the Selling Shareholders.
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<PAGE>
SELLING SHAREHOLDERS
The following table sets forth the names of the Selling Shareholders, the
number of shares of Common Stock owned beneficially by each of the Selling
Shareholders as of December 9, 1997, and the number of shares which may be
offered for sale pursuant to this Prospectus. Information set forth herein with
respect to each Selling Shareholder's beneficial ownership of Common Stock has
been provided by such Selling Shareholder. Because the Selling Shareholders may
offer all, some or none of their Common Stock, no definitive estimate as to the
number of shares that will be held by the Selling Shareholders after such
offering can be provided and the following table has been prepared on the
assumption that all shares of Common Stock covered by this Prospectus will be
sold.
The Company has agreed to initially register 3,020,000 Shares for resale by
the Selling Shareholders holding the Series C Preferred Stock and Series C
Warrants. The number of Shares shown in the following table as being offered by
the Selling Shareholders which hold Series C Preferred Stock and Series C
Warrants does not include such presently indeterminate number of shares of
Common Stock as may be issuable upon conversion of the Series C Preferred Stock
and exercise of the Series C Warrants pursuant to the provisions thereof
regarding determination of the applicable conversion price and certain
antidilution provisions but which shares of Common Stock are, in accordance with
Rule 416 under the Securities Act, included in the Registration Statement of
which this Prospectus forms a part.
Unless otherwise indicated, the persons and entities named in the table
have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable. Except
as noted, shares beneficially owned are deemed to include shares which may be
acquired within 60 days of the date of this Prospectus.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED AFTER
SHARES THE OFFERING (3)
BENEFICIALLY -------------------------------
OWNED PRIOR TO SHARES BEING PERCENT OF
SELLING SHAREHOLDER OFFERING(1) OFFERED(2) NUMBER OUTSTANDING
- ------------------- -------------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Capital Ventures International(4)(8)(9)............ 737,433 755,000 152,555 2.4%
CC Investments, LDC(5)(8).......................... 877,317 1,132,500 - -
Nelson Partners(6)(8)(10).......................... 393,038 507,361 - -
Olympus Securities, Ltd.(7)(8)(10)................. 484,278 625,139 - -
--------- ---------
Total.............................................. 2,492,066 3,020,000
========= =========
</TABLE>
____________________
(1) The share amounts represent shares of Common Stock issuable to the Selling
Shareholders assuming the conversion, as of December 9, 1997, of all shares
of Series C Preferred Stock and exercise of all Series C Warrants issued or
issuable to the Selling Shareholders calculated using an assumed conversion
price of $3.8333 (representing the average of the three lowest closing bid
prices for the Common Stock during the 22 consecutive trading days ending
December 8, 1997), with respect to the stated value of the Series C
Preferred Stock plus an accretion of 8% per year, based upon certain
conversion price provisions of the Series C Preferred Stock (which
conversion price could fluctuate from time to time based on changes in the
market price of the Common Stock). The shares of Series C Preferred Stock
and the Series C Warrants include 3,000 shares of Series C Preferred Stock
and 104,957 Series C Warrants (assuming such shares and warrants were
15
<PAGE>
issued as of December 9, 1997) which the holders of the Series C Preferred
Stock may be required to purchase within the next 60 days, subject to
certain conditions. This Prospectus also covers the resale of such
presently indeterminate number of additional Shares as may be issuable upon
conversion of the Series C Preferred Stock and the Series C Warrants, based
upon fluctuations in the conversion price of the Series C Preferred Stock
and certain antidilution provisions. As described in footnote 8 below, the
actual number of shares of Common Stock issuable upon conversion of the
Series C Preferred Stock depends, subject to certain limitations, upon the
average closing price of the Common Stock prior to conversion and may be
less than or greater than the number of shares shown as beneficially owned
by the Selling Shareholders or otherwise covered by this Prospectus.
In the case of Capital Ventures International ("CVI"), the share amount
includes 152,555 shares of Common Stock issuable to CVI assuming the
conversion, as of December 9, 1997, of all shares of Series A Preferred
Stock and the exercise of all Series A Warrants owned of record by CVI on
such date. As described in footnote 9 below, the actual number of shares of
Common Stock issuable upon conversion of the Series A Preferred Stock
depends, subject to certain limitations, upon the average closing price of
the Common Stock prior to conversion and may be less than or greater than
the number of shares shown as beneficially owned by CVI.
(2) The number of shares of Common Stock registered pursuant to the
Registration Statement and the number of Shares offered hereby have been
determined by agreement between the Company and the Selling Shareholders.
Because the number of shares of Common Stock that will ultimately be issued
upon conversion of the Series C Preferred Stock and exercise of the Series
C Warrants is dependent, subject to certain limitations, upon the average
closing price of the Common Stock prior to conversion as described in
footnote 8 below, such number of shares (and therefore the number of Shares
offered hereby) cannot be determined at this time.
(3) Assumes the sale of all Shares offered hereby.
(4) Pursuant to the Series C Purchase Agreement, the Selling Shareholder
purchased 1,250 shares of Series C Preferred Stock and Series C Warrants
for 34,965 shares of Common Stock at a first closing on November 12, 1997
(the "First Closing"), and agreed to purchase, subject to certain
conditions, an additional 750 shares of Series C Preferred Stock and a
presently indeterminate number of Series C Warrants at a second closing on
or before January 29, 1998 (the "Second Closing"). The Selling Shareholder
also owns 500 shares of Series A Preferred Stock and Series A Warrants to
purchase 11,908 shares of Common Stock which were acquired in a private
placement pursuant to the Securities Purchase Agreement, dated January 10,
1997 (the "Series A Purchase Agreement").
(5) Pursuant to the Series C Purchase Agreement, the Selling Shareholder
purchased 1,875 shares of Series C Preferred Stock and Series C Warrants
for 52,448 shares of Common Stock at the First Closing, and agreed to
purchase, subject to certain conditions, an additional 1,125 shares of
Series C Preferred Stock and a presently indeterminate number of Series C
Warrants at the Second Closing.
(6) Pursuant to the Series C Purchase Agreement, the Selling Shareholder
purchased 840 shares of Series C Preferred Stock and Series C Warrants for
23,497 shares of Common Stock at the First Closing, and agreed to purchase,
subject to certain conditions, an additional 504 shares of Series C
Preferred Stock and a presently indeterminate number of Series C Warrants
at the Second Closing.
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<PAGE>
(7) Pursuant to the Series C Purchase Agreement, the Selling Shareholder
purchased 1,035 shares of Series C Preferred Stock and Series C Warrants
for 28,951 shares of Common Stock at the First Closing, and agreed to
purchase, subject to certain conditions, an additional 621 shares of Series
C Preferred Stock and a presently indeterminate number of Series C Warrants
at the Second Closing.
(8) Each share of Series C Preferred Stock is convertible into that number of
shares of Common Stock equal to (i) the share's stated value of $1,000,
plus a premium in the amount of 8% per annum accruing from the date of
issuance through the date of conversion, divided by (ii) the conversion
price equal to the lesser of (a) a fixed price equal to 120% of the average
of the closing bid prices of the Common Stock for the five trading days
preceding the issuance date (the "Fixed Conversion Price") or (b) a
floating conversion price equal to 100% (subject to downward adjustment if
the Common Stock is not quoted on certain markets) of the average of the
three lowest closing bid prices for the Common Stock over the 22 trading
days preceding the conversion date. The initial Fixed Conversion Price for
the 5,000 shares of Series C Preferred Stock issued on November 12, 1997,
is $6.435. However, if the average of the closing bid prices of the Common
Stock for the five trading days preceding the effective date of the
Registration Statement of which this Prospectus form a part is less than
90% of the average of the closing bid prices of the Common Stock for the
five trading days preceding the issuance date of the Series C Preferred
Stock issued on November 12, 1997, then the Fixed Conversion Price will be
reduced to a price equal to 120% of such lower five-day average price.
The Series C Warrants issued at the first closing are exercisable for an
aggregate of 139,861 shares of Common Stock at a price of $6.435 per share.
The Series C Warrants to be issued at the Second Closing will be
exercisable for an aggregate number of shares of Common Stock equal to 15%
of the purchase price of the Series C Preferred Stock purchased at the
Second Closing, divided by the average closing bid price of the Common
Stock for the five trading days preceding the issuance date, at a price
equal to the Fixed Conversion Price of the Series C Preferred Stock
purchased on such date. The Series C Warrants become exercisable in two
equal installments, at 150 days from the date of issuance, and 270 days
from the date of issuance, but only in the same proportion which the number
of shares of Series C Preferred Stock then outstanding bears to the number
of shares of Series C Preferred Stock initially issued. The Series C
Warrants expire three years after the date of issuance.
In accordance with the rights and restrictions of the Series C Preferred
Stock, unless waived by the Selling Shareholder, no Selling Shareholder may
convert the Series C Preferred Stock or exercise the Series C Warrants to
the extent that the shares to be received by such holder upon such
conversion or exercise would cause such holder to own more than 4.99% of
the outstanding shares of Common Stock. In addition, pursuant to the
regulations of the National Association of Securities Dealers, Inc., in the
absence of shareholder approval, the aggregate number of shares of Common
Stock issuable to the Selling Shareholders at a discount from market price
upon conversion of the Series C Preferred Stock and exercise of the Series
C Warrants which have been and may be purchased by the Selling Shareholders
pursuant to the Series C Purchase Agreement may not equal or exceed 20% of
the outstanding shares of Common Stock on November 12, 1997 (i.e.,
1,108,335 shares). The Company is soliciting shareholder approval of the
issuance of in excess of 1,108,335 shares of Common Stock upon conversion
of the Series C Preferred Stock and the exercise of the Series C Warrants.
If shareholder approval is not obtained to issue shares of Common Stock to
the Selling Shareholders in excess of such amount, none of the Selling
Shareholders will be entitled to acquire more than its proportionate share
of such maximum amount. Any Series C Preferred Stock which may not be
converted and any Series C Warrants
17
<PAGE>
which may not be exercised because of such limitation must be redeemed by
the Company. For a complete description of the rights, preferences and
restrictions of the Series C Preferred Stock, see the Statement of
Designations, Preferences and Rights of Series C Convertible Participating
Preferred Stock of DATA RACE, Inc. filed as an Exhibit to the Registration
Statement of which this Prospectus forms a part.
(9) The share information for CVI includes 140,647 shares of Common Stock
issuable upon conversion of the Series A Preferred Stock owned by CVI,
assuming conversion as of December 9, 1997, and 11,908 shares of Common
Stock issuable upon exercise of the Series A Warrants owned by CVI. The
actual number of shares of Common Stock issuable upon conversion of the
Series A Preferred Stock will equal (i) the aggregate stated value of the
shares of Preferred Stock then being converted (i.e., $1,000 per share),
plus, in the case of conversions after January 10, 1998, a premium in the
amount of 1% per annum accruing from January 10, 1997, through the date of
conversion (unless the Company chooses to pay such premium in cash),
divided by (ii) (a) in the case of conversions on or before January 10,
1998, a conversion price equal to a percentage of the average closing price
of the Common Stock during a specified trading period immediately prior to
conversion (as determined in accordance with the Statement of Designations
establishing the Preferred Stock), which percentage currently is equal to
80%, and which is reduced on January 5, 1998 to 75% or (b) in the case of
conversions after January 10, 1998, a conversion price equal to the lesser
of 75% of the average closing price of the Common Stock during a specified
trading period immediately prior to conversion or the average closing price
of the Common Stock during a specified trading period immediately prior to
January 10, 1998 (each as determined in accordance with the Statement of
Designations). For a complete description of the rights, preferences and
restrictions of the Series A Preferred Stock, see the Statement of
Designations, Preferences and Rights of 1997 Series A Convertible Preferred
Stock of DATA RACE, Inc. filed as an Exhibit to the Registration Statement
of which this Prospectus forms a part.
(10) Citadel Limited Partnership is the managing general partner of Nelson
Partners ("Nelson") and the trading manager of Olympus Securities, Ltd.
("Olympus") and consequently has voting control and investment discretion
over securities held by both Nelson and Olympus. The ownership information
for Nelson does not include the Shares owned by Olympus and the ownership
information for Olympus does not include the Shares owned by Nelson.
PLAN OF DISTRIBUTION
The Shares may be sold or distributed from time to time by the Selling
Shareholders, or by pledgees, donees or transferees of, or other successors in
interest to, the Selling Shareholders, directly to one or more purchasers
(including pledgees) or through brokers, dealers or underwriters who may act
solely as agents or may acquire Shares as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices, at negotiated prices, or at fixed prices, which may be changed. The
distribution of the Shares may be effected by one or more of the following
methods: (i) ordinary brokers' transactions, which may include long or short
sales; (ii) transactions involving cross or block trades or otherwise on the
Nasdaq National Market; (iii) purchases by brokers, dealers or underwriters as
principals and resale by such purchasers for their own accounts pursuant to this
Prospectus; (iv) "at the market" to or through market makers or into an existing
market for the Common Stock; (v) in other ways not involving market makers or
established trading markets, including direct sales to purchasers or sales
effected through agents; (vi) through transactions in options, swaps or other
18
<PAGE>
derivatives (whether exchange-listed or otherwise), or (vii) any combination of
the foregoing, or by any other legally available means. In addition, the Selling
Shareholders or their successors in interest may enter into hedging transactions
with broker-dealers who may engage in short sales of Common Stock in the course
of hedging the positions they assume with the Selling Shareholders. The Selling
Shareholders or their successors in interest may also enter into option or other
transactions with broker-dealers that require the delivery to such broker-
dealers of the Shares, which Shares may be resold thereafter pursuant to this
Prospectus. Shares to be sold hereunder may be issued upon conversion of the
Series C Preferred Stock in accordance with its terms, or in other transactions
with the Company involving the Series C Preferred Stock, including, without
limitation, issuance of Shares in exchange for shares of Series C Preferred
Stock and issuance of Shares pursuant to modification of the terms of the Series
C Preferred Stock, or in settlement of claims with respect to rights of holders
of Series C Preferred Stock.
Brokers, dealers, underwriters or agents participating in the distribution
of the Shares as agent may receive compensation in the form of discounts,
concessions or commissions from the Selling Shareholders (and, if they act as
agent for the purchaser of such Shares, from such purchaser). Such discounts,
concessions or commissions as to a particular broker, dealer, underwriter or
agent might be greater or less than those customary in the type of transaction
involved.
The Selling Shareholders and any brokers, dealers, underwriters or agents
that participate in the distribution of the Shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any discounts,
commissions or concessions received by any such persons might be deemed to be
underwriting discounts and commissions under the Securities Act. Neither the
Company nor the Selling Shareholders can presently estimate the amount of such
compensation. The Company knows of no existing arrangements between any Selling
Shareholder and any other Shareholder, broker, dealer, underwriter or agent
relating to the sale or distribution of the Shares.
To the extent required, the Company will file, during any period in which
offers or sales are being made, a supplement to this Prospectus which sets
forth, with respect to a particular offering, the specific number of Shares to
be sold, the name of the selling shareholder, the sales price, the name of any
participating broker, dealer, underwriter or agent, any applicable commission or
discount and any other material information with respect to the plan of
distribution not previously disclosed.
The Company will not receive any of the proceeds from the sale of the
Shares offered hereby. The Company will pay substantially all of the expenses
incident to this Offering of the Shares by the Selling Shareholders to the
public other than commissions and discounts of brokers, dealers, underwriters or
agents. Such expenses are currently estimated to be approximately $50,000. The
Company has agreed to indemnify the Selling Shareholders and certain related
persons against certain liabilities, including certain liabilities under the
Securities Act.
In order to comply with certain states' securities laws, if applicable, the
Shares will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In addition, in certain states the Common Stock may not be
sold unless the Common Stock has been registered or qualified for sale in such
state or an exemption from registration or qualification is available and is
satisfied.
LEGAL OPINIONS
The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by Akin, Gump, Strauss, Hauer, & Feld, L.L.P., San Antonio,
Texas.
19
<PAGE>
EXPERTS
The financial statements of the Company as of June 30, 1997 and 1996, and
for each of the years in the three year period ended June 30, 1997, have been
incorporated by reference in this Prospectus and in the Registration Statement
of which this Prospectus forms a part in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
The report of KPMG Peat Marwick LLP covering the June 30, 1997 financial
statements contains an explanatory paragraph that states the Company has
suffered recurring losses and, during fiscal 1997, incurred negative cash flow
from operations, which conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of that uncertainty.
20
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
_____________________
TABLE OF CONTENTS
Page
----
Available Information......................................... 3
Incorporation of Certain Documents
by Reference................................................. 3
The Company................................................... 4
Risk Factors.................................................. 5
Use of Proceeds............................................... 14
Selling Shareholders.......................................... 15
Plan of Distribution.......................................... 18
Legal Opinions................................................ 19
Experts....................................................... 20
================================================================================
================================================================================
Up to 3,020,000 Shares
DATA RACE, INC.
Common Stock
------------------------
P R O S P E C T U S
------------------------
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses (other than underwriting discounts and commissions) in
connection with the issuance and distribution of the Common Stock registered
hereby are as follows:
SEC registration fee.................................. $ 4,093
Nasdaq Listing of Additional Shares filing fee........ 17,500
Legal fees and expenses............................... 15,000*
Accounting fees and expenses.......................... 5,000*
Miscellaneous......................................... 8,407*
--------
Total............................................... $ 50,000*
_______________
* Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02-1 of the Texas Business Corporation Act provides for
indemnification of directors and officers in certain circumstances. In
addition, the Texas Miscellaneous Corporation Law provides that a corporation
may amend its Articles of Incorporation to provide that no director shall be
liable to the corporation or its shareholders for monetary damages for an act or
omission in the director's capacity as a director, provided that the liability
of a director is not eliminated or limited (i) for any breach of the director's
duty of loyalty to the corporation or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, (iii) any transaction from which such director derived an
improper personal benefit, or (iv) an act or omission for which the liability of
a director is expressly provided by an applicable statute. The Company has
amended its Articles of Incorporation and added Article Ten adopting such
limitations on a director's liability. The Company's Articles of Incorporation
also provide in Article Ten, for indemnification of directors or officers in
connection with the defense or settlement of suits brought against them in their
capacities as directors or officers of the Company, except in respect of
liabilities arising from gross negligence or willful misconduct in the
performance of their duties.
Article VIII of the Company's bylaws provides for indemnification of any
person made a party to a proceeding by reason of such person's status as a
director, officer or employee of the Company, except in respect of liabilities
arising from negligence or misconduct in the performance of their duties.
An insurance policy obtained by the Company provides for indemnification of
officers and directors of the Company and certain other persons against
liabilities and expenses incurred by any of them in certain stated proceedings
and under certain stated conditions.
II-1
<PAGE>
ITEM 16. EXHIBITS
EXHIBITS
3.1 Articles of Amendment to and Restatement of the Articles of
Incorporation of the Company, filed December 27, 1991. (a)
3.2 Articles of Correction to Articles of Amendment to and Restatement of
the Articles of Incorporation of the Company, filed August 13,
1992.(a)
3.3 Articles of Amendment to the Articles of Incorporation of the
Company, filed August 21, 1992. (a)
3.4 Statement of Designation, Preferences and Rights of 1997 Series A
Convertible Preferred Stock, filed January 10, 1997.(b)
3.5 Statement of Resolution Establishing Series B Participating
Cumulative Preferred Stock. (c)
3.6 Statement of Designation, Preferences and Rights of 1997 Series C
Convertible Participating Preferred Stock. (d)
5. Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.(e)
23.1 Consent of KPMG Peat Marwick LLP.(e)
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in opinion filed as Exhibit 5)
24. Power of Attorney (included as part of signature page of this
Registration Statement).
_______________
(a) Filed as an exhibit to Form S-1 Registration Statement No. 33-51170,
effective October 7, 1992.
(b) Filed as an exhibit to 10-Q Quarterly Report for the quarter ended
December 31, 1996.
(c) Filed as an exhibit to Form 10-K Annual Report for the fiscal year
ended June 30, 1997.
(d) Filed as an exhibit to Form 8-K Current Report dated November 12,
1997.
(e) Filed herewith.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement, or any material change to such information in the
Registration Statement; provided, however, that paragraphs
(a)(1)(i) and (a)(1)(ii) do not apply if the information
required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by
the Registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference
II-3
<PAGE>
in the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such new securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Antonio, State of Texas, on December 12, 1997.
DATA RACE, INC.
By: /s/ Dr. W. B. Barker
-----------------------------------
Dr. W. B. Barker
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and
officers of DATA RACE, Inc., hereby constitute and appoint Dr. W. B. Barker and
Gregory T. Skalla, and each of them, his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution, for him and his name
place and stead, in any and all capacities, to execute any and all amendments
(including post-effective amendments) to this Registration Statement, and any
and all Registration Statements filed pursuant to Rule 462 under the Securities
Act of 1933, as amended, and to file the same with all exhibits thereto, and all
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated below.
NAME TITLE DATE
---- ----- ----
/s/ Dr. W. B. Barker President, Chief Executive December 12, 1997
- --------------------------- Officer and Director
Dr. W. B. Barker
Vice President-Finance, Chief December 12, 1997
/s/ Gregory T. Skalla Financial Officer, Treasurer
- -------------------------- and Secretary (Principal
Gregory T. Skalla Financial and Accounting
Officer)
/s/ Jeffrey P. Blanchard Chairman of the Board December 12, 1997
- ------------------------- of Directors
Jeffrey P. Blanchard
/s/ Matthew A. Kenny Director December 12, 1997
- -------------------------
Matthew A. Kenny
/s/ George R. Grumbles Director December 12, 1997
- -------------------------
George R. Grumbles
Director December , 1997
- -------------------------
Marcelo A. Gumucio
/s/ Dwight E. Lee Director December 12, 1997
- -------------------------
Dwight E. Lee
/s/ Edward A. Masi Director December 12, 1997
- -------------------------
Edward A. Masi
<PAGE>
INDEX TO EXHIBITS
EXHIBITS
3.1 Articles of Amendment to and Restatement of the Articles of Incorporation
of the Company, filed December 27, 1991. (a)
3.2 Articles of Correction to Articles of Amendment to and Restatement of the
Articles of Incorporation of the Company, filed August 13, 1992.(a)
3.3 Articles of Amendment to the Articles of Incorporation of the
Company, filed August 21, 1992. (a)
3.4 Statement of Designation, Preferences and Rights of 1997 Series A
Convertible Preferred Stock, filed January 10, 1997.(b)
3.5 Statement of Resolution Establishing Series B Participating Cumulative
Preferred Stock. (c)
3.6 Statement of Designation, Preferences and Rights of 1997 Series C
Convertible Participating Preferred Stock. (d)
5. Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.(e)
23.1 Consent of KPMG Peat Marwick LLP.(e)
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in opinion filed as Exhibit 5)
24. Power of Attorney (included as part of signature page of this
Registration Statement).
________________
(a) Filed as an exhibit to Form S-1 Registration Statement No. 33-51170,
effective October 7, 1992.
(b) Filed as an exhibit to 10-Q Quarterly Report for the quarter ended
December 31, 1996.
(c) Filed as an exhibit to Form 10-K Annual Report for the fiscal year
ended June 30, 1997.
(d) Filed as an exhibit to Form 8-K Current Report dated November 12, 1997.
(e) Filed herewith.
<PAGE>
Exhibit 5
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
AUSTIN ATTORNEYS AT LAW
BRUSSELS A REGISTERED LIMITED LIABILITY PARTNERSHIP
DALLAS INCLUDING PROFESSIONAL CORPORATIONS
HOUSTON
LONDON
LOS ANGELES 1500 NATIONSBANK PLAZA
MOSCOW 300 CONVENT STREET
NEW YORK SAN ANTONIO, TEXAS 78205
PHILADELPHIA (210) 270-0800
WASHINGTON FAX (210) 224-2035
December 11, 1997
DATA RACE, Inc.
12400 Network Blvd.
San Antonio, Texas 78249
Gentlemen:
We have acted as counsel to DATA RACE, Inc., a Texas corporation (the
"Company"), in connection with the registration by the Company under the
Securities Act of 1933, as amended (the "Act"), pursuant to the Company's
registration statement on Form S-3 (the "Registration Statement") of an
aggregate of up to 3,020,000 shares of the Company's Common Stock, no par value
(the "Common Stock"), issued or issuable from time to time by the Company as
follows:
(i) up to 3,020,000 shares (the "Conversion Shares") issuable upon
conversion of the Company's 1997 Series C Convertible Participating
Preferred Stock (the "Preferred Stock"), issued and issuable hereafter
to certain Selling Shareholders (as defined in the Registration
Statement) in connection with a private placement of securities
pursuant to a Securities Purchase Agreement entered into as of
November 7, 1997, between the Company and the Selling Shareholders
(the "Series C Purchase Agreement"); and
(ii) up to 139,861 shares (the "Warrant Shares") issuable upon the exercise
of stock purchase warrants (the "Series C Warrants") issued and
issuable hereafter to certain Selling Shareholders pursuant to the
Series C Purchase Agreement.
We have, as counsel, examined such corporate records, certificates and
other documents and reviewed such questions of law as we have deemed necessary,
relevant or appropriate to enable us to render the opinion expressed below. In
rendering such opinion, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures and the authenticity of all documents
examined by us. As to various questions of fact material to such opinion, we
have relied upon representations of the Company.
<PAGE>
DATA RACE, Inc.
December 11, 1997
Page 2
Based upon such examination and representations, we advise you that, in our
opinion:
(i) when issued to the holders of the Preferred Stock in accordance with
the Series C Purchase Agreement and the Certificate of Designation (as
defined in the Series C Purchase Agreement), the Conversion Shares
will be duly authorized, validly issued, fully paid and nonassessable;
and
(ii) when issued to the holders of the Series C Warrants upon the exercise
thereof in accordance with the respective warrant agreements
(including the payment of the exercise price specified therein), the
Series C Warrant Shares will be duly authorized, validly issued, fully
paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference of this firm under the caption
"Legal Opinions" in the Prospectus contained therein.
This opinion is to be used only in connection with the issuance of the
Common Stock while the Registration Statement is in effect.
Very truly yours,
/s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
DataRace, Inc.:
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
Our report dated September 30, 1997 contains an explanatory paragraph that
states the Company has suffered recurring losses and during fiscal 1997,
incurred negative cash flows from operations, which conditions raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
that uncertainty.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
San Antonio, Texas
December 11, 1997
