<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 28, 1997
REGISTRATION NO. 333-
------
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
-------------------
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)
Copies to:
MATTHEW R. BAIR, ESQ.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1500 NATIONSBANK PLAZA
300 CONVENT STREET
SAN ANTONIO, TEXAS 78205
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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
Title of each Amount Maximum Maximum Amount of
class of securities to be Offering Price Aggregate Registration
to be registered Registered Per Share (1) Offering Price (1) Fee
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value..... 1,257,238(2) $13.25 $16,662,378.50 $5,048
=================================================================================================
</TABLE>
(1) 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 February 25,
1997.
(2) Pursuant to Rule 416(a), also registered hereunder is an indeterminate
number of shares of Common Stock issuable as a result of the anti-dilution
provisions of the preferred stock convertible into, and warrants
exercisable for, the Common Stock registered hereby.
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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>
DATA RACE, INC.
CROSS REFERENCE SHEET
Between Items of Form S-3 and Prospectus
<TABLE>
<CAPTION>
Registration Statement Item and Heading Prospectus Caption
- --------------------------------------- ------------------
<S> <C>
1. Forepart of the Registration Statement Outside Front Cover Page
and Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages Front and Outside Back Cover Pages
of Prospectus
3. Risk Factors Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Shareholders
8. Plan of Distribution Cover Page; Plan of Distribution
9. Description of Securities to be Registered Not Applicable
10. Interests of Named Experts and Counsel Not Applicable
11. Material Changes Incorporation of Certain Documents by Reference
12. Incorporation of Certain Information by Reference Incorporation of Certain Documents by Reference
13. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
</TABLE>
<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. |
- --------------------------------------------------------------------------------
SUBJECT TO COMPLETION, DATED FEBRUARY 28, 1997
Up To 1,257,238 Shares
DATA RACE, INC.
Common Stock
------------
This Prospectus relates to an aggregate of up to 1,257,238 shares (the
"Shares") of common stock, without par value (the "Common Stock"), of DATA RACE,
Inc., a Texas corporation (the "Company"), 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 or are currently outstanding
and held by a Selling Shareholder, as follows:
(i) up to 965,625 Shares (the "Conversion Shares") are issuable upon
conversion of the Company's 1997 Series A Convertible Preferred Stock,
without par value (the "Preferred Stock"), issued and issuable hereafter to
certain of the Selling Shareholders (the "1997 Investors") in connection
with a private placement of securities pursuant to a Securities Purchase
Agreement entered into as of January 10, 1997, between the Company and the
1997 Investors (the "Securities 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;
(ii) up to 68,700 Shares (the "1997 Warrant Shares") are issuable
upon the exercise of stock purchase warrants (the "1997 Warrants") issued
and issuable hereafter to the 1997 Investors pursuant to the Securities
Purchase Agreement;
(iii) up to 6,106 Shares (the "Consulting Shares") are issuable upon
the exercise of stock purchase warrants (the "Consulting Warrants") issued
to a Selling Shareholder pursuant to a consulting arrangement with such
Selling Shareholder;
(iv) up to 250,000 Shares (the "Omnitel Shares") are issuable upon the
exercise of stock purchase warrants (the "Omnitel Warrants") issued to
certain of the Selling Shareholders in connection with the purchase by the
Company in 1993 of certain assets of Omnitel, Inc.; and
(v) up to 35,507 outstanding Shares (the "Outstanding Option Shares")
were issued to a Selling Shareholder upon exercise of stock options granted
in 1991 in connection with a private placement of securities.
Pursuant to regulations of the National Association of Securities Dealers,
in the absence of shareholder approval, the Company may not issue, in the
aggregate, more than 965,625 shares of Common Stock at a discount from market
price upon conversion of the Preferred Stock and the exercise of the 1997
Warrants. Accordingly, the total number of Shares covered by this Prospectus
includes, with respect to the Conversion Shares and the 1997 Warrant Shares,
only the aggregate number of Shares issuable by the Company as limited by such
regulations.
This prospectus also covers, pursuant to Rule 416 of the Securities Act of
1933, as amended, the offer and sale by the Selling Shareholders of any and all
shares of Common Stock issued with respect to the Preferred Stock, the 1997
Warrants, the Consulting Warrants and the Omnitel Warrants as a result of stock
splits, stock dividends and antidilution provisions (including by reason of
changes in the conversion price of the Preferred Stock in accordance with the
terms thereof).
The Company will receive proceeds only upon the exercise of the 1997
Warrants, the Consulting Warrants and the Omnitel 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 February 25, 1997, the last
reported sale price of the Common Stock was $14.625 per share. As of February
25, 1997, there were 4,931,390 shares outstanding (without giving effect to the
issuance of the Conversion Shares, the 1997 Warrant Shares, the Consulting
Shares or the Omnitel Shares).
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.
-------------------
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.
-------------------
THE DATE OF THIS PROSPECTUS IS _______________, 1997
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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 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; Los Angeles Regional Office, Suite 1100, 5670 Wilshire
Boulevard, Los Angeles, California 90036; and Chicago Regional Office, 500 W.
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.
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, 1996;
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996;
(c) The Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996;
(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 Securities Exchange Act of 1934, 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."
These products include modems for notebook computers that support data and fax
connections, as well as voice connections through speakerphone and answering
machine functions, sold primarily to manufacturers of notebook computers. Also
included is a line of network multiplexers which carry terminal, LAN, voice and
fax traffic between a company's branch and headquarters offices, over a broad
range of wide area communications speeds and services. These networking products
are sold through distributors, resellers and systems integrators throughout the
world. In February 1997, the Company launched a line of products for the
teleworker market that employ the Company's modem and multiplexer technologies
to allow the teleworker access to the corporate LAN, intranet, voice, and fax
services. The products provide the telecommuter with much of the functionality
of three dedicated phone lines -- one each for voice, fax and data transmission
- -- over a single standard telephone connection.
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
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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.
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. 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 incorporating technology as advanced or more advanced than
the Company's, thereby rendering the Company's products or technologies
uncompetitive or obsolete. Any significant delays in developing or shipping new
or enhanced products 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 support such products. Any of these
factors could materially adversely affect the market for data communications
products and the Company's operating results.
INTRODUCTION OF NEW PRODUCTS
The Company's future revenue is dependent on its ability to successfully
develop, manufacture and market products, including the recently launched
teleworker products. In this regard, future growth is dependent on the
Company's ability to timely and successfully develop and introduce new products,
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. 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 product inventories
and ensure that adequate supplies of new products can be delivered to meet
customer demand. In addition, as the technical complexity of new products
increases, it may become increasingly difficult to introduce new products
quickly and according to schedule. There can be no assurance that the Company
will successfully manage the transition to new products or that the Company's
research and development efforts will result in commercially successful new
technology and products in the future.
5
<PAGE>
In February 1997, the Company launched its teleworker products business.
The business represents a new line of business for the Company which is
significantly different from the Company's existing network multiplexer and
custom modem businesses, and presents a unique set of risks and challenges for
the Company. The Company has not recorded revenue from the products. In addition
to the potential obstacles described above with respect to new product
development, in order for the Company to successfully penetrate the teleworker
market, the Company must make significant additions to its sales and marketing
infrastructure, as well as expand its operational systems. Because of the
industry in which the Company operates, the number of qualified sales and
marketing persons available to the Company may be limited. Moreover, there can
be no assurance that additions to management will integrate well with existing
management. The Company must establish new distribution channels and develop
marketing strategies to penetrate those channels which are substantially
different from current marketing strategies. The Company has little or no
experience in marketing its new teleworker products to potential customers or
through sales channels for such products. In addition, the Company may be
required to enhance the features and performance, including voice quality, of
the teleworker products in order to achieve wider market acceptance of the
products. There can be no assurance that the Company will overcome such
obstacles, the failure of which could have a material adverse effect on the
Company's business, results of operations or financial condition.
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 levels of growth and size will reach expected levels.
In addition, the Company's 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, including voice quality, of the Company's products are
sufficient to meet customers' needs. 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 data/FAX modems and network
multiplexer products. With the launch of the Company's teleworker products, the
Company has begun to compete with competitors with whom the Company has had
little or no experience. 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. 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, 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. There can be no assurance that
competitors will not introduce products 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 which can adversely affect 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
6
<PAGE>
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 would 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 have
represented a large portion of the Company's total revenue. For example, revenue
from custom modem shipments to IBM, the Company's largest customer in fiscal
year 1996, accounted for approximately 46% of the Company's total revenues for
such fiscal year. The Company believes that its custom modem business will, for
the foreseeable future, continue to be characterized by a small number of large
contracts, each typically with the bulk of volume deliveries over a six month
period or less. Historically, 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
reported 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 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 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, 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, 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
Securities Exchange Act of 1934. 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 touting
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
7
<PAGE>
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.
- -------------------------------------------
The defendants answered the lawsuit denying any liability to the
plaintiffs. The parties have unsuccessfully attempted to mediate the case.
Discovery is in progress. The Company believes that the case is absolutely
without merit and is vigorously defending against the claims made in the
lawsuit. The Company is unable, however, to predict the costs to be incurred to
resolve the lawsuit. The Company is required under certain circumstances to
indemnify the named officers against losses incurred as a result of lawsuits
against the named officers.
FUTURE CAPITAL REQUIREMENTS
The Company's ability to make future capital expenditures and fund the
development and launch of new products, including the continued development of
the teleworker products, are dependent on existing cash and some or all of the
following: demands on cash to support inventory for the custom modem business,
demands on cash arising from the redemption (if required) of the Preferred
Stock, favorable settlement of the shareholder lawsuit and the Company's return
to profitability. The timing and amount of the Company's future capital
requirements can not be accurately predicted, nor can there be any assurance
that debt or equity financing, if required, can be obtained on acceptable terms.
There can be no assurance that the Company will have cash available in the
amounts and at the times needed. See "Potential Redemption of Preferred Stock."
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 and on its telecommuter
products sales executives to develop and implement its sales strategies for the
telecommuter products. Competition for qualified personnel is intense in the
data communications industry. All of the Company's senior executives, including
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 are from products containing one or more components which
are available from single supply sources. 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. Resulting delays or reductions in
product shipments 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.
8
<PAGE>
SALES CHANNEL RISKS
The Company has derived a significant amount of its revenue from sales to
its national, regional and international distributors and resellers. These
independent distributors and resellers 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. There can be no assurance that the Company will be successful in
developing products for sales to network multiplexer distributors and resellers.
The loss of any of the Company's major distributors and 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. 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 custom modem orders, or as the result of delays in receiving certain
components, such as critical chipsets, from suppliers and the concurrent
accumulation of other inventory. The Company may also experience similar
inventory build-ups to support expected growth of its teleworker business.
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
inventory levels could have a material adverse affect on the Company's financial
condition and results of operations.
BACKLOG
The Company generally manufactures custom modems upon orders from notebook
computer manufacturers. In contrast, the Company strives to manufacture network
multiplexers and its new teleworker products to meet anticipated demand, and to
maintain inventories of products, in an effort to ship such products as soon as
possible following receipt of orders from customers. For such reasons, and
because customers may cancel or reschedule orders, the Company's backlog at any
particular time is not necessarily indicative of the future levels of sales
revenues.
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. Further, given the rapid evolution of technology and uncertainties in
intellectual property law, there can be no assurance that the Company's current
or future products will not be determined to infringe proprietary rights of
others. Should the Company be sued for patent infringement, there
9
<PAGE>
can be no assurance that the Company will prevail, or, if required by such
litigation, that it will be able to obtain the requisite licenses or rights to
use such technology on commercially reasonable terms. In addition, any
litigation, regardless of the outcome, could result in substantial costs to the
Company.
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 portable 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. Any inability of the Company's products to conform to FCC
regulations or any failure of the Company's products to meet FCC testing
requirements could delay the introduction of the Company's products into the
market, impact 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. Any 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 may 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
Pursuant to regulations of the National Association of Securities Dealers,
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
Preferred Stock and the exercise of the 1997 Warrants. The actual number of
shares of Common Stock to be issued upon conversion of the Preferred Stock will
depend on the average closing price of the Common Stock prior to conversion. The
Company is obligated to redeem any shares of Preferred Stock which may not be
converted and any 1997 Warrants which may not be exercised as a result of such
regulatory limitation. The cash demands to fund such a redemption may adversely
affect the Company's ability to make future capital expenditures and fund the
development and launch of new products, including the continued development of
the telecommuter business. Furthermore, there can be no assurance that the
Company will have cash available to fund such a redemption. See "Future Capital
Requirements."
POTENTIAL ISSUANCE OF PREFERRED STOCK
Certain provisions of the Company's Articles of Incorporation 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 may make it difficult to replace incumbent
management.
PRICE VOLATILITY AND ABSENCE OF DIVIDENDS
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,
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 by the Selling Shareholders), loss of key
personnel and
10
<PAGE>
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.
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 such a
company. 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. See "Shareholder
Lawsuit." During the period from July 1, 1996 to February 25, 1997, the closing
price of the Company's Common Stock as reported on the Nasdaq National Market
ranged from a low of $5.375 per share on July 30, 1996 to a high of $24.375 per
share on December 30, 1996. On February 25, 1997, the closing price of the
Company's Common Stock as reported on the Nasdaq National Market was $14.625 per
share. The Company has never paid any cash dividends on its capital stock, and
there can be no assurances that the Company will do so in the future.
USE OF PROCEEDS
If the 1997 Warrants and the Consulting Warrants (each with an exercise
price of $16.375 per share), and the Omnitel Warrants (with an exercise price of
$18.95 per share) are exercised in full, the Company will receive proceeds in
the amount of $1,124,963 (assuming the issuance of the full number of 1997
Warrants which may be issued pursuant to the Securities Purchase Agreement),
$99,986 and $4,737,500, respectively. 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 sale by the Selling Shareholders of the Conversion
Shares, the 1997 Warrant Shares, the Consulting Shares, the Omnitel Shares or
the Outstanding Option Shares.
11
<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 February 25, 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. 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.
Pursuant to Rule 416 of the Securities Act, Selling Shareholders may also
offer and sell shares of Common Stock issued with respect to the Preferred
Stock, the 1997 Warrants, the Consulting Warrants and the Omnitel Warrants as a
result of stock splits, stock dividends and antidilution provisions (including
by reason of changes in the conversion price of the Preferrd Stock in accordance
with the terms thereof).
<TABLE>
<CAPTION>
Shares Beneficially
Owned
After the Offering (1)
Shares ----------------------
Beneficially Shares
Owned Prior Being Percent of
Selling Shareholder to Offering Offered Number Outstanding
- ------------------- ------------ ------- ------ ------------
<S> <C> <C> <C> <C>
Capital Ventures 637,313 637,313 0.00 0.00
International(2)(5)
Credit Suisse First Boston 231,750 231,750 0.00 0.00
Corporation(3)(5)
Zanett Lombardier, 96,562 96,562 0.00 0.00
Ltd.(4)(5)
Charles B. Krusen(6) 6,106 6,106 0.00 0.00
Marjac Investments, Inc.(7) 128,003 128,003 0.00 0.00
Inder M. Singh(7) 38,137 38,137 0.00 0.00
Bass Associates(7) 58,860 58,860 0.00 0.00
Venkat A. Mohan(7) 25,000 25,000 0.00 0.00
Capital Southwest Corporation(8) 225,950 35,507 190,443 3.87%
------- --------- ------- ----
Total 1,447,681 1,257,238 190,443 3.87%
========= ========= ======= ====
</TABLE>
- -------------------
(1) Assumes the sale of all Shares offered hereby.
(2) Pursuant to the Securities Purchase Agreement, the Selling Shareholder
purchased 3,300 shares of Preferred Stock and 1997 Warrants for 30,228
shares of Common Stock at a first closing on January 10, 1997, and agreed to
purchase, subject to certain conditions, an additional 1,650 shares of
Preferred Stock and 1997 Warrants for 15,114 shares of Common Stock at a
second closing on or before October 31, 1997.
12
<PAGE>
(3) Pursuant to the Securities Purchase Agreement, the Selling Shareholder
purchased 1,200 shares of Preferred Stock and 1997 Warrants for 10,992
shares of Common Stock at a first closing on January 10, 1997, and agreed to
purchase, subject to certain conditions, an additional 600 shares of
Preferred Stock and 1997 Warrants for 5,496 shares of Common Stock at a
second closing on or before October 31, 1997.
(4) Pursuant to the Securities Purchase Agreement, the Selling Shareholder
purchased 500 shares of Preferred Stock and 1997 Warrants for 4,580 shares
of Common Stock at a first closing on January 10, 1997, and agreed to
purchase, subject to certain conditions, an additional 250 shares of
Preferred Stock and 1997 Warrants for 2,290 shares of Common Stock at a
second closing on or before October 31, 1997.
(5) The share information in the first two columns represents the maximum number
of shares of Common Stock issuable to the Selling Shareholder upon
conversion of the Preferred Stock and exercise of the 1997 Warrants which
have been and may be purchased by the Selling Shareholder pursuant to the
Securities Purchase Agreement. No holder of the Preferred Stock and 1997
Warrants is entitled to convert or exercise such securities to the extent
that the shares to be received by such holder upon such conversion or
exercise would cause such holder to beneficially own more than 4.9% of the
Company's Common Stock. Therefore the number of shares set forth herein and
which a Selling Shareholder may sell pursuant to this Prospectus may exceed
the number of shares of Common Stock such Selling Shareholder beneficially
owns as determined pursuant to Section 13(d) of the Exchange Act. Moreover,
pursuant to the regulations of the National Association of Securities
Dealers, in the absence of shareholder approval, the aggregate number of
shares of Common Stock issuable to the 1997 Investors at a discount from
market price upon conversion of the Preferred Stock and exercise of the 1997
Warrants which have been and may be purchased by the 1997 Investors pursuant
to the Securities Purchase Agreement may not exceed 19.99% of the
outstanding shares of Common Stock on January 10, 1997 (i.e., 965,625
shares). Unless shareholder approval is obtained to issue shares of Common
Stock to the 1997 Investors in excess of the maximum amount set forth above,
none of the 1997 Investors will be entitled to acquire more than its
proportionate share of such maximum amount. Any Preferred Stock which may
not be converted and any 1997 Warrants which may not be exercised because of
such limitation must be redeemed by the Company.
The actual number of shares of Common Stock issuable upon conversion of the
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 initially is equal to 85%, then is
reduced on July 9, 1997 to 80%, and then is reduced further 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 relative rights, preferences, privileges, powers and
restrictions of the Preferred Stock, see the Statement of Designations,
Preferences and Rights of 1997 Series A Convertible Preferred Stock of DATA
RACE, Inc. attached as Exhibit 3.7 to the Company's Form 10-Q for the
quarter ended December 31, 1996, incorporated by reference herein.
(6) Represents shares which may be acquired upon exercise of the Consulting
Warrants.
(7) Represents shares which may be acquired upon exercise of Omnitel Warrants.
(8) Includes 49,845 shares owned by Capital Southwest Venture Corporation, a
wholly-owned subsidiary of Capital Southwest Corporation.
13
<PAGE>
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 in 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
principal 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
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.
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.
14
<PAGE>
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.
EXPERTS
The financial statements of the Company as of June 30, 1996 and 1995, and
for each of the years in the three year period ended June 30, 1996, 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 refers to a change in the method
of accounting for income taxes in the year ended June 30, 1994.
15
<PAGE>
-------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH 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 ANY 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...................................... 11
Selling Shareholders................................. 12
Plan of Distribution................................. 14
Legal Opinions....................................... 15
Experts.............................................. 15
-------------------------------------------------------
Up to 1,257,238 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 estimated expenses (other than underwriting discounts and commissions)
in connection with the issuance and distribution of the Common Stock registered
hereby are as follows:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee................................ $ 5,048
Nasdaq Listing of Additional Shares
filing fee......................................... $17,500
Legal fees and expenses............................. $15,000*
Accounting fees and expenses........................ $ 5,000*
Blue Sky fees and expenses.......................... $ 5,000*
Miscellaneous....................................... $ 2,451*
--------
Total............................................... $50,000*
________
* Estimated.
</TABLE>
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.
II-1
<PAGE>
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.
ITEM 16. EXHIBITS
EXHIBITS.
5 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
23.1 Consent of KPMG Peat Marwick LLP.
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).
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.
II-2
<PAGE>
(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 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-3
<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 February 28, 1997.
DATA RACE, INC.
By: /s/ W. B. Barker
-----------------------------------------------
W. B. Barker
President and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
W. B. Barker and Gregory T. Skalla, and each of them, each with full power to
act without the other, his true and lawful attorneys-in-fact and agents, each
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments to
this Registration Statement (including post-effective amendments), and to file
the same with all exhibits thereto and other documents in connection therewith,
with such changes as they may deem appropriate, with the Securities and Exchange
Commission, granting unto each of said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person hereby ratifying and confirming that
each of said attorneys-in-fact and agents or his substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this First
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
NAME TITLE DATE
---- ----- ----
/s/ W. B. Barker President, Chief Executive February 28, 1997
- --------------------------- Officer and Director
W. B. Barker
/s/ Gregory T. Skalla Vice President-Finance, Chief
- --------------------------- Financial Officer, Treasurer February 28, 1997
Gregory T. Skalla and Secretary (Principal
Financial and Accounting
Officer)
/s/ Jeffrey P. Blanchard Chairman of the Board of February 28, 1997
- --------------------------- Directors
Jeffrey P. Blanchard
/s/ Matthew A. Kenny Director February 28, 1997
- ---------------------------
Matthew A. Kenny
/s/ George R. Grumbles Director February 28, 1997
- ---------------------------
George R. Grumbles
/s/ Marcelo A. Gumucio Director February 28, 1997
- ---------------------------
Marcelo A. Gumucio
/s/ Dwight E. Lee Director February 28, 1997
- ---------------------------
Dwight E. Lee
II-4
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
------- -------
5 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
23.1 Consent of KPMG Peat Marwick LLP.
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).
<PAGE>
EXHIBIT 5
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1500 NATIONSBANK PLAZA
300 CONVENT STREET
SAN ANTONIO, TEXAS 78205
(210) 270-0800
February 28, 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 1,257,238 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 965,625 shares (the "Conversion Shares") issuable upon
conversion of the Company's 1997 Series A Convertible 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 January 10, 1997,
between the Company and the 1997 Investors (the "Securities Purchase
Agreement");
(ii) up to 68,700 shares (the "1997 Warrant Shares") issuable upon the
exercise of stock purchase warrants (the "1997 Warrants") issued and
issuable hereafter to certain Selling Shareholders pursuant to the
Securities Purchase Agreement;
(iii) up to 6,106 shares (the "Consulting Shares") issuable upon exercise
of stock purchase warrants (the "Consulting Warrants") issued to a
Selling Shareholder pursuant to a consulting arrangement with such
Selling Shareholder;
(iv) up to 250,000 shares (the "Omnitel Shares") issuable upon the
exercise of stock purchase warrants (the "Omnitel Warrants") issued
to certain Selling Shareholders in connection with the purchase by
the Company in 1993 of certain assets of Omnitel, Inc.; and
(v) up to 35,507 outstanding shares (the "Outstanding Option Shares")
issued to a Selling Shareholder upon the exercise of stock options
granted in 1991 in connection with a private placement of securities.
<PAGE>
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
DATA RACE, Inc.
February 28, 1997
Page 2
- -----------------------------------------------------
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.
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 Securities Purchase Agreement and the Certificate of Designation
(as defined in the Securities Purchase Agreement), the Conversion
Shares will be duly authorized, validly issued, fully paid and
nonassessable;
(ii) when issued to the holders of the 1997 Warrants upon the exercise
thereof in accordance with the respective warrant agreements
(including the payment of the exercise price specified therein), the
1997 Warrant Shares will be duly authorized, validly issued, fully
paid and nonassessable;
(iii) when issued to the holder of the Consulting Warrants upon the
exercise thereof in accordance with the warrant agreement (including
the payment of the exercise price specified therein), the Consulting
Shares will be duly authorized, validly issued, fully paid and
nonassessable;
(iv) when issued to the holders of the Omnitel Warrants upon the exercise
thereof in accordance with the respective warrant agreements
(including the payment of the exercise price specified therein), the
Omnitel Shares will be duly authorized, validly issued, fully paid
and nonassessable; and
(v) the Outstanding Option Shares are 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
Board of Directors
DATA RACE, 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
refers to a change in the method of accounting for income taxes in the year
ended June 30, 1994.
/s/ KPMG Peat Marwick LLP
San Antonio, Texas
February 26, 1997
