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As filed with the Securities and Exchange Commission on May 27, 1998.
Registration No. 333-
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================================================================================
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)
-------------------------
<TABLE>
<S> <C> <C>
Texas 3661 74-2272363
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
-------------------------
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:
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:
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=====================================================================================================================
Proposed Proposed
Maximum Maximum Amount of
Amount to be Offering Price Aggregate Registration
Registered(1)(2) Per Share(3) Offering Price(3) Fee(3)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value.................... 8,425,939 $1.00 $8,425,939 $2,486
=====================================================================================================================
</TABLE>
(1) In accordance with Rule 429 under the Securities Act of 1933, the Prospectus
included herein is a combined prospectus which also relates to the Company's
Registration Statement on Form S-3 (File No. 333-42203) (the "Prior
Registration Statement"). This Registration Statement, which is a new
registration statement, also constitutes the first post-effective amendment
to the Prior Registration Statement. Such post-effective amendment shall
hereafter become effective concurrently with the effectiveness of this
Registration Statement in accordance with Section 8-A of the Securities Act
of 1933. The number of shares of Common Stock registered pursuant to the
Prior Registration Statement (2,074,061 shares as of May 13, 1998) shall be
carried forward to this Registration Statement. The amount of the filing
fee associated with such shares that was previously paid with the Prior
Registration Statement is $2,812.
<PAGE>
(2) 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.
(3) 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 May 19, 1998.
____________________
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.
2
<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 +
+ become 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 May 27, 1998
Up To 10,500,000 Shares
DATA RACE, INC.
Common Stock
This Prospectus relates to (i) an aggregate of up to 10,500,000 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 10,500,000 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.
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."
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
<PAGE>
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 May 26, 1998, the last reported
sale price of the Common Stock was $1.0625 per share. As of May 26, 1998, there
were 6,809,286 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 May ___, 1998.
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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
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 Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997;
(d) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998;
(e) The Company's Current Report on Form 8-K, filed November 19, 1997;
(f) The Company's Current Report on Form 8-K, filed April 15, 1998;
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<PAGE>
(g) 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.
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 for remote access to the corporate environment. Its unique
client/server product, the Be There! remote access system, gives teleworkers
access to all elements of the corporate communications network. Through Be
There!, teleworkers reach 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 advanced communications
subsystems for makers of notebook computers and network multiplexers which carry
data, LAN, voice, and fax traffic between a company's multiple offices.
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! remote access system. The 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, make future capital
expenditures and fund the development and marketing of new products, including
the Be There! remote access system, are highly dependent upon limited existing
cash, the ability to raise additional capital, the cash requirements to fund
redemption (if required) of the Series A and Series C Preferred Stock, and the
Company's return to profitability. See "Potential Redemption of Preferred Stock"
below. There can be no assurance that the Company's limited 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 profitability as
long as its expenditures on the Be There! system remain disproportionate to Be
There! attendant 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 and stock
price requirements. The Company's recurring losses have had a negative effect on
the Company's shareholder's equity. In addition, the Company's stock price, as
quoted on the Nasdaq National Market, is volatile and, on May 12, 1998, closed
at $0.9375. 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 product inventories, and
ensure that adequate supplies of new products can be delivered to meet
6
<PAGE>
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 network multiplexer products and high
speed custom data/fax modems. 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 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 network
multiplexer and the custom modem 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 There! remote access
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
7
<PAGE>
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 the market for custom
modems is in a state of transition, and future opportunities in this market are
expected to increasingly shift from high-volume manufacturing to alternatives
such as custom design contracts and royalties. 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 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.
8
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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 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 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, the Company anticipates that the
success of the Be There! products will depend, in large part, on its
9
<PAGE>
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. 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 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
10
<PAGE>
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 May 1, 1998, 4,825 shares of the originally issued 5,000 shares of
Series A Preferred Stock had been converted into 841,314 shares of Common Stock.
In addition, 1,515 shares of the originally issued 5,000 shares of Series C
Preferred Stock had been converted into 750,083 shares of Common Stock as of
such date. 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"). The
Company is obligated to redeem any shares of such Series A Preferred Stock which
may not be converted and any Series A Warrants which may not be exercised as a
result of such regulatory limitation. 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." In addition, the Series C
Preferred Stock is redeemable upon certain major corporate events and other
triggering events. 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! remote access system, and
make future capital expenditures.
11
<PAGE>
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
with respect to Series A 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 May 1, 1998, there were 6,571,388 shares of Common Stock issued and
outstanding. As of May 1, 1998, a total of 2,653,227 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 eligible 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 4,194,228 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.
As of April 15, 1998, options for approximately 1,280,529 shares of Common
Stock were outstanding under the Company's option plans, with a weighted average
exercise price of approximately $7.66 per share.
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 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
12
<PAGE>
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.
13
<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 May 1, 1998, 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 initially registered 3,020,000 Shares for resale by the Selling
Shareholders holding the Series C Preferred Stock and Series C Warrants, and has
agreed to register an additional 8,425,939 Shares for resale by such Selling
Shareholders. 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
the Offering (3)
----------------
Shares
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)......... 1,199,855 2,594,882 11,908 *
CC Investments, LDC(5)(8).................... 1,994,925 4,357,598 - -
Nelson Partners(6)(8)(9)..................... 677,240 1,479,324 - -
Olympus Securities, Ltd.(7)(8)(9)............ 946,828 2,068,196 - -
--------- ----------
Total........................................ 4,818,848 10,500,000
========= ==========
</TABLE>
____________________
*Less than 1%
(1) The share amounts represent shares of Common Stock issuable to the Selling
Shareholders assuming the conversion, as of May 1, 1998, of all shares of
Series C Preferred Stock issued and not previously converted and issuable
to the Selling Shareholders and the exercise of all Series C Warrants
issued or issuable to the Selling Shareholders calculated using an assumed
conversion price of $1.50 (representing the average of the three lowest
closing bid prices for the Common Stock during the 22 consecutive trading
days ending April 30, 1998), 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
14
<PAGE>
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 293,878
Series C Warrants (assuming such shares and warrants were issued as of May
1, 1998) which the holders of the Series C Preferred Stock are required to
purchase on June 1, 1998, 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 11,908 shares of Common Stock issuable to CVI assuming the
exercise, as of May 1, 1998, of all Series A Warrants owned of record by
CVI on such date.
(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 at a first closing on November 12, 1997 (the "First Closing")
1,250 shares of Series C Preferred Stock, of which 400 shares had been
converted into 233,755 shares of Common Stock at May 1, 1998 and 850 shares
remained unconverted at such date, and Series C Warrants for 26,573 shares
of Common Stock, 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
June 1, 1998 (the "Second Closing"). The Selling Shareholder also owned, as
of May 1, 1998, 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 at the First Closing 1,875 shares of Series C Preferred Stock, of
which 300 shares had been converted into 153,705 shares of Common Stock at
May 1, 1998 and 1,575 shares remained unconverted at such date, and Series
C Warrants for 45,368 shares of Common Stock, 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 at the First Closing 840 shares of Series C Preferred Stock, of
which 435 shares had been converted into 191,543 shares of Common Stock at
May 1, 1998 and 405 shares remained unconverted at such date, and Series C
Warrants for 11,749 shares of Common Stock, and agreed to purchase, subject
15
<PAGE>
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.
(7) Pursuant to the Series C Purchase Agreement, the Selling Shareholder
purchased at the First Closing 1,035 shares of Series C Preferred Stock, of
which 380 shares had been converted into 171,080 shares of Common Stock at
May 1, 1998 and 655 shares remained unconverted at such date, and Series C
Warrants for 18,963 shares of Common Stock, 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) $4.185, which equals 120% of the average
of the closing bid prices of the Common Stock for the five trading days
preceding the effective date of the Company's Registration Statement on
Form S-3 (Registration Statement No. 333-42203), filed with the U.S.
Securities and Exchange Commission on December 13, 1997 (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 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. 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) 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.
16
<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 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
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,
17
<PAGE>
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.
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 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.
18
<PAGE>
================================================================================
Up to 10,500,000 Shares
DATA RACE, INC.
Common Stock
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.
--------------------------
P R O S P E C T U S
--------------------------
May ___, 1998
TABLE OF CONTENTS
Page
----
Available Information...................................................... 3
Incorporation of Certain Documents by Reference............................ 3
The Company................................................................ 4
Risk Factors............................................................... 5
Use of Proceeds........................................................... 13
Selling Shareholders...................................................... 14
Plan of Distribution...................................................... 17
Legal Opinions............................................................ 18
Experts................................................................... 18
================================================================================
<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.................................................$ 2,486
Nasdaq Listing of Additional Shares filing fee.........................17,500
Legal fees and expenses.................................................7,500*
Accounting fees and expenses............................................2,000*
Miscellaneous...........................................................5,514*
------
Total...........................................................$ 35,000*
=========
- -----------------
* 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)
3.7 Bylaws of the Company (a)
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 May 27, 1998.
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.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Dr. W. B. Barker President, Chief Executive Officer and Director May 27, 1998
- ------------------------------------
Dr. W. B. Barker
/s/ Gregory T. Skalla Vice President-Finance, Chief Financial Officer, May 27, 1998
- ------------------------------------ Treasurer and Secretary (Principal Financial and
Gregory T. Skalla Accounting Officer)
/s/ Jeffrey P. Blanchard Chairman of the Board of Directors May 27, 1998
- ------------------------------------
Jeffrey P. Blanchard
/s/ Matthew A. Kenny Director May 27, 1998
- ------------------------------------
Matthew A. Kenny
/s/ George R. Grumbles Director May 27, 1998
- ------------------------------------
George R. Grumbles
/s/ Marcelo A. Gumucio Director May 27, 1998
- ------------------------------------
Marcelo A. Gumucio
/s/ Dwight E. Lee Director May 27, 1998
- ------------------------------------
Dwight E. Lee
/s/ Edward A. Masi Director May 27, 1998
- ------------------------------------
Edward A. Masi
</TABLE>
<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)
3.7 Bylaws of the Company. (a)
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
[LETTERHEAD OF AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. APPEARS HERE]
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 10,500,000 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 10,500,000 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>
DATARACE, Inc.
May 27, 1998
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 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
May 27, 1998
