<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1998
Registration No. 333-62147
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
AMENDMENT NO. 2
TO
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 (I.R.S. Employer
of incorporation or Industrial Classification Identification No.)
organization) Code Number)
_________________________
GREGORY T. SKALLA
DATA RACE, Inc.
12400 NETWORK BOULEVARD
SAN ANTONIO, TEXAS 78249
(210) 263-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
MATTHEW R. BAIR, ESQ.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1500 NATIONSBANK PLAZA
300 CONVENT STREET
SAN ANTONIO, TEXAS 78205
_________________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
_________________________
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
____________________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
<PAGE>
********************************************************************************
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
********************************************************************************
SUBJECT TO COMPLETION
DATED NOVEMBER 6, 1998
UP TO 4,931,082 SHARES
DATA RACE, INC.
COMMON STOCK
This Prospectus relates to an aggregate of up to 4,931,082 shares (the
"Shares") of common stock, without par value (the "Common Stock"), of DATA RACE,
Inc., a Texas corporation (the "Company") issued or issuable upon conversion of
the Company's outstanding Series D Convertible Preferred Stock, without par
value ("Series D Preferred Stock"), and Series E Convertible Preferred Stock,
without par value (the "Series E Preferred Stock") and upon exercise of stock
purchase warrants described below which may be offered and sold from time to
time by the selling shareholders named herein (the "Selling Shareholders"). See
"Selling Shareholders." The Shares were issued or are issuable from time to time
by the Company to the Selling Shareholders as follows:
(i) up to 2,905,782 Shares are issuable upon
(a) the conversion of outstanding Series D Preferred Stock and
Series E Preferred Stock previously issued to certain of the
Selling Shareholders (the "Investors") in connection with a
private placement of securities pursuant to a Purchase Agreement
dated as of July 24, 1998, between the Company and the Investors
(the "Purchase Agreement"); as described herein, because the
Company may issue Common Stock upon conversion of the Series D
and E Preferred Stock in lieu of paying a cash premium accrued
thereon, and because the conversion price of the Series D
Preferred Stock depends upon the average closing bid price of
the Common Stock prior to conversion (subject to maximum and
minimum conversion prices which are now fixed), the actual
number of shares that are issued upon conversion of the Series D
and E Preferred Stock (the "Conversion Shares") (including the
shares of Common Stock issued in payment of the accrued premium
thereon) will depend on the average closing bid price of the
Common Stock prior to conversion;
(b) the exercise of outstanding Common Stock Purchase Warrants
("Class A Warrants") previously issued pursuant to the Purchase
Agreement to Investors purchasing Series D Preferred Stock and
the exercise of outstanding Common Stock Purchase Warrants
("Class B Warrants") issued pursuant to the Purchase Agreement
to the Investor purchasing the Series E Preferred Stock (the
Class A Warrants and the Class B Warrants are referred to herein
as the "Warrants");
(c) the exercise of outstanding Class A Warrants previously issued
to two Selling Shareholders (the "Other Warrant Holders") for
services rendered to the Company; and
(ii) 2,025,300 Shares were issued to three Selling Shareholders in
connection with the execution of a consulting agreement between the
Company and one such Selling Shareholder.
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 2,905,782 shares of Common Stock at a discount from market
price upon conversion and exercise of securities issued pursuant to the Purchase
Agreement. Accordingly, the total number of Shares covered by this Prospectus
includes, with respect to the Conversion Shares and the shares issuable upon
exercise of the Warrants issued to the Investors and the Other Warrant Holders
(the "Warrant Shares"), only such aggregate number of shares issuable by the
Company as limited by such regulations. The Company is soliciting shareholder
approval of the issuance of in excess of 2,905,782 shares of Common Stock upon
conversion and exercise of securities issued pursuant to the Purchase Agreement.
The Company will receive proceeds only upon the exercise of the 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") or over-the-counter
markets, 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 Investors against certain liabilities. See "Plan of Distribution."
The Common Stock of the Company is currently listed for trading on the
Nasdaq National Market under the symbol "RACE." On October 27, 1998, the last
reported sale price of the Common Stock was $3.00 per share. As of October
27, 1998, there were 14,537,140 shares outstanding (without giving effect to the
issuance of the Conversion Shares or the Warrant Shares).
THE SHARES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 4 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.
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 ___________.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and information statements filed by the Company with the Commission
pursuant to the information requirements of the Exchange Act may be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549; and at the following Regional
Offices of the Commission: New York Regional Office, Seven World Trade Center,
13th Floor, New York, New York 10048; and Chicago Regional Office, Citicorp
Center, 500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies of
such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also maintains a site on the World Wide Web at
http://www.sec.gov that contains reports, proxies and information statements and
other information regarding registrants (including the Company) that file
electronically. In addition, reports, proxy statements and other information
concerning the Company can be inspected and copied at the offices of the Nasdaq
National Market, Report Section, 1735 K Street, N.W., Washington, D.C. 20006, on
which the Common Stock of the Company (symbol: "RACE") is listed.
The Company has filed with the Commission a registration statement on Form
S-3 with respect to the Common Stock offered hereby (including all amendments
and supplements thereto, the "Registration Statement"). This Prospectus, filed
as part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement, certain portions of which have been
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement, including the exhibits
and schedules thereto. Each statement made in the Prospectus as to the content
of any contract, agreement or other document referred to is not necessarily
complete and is qualified in its entirety by reference to the copy of such
contract, agreement or other document filed as an exhibit to the Registration
Statement. The Registration Statement, including exhibits thereto, can be
inspected and copied at the Commission's public reference facilities and
regional offices and at the offices of Nasdaq National Market referred to above
in Washington, D.C., at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated by reference in this Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998;
(b) The Company's Current Report on Form 8-K filed August 4, 1998;
and
2
<PAGE>
(c) 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 communications
products for remote access to the corporate environment. Its unique
client/server product, the Be There!(TM) Remote Access System, gives teleworkers
access to all elements of corporate communications networks, including the PBX,
Intranet and Internet. Through Be There!, remote workers send and receive e-
mail, faxes and phone calls simultaneously over a single phone line. The
Company also designs and manufactures advanced network multiplexers which carry
data, network, voice and fax traffic between a company's multiple offices. DATA
RACE products are resold nationally through Inacom Communications and Data
General Corp., and through many regional resellers.
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.
3
<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 of 1933, as amended (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
Historically, the Company has derived the majority of its revenue from
custom modem and network multiplexer product sales. The market for custom
modems has shifted away from high volume manufacturing and is moving toward
standardized modem products where the Company does not compete and the network
multiplexer business has been declining. The Company's goal of returning to
profitability and developing a more reliable revenue base will depend on the
success of the Be There! Remote Access System. Revenue to date from the
Company's Be There! products has not been significant. The Be There! system
represents a new type of product for the Company which is significantly
different from the Company's network multiplexer products and prior custom modem
products, and presents a unique set of risks and challenges for the Company.
Since its release in early 1997, the Be There! product line has had very limited
success. Future growth is dependent on the Company's ability to penetrate its
target markets and increase sales of Be There!, to timely and successfully
develop and introduce new or follow-on products and enhancements, establish new
distribution channels, develop affiliations with leading market participants
which facilitate product development and distribution, and market existing and
new products through distributors, resellers 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
distribution capabilities. Competition for qualified personnel is intense in the
data communications industry. The Company is continuing its efforts to establish
additional distribution channels and to develop marketing strategies which are
substantially different from prior marketing strategies. The Company has had
limited success in marketing the Be There! system to potential customers or
through sales channels for such products, and there can be no assurance that the
Company will be successful in establishing a market for Be There! or in
establishing the Company's credibility in such market. In addition, the Company
may be required to enhance the features and performance, including voice
quality, of the teleworker products in order to achieve broad 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. For example, Sprint recently announced its ION service,
and Lucent Technologies has also announced a relevant product known as the
Virtual Telephone, both of which purport to provide many of the Be There!
features. Technologies such as ISDN and the more recently announced DSL products
also provide a more limited set of features similar to those offered by Be
There! Rapidly changing technology, emerging
4
<PAGE>
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. See
"Competition" below.
In order to pursue its objective of capturing a leadership position in the
remote access solutions market, the Company has developed and continues to seek
relationships with strategic partners able to assist the Company with marketing,
distribution and further development of the Be There! product line, to provide
needed capital, and otherwise to enhance value of the Company's business and
assets. There can be no assurance that existing relationships will be
maintained or that new relationships will be developed. The loss of these
relationships or the inability to forge a key relationship could have a material
adverse effect on the Company.
RECENT OPERATING LOSSES; ADEQUACY OF CAPITAL RESOURCES
The Company has suffered substantial recurring losses and revenue to date
from the Company's Be There! products has not been significant. 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, 1998 financial statements which expresses substantial doubt about the
Company's ability to continue as a going concern. The explanatory paragraph
notes that the Company has suffered recurring losses and incurred negative cash
flow from operations during fiscal 1998 and fiscal 1997.
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 securities issued pursuant to the Purchase
Agreement and to pay the premium on the preferred stock issued pursuant to the
Purchase Agreement (in the event the Company does not or cannot issue shares of
Common Stock in lieu thereof) 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 attendant Be There! revenues. As a
result, in the future, the Company will likely 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 can be
obtained or that, if obtained, the Company will be able to satisfy conditions
restricting the Company's ability to utilize such financing sources. Moreover,
although the Company is soliciting shareholder approval to increase its
authorized shares, there is currently a limited number of shares of Common Stock
available for future financings, and the failure to obtain such shareholder
approval would likely have a material adverse effect on the Company's ability
to complete future financings (including the second closing under the Purchase
Agreement). There can be no assurance that the Company will be able to satisfy
the conditions precedent to the second closing for Preferred Stock and Warrants
pursuant to the Purchase Agreement. Accordingly, 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 in order to remain so listed. The Company's recurring losses
have had a negative effect on the Company's shareholders' equity, and the
Company does not currently meet the Nasdaq National Market net tangible assets
requirement; the Company has received notice of non-compliance from Nasdaq and
the Company intends to request a hearing with Nasdaq in accordance with Nasdaq's
procedures. In addition, the Company's stock price, as quoted on the Nasdaq
National Market, is volatile and, during a six week period earlier this year,
closed below the Nasdaq National Market minimum requirement of $1.00 per share.
There can be no assurance that the Company will be able to comply with 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 would likely
have a material adverse effect on the market price and liquidity of the Common
Stock, and on the Company's ability to raise additional capital. Delisting could
also jeopardize certain secondary trading exemptions from state "blue sky" laws,
further affecting liquidity of the Common Stock. In addition, the Company would
be liable for certain substantial monetary penalties to the holders of the
Preferred Stock in the event of such a termination of listing (failure to pay
such penalties could also result in redemption of the Preferred stock).
5
<PAGE>
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 and
influence the development of these 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 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 size and growth 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 substantial
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, and financial condition may be
adversely affected.
COMPETITION
The communications industry is intensely competitive. The Company currently
competes principally in the remote access markets. The Company's existing and
potential competitors have far more extensive financial, engineering, product
development, manufacturing and marketing resources than the Company. 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 competitiors or alliances among competitors
may emerge and
6
<PAGE>
rapidly acquire significant market share. 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 features and functions, modularity and expansibility,
reliability, service and support, supplier credibility, recommendations of the
systems integrators, perceived cost savings and price.
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 or services incorporating
technology as advanced or more advanced than the Company's or that changes in
the communications environment will not render competitors' product solutions
more attractive to the customer than the Company's solutions. For example,
Sprint recently announced its ION service and Lucent Technologies has also
announced a relevant product known as the Virtual Telephone, both of which
purport to provide many of the Be There! features. Technologies such as ISDN and
the more recently announced DSL products also provide a more limited set of
features similar to those offered by Be There!
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 new competition to arise as
new technologies develop, such as Computer Telephony Integration, Voice over IP,
and others. 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.
SALES CHANNEL RISKS
The Company anticipates that the success of the Be There! products will
depend, in large part, on its ability to market through distributors, resellers,
and other strategic marketing partners where the Company has little experience.
Independent distributors, resellers, and other strategic marketing partners,
including Inacom Communications and Data General Corp., 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, including Inacom Communications and Data
General Corp., could have a significant adverse effect on the Company's
operating results. Failure of the Company to successfully develop, manufacture,
and market products appropriate for such channels could have a material adverse
effect on the Company's results of operations.
DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS; FLUCTUATIONS IN PERIOD TO PERIOD
OPERATING RESULTS
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 significant
fluctuations in revenue. 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 and services market, pricing and
7
<PAGE>
other competitive conditions, market acceptance of the Company's products, the
timing of the announcement and introduction of new products and services 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, particularly until
such time (if ever) that the Company's revenue from Be There! sales increase
substantially. Any of these factors could materially adversely affect the
Company's results of operations.
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 President, Dr. W.B.
Barker, its teleworker products sales executives to generate substantial revenue
from Be There! products, and on its key technical personnel to introduce new
products and to remain in the forefront of technological advances. Competition
for qualified personnel is intense in the data communications industry. All of
the Company's senior executives and other employees are employed on an "at-will"
basis. There can be no assurance that the Company will retain its key employees
or that it will attract and assimilate such employees in the future. The loss of
key 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
8
<PAGE>
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.
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. 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 the Company or
others. See "Patent Infringement Lawsuit" below. 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, including litigation
initiated by the Company, could result in the loss of the Company's proprietary
rights, subject the Company to significant liabilities, require the Company to
seek licenses from third parties or prevent the Company from manufacturing or
selling its products, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is currently required to obtain licenses for various
technologies used in many of the Company's products. There can be no assurance
that the Company will continue to be able to
9
<PAGE>
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.
PATENT INFRINGEMENT LAWSUIT
On August 19, 1998, the Company filed a lawsuit in United States District
Court in San Antonio, Texas, against Lucent Technologies Inc. ("Lucent"). The
suit alleges that Lucent is infringing upon a patent held by the Company
entitled "System and Method for Providing a Remote User with a Virtual Presence
to an Office." There can be no assurance that the Company will be able to fully
pursue such suit due to limited resources, uncertainty as to the source of
funding to pay the total amount of legal expenses, the court's interpretations
and decisions regarding the Company's allegation in the lawsuit (including their
effect on the validity or enforceability of the Company's patents), and the risk
of costly counter claims. Litigation by its very nature is unpredictable and
there can be no assurance that the Company will prevail in the lawsuit. Should
the Company fail to prevail in a significant manner, such failure may have a
material adverse effect on the Company's financial condition and operations. For
additional risks associated with such litigation, see "--Intellectual Property
Rights" above.
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. 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, 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 October 27, 1998, 1,500 shares of Series D Preferred Stock, 750
shares of Series E Preferred Stock and Warrants to purchase 819,871 Warrant
Shares were issued and outstanding, all of which were issued in the first
closing pursuant to the Purchase Agreement. Subject to the satisfaction of
certain conditions (as to which there can be no assurance), the Company may also
issue in a second closing pursuant to the Purchase Agreement an additional 1,000
shares of Series D Preferred Stock, 750 shares of a new Series F Preferred Stock
and additional Warrants to purchase 480,248 Warrant Shares. 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 2,905,782 shares of Common Stock upon conversion of the Series D, E and F
Preferred Stock issued pursuant to the Purchase Agreement (the "Preferred
Stock") and exercise of the Warrants issued pursuant to the Purchase Agreement.
The Company is obligated to redeem any shares of Preferred Stock which may not
be converted and any Warrants which may not be exercised as a result of such
regulatory limitation or as a result of an insufficient number of authorized
shares of Common Stock pursuant to the Company's articles of incorporation. In
addition, the Preferred Stock is redeemable upon certain major corporate events
and other triggering events (including failure to pay penalties arising from
delisting of the Common Stock from the Nasdaq National Market). Because the
Company may issue Common Stock upon conversion of the Preferred Stock in lieu of
paying a cash premium accrued thereon, and because the conversion price of the
Series D Preferred Stock depends upon the average closing bid price of the
Common Stock prior to conversion (subject to maximum and minimum
10
<PAGE>
conversion prices), the actual number of shares that are issuable upon
conversion of the Preferred Stock (including the shares of Common Stock issued
in payment of the accrued premium thereon) will depend on the average closing
bid price of the Common Stock prior to conversion. As of October 27, 1998,
assuming conversion of the outstanding Series D Preferred Stock at the minimum
conversion price of $1.58333 per share, the conversion of the outstanding Series
E Preferred Stock and the exercise of the outstanding Warrants (excluding any
payment in Common Stock of the accrued premium on the Preferred Stock), the
Company would be required to issue an aggregate of 2,517,241 shares of Common
Stock; assuming the issuance on such date of all such Conversion Shares and
Warrant Shares, there would have been approximately 19,141,456 shares of Common
Stock outstanding and reserved for issuance pursuant to employee benefit plans
and other arrangements. Although the Company intends to seek shareholder
approval of the issuance of in excess of 2,905,782 Conversion Shares and Warrant
Shares and of an increase of in its currently authorized 20,000,000 shares of
Common Stock, there can be no assurance that such approvals will be obtained.
The cash requirements to fund such a redemption of the Preferred Stock and
Warrants could adversely affect the Company's ability to sustain operations,
fund the continued development and marketing of products, including the Be
There! remote access system, and make future capital expenditures.
POTENTIAL DILUTION; SHARES ELIGIBLE FOR FUTURE SALES; POSSIBLE EFFECT ON
ADDITIONAL EQUITY FINANCING
A substantial number of shares of Common Stock may be issued by the
Company pursuant to the Purchase Agreement upon the conversion of the Preferred
Stock and upon the exercise of the Warrants which could result in substantial
dilution to a shareholder's percentage ownership interest in the Company and
could adversely affect the market price of the Common Stock. Because the Company
may issue Common Stock upon conversion of the Preferred Stock in lieu of paying
a cash premium accrued thereon, and because the conversion price of the Series D
Preferred Stock depends upon the average closing bid price of the Common Stock
prior to conversion (subject to maximum and minimum conversion prices), the
actual number of shares that are issuable upon conversion of the Preferred Stock
(including the shares of Common Stock issued in payment of the accrued premium
thereon) 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). In addition, the conversion price of the Series
F Preferred Stock issuable at the second closing pursuant to the Purchase
Agreement will be determined based on the average closing bid price of the
Common Stock on the date of issuance. For a complete description of the rights
of holders of Preferred Stock, see the Statement of Designations, Preferences
and Rights of each series of Preferred Stock filed as an Exhibit to the
Company's Current Report on Form 8-K filed August 4, 1998 and incorporated
herein by reference.
The Company has also reserved 2,017,824 shares of Common Stock for issuance
pursuant to employee benefit plans and, subject to certain shareholder
approvals, has reserved an additional 1,000,000 shares for issuance pursuant to
the Company's 1998 Stock Option Plan. The Company may from time to time issue or
reserve for issuance additional shares of Common Stock to employees, directors,
consultants and third parties for various purposes.
The sale or availability for sale of a significant number of shares of
Common Stock in the public market could adversely affect the market price of the
Common Stock. In addition, certain holders of outstanding securities of the
Company have rights to approve and/or participate in certain types of future
equity financing by the Company. Such rights could have an adverse effect on
the Company's ability to obtain additional equity financing.
ANTI-TAKEOVER MEASURES
The Company has adopted a shareholder rights plan in an effort to guard
against abusive tactics which could deprive shareholders of the opportunity to
realize the long-term value of their investment in the Company. In addition,
certain provisions of the Company's Articles of Incorporation
11
<PAGE>
may have the effect of discouraging unsolicited proposals for acquisition of
control of the Company. The Company's Board of Directors can, without obtaining
shareholder approval, issue shares of no par value preferred stock of the
Company having rights that could adversely affect the voting power of holders of
the Common Stock, including the right to vote as a class on any proposed change
of control. Such an issuance could have the effect of delaying, deferring, or
preventing a change of control of the Company and might make it difficult to
replace incumbent management.
Certain provisions of Texas corporate law, including the Texas "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, changes in distributor or reseller
relationships, 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 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 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 outstanding Class A Warrants (with an exercise price of $.6625 per
share) and the Class B outstanding Warrants (with an exercise price of $.80 per
share) issued pursuant to the Purchase Agreement are exercised in full, the
Company will receive gross proceeds (before fees) of $562,500. Such proceeds, to
the extent received, 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.
12
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth the names of the Selling Shareholders, the
number of shares of Common Stock owned by each of the Selling Shareholders as of
October 27, 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 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.
In connection with the issuance on July 24, 1998 of the Series D and E
Preferred Stock and Warrants pursuant to the Purchase Agreement, the Company is
registering for resale by the Investors and the Other Warrant Holders an
aggregate of 2,905,782 Conversion Shares and Warrant Shares issuable upon
conversion or exercise of such outstanding securities. The number of Shares
shown in the following table as being offered by the Investors and the Other
Warrant Holders does not include such presently indeterminate number of shares
of Common Stock as may be issuable upon conversion of the outstanding Preferred
Stock and exercise of the outstanding Warrants pursuant to applicable
antidilution provisions.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AFTER THE OFFERING (1)
--------------------------
SHARES
BENEFICIALLY
OWNED PRIOR TO SHARES BEING PERCENT OF
SELLING SHAREHOLDER OFFERING OFFERED NUMBER OUTSTANDING
------------------- ---------------- ------------ ------ -----------
<S> <C> <C> <C> <C>
Sovereign Partners L.P.(2)(9)(10)(11)........ 857,995 1,011,067 - -
Dominion Capital Fund, Ltd.(3)(9)(10)(11).... 428,998 505,533 - -
First Capital Group of Texas II,
L.P.(4)(9)(12).......................... 890,625 1,049,559 - -
Steven Nehorayoff(5)(9)(11).................. 429,623 429,623 - -
Michael S. Rosenblum(6)(9)(11)............... 63,000 60,000 3,000 *
Liviakis Financial Communications,
Inc.(7)................................. 1,446,475 1,406,475 40,000 *
Robert B. Prag(8)............................ 468,825 468,825 - -
</TABLE>
____________________
*Less than 1%
(1) Assumes the sale of all Shares offered hereby.
(2) Pursuant to the Purchase Agreement, the Selling Shareholder (also referred
to herein as an "Investor") purchased at a first closing on July 24, 1998
(the "First Closing"), 1,000 shares of Series D Preferred Stock and Class A
Warrants for 226,415 shares of Common Stock, and agreed
13
<PAGE>
to purchase at a second closing on or before January 31, 1999 (the "Second
Closing"), subject to certain conditions, an additional 667 shares of
Series D Preferred Stock and Class A Warrants for 151,019 shares of Common
Stock. The number of shares beneficially owned assumes (i) the conversion
of 1,000 shares of Series D Preferred Stock, at the minimum conversion
price of $1.58333, into 631,580 shares of Common Stock (excluding the
issuance of any shares in payment of the premium thereon) and (ii) the
exercise of Class A Warrants for 226,415 shares. As described in footnote
10 below, the actual number of shares of Common Stock issuable upon
conversion of the Series D Preferred Stock depends upon the average closing
bid price of the Common Stock on the date of conversion, subject to the
maximum conversion price of $1.95625 and the minimum conversion price of
$1.58333.
(3) Pursuant to the Purchase Agreement, the Selling Shareholder (also referred
to herein as an "Investor") purchased at the First Closing 500 shares of
Series D Preferred Stock and Class A Warrants for 113,208 shares of Common
Stock, and agreed to purchase at the Second Closing, subject to certain
conditions, an additional 333 shares of Series D Preferred Stock and Class
A Warrants for 75,396 shares of Common Stock. The number of shares
beneficially owned assumes (i) the conversion of 500 shares of Series D
Preferred Stock, at the minimum conversion price of $1.58333, into 315,790
shares of Common Stock (excluding the issuance of any shares in payment of
the premium thereon) and (ii) the exercise of Class A Warrants for 113,208
shares. As described in footnote 10 below, the actual number of shares of
Common Stock issuable upon conversion of the Series D Preferred Stock
depends upon the average closing bid price of the Common Stock on the date
of conversion, subject to the maximum conversion price of $1.95625 and the
minimum conversion price of $1.58333.
(4) Pursuant to the Purchase Agreement, the Selling Shareholder (also referred
to herein as an "Investor") purchased at the First Closing 750 shares of
Series E Preferred Stock and Class B Warrants for 140,625 shares of Common
Stock, and agreed to purchase at the Second Closing, subject to certain
conditions, an additional 750 shares of Series F Preferred Stock and Class
A Warrants for 140,625 shares of Common Stock. The number of shares
beneficially owned assumes (i) the conversion of 750 shares of Series E
Preferred Stock, at a conversion price of $1.00, into 750,000 shares of
Common Stock (excluding the issuance of any shares in payment of the
premium thereon) and (ii) the exercise of Class B Warrants for 140,625
shares. As described in footnote 12 below, the Series E Preferred Stock and
the Class B Warrants are not convertible or exercisable until the first
anniversary of their dates of issuance. Does not include shares of Common
Stock beneficially owned by Jeffrey P. Blanchard, a member of the general
partner (a limited liability company) of the general partner (a limited
partnership) of the Selling Shareholder. The Selling Shareholder
disclaims any beneficial ownership in such shares.
(5) Consists of (i) 279,623 shares of Common Stock issuable upon exercise of
Class A Warrants issued to the Selling Shareholder (also referred to herein
as an "Other Warrant Holder") as compensation for services to the Company
in connection with the First Closing pursuant to the Purchase Agreement;
upon completion of the Second Closing of the sale of 1,000 shares of Series
D Preferred Stock, the Selling Shareholder will receive additional Class A
Warrants to purchase 113,208 shares of Common Stock; and (ii) 150,000
shares previously issued to the Selling Shareholder in connection with the
execution of a consulting agreement between the Company and Liviakis
Financial Communications, Inc., for certain investor relations services.
14
<PAGE>
(6) Includes 60,000 shares of Common Stock issuable upon exercise of Class A
Warrants issued to the Selling Shareholder (also referred to herein as an
"Other Warrant Holder") as compensation for services to the Company in
connection with the Purchase Agreement.
(7) Includes 1,406,475 shares previously issued to the Selling Shareholder in
connection with the execution of a consulting agreement between the Company
and the Selling Shareholder, for certain investor relations services. Such
shares may not be sold prior to March 15, 1999 without the Company's
consent. John M. Liviakis, an officer, director and the principal owner of
the Selling Shareholder, beneficially owns an additional 61,400 shares of
Common Stock.
(8) Represents shares previously issued to the Selling Shareholder in
connection with the execution of a consulting agreement between the Company
and Liviakis Financial Communications, Inc., for certain investor relations
services. Such shares may not be sold prior to March 15, 1999 without the
Company's consent. The Selling Shareholder is Senior Vice President of
Liviakis Financial Communications, Inc., but disclaims any beneficial
ownership in shares owned by Liviakis Financial Communications, Inc.
(9) Pursuant to Marketplace Rule 4460(i) of the National Association of
Securities Dealers, issuers of securities listed on the Nasdaq National
Market must obtain shareholder approval prior to issuing shares of common
stock (or securities convertible into or exercisable for common stock) in a
private placement equal to 20% or more of the common stock outstanding
prior to the issuance, at a price less than the greater of book or market
value of the stock. As a result of such NASD regulations, in the absence of
shareholder approval, the aggregate number of shares of Common Stock
issuable to the Investors and the Other Warrant Holders at a discount from
its market price upon conversion of the Preferred Stock and exercise of the
Warrants which have been and may be issued pursuant to the Purchase
Agreement may not exceed 19.99% of the outstanding shares of Common Stock
on July 24, 1998, which equals 2,905,782 shares (the "Nasdaq Cap"). Unless
shareholder approval is obtained to issue shares of Common Stock to the
Investors and the Other Warrant Holders in excess of the Nasdaq Cap, none
of the Investors and Other Warrant Holders will be entitled to acquire more
than its or his proportionate share of such maximum amount. Accordingly,
the number of Shares being offered for sale by such Selling Shareholders
has been determined by agreement, and in the case of each Investor
represents the Investor's proportionate share of such Nasdaq Cap, (reduced
by the shares being offered by the other Warrant Holders), determined in
the same proportion as the Investor's proportionate share of the maximum
aggregate number of shares of Common Stock issuable as of October 27, 1998
to all Investors upon conversion as of such date of the outstanding
Preferred Stock (excluding premium shares thereon) and exercise of the
outstanding Warrants. The number of Shares actually sold hereunder by each
Investor may be less than or greater than the number of Shares shown as
offered by the Investor, but all Investors and Other Warrant Holders as a
group will not sell more than 2,905,782 shares of Common Stock issued upon
conversion of the Preferred Stock and exercise of the Warrants. The Company
is seeking shareholder approval of the issuances of the shares of Common
Stock to the Investors and the Other Warrant Holders to allow the Company
to issue more than 2,905,782 shares of Common Stock upon conversion of the
Preferred Stock and exercise of the Warrants. In the absence of shareholder
approval of the issuances, any Preferred Stock which may not be converted
or Warrants that may not be exercised because of the Nasdaq Cap limitation
must be redeemed at a premium by the Company for cash. In addition,
shareholder approval of the issuances is a condition to the Second
Closing.
(10) The Series D Preferred Stock is convertible into Common Stock at the option
of the holder beginning 90 days after its issuance, subject to acceleration
in certain events, at a conversion price equal to 80% of the trailing five-
day average closing bid price of the Common Stock on the conversion date,
subject to a minimum conversion price for the outstanding Series D
Preferred Stock of $1.58333 (the trailing 15-day average closing bid price
of the Common Stock 90 days after the issuance date) and subject to the
maximum conversion price for the outstanding Series D Preferred Stock of
$1.95625 (the lesser of $3.00 or the trailing five-day average closing bid
price of the Common Stock 90 days after the issuance date). The number of
shares of Common Stock issuable upon conversion of one share of Series D
Preferred Stock is computed by dividing the share's stated value of $1,000
by the applicable conversion price, plus, in the event the Company elects
to pay in Common Stock the 8% accrued premium on such Preferred Stock, that
number of shares of Common Stock having a value equal to such accrued
premium (based on the trailing five-day average closing bid price of the
Common Stock on the conversion date). For a complete description of the
rights, preferences and restrictions of the Series D Preferred Stock, see
the Statement of Designation, Preferences and Rights of Series D
Convertible Preferred Stock filed as an Exhibit to the Company's Current
Report on Form 8-K filed on August 4, 1998 and incorporated herein by
reference.
15
<PAGE>
(11) The Class A Warrants are exercisable on the earlier of 90 days after their
issuance, or the effective date of the Registration Statement of which this
Prospectus forms a part, subject to acceleration in certain events, at an
exercise price equal to $0.6625.
(12) The Series E Preferred Stock is convertible into Common Stock at the option
of the holder beginning one year after its issuance, subject to
acceleration in certain events, at a conversion price equal to $1.00. The
number of shares of Common Stock issuable upon conversion of one share of
Series E Preferred Stock is computed by dividing the share's stated value
of $1,000 by the applicable conversion price, plus, in the event the
Company elects to pay in Common Stock the 8% accrued premium on such
Preferred Stock, that number of shares of Common Stock having a value equal
to such accrued premium (based on the trailing five-day average closing bid
price of the Common Stock on the conversion date). For a complete
description of the rights, preferences and restrictions of the Series E
Preferred Stock, see the Statement of Designation, Preferences and Rights
of the Series E Convertible Preferred Stock, filed as an Exhibit to the
Company's Current Report on Form 8-K filed on August 4, 1998 and
incorporated herein by reference. The Class B Warrants are exercisable one
year after their issuance, subject to acceleration in certain events, at an
exercise price equal to $0.80.
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 any
national securities exchange or quotation service on which the Common Stock may
be listed or quoted at the time of sale, in the over-the-counter market or in
any other market for the Common Stock; (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
16
<PAGE>
sold hereunder may be issued upon conversion of the Preferred Stock and exercise
of the Warrants in accordance with their respective terms, or in other
transactions with the Company involving the Preferred Stock or Warrants,
including, without limitation, issuance of Shares in exchange for shares of
Preferred Stock or Warrants and issuance of Shares pursuant to modification of
the terms of the Preferred Stock or Warrants, or in settlement of claims with
respect to rights of holders of Preferred Stock or Warrants.
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.
Any underwriter may engage in stabilizing transactions in accordance with
Rule 104 under the Exchange Act. Rule 104 permits stabilizing bids to purchase
the underlying security so long as the stabilizing bids do not exceed a
specified maximum. The underwriters may over-allot shares of the Common Stock in
connection with an offering of the Common Stock, thereby creating a short
position in the underwriters' account. These transactions, if commenced, may be
discontinued at any time.
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 $45,000. The
Company has agreed to indemnify the Investors 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, 1998 and 1997, and
for each of the years in the three year period ended June 30, 1998, 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 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.
17
<PAGE>
========================================== ==================================
No person has been authorized in
connection with the offering made hereby Up to 4,931,082 Shares
to give any information or to make any
representation not contained in this DATA RACE, INC.
prospectus and, if given or made, such
information or representation must not be Common Stock
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
----------------------------------
TABLE OF CONTENTS
Page
----
Available Information.................. 2
Incorporation of Certain Documents ___________, 1998
by Reference........................... 2
The Company............................ 3
Risk Factors........................... 4
Use of Proceeds........................12
Selling Shareholders...................13
Plan of Distribution...................16
Legal Opinions.........................17
Experts................................17
========================================== ==================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses (other than underwriting discounts and commissions and
placement fees) in connection with the issuance and distribution of the Common
Stock registered hereby are as follows:
SEC registration fee........................................... $ 3,250
Nasdaq Listing of Additional Shares filing fee................. 17,500
Legal fees and expenses........................................ 17,500*
Accounting fees and expenses................................... 2,000*
Miscellaneous.................................................. 4,750*
---------
Total..................................................... $ 45,000*
=========
- ---------------
* 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 Resolution Establishing Series B Participating
Cumulative Preferred Stock. (b)
3.5 Statement of Designation, Preferences and Rights of Series D
Convertible Preferred Stock. (c)
3.6 Statement of Designation, Preferences and Rights of Series E
Convertible Preferred Stock. (c)
3.7 Bylaws of the Company and Amendments to Bylaws. (a)(d)
4.1 Form of Class A Common Stock Purchase Warrant. (c)
4.2 Form of Class B Common Stock Purchase Warrant. (c)
4.3 Form of Statement of Designation, Preferences and Rights of
Series F Convertible Preferred Stock. (c)
5. Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (f)
10. Modification Agreement, dated November 5, 1998. (f)
23.1 Consent of KPMG Peat Marwick LLP. (f)
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in opinion filed as Exhibit 5)
24. Power of Attorney. (e)
- --------------------------------
(a) Filed as an exhibit to Form S-1 Registration Statement No. 33-
51170, effective October 7, 1992.
(b) Filed as an exhibit to Form 10-K Annual Report for the fiscal
year ended June 30, 1997.
(c) Filed as an exhibit to Form 8-K filed August 4, 1998.
(d) Filed as an exhibit to Form 10-Q Quarterly Report for the quarter
ended December 31, 1996.
(e) Filed with the Company's Registration Statement on Form S-3 (File
No. 333-62147) on August 24, 1998.
(f) 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 Amendment No. 2 to
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
November 6, 1998.
DATA RACE, INC.
By: /s/ Gregory T. Skalla
------------------------------------
Gregory T. Skalla
Senior Vice President, Chief
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to 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 November 6, 1998
- ------------------------------- Officer and Director
Dr. W. B. Barker
/s/ Gregory T. Skalla Senior Vice President-Finance, November 6, 1998
- ------------------------------- Chief Financial Officer, Treasurer
Gregory T. Skalla and Secretary (Principal
Financial and Accounting Officer)
/s/ Jeffrey P. Blanchard* Chairman of the Board of Directors November 6, 1998
- -------------------------------
Jeffrey P. Blanchard
/s/ Matthew A. Kenny* Director November 6, 1998
- ------------------------------
Matthew A. Kenny
/s/ George R. Grumbles* Director November 6, 1998
- ------------------------------
George R. Grumbles
/s/ Marcelo A. Gumucio* Director November 6, 1998
- ------------------------------
Marcelo A. Gumucio
/s/ Dwight E. Lee* Director November 6, 1998
- ------------------------------
Dwight E. Lee
/s/ Edward A. Masi* Director November 6, 1998
- ------------------------------
Edward A. Masi
*By: /s/ Gregory T. Skalla
--------------------------
Gregory T. Skalla,
as Attorney-in-Fact
pursuant to Power of Attorney
previously filed
</TABLE>
II-5
<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 Resolution Establishing Series B Participating Cumulative
Preferred Stock. (b)
3.5 Statement of Designation, Preferences and Rights of Series D Convertible
Preferred Stock. (c)
3.6 Statement of Designation, Preferences and Rights of Series E Convertible
Preferred Stock. (c)
3.7 Bylaws of the Company and Amendments to Bylaws. (a)(d)
4.1 Form of Class A Common Stock Purchase Warrant. (c)
4.2 Form of Class B Common Stock Purchase Warrant. (c)
4.3 Form of Statement of Designation, Preferences and Rights of Series F
Convertible Preferred Stock. (c)
5. Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (f)
10. Modification Agreement dated November 5, 1998. (f)
23.1 Consent of KPMG Peat Marwick LLP. (f)
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in opinion
filed as Exhibit 5)
24. Power of Attorney. (e)
- --------------------------------
(a) Filed as an exhibit to Form S-1 Registration Statement No. 33-51170,
effective October 7, 1992.
(b) Filed as an exhibit to Form 10-K Annual Report for the fiscal year ended
June 30, 1997.
(c) Filed as an exhibit to Form 8-K filed August 4, 1998.
(d) Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended
December 31, 1996.
(e) Filed with the Company's Registration Statement on Form S-3 (File No.
333-62147) on August 24, 1998.
(f) Filed herewith.
<PAGE>
EXHIBIT 5
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
300 CONVENT STREET, SUITE 1500
SAN ANTONIO, TEXAS 78205
(210) 281-7000
November 6, 1998
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 4,931,082 shares of the Company's Common Stock, no par value
(the "Common Stock"), issued or issuable from time to time by the Company to the
Selling Shareholders (as defined in the Registration Statement) as follows:
(i) up to 2,905,782 shares are issuable upon
(a) the conversion of the Company's outstanding Series D Convertible Preferred
Stock and Series E Convertible Preferred Stock (collectively, the
"Preferred Stock"), issued to certain Selling Shareholders (the
"Investors") in connection with a private placement of securities pursuant
to a Purchase Agreement entered into as of July 24, 1998, between the
Company and the Investors (the "Purchase Agreement");
(b) the exercise of outstanding Common Stock Purchase Warrants ("Class A
Warrants") issued to Investors purchasing Series D Convertible Preferred
Stock pursuant to the Purchase Agreement and the exercise of Common Stock
Purchase Warrants ("Class B Warrants") issued to the Investor purchasing
Series E Preferred Stock pursuant to the Purchase Agreement (the Class A
Warrants, including those referenced immediately below, and the Class B
Warrants are collectively referred to as the "Warrants");
(c) the exercise of Class A Warrants issued to certain Selling Shareholders for
services rendered to the Company; and
(ii) 2,025,300 shares (the "Consulting Shares") issued to certain Selling
Shareholders pursuant to a consulting agreement between the Company and
one such Selling Shareholder.
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
<PAGE>
DATA RACE, Inc.
November 6, 1998
Page 2
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.
We have further assumed that:
(a) all applicable state securities laws will have been complied with in
connection with each Preferred Stock conversion and Warrant exercise;
(b) at the time of the issuance of the shares of Common Stock upon conversion
of the Preferred Stock and exercise of the Warrants, the Company will have
sufficient authorized and unissued shares of Common Stock available for
issuance;
(c) the Preferred Stock will be converted in accordance with the applicable
Statement of Designation, Rights and Preferences, and the Warrants will be
exercised in accordance with the applicable warrant agreement; and
(d) the shares of Common Stock issuable upon conversion of the Preferred Stock
and exercise of the Warrants will, upon issuance, be evidenced by
appropriate certificates properly executed and delivered.
Based upon the foregoing, and subject to such assumptions and
qualifications, we are of the opinion that:
1. When issued to the holders of the Preferred Stock upon the conversion
thereof in accordance with the Purchase Agreement and the applicable
Statement of Designation (as defined in the Purchase Agreement), the shares
of Common Stock issuable upon conversion of the Preferred Stock will be
duly authorized, validly issued, fully paid and nonassessable.
2. When issued to the holders of the Warrants upon the exercise thereof in
accordance with the respective warrant agreements (including the payment of
the exercise price specified therein), the shares of Common Stock issuable
upon exercise of the Warrants will be duly authorized, validly issued,
fully paid and nonassessable.
3. The Consulting 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 10
MODIFICATION AGREEMENT
This MODIFICATION AGREEMENT (this "Agreement") is entered into as of
November 5, 1998, between DATA RACE, Inc., a Texas corporation (the "Company");
and Sovereign Partners L.P., Dominion Capital Fund, Ltd., and First Capital
Group of Texas II, L.P. (the "Purchasers").
RECITALS
WHEREAS, pursuant to that certain Purchase Agreement, dated July 24, 1998,
between the Company and the Purchasers (the "Purchase Agreement"), the Company
issued to the Purchasers an aggregate of 2,250 shares of the Company's
convertible preferred stock and common stock purchase warrants to purchase an
aggregate of 480,248 shares of the Company's common stock;
WHEREAS, pursuant to the Purchase Agreement, the Company agreed to issue,
and the Purchasers agreed to purchase, subject to the satisfaction of certain
conditions, an additional 1,750 shares of the Company's convertible preferred
stock and additional common stock purchase warrants to purchase an aggregate of
367,040 shares of the Company's common stock;
WHEREAS, pursuant to the Purchase Agreement, the Company and the Purchasers
entered into that certain Registration Rights Agreement, dated July 24, 1998
(the "Registration Rights Agreement"); and
WHEREAS, the parties to this Agreement desire to modify and clarify certain
provisions of the Purchase Agreement, the Registration Rights Agreement and
certain documents executed in connection therewith.
AGREEMENT
For good and valuable consideration, the sufficiency and receipt of which
is hereby acknowledged by each party, the parties to this Agreement agree as
follows:
1. Unless the context requires otherwise, capitalized terms used, but not
defined herein, shall have the applicable meanings given to them in the
Purchase Agreement, the Registration Rights Agreement and the
Statements of Designation referred to in the Purchase Agreement (the
"Statements of Designation").
2. The parties acknowledge that the Company does not intend to register
under the Securities Act, prior to the closing of the Call, the shares
of Common Stock underlying the Preferred Stock and Warrants to be
issued upon the closing of the Call. Accordingly, the parties hereby
waive the condition to the closing of the Call that a registration
statement under the Securities Act be in effect with respect to such
shares of Common Stock. The Company agrees that, notwithstanding
Section 3(a) of the Registration Rights Agreement and without reducing
the time
<PAGE>
periods set forth in Section 3(e) of the Registration Rights Agreement,
the Company agrees to file with the SEC an additional registration
statement under the Securities Act covering the resale by the Holders
of the shares of Common Stock underlying the Preferred Stock and
Warrants issued on the closing of the Call, within ten business days
following the closing of the Call; and assuming the SEC determines not
to review the registration statement, the Company agrees to use its
best efforts to cause the registration statement to be declared
effective within 20 business days following the closing of the Call.
The term "Demand," as used in the Registration Rights Agreement, shall
be deemed to have been given as of the date of the closing of the Call
with respect to the registration of the shares of Common Stock
underlying the Preferred Stock and Warrants issued in the closing of
the Call, and any penalties provided for under Section 3(e) of the
Registration Rights Agreement shall be determined based on such deemed
date of Demand. In addition to the modifications described above, the
Purchasers waive any default or damages attributable to the failure of
the registration statement previously filed with SEC with respect to
the shares of Common Stock underlying the outstanding Preferred Stock
and Warrants to be declared effective within the period specified in
the Registration Rights Agreement and the Statements of Designations;
provided, however, that the penalties accruing under Section 3(e) of
the Registration Rights Agreement with respect to the outstanding
Preferred Stock and Warrants shall be deemed waived only if the
registration statement covering the underlying securities is declared
effective on or before November 13, 1998. The parties acknowledge that,
except as specified herein, no other rights are waived or reduced with
respect to the matters described in this paragraph.
3. The parties acknowledge that the Preferred Stock to be issued at the
closing of the Call will not be included in the Company's net tangible
assets (as defined by the Nasdaq National Market continued listing
requirements) until the registration statement with respect to the
underlying shares of Common Stock is declared effective by the SEC.
Accordingly, the parties agree that the condition to the closing of the
Call that the Company be in compliance with the Nasdaq National Market
continued listing requirements requirement upon closing of the Call
shall be determined assuming that the Preferred Stock issued at such
closing were included in the Company's net tangible assets.
4. The parties agree that the legal opinion required to be delivered to
the Purchasers as a condition to the closing of the Call shall be
appropriately modified as may be necessary to be rendered consistent
with the matters addressed in or related to this Modification.
5. The parties agree that the condition to the closing of the Call that
the representations and warranties of the Company made pursuant to the
Purchase Agreement and Exhibits be true and correct as of the date of
the Call shall, in all cases, be subject to the matters addressed in or
related to this Agreement.
6. The parties agree that the condition to the closing of the Call that
the Company shall have performed, satisfied and complied with all
covenants, agreements and
2
<PAGE>
conditions required pursuant to the Purchase Agreement and Exhibits to
be performed, satisfied or complied with by the Company prior to the
closing of the Call shall, in all cases, be subject to the matters
addressed in or related to this Agreement.
7. The parties acknowledge that the minimum conversion price (and the
maximum conversion price) with respect to the outstanding Series D
Preferred Stock has been fixed in accordance with the Statement of
Designation for Series D Preferred Stock. Accordingly, the parties
agree that, with respect to the outstanding Preferred Stock and
Warrants, the Company shall be required to register and keep reserved
for issuance only that number of shares of Common Stock that is at any
time issuable upon conversion of such Preferred Stock and Warrants, and
the Purchase Agreement, the Registration Rights Agreement and the
Statements of Designation for the Series D Preferred Stock and Series E
Preferred Stock shall be deemed appropriately modified to such extent.
In addition, with respect to the Series F Preferred Stock and the
Warrants to be issued on the closing of the Call, the Company shall be
required to register and keep reserved for issuance only that number of
shares of Common Stock that is at any time issuable upon conversion of
such Series F Preferred Stock and Warrants, and the Purchase Agreement,
the Registration Rights Agreement and the Statement of Designation for
the Series F Preferred shall be deemed appropriately modified to such
extent.
8. The parties desire to clarify Section 4(e) of each of the Statements of
Designation which provides that the failure to pay certain penalties
constitutes a Triggering Event. The parties intended that the
redemption obligations arising from such a Triggering event be in lieu
of, rather than in addition to, the penalties described in Section
4(e). The parties acknowledge and agree that a holder that elects to
require the Company to redeem Preferred Shares upon the occurrence of a
Triggering Event attributable to such failure to pay the penalties
described in Section 4(e) shall be deemed to have waived its right to
receive the penalties described in such Section.
9. Notwithstanding that the Purchase Agreement and the Registration Rights
Agreement were executed on behalf of First Capital Group of Texas II,
L.P. ("First Capital Group"), by First Capital Group Investment
Partners, L.P., its General Partner, by Jeffrey P. Blanchard, "General
Partner" of First Capital Group Management Company, "L.P."
("Management Company"), the parties acknowledge that they have been
advised that Management Company is a Texas limited liability company
(rather than a limited partnership as implied by the signature pages to
the Purchase Agreement and the Registration Rights Agreement), and that
Jeffrey P. Blanchard is an authorized officer of Management Company
(rather than a partner of Management Company). The parties acknowledge
and agree that any documents executed on behalf of First Capital Group
in connection with the private placement pursuant to the Purchase
Agreement are deemed modified accordingly as of their respective dates
of execution.
3
<PAGE>
10. The parties acknowledge that, to the extent the Purchase Agreement,
the Registration Rights Agreement or any of the Statements of
Designation are inconsistent with the terms of this Agreement, the
terms of this Agreement shall be deemed controlling and the other
documents shall be deemed appropriately modified. Except as modified
as provided herein, the Purchase Agreement, the Registration Rights
Agreement and the Statements of Designation shall remain in full force
and effect in accordance with their terms.
11. This Agreement sets forth the entire understanding between the parties
hereto concerning the subject matter contained herein. Provisions of
this Agreement may be amended or waived only by written instrument
executed by the party against whom enforcement is sought. This
Agreement shall be binding upon the parties and the respective
successors and assigns. The parties agree to execute such additional
documents and take such additional actions as may be reasonably
necessary to give effect to the purposes and intent of this Agreement.
This Agreement may be executed in one or more counterparts, any of
which shall be deemed to be an original, all of which taken together
shall constitute one and the same instrument.
[signatures on following page]
4
<PAGE>
IN WITNESS WHEREOF, each party has duly executed this Modification
Agreement as of the date first written above.
COMPANY PURCHASERS
- ------- ----------
DATA RACE, INC. SOVEREIGN PARTNERS L.P.
By: /s/ Gregory T. Skalla By: /s/ Stephen Hicks
---------------------------- -----------------------------------------
Gregory T. Skalla, Senior Vice Name: Stephen Hicks
President-Finance and Chief ------------------------------------
Financial Officer Title: President: General Partner
-----------------------------------
DOMINION CAPITAL FUND, LTD.
By: Inter Carribean Services (Bahamas) Ltd.
By: /s/ Carl O'Connell
/s/ Nina Ray
-----------------------------------------
Name: Carl O'Connell; Nina Ray
------------------------------------
Title: Director and Attorney-in-Fact
-----------------------------------
FIRST CAPITAL GROUP OF TEXAS II, L.P.
By: First Capital Group Investment Partners,
L.P., its General Partner
By: First Capital Group Management Company,
L.C., its General Partner
By: /s/ Jeffrey P. Blanchard
-----------------------------------------
Jeffrey P. Blanchard
Authorized Officer
5
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The 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 dated September 2, 1998 contains an explanatory paragraph that states
the Company has suffered recurring losses and 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
November 6, 1998
