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As filed with the Securities and Exchange Commission on January 28, 1999
Registration No. 333-_____________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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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)
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Texas 3661 74-2272363
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Classification Identification No.)
Code Number)
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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
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Approximate date of commencement of proposed
sale to the public: As soon as practicable after
this Registration Statement becomes effective.
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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: [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed Proposed
Maximum Maximum Amount of
Amount to be Offering Price Aggregate Registration
Registered Per Share(1) Offering Fee(1)
Price(1)
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<S> <C> <C> <C> <C>
Common Stock, no par value.. 3,688,778 $8.0625 $29,740,772.62 $8,268
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(1) Pursuant to Rule 457(c), the offering price and registration fee are
computed on the basis of the average of the high and low prices of the
common stock, as reported by the Nasdaq National Market on January 25,
1999.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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Subject to Completion
January 28, 1999
The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Up to 3,688,778 Shares
DATA RACE, INC.
Common Stock
Our common stock is traded on the Nasdaq National Market under the
symbol "RACE." On January 25, 1999, the closing price of our common stock was
$7 3/4.
These shares of common stock are being sold by the security holders listed
under the heading "Selling Shareholders." The selling shareholders previously
received the shares from us or will receive the shares from us by converting
previously issued preferred stock or exercising previously issued common stock
purchase warrants. We will not receive any of the proceeds from the sales of the
shares by the selling shareholders.
Investing in our common stock involves many risks. See "Risk Factors"
beginning on page 3.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of the prospectus. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is January __, 1999.
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TABLE OF CONTENTS
Page
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Where You Can Find More Information..........................................2
About DATA RACE, Inc.........................................................3
Risk Factors.................................................................3
Forward-Looking Statements..................................................13
Use of Proceeds.............................................................14
Selling Shareholders........................................................14
Plan of Distribution........................................................17
Legal Opinions..............................................................19
Experts.....................................................................19
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, and Chicago. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. Our SEC filings are also available to the public at the SEC's web site at
http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them which means that we can disclose important information to you by
referring you to those documents instead of having to repeat the information in
this prospectus. The information incorporated by reference is considered to be
part of this prospectus, and later information that we file with the SEC will
automatically update and supersede this information. We incorporate by reference
the documents listed below and any future filings made with the SEC under
Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until
the selling shareholders sell all the shares.
. Annual Report on Form 10-K for the fiscal year ended June 30, 1998;
. Quarterly Report on Form 10-Q for the quarter ended September 30, 1998;
. Current Report on Form 8-K filed August 4, 1998; and
. Registration Statement on Form 8-A filed with the SEC on October 5,
1992, which contains a description of the terms of the company's common
stock, as well as any amendment or report filed later for the purpose of
updating such description.
You can request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
DATA RACE, Inc.
Attn: Corporate Secretary
12400 Network Blvd.
San Antonio, Texas 78249
(210) 263-2000
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You should rely only on the information contained in this prospectus or any
supplement and in the documents incorporated by reference. We have not
authorized anyone else to provide you with different information. The selling
shareholders will not make an offer of these shares in any state where the offer
is not permitted. You should not assume that the information in this prospectus
or any supplement or in the documents incorporated by reference is accurate on
any date other than the date on the front of those documents.
This prospectus is part of a registration statement we filed with the SEC
(Registration No. 333-___________). More information about the shares sold by
the selling shareholders is contained in that registration statement and the
exhibits filed along with the registration statement. Because information about
contracts referred to in this prospectus is not always complete, you should read
the full contracts which are filed as exhibits to the registration statement.
You may read and copy the full registration statement and its exhibits at the
SEC's public reference rooms or their web site.
ABOUT DATA RACE, INC.
We design, manufacture and market a line of communications products for
remote access to the corporate environment. Our 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. We also design and manufacture advanced
network multiplexers which carry data, network, voice and fax traffic between a
company's multiple offices. We sell our products nationally through Inacom
Communications and Data General Corp., and through many regional resellers.
Our principal executive offices are located at 12400 Network Boulevard, San
Antonio, Texas 78249, and our telephone number is (210) 263-2000. You can access
our web site at http://www.datarace.com.
RISK FACTORS
An investment in the common stock involves a high degree of risk. You
should carefully consider the risks described below and the other information
contained in this prospectus before deciding to invest in our common stock. The
risks described below are not the only ones facing our company. Additional risks
not presently known to us or which we currently consider immaterial may also
adversely affect our company. If any of the following risks actually occur, our
business, financial condition and operating results could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you could lose a part or all of your investment.
Substantial Dependence on Be There! Products Whose Market Acceptance is Not
Proven
Our goal of returning to profitability and developing a more reliable
revenue base will depend on the success of our Be There! Remote Access System.
Since its release in early 1997, the Be There! product line has had very limited
success and revenue to date from the products has not been significant. The Be
There! system represents a new type of product for us which is significantly
different from the our network multiplexer products and custom modem products.
This new product
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line presents a unique set of risks and challenges for us. Our future success is
dependent on many factors, including our ability to do the following:
. penetrate our target markets and increase sales of the Be There!
products;
. timely and successfully develop and introduce new or follow-on
products;
. enhance the features and performance, including voice quality, in
order to achieve broad market acceptance of the Be There! products;
. continue to develop existing distribution channels and establish new
distribution channels;
. develop affiliations with leading market participants which facilitate
product development and distribution;
. market existing and new products through distributors, resellers and
others; and
. overcome potential competition.
In order to pursue our objectives in the remote access solutions market, we
have developed and continue to seek relationships with strategic partners who
can assist us with marketing, distribution and further development of the Be
There! product line, who can provide needed capital, and who can enhance the
value of our business and assets. We can not assure you that we will be able to
maintain existing relationships or develop new ones. The loss of these
relationships or the inability to forge a key relationship could materially
adversely affect us. We can not assure you that we will establish a market for
Be There! or establish our credibility in such market.
Recent Operating Losses and Expected Continued Losses
We have suffered substantial recurring losses, and we have not had
significant revenue to date from our Be There! products. It is possible that we
will never return to profitability or generate future revenue levels sufficient
to support operations. Our independent auditors have included an explanatory
paragraph in their report covering the June 30, 1998 financial statements which
expresses substantial doubt about our ability to continue as a going concern.
The explanatory paragraph notes that we have suffered recurring losses and
incurred negative cash flow from operations during fiscal 1998 and fiscal 1997.
Need for Additional Capital and No Assurance of Raising Additional Capital
Our ability to sustain operations, make future capital expenditures and
fund the development and marketing of new or enhanced products is highly
dependent on our ability to raise additional capital. We do not expect that our
limited existing cash will sustain the company until we achieve positive cash
flow and we do not expect to return to profitability so long as expenditures on
the Be There! products remain disproportionate to attendant Be There! revenues.
Even if our sales grow, we could require additional capital to hire additional
personnel and increase inventory levels. We will therefore likely require more
capital in the near future. We can not predict the timing and amount of our
future capital requirements. It is possible that sources of capital, such as
investors, lenders or strategic partners may perceive our recent history of
losses, current financial condition, or lack of our technology's acceptance as
too great a risk to bear. As a result, we may not be able to obtain additional
capital on favorable terms, if at all. If we can not obtain additional capital
when needed,
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we may be forced to agree to terms which are not attractive to the company or
our shareholders or we may be required to suspend some, or ultimately, all of
our operations.
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 listed. Our recurring losses have had a
negative effect on shareholders' equity, and we did not meet the Nasdaq National
Market net tangible assets requirement of $4 million on June 30 and September
30, 1998. In late September 1998, we received a notice of non-compliance from
Nasdaq. We appealed the determination and a hearing on our appeal was held in
mid-January 1999. We have not yet received the results of the hearing, and can
give no assurance as to the outcome. In addition, our stock price is volatile
and, during a six-week period in 1998, closed below the Nasdaq National Market
minimum requirement of $1.00 per share. We may not be able to sustain compliance
with the maintenance criteria of the Nasdaq National Market, the failure of
which could result in the delisting of our common stock from such market.
Termination of listing of the common stock would likely have a material adverse
effect on the market price and liquidity of the common stock, and on our 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, we would be liable for substantial monetary
penalties to the holders of the preferred stock in the event of such a
termination of listing. Our failure to pay such penalties could also result in
redemption of the preferred stock.
Potential Adverse Effects of Rapid Technological Changes
The market for our products is characterized by rapidly changing
technology, emerging industry standards, product proliferation and short product
life cycles. We believe that our future success will depend on our ability to
enhance our existing products and to develop and introduce new products, which
conform to or support emerging data communications standards, meet a wide range
of evolving user needs, and be accepted by the market. The introduction of new
or enhanced products requires us 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. We may not succeed in
developing and marketing such new products or that we will be able to respond
effectively to technological changes, emerging industry standards, or new
product introductions by others. In addition, our competitors may introduce
products or services incorporating technology as advanced or more advanced than
ours, making our products or technologies obsolete. 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, as we have experienced in the past, could adversely affect
our 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. It is possible that such rapid technological change will not
continue or that the telecommunications infrastructure will not have the
capacity to support such products. Any of these factors could adversely affect
the market for our products as well as our operating results.
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Teleworker Market May Not Develop as Expected
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. The actual rate of
growth and size of the market may not reach expected levels. In addition, our
teleworker products have not yet been accepted widely in the market and may
never be adequately accepted in the market, whether because of shortcomings with
our feature sets and performance or for other reasons. We are beginning to see
and expect to see a growing array of remote access solutions, some or many of
which may be competitive to our products. Our business will be adversely
affected if the teleworker market does not develop as we hope, or if we are not
able to penetrate this market.
Intensely Competitive Industry; Competitors Have Greater Resources
The communications industry is intensely competitive. We currently compete
principally in the remote access markets. Our existing and potential competitors
have far more extensive financial, engineering, product development,
manufacturing and marketing resources than we have. 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 much greater resources to the
development, promotion, and sale of their products and services than we can. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to address the
needs of our prospective customers. New competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Many of
these competitors have far greater brand recognition, which places us at a
competitive disadvantage. In addition, some competitors, including many foreign
competitors, have a lower cost structure that gives them a competitive advantage
on the basis of price. Our products and services compete on the basis of a
number of factors, including features and functions, modularity and
expandability, reliability, service and support, supplier credibility,
recommendations of the systems integrators, perceived cost savings and price.
Our teleworker products may compete in areas in which we do not have the
experience or resources to address. Competitors may introduce products or
services incorporating technology as advanced or more advanced than ours.
Changes in the communications environment may also render our competitors'
product solutions more attractive to the customer than ours. 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! In addition, we expect new competition to
arise as new technologies develop, such as Computer Telephony Integration, Voice
Over IP, and others. The competitive pressures we face could materially and
adversely affect our business, financial condition or operating results.
Difficulties in Marketing Through Indirect Sales Channels
We believe that the success of our Be There! products will depend, in large
part, on our ability to market through distributors, resellers, and other
strategic marketing partners. We have little experience marketing in these
channels. Independent distributors, resellers, and other strategic marketing
partners, including Inacom Communications and Data General Corp., are not
contractually committed to continue to purchase our products and therefore could
discontinue carrying our
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products at any time in favor of a competitor's products or for any other
reason. The loss of any of our major distributors or resellers, including Inacom
Communications and Data General Corp., would likely have a significant adverse
effect on our business. Our failure to successfully develop, manufacture, and
market products appropriate for such channels could also have a material adverse
effect on our business.
Dependence on Limited Number of Customers; Fluctuations in Period to Period
Operating Results
Although we have not yet recorded significant revenue from our teleworker
products, we are currently attempting to market our products to large
corporations, as well as to smaller businesses. Although we have not had much
success to date, if we do succeed in attracting large customers, our revenue
could fluctuate significantly. We have also recently announced orders from
Sabratek corporation, a manufacturer of medical systems for the alternate-site
health care market, and announced our expectation for additional orders over the
coming months. Sabratek is not obligated to purchase a minimum amount of
products. A reduction or delay in orders or a delay or default in payment by an
important customer, including Sabratek, or the loss of a major customer, could
materially and adversely affect our operating results. Other factors which could
cause operating results for a particular quarter or other period to vary
considerably include the following:
. the overall state of the communications products and services market;
. pricing and other competitive conditions;
. market acceptance of our products;
. the timing of the announcement and introduction of new products and
services by us and our competitors;
. variations in our product mix and component costs;
. the financial stability of our customers;
. the timing of our expenditures in anticipation of future sales;
. the timing of product development costs; and
. economic conditions generally.
We expect our operating results to continue to fluctuate from period to
period in the future as a result of the factors described above and other
factors, particularly until such time, if ever, that revenue from Be There!
sales increase substantially. Any of these factors could materially adversely
affect our operating results.
Dependence on Management and Other Key Employees
Our success is dependent upon our ability to retain and continue to attract
highly talented managerial and technical personnel. We are especially dependent
on our president and chief executive officer, our other senior officers, and our
teleworker products sales executives to increase revenue from Be There!
products, and on our key technical personnel to introduce new products and to
remain in the forefront of technological advances. All of our senior executives
and other employees are employed on an "at-will" basis. We do not have any
insurance on our employees other than the $1 million dollar key-man insurance
policy on
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Dr. W. B. Barker. Competition for qualified personnel is intense in our industry
and we may not be able to retain our key employees or attract and assimilate
other qualified personnel. The loss of key personnel could materially and
adversely affect our business.
Dependence on Third Party Suppliers
We manufacture our products using components or subassemblies bought from
third party suppliers. Some of these components, such as critical microchips,
are available only from a single supplier, and others are available only from a
limited number of suppliers. Much of our prior sales have been from products
containing one or more components which are available from single supply
sources. We do not have any guaranteed supply arrangements. In addition,
component supplies are affected by worldwide conditions in the semiconductor
market. If we could not obtain a sufficient supply of such components from
current sources, we could have trouble obtaining alternative sources or altering
product designs to use alternative components. We have experienced and may again
experience supply shortages which delay product shipments. We may also have
trouble controlling the quality and reliability of the components we use to
manufacture our products. The costs of components can also rise quickly and
without warning. The occurrence of any of these events could adversely affect
our business, customer relationships or operating results.
Dependence on Others for Manufacturing Services
We use third party manufacturers to assist us in assembling our products.
Because of this reliance on third party manufacturers, we can not always
exercise direct control over manufacturing quality and costs. We may also have
problems with production schedules of our products because of other demands
placed on the third party manufacturers. Delays in production or deficiencies in
quality could adversely affect our operating results and could damage customer
relationships. These factors could also result in significantly higher
manufacturing costs.
Difficulties in Managing Inventory
In the past we have substantially increased our inventory levels to meet
production requirements of existing or anticipated orders. Inventory levels have
also increased because 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 our liquidity or
increase the risk of inventory obsolescence, whether from cancellation of
orders, failure to receive anticipated orders or for other reasons. High levels
of inventory could also increase the risk of a decline in market value of such
inventory or the risk of inventory losses from theft, fire, or other similar
occurrences. Our business and financial condition could be materially adversely
affected if we do not effectively manage our purchasing activities and inventory
levels.
Reliance on Patents and Proprietary Technology
Our success depends in part on our technological expertise and proprietary
product designs. We rely on our trade secret protection efforts and, to a lesser
extent, on patents and copyrights to protect our proprietary technologies. These
steps may not be adequate to deter misappropriation or infringement of our
proprietary technologies. Competitors may also independently develop
technologies that are similar or superior to our technology. In addition, the
laws of some foreign countries do not protect proprietary rights to the same
extent as do the laws of the United States.
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Intellectual property laws of the United States and foreign countries may not be
adequate to protect our proprietary rights.
We expect that remote access technologies and know-how in general will
become increasingly valuable intellectual properties as competition intensifies.
We believe this increasing value may produce a competitive environment where
intellectual property disputes are likely to arise. Intellectual property
disputes may be initiated against us for tactical purposes to gain competitive
advantage or overcome competitive disadvantage, even if the merits of a specific
dispute are doubtful. In some cases, we grant or may grant licenses of our
intellectual property rights. We may be required to bring or defend against
litigation to enforce our patents, to protect our trademarks, trade secrets, and
other intellectual property rights, to defend against infringement claims, to
resolve disputes under technology license arrangements, and to determine the
scope and validity of our proprietary rights or those of others. See "Patent
Infringement Lawsuit" below. Any litigation could be costly and divert
management's attention, each of which could have a material adverse effect on
our business and financial condition. Our limited resources may limit our
ability to bring or defend against any such litigation. Adverse determinations
in litigation, including litigation we initiate, could result in the loss of our
proprietary rights, subject us to significant liabilities, require us to seek
licenses from third parties or prevent us from manufacturing or selling our
products. Any of these results could materially adversely affect our business,
financial condition and operating results.
We currently license some of the technologies which we use in our products.
We may not be able to continue to obtain such licenses on commercially
reasonable terms. In addition, infringement claims against our suppliers could
adversely affect our ability to purchase components from those suppliers.
Patent Infringement Lawsuit
On August 19, 1998, we sued Lucent Technologies, Inc. in United States
District Court in San Antonio, Texas. The suit alleges that Lucent is infringing
on our patent entitled "System and Method for Providing a Remote User with a
Virtual Presence to an Office." Although we believe our claims against Lucent
are valid and we intend to vigorously pursue such claims, we may not be able to
fully pursue the lawsuit or defend against possible counterclaims because of
limited resources, including our ability to pay legal expenses. In addition, the
lawsuit could adversely affect the validity or enforceability of our patents.
Litigation by its very nature is unpredictable. We may not prevail in the
lawsuit. Our failure to prevail in a significant manner may materially adversely
affect our financial condition and operations. Additional risks associated with
such litigation are also described in the risk factor above regarding
intellectual property rights.
Compliance with FCC and Other Regulatory Standards
Aspects of our products are regulated by the Federal Communications
Commission. Our products must typically be tested before they are sold. The
failure of our products to conform to FCC regulations or meet FCC testing
requirements could delay the introduction of our products into the market, and
could adversely affect our business. 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
adversely affect our operating results. Changes in such laws, policies, or
requirements could also affect the demand for our products or result in the need
to modify products, either of which could involve substantial costs or delays in
sales and adversely affect our operating results.
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We Could Be Required to Redeem the Outstanding Preferred Stock
A total of 2,500 shares of Series D, E and F Convertible Preferred Stock
are outstanding, with a total stated value of $2,500,000. The holders of the
outstanding preferred stock have the right to require us to redeem their shares
of preferred stock for cash, at 120% of stated value, if any of the following
happens:
. our board agrees to sell the company or the Be There! product line to
another company, or our board consents to the tender offer of our
shares by another company;
. this registration statement is not declared effective by the SEC
before May 16, 1999;
. this registration statement can not be used to permit the sale of the
shares issuable upon conversion of the preferred stock for 30
consecutive trading days;
. we voluntarily terminate the listing of our shares on the Nasdaq
National Market;
. we fail to deliver shares of common stock upon conversion of the
preferred stock; or
. we file for bankruptcy.
In addition, if our common stock is delisted from the Nasdaq National
Market, and we fail to pay required penalties to the holders of the preferred
stock, then the holders of the preferred stock can require us to redeem their
shares of preferred stock. If we are required to redeem the preferred stock for
any reason, it is not likely that we would have sufficient cash available to
effect the redemption. In that case we would be forced to attempt to find other
sources of financing. If we could find such financing at all, it is not likely
that that such financing would be on favorable terms. The inability to find
financing or the terms of such unfavorable financing and our resulting lack of
liquidity could force us to close portions or all of our operations.
Potential Drop in Stock Price Due to Floating Conversion Feature of Series D
Convertible Preferred Stock
The Series D Convertible Preferred Stock is convertible into common stock
at a conversion price equal to a discount from the market price on the date of
conversion. On March 16, 1999, a conversion price floor and ceiling will be
established based on average market prices of the common stock during specified
periods of time prior to March 16, 1999. The conversion price is capped at $3.00
per share. Based on this conversion price formula, as the market price of the
common stock declines, the Series D Convertible Preferred Stock will be
convertible into a proportionately greater number of shares of common stock,
until the conversion price floor is reached. The number of shares we issue in
payment of the premium on the preferred stock will also increase as the market
price of the common stock declines. These increases in the number of shares
issuable upon conversion of the Series D Convertible Preferred Stock and upon
payment of the premium on the preferred stock could result in a meaningful
dilution to other holders of common stock and adversely affect the market price
of the common stock. In addition, the holders of the Series D Convertible
Preferred Stock could convert and sell part of their shares, which could drive
the stock price down even further and permit them to convert additional shares
at a lower price.
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Future Sales of Shares Could be Dilutive and Impair Ability to Raise Capital
This prospectus covers the potential sale from time to time of up to
3,688,778 shares of common stock. At January 20, 1999, we had reserved
approximately 1,284,899 shares of common stock for issuance upon conversion of
the outstanding Series E Convertible Preferred Stock and upon exercise of other
outstanding warrants. Those reserved shares are covered by other registration
statements and can be sold from time to time after issuance. At January 20,
1999, we had also reserved approximately 2,435,768 shares of common stock for
issuance under currently approved employee benefit plans, including 1,531,260
shares subject to outstanding options. 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 and impair our ability to
raise further capital. In addition, several persons have rights of first refusal
on additional financings. The existence of such rights could also adversely
affect our ability to complete future financings.
Possible Negative Effects of Anti-Takeover Measures
We have adopted a shareholder rights plan in an effort to guard against
abusive tactics which could deprive our shareholders of the opportunity to
realize the long-term value of their investment. In addition, certain provisions
of our articles of incorporation may have the effect of discouraging unsolicited
proposals to acquire control over us. Our board of directors can, without
obtaining shareholder approval, issue shares of preferred stock 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 did own 20% or more of the corporation's
voting stock. The terms appearing in quotations are defined in the Texas
Business Combination Law.
Price Volatility
The market price of our common stock has been, and will likely continue to
be, highly volatile. This is caused in part by our relatively small market float
(the aggregate market value of our publicly traded shares). Events or
circumstances may cause a much greater percentage change in the market price of
our shares than the market price of a company with a large market float. Many of
the events or circumstances are beyond our control. Factors which may cause the
market price of our stock to fluctuate substantially include the following:
11
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. quarterly fluctuations in our operating results;
. changes in and terminations of our distributor or reseller
relationships;
. adverse circumstances affecting the introduction or market acceptance
of new products which we may offer;
. changes in or cancellations under existing contracts;
. loss of key personnel;
. changes in the market success of other companies' products which
utilize or incorporate our products;
. announcements of new products by our competitors;
. changes in, or failure to meet, financial estimates by securities
analysts;
. changes in accounting principles;
. sales by our existing shareholders, including sales of the shares
covered by this prospectus; and
. short selling.
In addition, stock prices for many technology companies fluctuate widely
for other reasons unrelated to our operating results. For example, changes in
the general market perception of the high technology industry can affect our
stock price. These fluctuations, as well as general economic, political and
market conditions, such as recessions or military conflicts, may adversely
affect the market price of our common stock. Changes in the market price of our
common stock could affect our ability to successfully attract and retain
qualified personnel, develop distributor, customer or strategic partner
relationships, 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, having a material
adverse effect on us.
Year 2000 Risks
As is true for most companies, the year 2000 issue creates a risk for us.
If computer systems do not correctly recognize date information when the year
changes to 2000, there could be an adverse impact on our operations. The risk
for us exists primarily in the following areas:
. disruption of computer systems used by us to run our business
including information systems, equipment and facilities;
. disruption of computer systems used by our suppliers, including
suppliers of component parts and manufacturing services, as well as
suppliers of our necessary energy, telecommunications and transportation
needs;
. potential warranty or other claims from our customers based on year
2000 problems with our products; and
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. potential for reduced spending by other companies on our products as a
result of significant information systems spending on year 2000 compliance.
We are continuing to evaluate and mitigate our exposure in these areas
where appropriate and expect to establish contingency plans for identifiable
risks by June 30, 1999. We can not be certain that unexpected year 2000
compliance problems of our products, or our computer systems or of our vendors,
customers and service providers, will not materially and adversely affect our
business, financial condition or operating results.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference into this
prospectus contain forward-looking statements that are based on current
expectations, estimates and projections about our industry, management's
beliefs, and assumptions made by management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and variations
of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict; therefore, actual results may differ materially from
those expressed or forecasted in any forward-looking statements. Such risks and
uncertainties include those noted in "Risk Factors" above and in the documents
incorporated by reference. We undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
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USE OF PROCEEDS
We will not receive any proceeds from the sale by the selling shareholders
of the shares of common stock covered by this prospectus.
SELLING SHAREHOLDERS
The following table lists the names of the selling shareholders, the number
of shares of common stock beneficially owned by each selling shareholder on
January 22, 1999, and the number of shares which may be offered for sale by this
prospectus. Each selling shareholder provided to us the information regarding
his or its share ownership. Because the selling shareholders may offer all, some
or none of their common stock, we can not provide a definitive estimate as to
the number of shares that will be held by the selling shareholders after the
offering and we prepared the following table based on the assumption that the
selling shareholders sell all of the shares of common stock covered by this
prospectus. The number of shares shown in the following table as being offered
by the selling shareholders upon conversion of their preferred stock or exercise
of their warrants does not include such presently indeterminate number of shares
of common stock as may be issuable upon conversion and exercise of those
securities pursuant to applicable antidilution provisions.
<TABLE>
<CAPTION>
Shares 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)(12) ................. 373,352 595,685 -- --
Dominion Capital Fund, Ltd.(3)(12).............. 186,396 297,396 -- --
First Capital Group of Texas II, L.P.(4)(13) ... 1,249,829 468,494 890,625 5.0%
Steven Nehorayoff(5) ........................... 578,306 148,683 429,623 2.5%
Michael S. Rosenblum(6) ........................ 58,368 22,968 35,400 *
Liviakis Financial Communications, Inc.(7) ..... 2,751,453 1,177,778 1,573,675 9.0%
Robert S. London(8) ............................ 1,126,910 711,110 415,800 2.4%
Timothy D. Wilson, Sr. (9) ..................... 173,146 88,888 84,258 *
Anthony Altavilla (10) ......................... 88,888 88,888 0 0
Dr. W. B. Barker (11) .......................... 505,815 88,888 416,371 2.4%
</TABLE>
- --------------------
*Less than 1%
(1) Assumes all of the shares covered by this prospectus are sold.
(2) On December 17, 1998, the selling shareholder bought 667 shares of Series D
Convertible Preferred Stock and Class A Warrants for 151,019 shares of
common stock as part of a second closing under a purchase agreement dated
July 24, 1998. This prospectus covers the resale of the shares of common
stock issuable upon conversion and exercise of those securities. The number
of shares shown as beneficially owned assumes (i) the conversion on
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January 22, 1999, of the 667 shares of Series D Convertible Preferred Stock
at the maximum conversion price of $3.00, into 222,333 shares of common
stock (exclusive of any shares in payment of the premium on the preferred
stock) and (ii) the exercise of Class A Warrants for 151,019 shares. As
described in footnote 12 below, the actual number of shares of common stock
issuable upon conversion of the Series D Convertible Preferred Stock
depends upon the average closing bid price of the common stock on the date
of conversion, subject to the maximum and minimum conversion prices which
are set on March 17, 1999. The number of shares being offered has been
determined by agreement and includes 200% of the number of shares of common
stock issuable upon conversion of the Series D Convertible Preferred Stock
at the maximum conversion price of $3.00.
(3) On December 17, 1998, the selling shareholder bought 333 shares of Series D
Convertible Preferred Stock and Class A Warrants for 75,396 shares of
common stock as part of the second closing under the purchase agreement
dated July 24, 1998. This prospectus covers the resale of the shares of
common stock issuable upon conversion and exercise of those securities. The
number of shares shown as beneficially owned assumes (i) the conversion on
January 22, 1999, of the 333 shares of Series D Convertible Preferred Stock
at the maximum conversion price of $3.00, into 111,000 shares of common
stock (exclusive of any shares in payment of the premium on the preferred
stock) and (ii) the exercise of Class A Warrants for 75,396 shares. As
described in footnote 12 below, the actual number of shares of common stock
issuable upon conversion of the Series D Convertible Preferred Stock
depends upon the average closing bid price of the common stock on the date
of conversion, subject to the maximum and minimum conversion prices which
are set on March 17, 1999. The number of shares being offered has been
determined by agreement and includes 200% of the number of shares of common
stock issuable upon conversion of the Series D Convertible Preferred Stock
at the maximum conversion price of $3.00.
(4) On January 22, 1999, the selling shareholder bought 750 shares of Series F
Convertible Preferred Stock and Class B Warrants for 140,625 shares of
common stock as part of the third closing under the purchase agreement
dated July 24, 1998. This prospectus covers the resale of the shares of
common stock issuable upon conversion and exercise of those securities. The
number of shares shown as beneficially owned assumes (i) the conversion of
750 shares of Series F Preferred Stock, at the conversion price of
$3.43125, into 218,579 shares of common stock (exclusive of any shares in
payment of the premium on the preferred stock) and (ii) the exercise of
Class B Warrants for 140,625 shares. The number of shares shown as
beneficially owned also assumes (i) the conversion of 750 shares of Series
E Convertible Preferred Stock issued on July 24, 1998, in the first closing
under the purchase agreement, at the conversion price of $1.00, into
750,000 shares of common stock (exclusive of any shares in payment of the
premium on the preferred stock) and (ii) the exercise of Class B Warrants
issued in the first closing under the purchase agreement, for 140,625
shares of common stock. The securities issued in the first and third
closings under the purchase agreement are not convertible or exercisable,
except in limited circumstances, until the first anniversary of their dates
of issuance. The number of shares shown as beneficially owned 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 Mr. Blanchard's
shares. Mr. Blanchard is the chairman of our board of directors. The number
of shares being offered has been determined by agreement and
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<PAGE>
includes 150% of the number of shares of common stock issuable upon
conversion of the Series F Convertible Preferred Stock at conversion price
of $3.43125.
(5) On December 17, 1998, as compensation for services in connection with the
purchase agreement, the selling shareholder received Class A Warrants to
purchase 148,683 shares of common stock. This prospectus covers the resale
of the shares of common stock issuable upon exercise of those warrants. The
number of shares shown as beneficially owned also includes 279,623 shares
of common stock issuable upon exercise of additional warrants.
(6) On December 17, 1998, as compensation for services in connection with the
purchase agreement, the selling shareholder received Class A Warrants to
purchase 22,968 shares of common stock. This prospectus covers the resale
of the shares of common stock issuable upon exercise of those warrants. The
number of shares shown as beneficially owned also includes 35,400 shares of
common stock issuable upon exercise of the warrants previously issued.
(7) On November 19, 1998, the selling shareholder bought 488,889 shares of
common stock and warrants for 488,889 shares of common stock. In addition,
the selling shareholder received 200,000 shares of common stock in
connection with the extension of its consulting agreement with us. This
prospectus covers the resale of those shares of common stock. Unless we
consent, however, 977,778 of such shares may not be sold prior to November
19, 1999, and 200,000 of such shares (together with 1,406,475 shares of
common stock previously issued to the selling shareholder) may not be sold
prior to January 1, 2000. The number of shares shown as beneficially owned
includes the 488,889 shares issuable upon exercise of the purchased
warrants. The number of shares shown as beneficially owned does not include
61,400 shares of common stock beneficially owned by John M. Liviakis, an
officer, director and the principal owner of the selling shareholder.
(8) On November 19, 1998, the selling shareholder bought 355,555 shares of
common stock and warrants for 355,555 shares of common stock. This
prospectus covers the resale of those shares of common stock. Unless we
consent, however, such shares may not be sold prior to November 19, 1999.
The number of shares shown as beneficially owned includes the 355,555
shares issuable upon exercise of the purchased warrants.
(9) On November 19, 1998, the selling shareholder bought 44,444 shares of
common stock and warrants for 44,444 shares of common stock. This
prospectus covers the resale of those shares of common stock. Unless we
consent, however, such shares may not be sold prior to November 19, 1999.
The number of shares shown as beneficially owned includes the 44,444 shares
issuable upon exercise of the purchased warrants.
(10) On November 19, 1998, the selling shareholder bought 44,444 shares of
common stock and warrants for 44,444 shares of common stock. This
prospectus covers the resale of those shares of common stock. Unless we
consent however, such shares may not be sold prior to November 19, 1999.
The number of shares shown as beneficially owned includes the 44,444 shares
issuable upon exercise of the purchased warrants.
(11) On January 4, 1999, the selling shareholder bought 44,444 shares of common
stock and warrants for 44,444 shares of common stock. This prospectus
covers the resale of those shares of common stock. Unless we consent,
however, such shares may not be sold prior to November 19, 1999. The number
of shares shown as beneficially owned includes the 44,444
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<PAGE>
shares of common stock issuable upon exercise of the purchased warrants and
380,250 shares of common stock issuable upon exercise of outstanding
options. The selling shareholder is our President and Chief Executive
Officer.
(12) The Series D Convertible Preferred Stock is convertible into common stock
at the option of the holder beginning March 17, 1999, 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. The conversion price is subject to a minimum conversion
price equal to the trailing 15-day average closing bid price of the common
stock on March 17, 1999 and is subject to the maximum conversion price
equal to the lesser of $3.00 or the trailing five-day average closing bid
price of the common stock on March 17, 1999. The number of shares of common
stock issuable upon conversion of one share of Series D Convertible
Preferred Stock is computed by dividing the share's stated value of $1,000
by the applicable conversion price, plus, in the event we elect 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. For a
complete description of the rights, preferences and restrictions of the
Series D Convertible Preferred Stock, see the Statement of Designation,
Preferences and Rights of Series D Convertible Preferred Stock filed as an
exhibit to our Current Report on Form 8-K filed on August 4, 1998.
(13) The Series F Convertible Preferred Stock is convertible into common stock
at the option of the holder beginning January 22, 2000, subject to
acceleration in certain events, at a conversion price of $3.43125. The
conversion price was determined pursuant to the purchase agreement dated
July 24, 1998, and equals the trailing five-day average closing bid price
on January 7, 1999, the date we issued the notice under the purchase
agreement to call the additional investment. The number of shares of common
stock issuable upon conversion of one share of Series F Convertible
Preferred Stock is computed by dividing the share's stated value of $1,000
by the applicable conversion price, plus, in the event we elect 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. For a
complete description of the rights, preferences and restrictions of the
Series F Convertible Preferred Stock, see the Statement of Designation,
Preferences and Rights of the Series F Convertible Preferred Stock, filed
as an exhibit to this registration statement.
PLAN OF DISTRIBUTION
The shares of common stock 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 of common stock 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 of common stock may be effected by one
or more of the following methods:
. ordinary brokers' transactions, which may include long or short sales;
17
<PAGE>
. 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;
. purchases by brokers, dealers or underwriters as principals and resale by
such purchasers for their own accounts pursuant to this prospectus;
. "at the market" to or through market makers or into an existing market for
the common stock;
. in other ways not involving market makers or established trading markets,
including direct sales to purchasers or sales effected through agents;
. through transactions in options, swaps or other derivatives (whether
exchange-listed or otherwise); or
. 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 of common stock,
which shares may be resold thereafter pursuant to this prospectus. Shares of
common stock to be 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 us involving the preferred stock or warrants,
including, without limitation, issuance of shares of common stock in exchange
for shares of preferred stock or warrants and issuance of shares of common stock
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 of common stock 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 of common stock, 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 of common stock 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 we nor the selling shareholders can presently estimate the amount of
such compensation. We know 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 of common stock.
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
18
<PAGE>
position in the underwriters' account. These transactions, if commenced, may be
discontinued at any time.
To the extent required, we 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 of common stock
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.
We will not receive any of the proceeds from the sale of the shares of
common stock offered hereby. We will pay substantially all of the expenses
incident to this offering of the shares of common stock 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 $70,000. We have agreed to indemnify the selling shareholders and
certain related persons against certain liabilities, including certain
liabilities under the Securities Act.
In order to comply with certain states' securities laws, if applicable, the
shares of common stock 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
Our outside law firm, Akin, Gump, Strauss, Hauer, & Feld, L.L.P., San
Antonio, Texas, has issued a legal opinion regarding the legality of the shares.
EXPERTS
Our financial statements 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 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 LLP contains an explanatory paragraph that states that
we have suffered recurring losses and incurred negative cash flow from
operations, which conditions raise substantial doubt about our ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses (other than underwriting discounts and commissions) in
connection with the issuance and distribution of the common stock registered
hereby are as follows:
SEC registration fee.................................................... $8,268
Nasdaq Listing of Additional Shares filing fee.......................... 35,000
Legal fees and expenses................................................. 20,000*
Accounting fees and expenses............................................ 2,500*
Miscellaneous .......................................................... 4,232*
------
Total..........................................................$70,000*
=======
- ---------------
* 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 for: (i) 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.
We amended our Articles of Incorporation and added Article Ten adopting
such limitations on a director's liability. Our 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 our 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.
20
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We have obtained an insurance policy which 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.
21
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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 Articles of Amendment to the Articles of Incorporation of the Company,
filed January 21, 1999. (e)
3.8 Statement of Designation, Preferences and Rights of Series F
Convertible Preferred Stock. (e)
3.9 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)
5. Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (e)
23.1 Consent of KPMG LLP. (e)
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
opinion filed as Exhibit 5)
24. Power of Attorney (included as part of signature page of this
Registration Statement).
- --------------------------------
(a) Filed as an exhibit to Form S-1 Registration Statement No. 33-51170,
effective October 7, 1992.
(b) Filed as an exhibit to 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 herewith.
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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
23
<PAGE>
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such new securities at that time shall be deemed to be the
initial bona fide offering thereof.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Antonio, State of Texas, on January 26, 1999.
DATA RACE, INC.
By: /s/ Dr. W. B. Barker
----------------------------------
Dr. W. B. Barker
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and
officers of DATA RACE, Inc., hereby constitute and appoint Dr. W. B. Barker and
Gregory T. Skalla, and each of them, his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution, for him and his name
place and stead, in any and all capacities, to execute any and all amendments
(including post-effective amendments) to this Registration Statement, and any
and all Registration Statements filed pursuant to Rule 462 or Rule 429 under the
Securities Act of 1933, as amended, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated below.
25
<PAGE>
Name Title Date
---- ----- ----
/s/ Dr. W. B. Barker President, Chief Executive January 26, 1999
- ----------------------------- Officer and Director
Dr. W. B. Barker
/s/ Gregory T. Skalla Vice President-Finance, Chief January 28, 1999
- ----------------------------- Financial Officer, Treasurer
Gregory T. Skalla and Secretary (Principal Financial
and Accounting Officer)
/s/ Jeffrey P. Blanchard Chairman of the Board of January 25, 1999
- ----------------------------- Directors
Jeffrey P. Blanchard
/s/ Mathew A. Kenny Director January 27, 1999
- -----------------------------
Matthew A. Kenny
/s/ George R. Grumbles Director January 26, 1999
- -----------------------------
George R. Grumbles
/s/ Dwight E. Lee Director January 25, 1999
- -----------------------------
Dwight E. Lee
/s/ Edward A. Masi Director January 26, 1999
- -----------------------------
Edward A. Masi
26
<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 Articles of Amendment to the Articles of Incorporation of the Company,
filed January 21, 1999. (e)
3.8 Statement of Designation, Preferences and Rights of Series F Convertible
Preferred Stock. (e)
3.9 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)
5. Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (e)
23.1 Consent of KPMG LLP. (e)
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in opinion
filed as Exhibit 5)
24. Power of Attorney (included as part of signature page of this Registration
Statement).
- --------------------------------
(a) Filed as an exhibit to Form S-1 Registration Statement No. 33-51170,
effective October 7, 1992.
(b) Filed as an exhibit to 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 herewith.
27
<PAGE>
EXHIBIT 3.7
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
OF DATA RACE, INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following articles of
amendment to its articles of incorporation:
ARTICLE ONE
The name of the corporation is DATA RACE, INC.
ARTICLE TWO
The following amendment to the articles of incorporation, increasing the
number of shares of Common Stock that the corporation is authorized to issue,
was adopted by the shareholders of the corporation on January 15, 1999. The
amendment alters or changes Article Four, Section 4.1 of the articles of
incorporation and the full text of such section is as follows:
ARTICLE FOUR
4.1 General. The aggregate number of shares which the Corporation has the
-------
authority to issue is Thirty Nine Million Five Hundred Thousand
(39,500,000), divided into: one class of Thirty Seven Million Five
Hundred Thousand (37,500,000) shares of Common Stock, no par value,
and one class of Two Million (2,000,000) shares of Preferred Stock, no
par value, which may be divided into and issued in multiple series."
ARTICLE THREE
The number of shares of Common Stock of the corporation outstanding at the
time of such adoption was 16,730,444; and the number of shares of Common Stock
entitled to vote thereon was 16,614,079.
ARTICLE FOUR
The number of shares of Common Stock voted for such amendment was
14,427,512; and the number of shares of Common Stock voted against such
amendment was 318,590.
Dated January 20, 1999.
DATA RACE, INC.
By: /s/ GREGORY T. SKALLA
--------------------------------------
Gregory T. Skalla
Senior Vice President - Finance
Chief Financial Officer
<PAGE>
EXHIBIT 3.8
STATEMENT OF DESIGNATION,
PREFERENCES AND RIGHTS
of
SERIES F CONVERTIBLE PREFERRED STOCK
of
DATA RACE, INC.
Pursuant to Article 2.13 of the
Texas Business Corporation Act
Data Race, Inc., a corporation organized and existing under the Texas
Business Corporation Act (the "Company"), does hereby certify that the following
resolutions were adopted by the Board of Directors of the Company on July 20,
1998 pursuant to authority of the Board of Directors as required by Article 2.13
of the Texas Business Corporation Act.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Company (the "Board of Directors" or the
"Board") in accordance with the provisions of its Articles of
Incorporation, the Board of Directors hereby authorizes a series of the
Company's previously authorized preferred stock, no par value (the
"Preferred Stock"), and hereby states the designation and number of shares,
and fixes the relative rights, preferences, privileges, powers and
restrictions thereof as follows:
Series F Convertible Preferred Stock:
1. Designation, Amount and Dividends. The designation of this series,
---------------------------------
which consists of 750 shares of Preferred Stock, is the Series F
Convertible Preferred Stock (the "Preferred Shares") and the stated value
shall be One Thousand Dollars ($1,000.00) per share (the "Stated Value").
The Preferred Shares shall not bear any dividends.
2. Holder's Conversion of Preferred Shares. A holder of Preferred
---------------------------------------
Shares shall have the right, at such holder's option, to convert the
Preferred Shares into shares of the Company's common stock, no par value
per share (the "Common Stock"), on the following terms and conditions:
a. Conversion Right. Subject to the provisions of Section 11 below, at
----------------
any time or times on or after the earliest of the first anniversary of the
Issuance Date (as defined below), the Mandatory Conversion Date (as defined
below) or the occurrence of a
<PAGE>
Triggering Event (as defined below), any holder of Preferred Shares shall
be entitled to convert any whole number of Preferred Shares into fully paid
and nonassessable shares (rounded to the nearest whole share in accordance
with Section 2(i) below) of Common Stock, at the Conversion Rate (as
defined below); provided, however, that in no event shall any holder be
entitled to convert Preferred Shares in excess of that number of Preferred
Shares which, upon giving effect to such conversion, would cause the
aggregate number of shares of Common Stock beneficially owned by the holder
and its affiliates to exceed 4.99% of the outstanding shares of the Common
Stock following such conversion. For purposes of the foregoing proviso, the
aggregate number of shares of Common Stock beneficially owned by the holder
and its affiliates shall include the number of shares of Common Stock
issuable upon conversion of the Preferred Shares with respect to which the
determination of such proviso is being made, but shall exclude the number
of shares of Common Stock which would be issuable upon (i) conversion of
the remaining, nonconverted Preferred Shares beneficially owned by the
holder and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
(including, without limitation, any warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by the holder and its affiliates. Except as set forth in
the preceding sentence, for purposes of this paragraph, beneficial
ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. Each holder may waive the
foregoing limitation with respect to its conversions by written notice to
the Company upon not less than 61 days prior notice (with such waiver
taking effect only upon the expiration of such 61 day notice period), and
such limitation shall not apply to conversions as of the Mandatory
Conversion Date.
b. Conversion Rate. Subject to the other provisions hereof, each of
---------------
the Preferred Shares shall be convertible, at the option of the holder,
into that number of shares of fully paid and nonassessable shares of Common
Stock which is to be derived from dividing the Stated Value by the
Conversion Price (the "Conversion Rate).
For purposes of this Statement of Designation, the following terms shall
have the following meanings:
The "Closing Bid Price" shall mean, for any security as of any date, the
last closing bid price for such security on the Nasdaq National Market as
reported by Bloomberg Financial Markets ("Bloomberg"), or, if the Nasdaq
National Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing bid price of such security in
the over-the-counter market on the electronic bulletin board for such security
as reported by Bloomberg, or, if no closing bid price is reported for such
security by Bloomberg, the last closing trade price of such security as reported
by Bloomberg, or, if no last closing trade price is reported for such security
by Bloomberg, the average of the bid prices of any market makers for such
security as reported in the "pink sheets" by the National Quotation Bureau, Inc.
If the Closing Bid Price cannot be calculated for such security on such date on
any of the foregoing bases, the Closing Bid Price of such security on such date
shall be the fair market value as mutually determined by the Company and the
holders of a majority of the outstanding Preferred Shares. If the Company and
the holders of Preferred Shares
<PAGE>
are unable to agree upon the fair market value of the Common Stock, then such
dispute shall be resolved pursuant to Section 2(g)(iii) below with the term
"Closing Bid Price" being substituted for the term "Market Price". To the extent
required hereunder, all such determinations of the Closing Bid Price shall be
appropriately adjusted for any stock dividend, stock split or other similar
transaction.
"Conversion Price" means, as of any Conversion Date (as defined below) or
other date of determination, the Fixed Conversion Price.
"Fixed Conversion Price" means $3.4313, subject to adjustment as provided
herein.
Issuance Date" shall mean, with respect to each Preferred Share, the date
of issuance of the applicable Preferred Share.
"Market Price" shall mean, with respect to any security for any date, the
arithmetic average of the Closing Bid Price for such security on each of the
five consecutive trading days immediately preceding such date.
c. Premium. The Preferred Shares shall bear a non-compounding premium at
-------
the rate of eight (8%) percent per annum. Accrual of such premium shall commence
on the Issuance Date. The premium on each Preferred Share shall be payable by
the Company upon conversion of the Preferred Share, at the Company's option, in
cash or, subject to the Exchange Cap as provided in Section 11, in shares of
Common Stock (valued at the Market Price on the Conversion Date) which have been
previously registered by the Company for resale by the holder of the Preferred
Shares. The premium on each Preferred Share shall be payable solely in cash by
the Company upon redemption thereof or liquidation.
d. Adjustment to Conversion Price -- Dilution and Other Events. In order to
-----------------------------------------------------------
prevent dilution of the rights granted under this Statement of Designation, the
Conversion Price will be subject to adjustment from time to time as provided in
this Section 2(d).
(i) Adjustment of Fixed Conversion Price Upon Issuance of Common Stock.
------------------------------------------------------------------
If and whenever on or after the date of issuance of the Preferred Shares, the
Company issues or sells, or is deemed to have issued or sold, any shares of
Common Stock (other than shares of Common Stock deemed to have been issued by
the Company in connection with Approved Issuances (as defined below)) for a
consideration per share less than the Market Price in effect immediately prior
to such time (the "Applicable Price"), then immediately after such issue or
sale, the Fixed Conversion Price shall be reduced to an amount equal to the
product of (x) the Fixed Conversion Price in effect immediately prior to such
issue or sale and (y) the quotient determined by dividing (1) the sum of (I) the
product of the Applicable Price and the number of shares of Common Stock Deemed
Outstanding (as defined below) immediately prior to such issue or sale, and (II)
the consideration, if any, received by the Company upon such issue or sale, by
(2) the product of (I) the Applicable Price and (II) the number of shares of
Common Stock Deemed Outstanding immediately after such issue or sale. For
purposes of determining the adjusted Fixed Conversion Price under this Section
2(d)(i), the following shall be applicable:
<PAGE>
(A) Issuance of Options. If the Company in any manner grants any rights or
-------------------
options to subscribe for or to purchase Common Stock (other than in connection
with an Approved Issuance or upon conversion of the Preferred Shares) or any
stock or other securities convertible into or exchangeable for Common Stock
(such rights or options being herein called "Options" and such convertible or
exchangeable stock or securities being herein called "Convertible Securities")
and the price per share for which Common Stock is issuable upon the exercise of
such Options or upon conversion or exchange of such Convertible Securities is
less than the Applicable Price, then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities issuable
upon the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Company for such price per share. For purposes of
this Section 2(d)(i)(A), the "price per share for which Common Stock is issuable
upon exercise of such Options or upon conversion or exchange of such Convertible
Securities" is determined by dividing (I) the total amount, if any, received or
receivable by the Company as consideration for the granting of such Options,
plus the minimum aggregate amount of additional consideration payable to the
Company upon the exercise of all such Options, plus in the case of such Options
which relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the issuance or
sale of such Convertible Securities and the conversion or exchange thereof, by
(II) the total maximum number of shares of Common Stock issuable upon exercise
of such Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options. No adjustment of the
Fixed Conversion Price shall be made upon the actual issuance of such Common
Stock or of such Convertible Securities upon the exercise of such Options or
upon the actual issuance of such Common Stock upon conversion or exchange of
such Convertible Securities.
(B) Issuance of Convertible Securities. If the Company in any manner issues
----------------------------------
or sells any Convertible Securities and the price per share for which Common
Stock is issuable upon such conversion or exchange is less than the Applicable
Price, then the maximum number of shares of Common Stock issuable upon
conversion or exchange of such Convertible Securities shall be deemed to be
outstanding and to have been issued and sold by the Company for such price per
share. For the purposes of this Section 2(d)(i)(B), the "price per share for
which Common Stock is issuable upon such conversion or exchange" is determined
by dividing (I) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (II) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities. No adjustment of the Fixed Conversion Price shall
be made upon the actual issue of such Common Stock upon conversion or exchange
of such Convertible Securities, and if any such issue or sale of such
Convertible Securities is made upon exercise of any Options for which adjustment
of the Fixed Conversion Price had been or are to be made pursuant to other
provisions of this Section 2(d)(i), no further adjustment of the Fixed
Conversion Price shall be made by reason of such issue or sale.
<PAGE>
(C) Change in Option Price or Rate of Conversion. If the purchase price
--------------------------------------------
provided for in any Options, the additional consideration, if any, payable upon
the issue, conversion or exchange of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exchangeable for Common
Stock change at any time, the Fixed Conversion Price in effect at the time of
such change shall be readjusted to the Fixed Conversion Price which would have
been in effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration
or changed conversion rate, as the case may be, at the time initially granted,
issued or sold; provided that no adjustment shall be made if such adjustment
would result in an increase of the Fixed Conversion Price then in effect.
(D) Certain Definitions. For purposes of determining the adjusted Fixed
-------------------
Conversion Price under this Section 2(d)(i), the following terms have meanings
set forth below:
(I) "Approved Issuances" shall mean (i) a loan from a commercial
bank, (ii) any transaction involving the Company's issuances of securities (A)
as consideration in a merger or consolidation or (B) as consideration for the
acquisition of a business, product or license or other assets by the Company,
(iii) the issuance of Common Stock in a firm commitment, underwritten public
offering, (iv) the issuance of securities upon exercise or conversion of the
Company's options, warrants or other convertible securities outstanding as of
the date hereof, (v) the grant of additional options or warrants, or the
issuance of additional securities, under any Company stock option plan,
restricted stock plan, stock purchase plan or other plan or written compensation
contract for the benefit of the Company's employees, consultants or directors,
(vi) the issuance of securities pursuant to the Rights Agreement, dated
September 15, 1997, between the Company and ChaseMellon Shareholder Services,
L.L.C., as amended from time to time in accordance with its terms (the "Rights
Agreement"), and (vii) the issuance of securities pursuant to the Purchase
Agreement, or in connection with any of the transactions related thereto.
(II) "Common Stock Deemed Outstanding" means, at any given time, the
number of shares of Common Stock actually outstanding at such time, plus the
number of shares of Common Stock deemed to be outstanding pursuant to Sections
2(d)(i)(A) and 2(d)(i)(B) hereof regardless of whether the Options or
Convertible Securities are actually exercisable at such time, but excluding any
shares of Common Stock issuable upon conversion of the Preferred Shares.
(E) Treatment of Expired Options and Unexercised Convertible Securities.
-------------------------------------------------------------------
If, in any case, the total number of shares of Common Stock issuable upon the
exercise of any Option or upon exercise, conversion or exchange of any
Convertible Security is not, in fact, issued and the rights to exercise such
Option or to exercise, convert or exchange such Convertible Securities shall
have expired or terminated, the Fixed Conversion Price then in effect will be
readjusted to the Fixed Conversion Price which would have been effect at the
time of such expiration or termination had such Option
<PAGE>
or Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination (other than in respect of the actual number of shares
of Common Stock issued upon exercise or conversion thereof), never been issued.
(F) Effect on Fixed Conversion Price of Certain Events. For purposes of
--------------------------------------------------
determining the adjusted Fixed Conversion Price under this Section 2(d)(i), the
following shall be applicable:
(I) Calculation of Consideration Received. If any Common Stock, Options or
-------------------------------------
Convertible Securities are issued or sold or deemed to have been issued or sold
for cash, the consideration received therefor will be deemed to be the amount
received by the Company therefor, before deduction of reasonable commissions,
underwriting discounts or allowances or other reasonable expenses paid or
incurred by the Company in connection with such issuance or sale. In case any
Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except
where such consideration consists of securities, in which case the amount of
consideration received by the Company will be the Market Price of such security
on the date of receipt. In case any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities will be determined
jointly by the Company and the holders of a majority of the Preferred Shares
then outstanding. If such parties are unable to reach agreement within ten (10)
days after the occurrence of an event requiring valuation (the "Valuation
Event"), the fair value of such consideration will be determined within
forty-eight (48) hours of the tenth (10th) day following the Valuation Event by
an independent, reputable appraiser selected by the Company. The determination
of such appraiser shall be deemed binding upon all parties absent manifest
error.
(II) Integrated Transactions. In case any Option is issued in
-----------------------
connection with the issue or sale of other securities of the Company, together
comprising one integrated transaction in which no specific consideration is
allocated to such Options by the parties thereto, the Options will be deemed to
have been issued for a consideration of $.01 for purposes of Section 2(d)(i)(A).
(III) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time does not include shares owned or held by or for
the account of the Company, and the disposition of any shares so owned or held
will be considered an issue or sale of Common Stock.
(IV) Record Date. If the Company takes a record of the holders of
-----------
Common Stock for the purpose of entitling them (1) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (2) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then
<PAGE>
such record date will be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be (assuming
such issuance ultimately occurs).
(ii) Adjustment of Fixed Conversion Price upon Subdivision or
--------------------------------------------------------
Combination of Common Stock. If the Company at any time subdivides (by any stock
- ---------------------------
split, stock dividend, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the Fixed
Conversion Price in effect immediately prior to such subdivision will be
proportionately reduced. If the Company at any time combines (by combination,
reverse stock split or otherwise) one or more classes of its outstanding shares
of Common Stock into a smaller number of shares, the Fixed Conversion Price in
effect immediately prior to such combination will be proportionately increased.
(iii) [Intentionally omitted.]
(iv) Reorganization, Reclassification, Consolidation, Merger or
----------------------------------------------------------
Sale. Any recapitalization, reorganization, reclassification, consolidation,
- ----
merger, sale of all or substantially all of the Company's assets to another
Person (as defined below) or other transaction which is effected in such a way
that holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock, other than a Major Transaction, is referred to herein
as "Organic Change." Prior to the consummation of any Organic Change, the
Company will appropriate provision (in form and substance reasonably
satisfactory to the holders of a majority of the Preferred Shares then
outstanding) to insure that each of the holders of the Preferred Shares will
thereafter have the right to acquire and receive in lieu of or addition to (as
the case may be) the shares of Common Stock otherwise acquirable and receivable
upon the conversion of such holder's Preferred Shares, such shares of stock,
securities or assets that would have been issued or payable in such Organic
Change with respect to or in exchange for the number of shares of Common Stock
which would have been acquirable and receivable upon the conversion of such
holder's Preferred Shares had such Organic Change not taken place (without
taking into account any limitations or restrictions on the timing or amount of
conversions). In any such case, the Company will make appropriate provision (in
form and substance reasonably satisfactory to the holders of a majority of the
Preferred Shares then outstanding) with respect to such holders' rights and
interests to insure that the provisions of this Section 2(d) and Section 2(e)
below will thereafter be applicable to the Preferred Shares (including, in the
case of any such consolidation, merger or sale in which the successor entity or
purchasing entity is other than the Company, an immediate adjustment of the
Fixed Conversion Price to the value for the Common Stock reflected by the terms
of such consolidation, merger or sale, if the value so reflected is less than
the Fixed Conversion Price in effect immediately prior to such consolidation,
merger or sale). The Company will not effect any such consolidation, merger or
sale, other than a Major Transaction, unless prior to the consummation thereof,
the successor entity (if other than the Company) resulting from consolidation or
merger or the entity purchasing such assets assumes, by written instrument, the
obligation to deliver to
<PAGE>
each holder of Preferred Shares such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder may be
entitled to acquire. "Person" shall mean an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.
(v) Certain Events. If any event occurs of the type contemplated by the
--------------
provisions of this Section 2(d) but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Company's Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of the Preferred
Shares; provided that no such adjustment will increase the Conversion Price as
otherwise determined pursuant to this Section 2(d).
(vi) Notices.
-------
(A) Immediately upon any adjustment of the Conversion Price, the
Company will give written notice thereof to each holder of Preferred Shares,
setting forth in reasonable detail and certifying the calculation of such
adjustment.
(B) The Company will give written notice to each holder of Preferred
Shares at least twenty (20) days prior to the date on which the Company closes
its books or takes a record (I) with respect to any dividend or distribution
upon the Common Stock, (II) with respect to any pro rata subscription offer to
holders of Common Stock or (III) for determining rights to vote with respect to
any Organic Change, dissolution or liquidation and in no event shall such notice
be provided to such holder prior to such information being made known to the
public.
(C) The Company will also give written notice to each holder of
Preferred Shares at least twenty (20) days prior to the date on which any
Organic Change, dissolution or liquidation will take place and in no event shall
such notice be provided to such holder prior to such information being made
known to the public.
e. Purchase Rights. In addition to any adjustments of the Conversion Price
---------------
pursuant to Section 2(d) above, if at any time after the Issuance Date the
Company grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of Common Stock (the "Purchase Rights"), then the holders
of Preferred Shares will be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock acquirable
upon complete conversion of the Preferred Shares (without taking into account
any limitations or restrictions on the timing or amount of conversions)
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
<PAGE>
f. [Intentionally omitted.]
g. Mechanics of Conversion. Subject to the Company's inability to fully
-----------------------
satisfy its obligations under a Conversion Notice (as defined below) as provided
for in Section 4 below:
(i) Holder's Delivery Requirements. To convert Preferred Shares into
------------------------------
full shares of Common Stock on any date (the "Conversion Date"), the holder
thereof shall (A) transmit by facsimile (or otherwise deliver), for receipt on
or prior to 11:59 p.m., Eastern Time on such date, a copy of a fully executed
notice of conversion in the form attached hereto as Exhibit I (the "Conversion
Notice"), to the Company, and (B) surrender to a common carrier for delivery to
the Company as soon as practicable following such date, the original
certificates representing the Preferred Shares being converted (or an
indemnification undertaking with respect to such shares in the case of their
loss, theft or destruction) (the "Preferred Stock Certificates") and the
originally executed Conversion Notice.
(ii) Company's Response. Upon receipt by the Company of a facsimile
------------------
copy of a Conversion Notice, the Company shall immediately send, via facsimile,
a confirmation of receipt of such Conversion Notice to such holder. Upon receipt
by the Company of the Preferred Stock Certificates to be converted pursuant to a
Conversion Notice, together with the originally executed Conversion Notice, the
Company or its designated transfer agent (the "Transfer Agent") (as applicable)
shall, on the next business day following the date of receipt of both (or the
second business day following the date of receipt of both if received after
11:00 a.m. local time of the Company), (I) issue and surrender to a common
carrier for overnight delivery to the address as specified in the Conversion
Notice, a certificate, registered in the name of the holder or its designee, for
the number of shares of Common Stock to which the holder shall be entitled, or
(II) credit such aggregate number of shares of Common Stock to which the holder
shall be entitled to the holder's or its designee's balance account with The
Depository Trust Company. If the number of Preferred Shares represented by the
Preferred Stock Certificate(s) submitted for conversion is greater than the
number of Preferred Shares being converted, then the Company shall, as soon as
practicable and in no event later than two business days after receipt of the
Preferred Stock Certificate(s) and at its own expense, issue and deliver to the
holder a new Preferred Stock Certificate representing the number of Preferred
Shares not converted.
(iii) Dispute Resolution. In the case of a dispute as to the
------------------
determination of the Market Price or the arithmetic calculation of the
Conversion Rate, the Company shall promptly issue to the holder the number of
shares of Common Stock that is not disputed and shall submit the disputed
determinations or arithmetic calculations to the holder via facsimile as soon as
possible, but in no event later than two (2) business days after receipt of such
holder's Conversion Notice. If such holder and the Company are unable to agree
upon the determination of the Market Price or arithmetic calculation of the
Conversion Rate within one (1) business day of such disputed determination or
arithmetic calculation being submitted to the holder, then the Company shall
within one (1) business
<PAGE>
day submit via facsimile (A) the disputed determination of the Market Price to
an independent, reputable investment bank or (B) the disputed arithmetic
calculation of the Conversion Rate to its independent, outside accountant. The
Company shall cause the investment bank or the accountant, as the case may be,
to perform the determinations or calculations and notify the Company and the
holder of the results no later than forty-eight (48) hours from the time it
receives the disputed determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be, shall be binding
upon all parties absent manifest error. The period of time in which the Company
is required to effect conversions or redemptions under this Statement of
Designations shall be tolled with respect to the subject conversion or
redemption pending resolution of any dispute by the Company made in good faith
and in accordance with this Section 2(g)(iii).
(iv) Record Holder. The person or persons entitled to receive the
-------------
shares of Common Stock issuable upon a conversion of Preferred Shares shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within three (3) business
-----------------------------------
days of the Company's receipt of the Conversion Notice (the "Share Delivery
Period") the Company shall fail to issue a certificate to a holder for the
number of shares of Common Stock to which such holder is entitled upon such
holder's conversion of Preferred Shares or to issue a new Preferred Stock
Certificate representing the number of Preferred Shares to which such holder is
entitled pursuant to Section 2(g)(ii) (a "Conversion Failure"), in addition to
all other available remedies which such holder may pursue hereunder and under
the Purchase Agreement between the Company and the initial holders of the
Preferred Shares (the " Purchase Agreement") (including indemnification), the
Company shall pay additional damages to such holder for each business day after
such third (3rd) business day that such conversion is not timely effected in an
amount equal to two (2%) percent per month of the product of (A) the number of
shares of Common Stock not issued to the holder on a timely basis pursuant to
Section 2(g)(ii) and to which such holder is entitled, and (B) the Closing Bid
Price of the Common Stock on the last possible date which the Company could have
issued such Common Stock to such holder without violating Section 2(g)(ii). If
the Company fails to pay the additional damages set forth in this Section
2(g)(v) within five business days of the date incurred, then the holder entitled
to such payments shall have the right at any time, so long as the Company
continues to fail to make such payments, to require the Company, upon written
notice, to immediately issue, in lieu of the cash additional damages set forth
in this Section 2(g)(v), the number of shares of Common Stock equal to the
quotient of (X) the aggregate amount of the additional damages payments
described above divided by (Y) the Market Price in effect on such Conversion
Date as is specified by the holder in writing to the Company. Payment of the
additional damages shall not relieve the Company of its obligation to send the
shares of Common Stock to the holder upon conversion.
h. Mandatory Conversion. Subject to Section 11, if any Preferred Shares
--------------------
remain outstanding on the Mandatory Conversion Date (as defined below), then all
such Preferred Shares shall be converted as of such date in accordance with this
Section 2 as
<PAGE>
if the holders of such Preferred Shares had given the Conversion Notice on the
Mandatory Conversion Date; provided, however, that if a Triggering Event has
occurred and is continuing on the Mandatory Conversion Date, then the Company
shall, within five business days following the Mandatory Conversion Date (unless
otherwise notified in writing by the holder of its request to have the Preferred
Shares converted into Common Stock), pay to each holder of Preferred Shares then
outstanding, in immediately available funds, an amount equal to the Triggering
Event Redemption Price as of the Mandatory Conversion Date. All holders of
Preferred Shares shall thereupon surrender all Preferred Stock Certificates,
duly endorsed for cancellation, to the Company or the Transfer Agent, provided
that the Company has complied with its obligations under this Section 2(h).
Notwithstanding the foregoing, except in the case of a Major Transaction, if the
Common Stock is not designated for quotation on the Nasdaq National Market or
listed on The New York Stock Exchange, Inc. or The American Stock Exchange, Inc.
but such events do not constitute a Triggering Event, then the Mandatory
Conversion Date shall be extended until the Common Stock is so designated or
listed. "Mandatory Conversion Date" means the date which is the earlier of five
years after the applicable Issuance Date, subject to extension as described in
the immediately preceding sentence, or immediately prior to a Major Transaction.
i. Fractional Shares. The Company shall not issue any fraction of a share
-----------------
of Common Stock upon any conversion. All shares of Common Stock (including
fractions thereof) issuable upon conversion of more than one Preferred Share by
a holder thereof shall be aggregated for purposes of determining whether the
conversion would result in the issuance of a fraction of a share of Common
Stock. If, after the aforementioned aggregation, the issuance would result in
the issuance of a fraction of a share of Common Stock, the Company shall round
such fraction of a share of Common Stock up or down to the nearest whole share.
j. Taxes. The Company shall pay any and all taxes which may be imposed upon
-----
it with respect to the issuance and delivery of Common Stock upon the conversion
of the Preferred Shares.
3. Redemption at Option of Holders.
-------------------------------
a. Redemption Option Upon Major Transaction. In addition to all other
----------------------------------------
rights of the holders of Preferred Shares contained herein, simultaneous with
the occurrence of a Major Transaction (as defined below), each holder of
Preferred Shares shall have the right, at such holder's option, to require the
Company to redeem all or a portion of such holder's Preferred Shares at a price
per Preferred Share equal to 120% of the Liquidation Preference (as defined in
Section 8 below) ("Major Transaction Redemption Price").
b. Redemption Option Upon Triggering Event. In addition to all other rights
---------------------------------------
of the holders of Preferred Shares contained herein, after a Triggering Event
(as defined below), each holder of Preferred Shares shall have the right, at
such holder's option, to require the Company to redeem all or a portion of such
holder's Preferred Shares at a price per Preferred Share equal to 120% of the
Liquidation Preference ("Triggering Event
<PAGE>
Redemption Price" and, collectively with "Major Transaction Redemption Price,"
the "Redemption Price").
c. "Major Transaction". A "Major Transaction" shall be deemed to have
-------------------
occurred at such time as any of the following events:
(i) the consolidation, merger or other business combination of the
Company with or into another Person which requires or receives the consent or
recommendation of the Company's Board of Directors (excluding a consolidation,
merger or other business combination in which holders of the Company's voting
power immediately prior to the transaction continue after the transaction to
hold, directly or indirectly, the voting power of the surviving entity or
entities necessary to elect a majority of the members of the board of directors
(or their equivalent if other than a corporation) of such entity or entities and
excluding a short-form merger effected without the consent or recommendation of
the Company's Board of Directors) (an "Exempt Major Transaction").
(ii) the sale or transfer of all or substantially all of the Company's
assets or rights to the "Be There!" business or product line other than in
connection with a disposition to a subsidiary of the Company; or
(iii) consummation of a purchase, tender or exchange offer made to the
holders of more than 50% of the outstanding shares of Common Stock which
requires or receives the consent or recommendation of the Company's Board of
Directors.
d. "Triggering Event". A "Triggering Event" shall be deemed to have
------------------
occurred at such time as any of the following events (other than in connection
with a Major Transaction):
(i) the failure of the Registration Statement to be declared
effective by the SEC on or prior to the date that is 150 days after the Demand;
(ii) while the Registration Statement is required to be maintained
effective pursuant to the terms of the Registration Rights Agreement, the
effectiveness of the Registration Statement lapses for any reason (including,
without limitation, the issuance of a stop order) or is unavailable to the
holder of the Preferred Shares for sale of all of the Registrable Securities (as
defined in the Registration Rights Agreement) in accordance with the terms of
the Registration Rights Agreement, and such lapse or unavailability continues
for a period of thirty (30) consecutive trading days, provided that the cause of
such lapse or unavailability is not due to factors solely within the control of
such holder of Preferred Shares;
(iii) the Company undertakes any voluntary action to terminate the
quotation or listing of the Common Stock on the Nasdaq National Market, The New
York Stock Exchange, Inc. or The American Stock Exchange, Inc., unless such
action is taken in connection with the continued quotation or listing of the
Common Stock on another of the Nasdaq National Market, The New York Stock
Exchange, Inc. or The American Stock Exchange, Inc.;
<PAGE>
(iv) the Company's failure to deliver shares of Common Stock within 15
days of its receipt of a Conversion Notice (together with the Preferred Stock
Certificate) or the Company's notice to any holder of Preferred Shares,
including by way of public announcement, at any time, of its intention not to
comply with proper requests for conversion of any Preferred Shares into shares
of Common Stock, other than due to any of the reasons set forth in Section 4(a)
below; or
(v) if the Company pursuant to or within the meaning of Title 11, U.S.
Code, or any similar federal or state law for the relief of debtors ("Bankruptcy
Law"), (I) commences a voluntary case, (II) consents to the entry of an order
for relief against it in any involuntary case, (III) consents to the appointment
of a receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law (a "Custodian") of it or for all or substantially all of its
property, (IV) makes a general assignment for the benefit of its creditors, or
(V) admits in writing that it is generally unable to pay its debts as the same
become due.
e. Mechanics of Redemption at Option of Buyer Upon Major Transaction. No
-----------------------------------------------------------------
sooner than 15 days nor later than 10 days prior to the consummation of a Major
Transaction, but not prior to the public announcement of such Major Transaction,
the Company shall deliver written notice thereof via facsimile and overnight
courier ("Notice of Major Transaction") to each holder of Preferred Shares. At
any time after receipt of a Notice of Major Transaction (or, in the event a
Notice of Major Transaction is not delivered at least 10 days prior to a Major
Transaction, at any time within 10 days prior to a Major Transaction), any
holder of Preferred Shares then outstanding may require the Company to redeem,
effective immediately prior to the consummation of such Major Transaction, all
of the holder's Preferred Shares then outstanding by delivering written notice
thereof via facsimile and overnight courier ("Notice of Redemption at Option of
Buyer Upon Major Transaction") to the Company, which Notice of Redemption at
Option of Buyer Upon Major Transaction shall indicate (i) the number of
Preferred Shares that such holder is electing to redeem and (ii) the applicable
Major Transaction Redemption Price, as calculated pursuant to Section 3(a)
above. Preferred Shares which are not required to be redeemed pursuant to this
paragraph are subject to mandatory conversion as provided herein.
f. Mechanics of Redemption at Option of Buyer Upon Triggering Event. Within
----------------------------------------------------------------
one (1) day after the occurrence of a Triggering Event, the Company shall
deliver written notice thereof via facsimile and overnight courier ("Notice of
Triggering Event") to each holder of Preferred Shares. At any time after the
earlier of a holder's receipt of a Notice of Triggering Event and such holder
becoming aware of a Triggering Event, any holder of Preferred Shares then
outstanding may require the Company to redeem all of the Preferred Shares by
delivering written notice thereof via facsimile and overnight courier ("Notice
of Redemption at Option of Buyer Upon Triggering Event") to the Company, which
Notice of Redemption at Option of Buyer Upon Triggering Event shall indicate (i)
the number of Preferred Shares that such holder is electing to redeem and (ii)
the applicable Triggering Event Redemption Price, as calculated pursuant to
Section 3(b) above.
<PAGE>
g. Payment of Redemption Price. Upon the Company's receipt of a Notice(s)
---------------------------
of Redemption at Option of Buyer Upon Triggering Event or a Notice(s) of
Redemption at Option of Buyer Upon Major Transaction from any holder of
Preferred Shares or Pari Passu Shares (as defined in Section 8), the Company
shall immediately notify each holder of Preferred Shares and Pari Passu Shares
by facsimile of the Company's receipt of such Notice(s) of Redemption at Option
of Buyer Upon Triggering Event or Notice(s) of Redemption at Option of Buyer
Upon Major Transaction and each holder which has sent such a notice shall
promptly submit to the Company or its Transfer Agent such holder's Preferred
Stock Certificates which such holder has elected to have redeemed. The Company
shall deliver the applicable Triggering Event Redemption Price, in the case of a
redemption pursuant to Section 3(f), to such holder within five business days
after the Company's receipt of a Notice of Redemption at Option of Buyer Upon
Triggering Event and, in the case of a redemption pursuant to Section 3(e), the
Company shall deliver the applicable Major Transaction Redemption Price
immediately prior to the consummation of the Major Transaction; provided that a
holder's Preferred Stock Certificates shall have been so delivered to the
Company; provided further that if the Company is unable to redeem all of the
Preferred Shares and Pari Passu Shares to be redeemed (because of insufficient
funds to lawfully effect such redemption), the Company shall redeem an amount
from each holder of Preferred Shares and Pari Passu Shares being redeemed equal
to such holder's pro-rata amount (based on the relative redemption amounts of
all holders of Preferred Shares and Pari Passu Shares) of all Preferred Shares
and Pari Passu Shares being redeemed. If the Company shall fail to redeem all of
the Preferred Shares submitted for redemption (other than pursuant to a dispute
as to the arithmetic calculation of the Redemption Price), in addition to any
remedy such holder of Preferred Shares may have under this Statement of
Designations and the Purchase Agreement, the applicable Redemption Price payable
in respect of such unredeemed Preferred Shares shall bear interest at the rate
of 2.0% per month (prorated for partial months) until paid in full. Until the
Company pays such unpaid applicable Redemption Price in full to a holder of
Preferred Shares submitted for redemption, such holder shall have the option
(the "Void Optional Redemption Option") to, in lieu of redemption, require the
Company to promptly return to such holder(s) all of the Preferred Shares that
were submitted for redemption by such holder(s) under this Section 3 and for
which the applicable Redemption Price has not been paid, by sending written
notice thereof to the Company via facsimile (the "Void Optional Redemption
Notice"). Upon the Company's receipt of such Void Optional Redemption Notice(s)
and prior to payment of the full applicable Redemption Price to such holder, (i)
the Notice(s) of Redemption at Option of Buyer Upon Triggering Event or the
Notice(s) of Redemption at Option of Buyer Upon Major Transaction, as the case
may be, shall be null and void with respect to those Preferred Shares submitted
for redemption and for which the applicable Redemption Price has not been paid,
and (ii) the Company shall immediately return any Preferred Shares submitted to
the Company by each holder for redemption under this Section 3(g) and for which
the applicable Redemption Price has not been paid. Notwithstanding the
foregoing, in the event of a dispute as to the determination of the Closing Bid
Price or the arithmetic calculation of the Redemption Price, such dispute shall
be resolved pursuant to Section 2(g)(iii) above with the term "Closing Bid
Price" being substituted for the term "Average Market Price" and the term
"Redemption Price" being substituted for the term "Conversion Rate". A holder's
delivery of a Void Optional Redemption Notice and exercise of its rights
<PAGE>
following such notice shall not affect the Company's obligations to make any
payments which have accrued prior to the date of such notice. Payments provided
for in this Section 3 shall have priority to payments to other stockholders,
other than any required payments with respect to shares of the Company's Series
A Convertible Preferred Stock which were outstanding on the Issuance Date, in
connection with a Major Transaction.
4. Inability to Fully Convert.
--------------------------
a. Holder's Option if Company Cannot Fully Convert. If, upon the
-----------------------------------------------
Company's receipt of a Conversion Notice or on the Mandatory Conversion Date,
the Company can not issue shares of Common Stock registered for resale under the
Registration Statement for any reason, including, without limitation, because
the Company (x) does not have a sufficient number of shares of Common Stock
authorized and available, (y) is otherwise prohibited by applicable law or by
the rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Company or its
Securities, including without limitation the Exchange Cap, from issuing all of
the Common Stock which is to be issued to a holder of Preferred Shares pursuant
to a Conversion Notice or (z) fails to have a sufficient number of shares of
Common Stock registered for resale under the Registration Statement, then the
Company shall issue as many shares of Common Stock as it is able to issue in
accordance with such holder's Conversion Notice and pursuant to Section 2(g)
above and, with respect to the unconverted Preferred Shares, the holder, solely
at such holder's option, can elect to:
(i) require the Company to redeem from such holder those Preferred
Shares for which the Company is unable to issue Common Stock in accordance with
such holder's Conversion Notice ("Mandatory Redemption") at a price per
Preferred Share (the "Mandatory Redemption Price") equal to the Triggering Event
Redemption Price as of such Conversion Date;
(ii) if the Company's inability to fully convert Preferred Shares is
pursuant to Section 4(a)(z) above, require the Company to issue restricted
shares of Common Stock in accordance with such holder's Conversion Notice and
pursuant to Section 2(g) above;
(iii) void its Conversion Notice and retain or have returned, as the
case may be, the nonconverted Preferred Shares that were to be converted
pursuant to such holder's Conversion Notice (provided that a holder's voiding
its Conversion Notice shall not effect the Company's obligations to make any
payments which have accrued prior to the date of such notice); or
(iv) if the Company's inability to fully convert Preferred Shares is
pursuant to the Exchange Cap described in Section 4(a)(y) above, and the
issuance of additional Conversion Shares at a Conversion Price equal to the
Market Price would not violate the rules or regulations of The Nasdaq Stock
Market, Inc., then, subject to Section 11, require the Company to issue shares
of Common Stock in accordance with such holder's Conversion Notice and pursuant
to Section 2(g) above at a Conversion Price equal to the
<PAGE>
Market Price of the Common Stock on the date of such holder's Notice in Response
to Inability to Convert (as defined below).
b. Mechanics of Fulfilling Holder's Election. The Company shall immediately
-----------------------------------------
send via facsimile to a holder of Preferred Shares, upon receipt of a facsimile
copy of a Conversion Notice from such holder which cannot be fully satisfied as
described in Section 4(a) above, a notice of the Company's inability to fully
satisfy such holder's Conversion Notice (the "Inability to Fully Convert
Notice"). Such Inability to Fully Convert Notice shall indicate (i) the reason
why the Company is unable to fully satisfy such holder's Conversion Notice, (ii)
the number of Preferred Shares which cannot be converted and (iii) the
applicable Mandatory Redemption Price. Such holder shall notify the Company of
its election pursuant to Section 4(a) above by delivering written notice via
facsimile to the Company ("Notice in Response to Inability to Convert").
c. Payment of Redemption Price. If such holder shall elect to have its
---------------------------
shares redeemed pursuant to Section 4(a)(i) above, the Company shall pay the
Mandatory Redemption Price in cash to such holder within thirty (30) days of the
Company's receipt of the holder's Notice in Response to Inability to Convert,
provided that prior to the Company's receipt of the holder's Notice in Response
to Inability to Convert the Company has not delivered a notice to such holder
stating, to the satisfaction of the holder, that the event or condition
resulting in the Mandatory Redemption has been cured and all Conversion Shares
issuable to such holder can and will be delivered to the holder in accordance
with the terms of Section 2(g). If the Company shall fail to pay the applicable
Mandatory Redemption Price to such holder on a timely basis as described in this
Section 4(c) (other than pursuant to a dispute as to the determination of the
arithmetic calculation of the Redemption Price), in addition to any remedy such
holder of Preferred Shares may have under this Statement of Designations and the
Securities Purchase Agreement, such unpaid amount shall bear interest at the
rate of 2.0% per month (prorated for partial months) until paid in full. Until
the full Mandatory Redemption Price is paid in full to such holder, such holder
may void the Mandatory Redemption with respect to those Preferred Shares for
which the full Mandatory Redemption Price has not been paid and receive back
such Preferred Shares. Notwithstanding the foregoing, if the Company fails to
pay the applicable Mandatory Redemption Price within such thirty (30) days time
period due to a dispute as to the determination of the arithmetic calculation of
the Redemption Rate, such dispute shall be resolved pursuant to Section
2(g)(iii) above with the term "Redemption Price" being substituted for the term
"Conversion Rate".
d. Pro-rata Conversion and Redemption. In the event the Company receives a
----------------------------------
Conversion Notice from more than one holder of Preferred Shares or Pari Passu
Shares on the same day and the Company can convert and redeem some, but not all,
of the Preferred Shares or Pari Passu Shares pursuant to this Section 4, the
Company shall convert and redeem from each holder of Preferred Shares or Pari
Passu Shares electing to have Preferred Shares or Pari Passu Shares converted
and redeemed at such time an amount equal to such holder's pro-rata amount
(based on the relative redemption amounts of all holders of Preferred Shares and
Pari Passu shares) of all Preferred Shares and Pari Passu Shares being converted
and redeemed at such time.
<PAGE>
e. Involuntary Delisting. In the event the Common Stock at any
---------------------
time is not designated for quotation on the Nasdaq National Market or listed on
The New York Stock Exchange, Inc. or The American Stock Exchange, Inc. but such
events do not constitute a Triggering Event and are not in connection with a
Major Transaction, then in addition to any other remedies the holders of
Preferred Shares may have at law or in equity, the Company shall pay to each
holder of Preferred Shares an amount in cash per Preferred Share on each day
that the Common Stock is not so designated or listed equal to the product of the
Liquidation Preference multiplied by 1.0%, provided that the Company shall not
be required to make such payments for more than 24 consecutive days. The
Company's failure to pay such amounts on each day they are due shall constitute
a Triggering Event for purposes of Section 3.
5. Reissuance of Certificates. In the event of a conversion or redemption
--------------------------
pursuant to this Statement of Designations of less than all of the Preferred
Shares represented by a particular Preferred Stock Certificate, the Company
shall promptly cause to be issued and delivered to the holder of such Preferred
Shares a preferred stock certificate representing the remaining Preferred Shares
which have not been so converted or redeemed.
6. Reservation of Shares. Subject to the Exchange Cap in Section 11, the
---------------------
Company shall, so long as any of the Preferred Shares are outstanding, reserve
and keep available out of its authorized and unissued Common Stock, solely for
the purpose of effecting the conversion of the Preferred Shares, such number of
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all of the Preferred Shares then outstanding; provided that the
number of shares of Common Stock so reserved shall at no time be less than 200%
of the number of shares of Common Stock for which the Preferred Shares are at
any time convertible (subject to the Exchange Cap if lower). The initial number
of shares of Common Stock reserved for conversions of the Preferred Shares and
each increase in the number of shares so reserved shall be allocated pro rata
among the holders of the Preferred Shares based on the number of Preferred
Shares held by each holder at the time of issuance of the Preferred Shares or
increase in the number of reserved shares, as the case may be. In the event a
holder shall sell or otherwise transfer any of such holder's Preferred Shares,
each transferee shall be allocated a pro rata portion of the number of reserved
shares of Common Stock reserved for such transferor. Any shares of Common Stock
reserved and which remain allocated to any person or entity which does not hold
any Preferred Shares shall be allocated to the remaining holders of Preferred
Shares, pro rata based on the number of Preferred Shares then held by such
holder.
7. Voting Rights. Holders of Preferred Shares shall have no voting rights
-------------
(including with respect to a Major Transaction), except as expressly required by
law, including but not limited to the Texas Business Corporation Act, and as
expressly provided in this Statement of Designations.
8. Liquidation, Dissolution, Winding-Up. In the event of any voluntary or
------------------------------------
involuntary liquidation, dissolution or winding up of the Company, the holders
of the Preferred Shares shall be entitled to receive in cash out of the assets
of the Company,
<PAGE>
whether from capital or from earnings available for distribution to its
stockholders (the "Preferred Funds"), after all required payments with respect
to shares of the Company's Series A Convertible Preferred Stock which were
outstanding on the Issuance Date, but before any amount shall be paid to the
holders of any of the capital stock of the Company of any class junior in rank
to the Preferred Shares in respect of the preferences as to the distributions
and payments on the liquidation, dissolution and winding up of the Company, an
amount per Preferred Share equal to the Stated Value plus all accrued and unpaid
premium thereon (such sum being referred to as the "Liquidation Preference");
provided that, if the Preferred Funds are insufficient to pay the full amount
due to the holders of Preferred Shares and holders of the Company's Series D
Convertible Preferred Stock and Series E Convertible Preferred Stock (the "Pari
Passu Shares"), which are of equal rank with the Preferred Shares as to payments
of Preferred Funds (and redemption amounts), then each holder of Preferred
Shares and Pari Passu Shares shall receive a percentage of the Preferred Funds
equal to the full amount of Preferred Funds payable to such holder as a
liquidation preference, in accordance with their respective Statement of
Designations, Preferences and Rights, as a percentage of the full amount of
Preferred Funds payable to all holders of Preferred Shares and Pari Passu
Shares. The purchase or redemption by the Company of stock of any class, in any
manner permitted by law, shall not, for the purposes hereof, be regarded as a
liquidation, dissolution or winding up of the Company. Neither the consolidation
or merger of the Company with or into any other Person, nor the sale or transfer
by the Company of less than substantially all of its assets, shall, for the
purposes hereof, be deemed to be a liquidation, dissolution or winding up of the
Company. No holder of Preferred Shares shall be entitled to receive any amounts
with respect thereto upon any liquidation, dissolution or winding up of the
Company other than the amounts provided for herein; provided that a holder of
Preferred Shares shall be entitled to all amounts previously accrued with
respect to amounts owed hereunder.
9. Preferred Rank; Participation. (i) All shares of Common Stock shall be
-----------------------------
of junior rank to all Preferred Shares and Pari Passu Shares in respect to the
preferences as to distributions and payments upon the liquidation, dissolution
and winding up of the Company. The rights of the shares of Common Stock shall be
subject to the preferences and relative rights of the Preferred Shares and Pari
Passu Shares. Without the prior express written consent of the holders of not
less than three-fourths (3/4) of the then outstanding Preferred Shares and Pari
Passu Shares, the Company shall not hereafter authorize or issue additional or
other capital stock that is of senior or equal rank to the Preferred Shares and
Pari Passu Shares in respect of the preferences as to distributions and payments
upon the liquidation, dissolution and winding up of the Company. Without the
prior express written consent of the holders of not less than three-fourths
(3/4) of the then outstanding Preferred Shares and Pari Passu Shares, the
Company shall not hereafter authorize or make any amendment to the Company's
Articles of Incorporation or bylaws, or file any resolution of the board of
directors of the Company with the Texas Secretary of State containing any
provisions, which would adversely affect or otherwise impair the rights or
relative priority of the holders of the Preferred Shares and Pari Passu Shares
relative to the holders of the Common Stock or the holders of any other class of
capital stock; provided that the foregoing shall not affect the Company's
ability to effect a Major Transaction. In the event of the merger or
consolidation of the Company with or into another corporation (other than a
<PAGE>
Major Transaction), the Preferred Shares and Pari Passu Shares shall maintain
their relative powers, designations and preferences provided for herein and no
merger shall result inconsistent therewith.
(ii) Subject to the rights of the holders, if any, of the Parri Passu
Shares, the holders of the Preferred Shares shall, as holders of Preferred
Stock, be entitled to such dividends paid and distributions made to the holders
of Common Stock to the same extent as if such holders of Preferred Shares had
converted the Preferred Shares into Common Stock (without regard to any
limitations on conversion herein or elsewhere) and had held such shares of
Common Stock on the record date for such dividends and distributions. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock; provided that the holders of the
Preferred Shares shall be entitled to such dividends and distributions only to
the extent that they exceed an amount per Preferred Share equal to $1,000, plus
the accrued premium thereon.
10. Restriction on Redemption and Cash Dividends with respect to Other
------------------------------------------------------------------
Capital Stock. Until all of the Preferred Shares have been converted or
- -------------
redeemed as provided herein, except as permitted in the Rights Agreement, the
Company shall not, directly or indirectly, redeem, or declare or pay any cash
dividend or cash distribution on, its Common Stock without the prior express
written consent of the holders of not less than two-thirds (2/3) of the then
outstanding Preferred Shares.
11. Limitation on Number of Conversion Shares. Notwithstanding any other
-----------------------------------------
provision herein, the Company shall not be obligated to issue any shares of
Common Stock upon conversion of the Preferred Shares and Pari Passu Shares if
the issuance of such shares of Common Stock would exceed that number of shares
of Common Stock which the Company may issue upon Conversion of the Preferred
Shares and Pari Passu Shares (the "Exchange Cap") without breaching the
Company's obligations under the rules or regulations of The Nasdaq Stock Market,
Inc., except that such limitation shall not apply in the event that the Company
(a) obtains the approval of its stockholders as required by NASD Rule 4460 (or
any successor rule or regulation) for issuances of Common Stock in excess of
such amount or (ii) obtains a written opinion from outside counsel to the
Company that such approval is not required, which opinion shall be reasonably
satisfactory to the holders of a majority of the Preferred Shares then
outstanding. Until such approval or written opinion is obtained, no purchaser of
Preferred Shares and Pari Passu Shares pursuant to the Purchase Agreement (the
"Purchasers") shall be issued, upon conversion of Preferred Shares and Pari
Passu Shares, shares of Common Stock in an amount greater than the product of
(i) the Exchange Cap amount multiplied by (ii) a fraction, the numerator of
which is the number of Preferred Shares and Pari Passu Shares issued to such
Purchaser pursuant to the Purchase Agreement and the denominator of which is the
aggregate amount of all the Preferred Shares and Pari Passu Shares issued to the
Purchasers pursuant to the Purchase Agreement (the "Cap Allocation Amount"). In
the event that any Purchaser shall sell or otherwise transfer any of such
Purchaser's Preferred Shares and Pari Passu Shares, the transferee shall be
allocated a pro rata portion of such Purchaser's Cap Allocation Amount. In the
event that any holder of Preferred Shares and Pari Passu Shares shall convert
all of such holder's Preferred Shares and Pari Passu Shares into a number of
shares of Common
<PAGE>
Stock which, in the aggregate, is less than such holder's Cap Allocation Amount,
then the difference between such holder's Cap Allocation Amount and the number
of shares of Common Stock actually issued to such holder shall be allocated to
the respective Cap Allocation Amounts of the remaining holders of Preferred
Shares and Pari Passu Shares on a pro rata basis in proportion to the number of
Preferred Shares then held by each such holder.
12. Vote to Change the Terms of Preferred Shares. The affirmative vote at
--------------------------------------------
a meeting duly called for such purpose or the written consent without a meeting,
of the holders of not less than two-thirds (2/3) of the then outstanding
Preferred Shares and Pari Passu Shares, shall be required for any change to this
Statement of Designations or the Company's Certificate of Incorporation which
would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Preferred Shares.
13. Lost or Stolen Certificates. Upon receipt by the Company of evidence
---------------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing the Preferred Shares, and, in the case
of loss, theft or destruction, of any indemnification undertaking by the holder
to the Company and, in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Company shall execute and deliver new
preferred stock certificate(s) of like tenor and date; provided, however, the
Company shall not be obligated to re-issue preferred stock certificates if the
holder contemporaneously requests the Company to convert such Preferred Shares
into Common Stock.
14. Remedies, Characterizations, Other Obligations, Breaches and
------------------------------------------------------------
Injunctive Relief. The remedies provided in this Statement of Designations shall
- -----------------
be cumulative and in addition to all other remedies available under this
Statement of Designations, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Statement of
Designations. The Company covenants to each holder of Preferred Shares that
there shall be no characterization concerning this instrument other than as
expressly provided herein. Amounts set forth or provided for herein with respect
to payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of the
Preferred Shares and that the remedy at law for any such breach may be
inadequate. The Company therefore agrees that, in the event of any such breach
or threatened breach, the holders of the Preferred Shares shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.
15. Specific Shall Not Limit General; Construction. No specific provision
----------------------------------------------
contained in this Statement of Designations shall limit or modify any more
general provision contained herein. This Statement of Designations shall be
deemed to be jointly drafted by
<PAGE>
the Company and all holders of Preferred Shares and shall not be construed
against any person as the drafter hereof.
16. Failure or Indulgence Not Waiver. No failure or delay on the part of
--------------------------------
a holder of Preferred Shares in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Statement of Designations
to be signed on behalf of the Company, as of the 20th day of January, 1999.
DATA RACE, INC.
By: /s/ GREGORY T. SKALLA
------------------------------
Gregory T. Skalla
Senior Vice President-Finance
Chief Financial Officer
<PAGE>
DATA RACE, INC.
CONVERSION NOTICE
Reference is made to the Statement of Designations, Preferences and Rights of
Series F Convertible Preferred Stock (the "Statement of Designations"). In
accordance with and pursuant to the Statement of Designations, the undersigned
hereby elects to convert the number of shares of Series F Convertible Preferred
Stock, no par value per share (the "Preferred Shares"), of Data Race, Inc., a
Texas corporation (the "Company"), indicated below into shares of Common Stock,
no par value per share (the "Common Stock"), of the Company, by tendering the
stock certificate(s) representing the share(s) of Preferred Shares specified
below as of the date specified below.
Date of Conversion:
--------------------------------------------------------
Number of Preferred Shares to be converted:
--------------------------------
Stock certificate no(s). of Preferred Shares to be converted:
--------------
Please confirm the following information:
Conversion Price:
----------------------------------------------------------
Number of shares of Common Stock
to be issued:
--------------------------------------------------------------
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
--------------------------------------------------------
--------------------------------------------------------
--------------------------------------------------------
Facsimile Number:
--------------------------------------------------------
Authorization:
--------------------------------------------------------
By:
-----------------------------------------------------
Title:
--------------------------------------------------
Dated:
--------------------------------------------------------
Account Number:
(if electronic book entry transfer):
-------------------------------------
Transaction Code Number
(if electronic book entry transfer):
-------------------------------------
<PAGE>
EXHIBIT 5
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
300 Convent Street, Suite 1500
San Antonio, Texas 78205
(210) 281-7000
January 28, 1999
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"), covering the
sale from time to time by the selling shareholders named in the Registration
Statement (the "Selling Shareholders") of an aggregate of up to 3,688,778 shares
of the Company's Common Stock (the "Common Stock"), consisting of 1,177,776
outstanding shares of Common Stock (the "Outstanding Shares"), 994,535 shares of
Common Stock issuable upon conversion of outstanding shares of the Company's
Series D Convertible Preferred Stock and Series F Convertible Preferred Stock
(collectively, the "Preferred Stock"), and 1,516,467 shares of Common Stock
issuable upon exercise of outstanding stock purchase warrants (collectively, the
"Warrants").
We have, as counsel, examined such corporate records, certificates and
other documents and reviewed such questions of law as we have deemed necessary,
relevant or appropriate to enable us to render the opinion expressed below. In
rendering such opinion, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures and the authenticity of all documents
examined by us. As to various questions of fact material to such opinion, we
have relied upon representations of the Company.
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
<PAGE>
(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 applicable Statement of Designation,
Rights and Preferences, 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 Outstanding Shares are duly authorized, validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference of this firm under the caption
"Legal Opinions" in the Prospectus contained therein. This opinion is to be used
only in connection with the issuance of the Common Stock while the Registration
Statement is in effect.
Very truly yours,
/s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS CONSENT
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 that the Company has suffered recurring losses and incurred negative cash
flows form 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 LLP
KPMG LLP
San Antonio, Texas
January 26, 1999
