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As filed with the Securities and Exchange Commission on July 23, 1999
Registration No. 333-_________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_________________________
DATA RACE, INC.
(Exact name of Registrant as specified in its charter)
12400 Network Boulevard
San Antonio, Texas 78249
(210) 263-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
_________________________
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Texas 3661 74-2272363
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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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
_________________________
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
_________________________
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
____________________
CALCULATION OF REGISTRATION FEE
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Amount to be Proposed Maximum Proposed Maximum Amount of
Registered Offering Price Per Offering Price (1) Registration Fee
Share (1)
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Common Stock, no par value 2,772,843 $3.00 $8,318,529 $2,313
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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 July 21, 1999.
____________
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
July 23, 1999
The information in this prospectus is not complete and may be changed. The
selling shareholders 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 2,772,843 Shares
DATA RACE, INC.
Common Stock
Our common stock is traded on the Nasdaq National Market under the symbol
"RACE." On July 9, 1999, the closing price of our common stock was $3.25.
These shares of common stock are being sold by the shareholders listed
under the heading "Selling Shareholders." 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 2.
______________
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 this prospectus. Any representation to the contrary is a
criminal offense.
_______________
The date of this prospectus is _________, 1999.
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TABLE OF CONTENTS
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Page
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About DATA RACE, Inc.................................................. 2
Risk Factors.......................................................... 2
Forward-Looking Statements............................................ 10
Use of Proceeds....................................................... 10
Selling Shareholders.................................................. 10
Plan of Distribution.................................................. 12
Legal Opinions........................................................ 13
Experts............................................................... 13
Where You Can Find More Information................................... 14
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ABOUT DATA RACE, INC.
We design, manufacture and market communications products. Our products
carry data, voice, network and fax traffic between a company's headquarters and
its workers who are away from the headquarters. We market our products through
a small direct sales force and through national and regional distribution
partners.
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. We
believe the following risks represent the known, material risks facing our
company, in addition to the risks which typically face any company in our
industry. If any of the following risks actually occur, our business, financial
condition and operating results could be materially adversely affected. In that
case, the trading price of our common stock could decline, and you could lose a
part or all of your investment.
Our Future Success Depends on the Success of Unproven Be There! Products
The Company's success depends almost entirely on the success of its Be
There! product line. The failure of our Be There! products to achieve success
would likely have a material adverse effect on our business and our ability to
continue operations. We are currently devoting the vast majority of our
resources to the Be There! product line. The Be There! system has had very
limited success and has failed to generate significant revenue since it was
released in 1997. The majority of our historical revenue has come from products
other than Be There! The revenue from these other products has been declining
for several years and we believe the trend will continue. The market may not
accept our Be There! products for a variety of reasons. Our inability to
penetrate our target markets and increase Be There! sales will adversely affect
our business and operations.
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Our Success is Dependent on Developing a Relationship with a Strategic Partner
Our business strategy is heavily dependent on our ability to establish a
strategic relationship with a partner who can enhance our market presence and
credibility and who can provide needed capital. Our inability to develop a
strategic relationship could have a material adverse effect on our business and
prospects.
We Will Likely Need Additional Capital to Sustain Our Operations
We may be required to suspend some or all of our operations if we cannot
obtain additional capital when needed. 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 significant Be There!
product sales 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. Further, if we issue
equity securities, shareholders may experience additional dilution or the new
equity securities may have rights and preferences senior to the common stock.
Assuming continuing negative cash flows from operations at the same rate as
negative cash flows in the last four fiscal quarters, we believe existing cash
would last about 12 to 15 months. 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.
We Have a History of Operating Losses and Expect to Have Continued Losses
We have suffered substantial recurring losses, and our Be There! products
have not generated significant revenue. We may never return to profitability or
generate future revenue levels sufficient to support our operations. In recent
years we have funded operations from the sale of equity securities. We expect
to continue to incur significant product development, sales and marketing, and
administrative expenses and, as a result, will need to generate significant
revenue to achieve profitability.
We Must Expand Our Sales and Distribution Capabilities to Increase Sales
We must expand our direct and indirect sales operations to increase market
awareness of our Be There! products and increase revenue. We cannot be certain
that we will be successful in these efforts and our failure to do so could
adversely affect our business. Our products require a sophisticated sales
effort targeted at senior management of our prospective customers. Lack of
adequate capital, our current financial condition and competition for qualified
personnel all affect our ability to expand our direct sales force. These
factors, as well as our credibility in the market place, also hinder our ability
to increase our indirect distribution channels.
Our Business Could Suffer If We Lose Indirect Sales Channel Partners
The loss of our relationships with independent distributors, resellers, and
other marketing partners could materially adversely affect our business. Our
business strategy relies heavily on marketing and sales efforts of third
parties. We have little experience in marketing Be There! through indirect
channels and we have not generated significant revenue to date from these
channels. Our existing distributors, resellers and other marketing partners are
not contractually committed to
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continue to purchase our products and therefore could discontinue carrying our
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, or a reduction
in their commitment of resources to our products, would likely have an adverse
effect on our business.
The Market for Our Be There! Products May Not Develop as We Anticipate
The Be There! products have not yet been and may never be widely accepted
in the market. We can not assure you that we will establish a market for our Be
There! products or establish our credibility in that market. The market may
elect to embrace alternative products or service solutions to the need for
communication between the corporate headquarters and workers who are away from
the headquarters. The potential market for our Be There! products 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. Our business will be adversely affected if the market
does not develop or we are not able to penetrate it as we hope.
Rapid Technological Change Could Adversely Affect Our Business
The rapid pace of technological change may prevent us from developing and
marketing new products, enhancing our existing products, or responding
effectively to emerging industry standards or new product introductions by
others. Our future success will be largely dependent on our ability to enhance
our existing products and to develop and introduce successful new products. The
market for our products is characterized by rapidly changing technology,
emerging industry standards, product proliferation and short product life
cycles. 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 could
adversely affect our operating results.
Competition from Companies Having Greater Resources Could Adversely Affect Us
The communications industry is intensely competitive. The competitive
pressures we face could materially and adversely affect our business, financial
condition or operating results. 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. 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.
We are beginning to see a growing array of solutions for communication
between the corporate headquarters and its workers elsewhere, some of which are
competitive to our Be There! products. In addition, we expect new competition to
arise as new technologies develop.
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Our Limited Customer Base Could Adversely Affect Our Operating Results
We have a limited number of customers for our products and a loss of a key
customer or a reduction or delay in orders from the customer could materially
and adversely affect our operating results. In addition, although we have not
yet recorded significant revenue from our Be There! products, we are currently
attempting to market them to large corporations, as well as to smaller
businesses. If we do succeed in attracting large customers, the revenue from Be
There! products could fluctuate significantly according to the purchasing cycle
of those limited number of large customers. We do not have and may not obtain
minimum product purchase commitments from our customers. Cancellation of orders
by important customers could have a substantial effect on our revenue.
Our Business Could Suffer if We Lose Key Personnel or Cannot Attract Qualified
Personnel
The loss of key personnel could have a material adverse effect on our
business. Our success is dependent largely on the skills, experience and
performance of key management, sales and technical personnel. We are especially
dependent on our president and chief executive officer and other senior
officers, and our Be There! products sales executives. We are also dependent 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 our
president and chief executive officer. Our future success will also depend on
our ability to attract highly skilled personnel. 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 Inability to Protect Our Proprietary Technology Could Reduce Our Competitive
Advantage
Intellectual property laws of the United States and foreign countries may
not be adequate to protect our proprietary rights. Because our success depends
in part on our technological expertise and proprietary technologies, the loss of
our proprietary rights could have a material adverse effect on our business. 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.
Intellectual Property Disputes Could Be Costly and Disruptive and Affect the
Validity of Our Patents
We may be involved in intellectual property litigation which could
adversely affect our intellectual property rights, could be costly and could
divert management's attention away from the business. We believe that the
communications industry is a competitive environment where intellectual property
disputes are likely to arise. We may be required to bring or defend against
litigation to enforce our patents, to protect our trademarks, trade secrets, and
other intellectual
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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. In addition, 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. Our limited resources may limit our ability
to bring or defend against intellectual property 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. In addition, any litigation can be expensive and
divert management resources. Any of these consequences could materially
adversely affect our business, financial condition and operating results. See
"Patent Infringement Lawsuit" below.
Our Patent Infringement Lawsuit Against Lucent Could Adversely Affect the
Validity of Our Patents
An unfavorable outcome of our lawsuit against Lucent could adversely affect
the scope or validity of the patent we are seeking to enforce and could
adversely affect our financial condition. In August 1998 we sued Lucent
Technologies, Inc. in United States District Court in San Antonio, Texas,
alleging that Lucent is infringing upon our patent entitled "System and Method
for Providing a Remote User with a Virtual Presence in the Office." We may not
be able to fully pursue the lawsuit or defend against possible counterclaims
because of limited resources, including our cash available to pay legal fees.
Our failure to prevail in a meaningful way could adversely affect our ability to
obtain a competitive advantage through our patents.
Our Dependence on Third Party Suppliers Increases Potential Shipment Delays and
Other Risks
Our dependence on third party suppliers could adversely affect our
business, customer relationships or operating results. 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. We do not have any guaranteed supply arrangements. If we could
not obtain a sufficient supply of 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. In addition, we may also have trouble
controlling the cost, quality and reliability of the components we use to
manufacture our products.
Our Dependence on Third Party Manufacturers Increases Potential Manufacturing
Problems and Other Risks
Our dependence on third party manufacturers could adversely affect our
business, customer relationships or operating results. 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.
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Our Financial Condition and Operating Results Could be Adversely Affected If We
Do Not Manage Inventory
Our business and financial condition could be materially adversely affected
if we do not effectively manage our purchasing activities in the face of
uncertain revenue levels, or if shipments do not exceed inventory levels. In
the past we have substantially increased our inventory levels to meet
anticipated shipment requirements. Increased levels of inventory could
adversely affect our liquidity or increase the risk of inventory write offs.
We Could Be Adversely Affected If Our Products Fail to Meet FCC and Other
Regulatory Standards
The failure of our products to conform to the regulations established by
the Federal Communications Commission or similar foreign regulatory body or to
meet applicable testing requirements could adversely affect our business.
Aspects of our products are regulated by the FCC and other foreign regulators.
Our products must typically be tested before they are sold. 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 regulatory approvals
could delay the introduction of our products into the market and adversely
affect our operating results. In addition, changes in regulations or
requirements applicable to our products could 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.
Loss of Our Nasdaq National Market Listing Could Impair Liquidity in the Common
Stock and Adversely Affect Our Financial Condition
The delisting of our common stock from the Nasdaq National Market could
have a material adverse effect on the liquidity of our common stock and on our
financial condition. Our common stock may be delisted if we do not maintain at
least $4 million in net tangible assets and a stock price of at least $1.00, or
alternatively if we do not maintain a market capitalization of at least $50
million and a stock price of at least $5.00. Although there are other
requirements to maintain listing, we currently believe that we will be able to
satisfy these other requirements during the foreseeable future. Our recurring
losses and volatile stock price have from time to time caused us to fail to
satisfy the continued listing requirements. In January 1999, we successfully
appealed a notice of non-compliance from Nasdaq that we received based on our
temporary failure to satisfy the minimum net tangible asset requirement.
Termination of listing of the common stock on the Nasdaq National Market would
likely have a material adverse effect on the market price and liquidity of the
common stock, and on our ability to raise additional capital. Delisting could
also jeopardize secondary trading exemptions from state "blue sky" laws, further
affecting liquidity of the common stock. In addition, delisting would obligate
us to pay substantial monetary penalties to the holders of our outstanding
preferred stock. Our failure to pay those penalties could also result in
redemption of the preferred stock.
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Future Sales of Shares Could Adversely Affect Our Stock Price and Impair Our
Ability to Raise Capital
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, which is already volatile. In addition, the sale of these shares
could impair our ability to raise additional equity capital. This prospectus
covers the potential sale from time to time of up to 2,772,843 shares of common
stock. We have also previously registered for resale approximately 5,634,000
additional shares of common stock, including approximately 2,617,000 shares
underlying preferred stock and warrants, which have not yet been sold into the
market. In the case of our outstanding preferred stock, because we may elect to
pay accrued dividends in the form of common stock, the number of shares issuable
will increase as the market price drops. At June 30, 1999, we had reserved
approximately 2,670,000 shares of common stock for issuance under currently
approved employee benefit plans, including approximately 1,694,000 subject to
outstanding options. We may elect to reserve and issue additional shares in the
future.
Our Stock Price is Highly Volatile
The market price of our common stock in the past has been highly volatile,
and for the foreseeable future will likely continue to be highly volatile. This
is caused in part by the relatively low 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 higher aggregate market value. There are many events or circumstances,
including those highlighted in these risk factors, which could cause the market
price of our stock to fluctuate. Many of those events or circumstances are
outside our control. In addition, stock prices for many technology companies
fluctuate widely for reasons unrelated to their business, financial condition or
operating results.
Our Business May Be Adversely Affected by Class Action Litigation Due to Stock
Price Volatility
The filing of securities class action litigation against companies often
occurs following periods of volatility in the market price of a company's
securities. We have in the past and may in the future be a target of securities
litigation. Securities litigation could have a material adverse effect on our
business if it is filed against us because it could result in substantial costs
and a diversion of management's attention and resources. It may also adversely
affect our ability to raise capital, our sales efforts and our ability to
attract a strategic partner.
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Anti-Takeover Measures Could Prevent or Delay a Change in Control of Our Company
Our shareholder rights plan 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. In addition, 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.
In addition, Texas corporate laws, including the Texas Business Combination
Law, could also have the effect of hindering or delaying a takeover bid for the
company. These laws may inhibit takeover bids and decrease the chance of
shareholders realizing a premium to the then current market price of the common
stock as a result of a takeover bid. The Business Combination Law prohibits a
publicly traded Texas corporation from engaging in a broad range of business
combinations with a person who, together with affiliates and associates, owns or
did own 20% or more of the corporation's voting stock, for a period of three
years after the date of the transaction in which the person first became a 20%
owner, unless the business combination is approved in a prescribed manner.
We Could be Adversely Affected by Year 2000 Problems
We are exposed to the risk that the year 2000 issue could cause system
failures or miscalculations which could cause disruptions of operations,
including, among other things, a temporary inability to process financial
transactions or engage in similar normal business activities. We may be required
to modify or replace portions of our software and hardware so that those systems
will properly utilize dates beyond December 31, 1999. If necessary
modifications and replacements are not made, are not completed on time or are
insufficient to prevent systems failures or other disruptions, the year 2000
issue could have a material 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
. potential for reduced spending by other companies on our products as a
result of significant information systems spending on year 2000
compliance.
In addition, the possibility of interruption exists in the event that the
information systems of our suppliers, distributors, resellers and other
strategic marketing partners are not year 2000 compliant. The inability of our
suppliers, distributors, resellers and other strategic marketing partners to
complete their year 2000 resolution process in a timely fashion could materially
impact us. We can not predict the effect of non-compliance by these other
parties. In addition, disruptions in the economy generally resulting from the
year 2000 issues could also materially adversely affect us. We could be subject
to litigation for computer systems failure. We can not estimate the amount of
potential liability and lost revenue from year 2000 problems.
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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 these words and similar expressions are intended to identify the forward-
looking statements. These statements are not guarantees of future performance
and are subject to 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. These risks and uncertainties
include those noted in "Risk Factors" above and in the documents incorporated by
reference.
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
This prospectus covers the resale of the common stock issued and the common
stock issuable upon exercise of the warrants issued to selling shareholders in
the June 1999 $6 million private placement.
Summary of June 1999 Private Placement
Issuance of Common Stock and Warrants
On June 25, 1999, we completed a private placement of 2,132,955 shares of
our common stock and warrants to purchase 639,888 shares of our common stock to
three accredited investors: Cranshire Capital, L.P., Keyway Investments Ltd.,
and Lionhart Investments Ltd. The aggregate price of the securities was
approximately $6,000,000. In connection with the private placement, we entered
into a securities purchase agreement and a registration rights agreement with
the three investors. The following table summarizes the number of shares and
warrants issued and the purchase price paid.
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Investor Shares of Common Stock Warrants Purchase Price
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Cranshire Capital, L.P. 710,985 213,296 $2,000,000
Keyway Investments Ltd. 710,985 213,296 $2,000,000
Lionhart Investments Ltd. 710,985 213,296 $2,000,000
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Material Terms of the Securities Purchase Agreement
In the securities purchase agreement we granted the investors a right of
first refusal to acquire additional securities in any financing transactions we
undertake prior to December 25, 1999. If we issue additional shares of our
common stock prior to the effective date of the registration statement of which
this prospectus forms a part, then antidilution provisions contained in the
securities purchase agreement may require us to issue additional shares of
common stock to the investors so as to prevent dilution of the investors'
investment in our common stock. In addition, we agreed not to file with the SEC
any other registration statements covering the sale or resale of shares of our
common stock for a period of 90 days following the effective date of the
registration statement of which this prospectus forms a part.
Material Terms of the Warrants
The warrants entitle the holders to purchase our common stock at a price of
$4.02 per share through June 25, 2001. The exercise price was determined based
on the average closing bid price of our common stock over the five trading days
preceding the issuance of the warrants.
Material Terms of the Registration Rights Agreement
In the registration rights agreement we agreed to file the registration
statement of which this prospectus forms a part, covering the resale of the
common stock issued in the private placement and the shares of common stock
issuable upon exercise of the warrants issued in the private placement. We
agreed to pay all of the registration expenses. We must also pay penalties if
the registration statement is not declared effective by the SEC by October 23,
1999. These penalties may be paid in cash or, at the option of the investors,
in shares of our common stock.
Placement Agent Fees
PGN Capital Solutions, L.L.C. assisted us in arranging the sale of
securities to the participating investors. As compensation for the services
provided, we paid PGN Capital Solutions a cash fee equal to $360,000 or 6% of
the gross proceeds we received from the investors.
Selling Shareholder Table - Beneficial Ownership and Shares Offered for Sale
The following table lists the names of the selling shareholders, the number
of shares of common stock beneficially owned by each selling shareholder on July
12, 1999, and the number of shares, which may be offered for sale by this
prospectus. Each selling shareholder provided to us the information regarding
its share ownership. Because the selling shareholders may offer all, some or
none of their common stock, we can not give 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. At July 12, 1999, there were 20,186,766 shares of common stock
outstanding.
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Shares Beneficially Owned
After the Offering
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Shares Shares
Beneficially Owned Being Percent of
Selling Shareholder Prior to Offering Offered Number Outstanding
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Cranshire Capital, L.P. 924,281(1) 924,281 -- --
Keyway Investments Ltd. 924,281(1) 924,281 -- --
Lionhart Investments Ltd. 924,281(1) 924,281 -- --
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(1) Includes 213,296 shares issuable upon exercise of warrants.
PLAN OF DISTRIBUTION
This prospectus covers the resale of shares of common stock by the selling
shareholders and their pledgees, donees, assignees and other successors in
interest. The selling shareholders may sell their shares on the Nasdaq National
Market, in the over-the-counter market or through any other facility on which
the shares are traded, or in private transactions. These sales may be at market
prices or at negotiated prices. The selling shareholders may use the following
methods when selling shares:
. ordinary brokerage transactions and transactions in which the broker or
dealer solicits purchasers;
. block trades in which the broker or dealer attempts to sell the shares as
agent, but may position and resell a portion of the block as principal to
facilitate the transaction;
. purchases by a broker or dealer as principal and resale by the broker or
dealer for its account pursuant to this prospectus;
. privately negotiated transactions;
. any combination of these methods of sale; or
. any other legal method.
The selling shareholders may engage in short sales of the common stock and
deliver shares to close out their short positions. The selling shareholders may
also enter into put or call options or other transactions with broker-dealers or
others which require delivery to those persons of shares covered by this
prospectus.
Brokers, dealers or other agents participating in the distribution of the
shares of common stock may receive compensation in the form of discounts or
commissions from the selling shareholders, as well as the purchaser if they act
as agent for the purchaser. The discount or commission in a particular
transaction could be more than the customary amount. We know of no existing
arrangements between any selling shareholder and any underwriter, broker, dealer
or agent relating to the sale or distribution of the shares.
12
<PAGE>
The selling shareholders and any brokers or dealers that participate in the
sale of the shares may be deemed to be "underwriters" within the meaning of the
Securities Act. Any discounts, commissions or other compensation received by
these persons and any profit on the resale of the shares by them as principals
might be deemed to be underwriters' compensation. The selling shareholders may
agree to indemnify any broker, dealer or agent that participates in the sale of
the shares against various liabilities, including liabilities under the
Securities Act.
At the time a particular offer of shares is made, to the extent required we
will file a supplement to this prospectus which identifies the number of shares
being offered, the name of the selling shareholder, the name of any
participating broker or dealer, the amount of discounts and commissions, and any
other material information.
The selling shareholders and any other person participating in a
distribution will be subject to the applicable provisions of the Exchange Act
and its rules and regulations. For example, the anti-manipulative provisions of
Regulation M may limit the ability of the selling shareholders or others to
engage in stabilizing and other market making activities.
The selling shareholders may also sell their shares pursuant to Rule 144
under the Securities Act, rather than pursuant to this prospectus, so long as
they meet the criteria and conform to the requirements of the rule.
We will not receive any of the proceeds from the sale of the shares by the
selling shareholders. We will pay the registration and other offering expenses
related to this offering, but the selling shareholders will pay all underwriting
discounts and brokerage commissions incurred in connection with the offering.
Pursuant to the registration rights agreement for the June 1999 private
placement of common stock and warrants, we have agreed to indemnify the selling
shareholders against various liabilities, including liabilities under the
Securities Act.
In order to comply with some states' securities laws, if applicable, the
shares will be sold in those states only through registered or licensed brokers
or dealers. In addition, in some states the shares may not be sold unless they
have been registered or qualified for sale 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
The financial statements of Data Race, Inc. 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.
13
<PAGE>
The report of KPMG LLP covering the June 30, 1998 financial statements
contains an explanatory paragraph that states that the Company has suffered
recurring losses and incurred negative cash flow from operations, which
conditions raise substantial doubt about the entity'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.
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;
. Quarterly Report on Form 10-Q for the quarter ended December 31, 1998;
. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999;
. Current Report on Form 8-K filed August 4, 1998;
. Current Report on Form 8-K filed July 7, 1999; and
. Registration Statement on Form 8-A filed with the SEC on October 5,
1992, which contains a description of the terms of our common stock, as
well as any amendment or report filed later for the purpose of updating
the 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
14
<PAGE>
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 incorporated by reference in this prospectus. You
may read and copy the full registration statement and its exhibits at the SEC's
public reference rooms or their web site.
15
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses (other than underwriting discounts and commissions) in
connection with the issuance and distribution of the common stock registered
hereby are as follows:
SEC registration fee......................................... $ 2,313
Nasdaq Listing of Additional Shares filing fee............... 17,500
Legal fees and expenses...................................... 50,000*
Accounting fees and expenses................................. 2,500*
Miscellaneous................................................ 2,687*
------------
Total................................................... $ 75,000*
============
_______________
* 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.
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.
II-1
<PAGE>
Item 16. Exhibits
Exhibits
3.1 Articles of Amendment to and Restatement of the Articles of
Incorporation of the Company, filed December 27, 1991. (a)
3.2 Articles of Correction to Articles of Amendment to and
Restatement of the Articles of Incorporation of the Company,
filed August 13, 1992. (a)
3.3 Articles of Amendment to the Articles of Incorporation of the
Company, filed August 21, 1992. (a)
3.4 Statement of Resolution Establishing Series B Participating
Cumulative Preferred Stock. (b)
3.5 Statement of Designation, Preferences and Rights of Series D
Convertible Preferred Stock. (c)
3.6 Statement of Designation, Preferences and Rights of Series E
Convertible Preferred Stock. (c)
3.7 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)
5. Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (g)
10.1 Securities Purchase Agreement, dated June 25, 1999, between the
Company, Cranshire Capital, L.P., Kewyay Investments Ltd., and
Lionhart Investments Ltd. (f)
10.2 Registration Rights Agreement, dated June 25, 1999, between the
Company, Cranshire Capital, L.P., Kewyay Investments Ltd., and
Lionhart Investments Ltd. (f)
10.3 Warrants for June 1999 Private Placement (f)
23.1 Consent of KPMG LLP. (g)
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 the signature page to 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 Current Report filed August 4,
1998.
II-2
<PAGE>
(d) Filed as an exhibit to Form 10-Q Quarterly Report for the quarter
ended December 31, 1996.
(e) Filed as an exhibit to Form S-3 Registration Statement No. 333-
71319, effective April 20, 1999.
(f) Filed as an exhibit to Form 8-K Current Report filed July 7,
1999.
(g) Filed herewith.
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20
percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement, or any material change to such
information in the Registration Statement; provided,
however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a post-
effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act
of 1934 that are incorporated by reference in the
Registration Statement.
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities
offered herein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant, pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the
Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act of 1933
and will be governed by the final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such new securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Antonio, State of Texas, on July 22, 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
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.
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated below.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Dr. W. B. Barker President, Chief Executive Officer and July 22, 1999
- --------------------------------
Dr. W. B. Barker Director
/s/ Gregory T. Skalla Senior Vice President-Finance, Chief July 22, 1999
- --------------------------------
Gregory T. Skalla Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
/s/ Jeffrey P. Blanchard Chairman of the Board of Directors July 22, 1999
- --------------------------------
Jeffrey P. Blanchard
/s/ Matthew A. Kenny Director July 22, 1999
- --------------------------------
Matthew A. Kenny
/s/ George R. Grumbles Director July 22 1999
- --------------------------------
George R. Grumbles
/s/ Dwight E. Lee Director July 22, 1999
- --------------------------------
Dwight E. Lee
/s/ Edward A. Masi Director July 22, 1999
- --------------------------------
Edward A. Masi
</TABLE>
II-6
<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)
3.10 Articles of Amendment to the Articles of Incorporation of the
Company, filed August 21, 1992. (a)
3.11 Statement of Resolution Establishing Series B Participating
Cumulative Preferred Stock. (b)
3.12 Statement of Designation, Preferences and Rights of Series D
Convertible Preferred Stock. (c)
3.13 Statement of Designation, Preferences and Rights of Series E
Convertible Preferred Stock. (c)
3.14 Articles of Amendment to the Articles of Incorporation of the
Company, filed January 21, 1999. (e)
3.15 Statement of Designation, Preferences and Rights of Series F
Convertible Preferred Stock. (e)
3.16 Bylaws of the Company and Amendments to Bylaws. (a)(d)
5. Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (g)
10.1 Securities Purchase Agreement, dated June 25, 1999, between the
Company, Cranshire Capital, L.P., Kewyay Investments Ltd., and
Lionhart Investments Ltd. (f)
10.2 Registration Rights Agreement, dated June 25, 1999, between the
Company, Cranshire Capital, L.P., Kewyay Investments Ltd., and
Lionhart Investments Ltd. (f)
10.3 Warrants for June 1999 Private Placement (f)
23.1 Consent of KPMG LLP. (g)
23.3 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 the signature page to 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 Current Report filed August 4,
1998.
<PAGE>
EXHIBIT 5
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
300 Convent Street, Suite 1500
San Antonio, Texas 78205
(210) 281-7000
July 22, 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 2,772,843 shares
of the Company's Common Stock (the "Common Stock"), consisting of 2,132,955
outstanding shares of Common Stock (the "Outstanding Shares"), and 639,888
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 Warrant exercise;
b) at the time of the issuance of the shares of Common Stock upon the
exercise of the Warrants, the Company will have sufficient authorized
and unissued shares of Common Stock available for issuance;
c) the Warrants will be exercised in accordance with the applicable
warrant agreements; and
<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
from operations, which conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of that uncertainty.
/s/ KPMG LLP
KPMG LLP
San Antonio, Texas
July 22, 1999
