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As filed with the Securities and Exchange Commission on April 19, 1999
Registration No. 333-71319
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
Amendment No. 2 to
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_________________________
DATA RACE, INC.
(Exact name of Registrant as specified in its charter)
12400 Network Boulevard
San Antonio, Texas 78249
(210) 263-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive office)
_________________________
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<S> <C> <C>
Texas 3661 74-2272363
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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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: [_]
____________________
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
April 19, 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 3,688,778 Shares
DATA RACE, INC.
Common Stock
Our common stock is traded on the Nasdaq National Market under the symbol
"RACE." On April 14, 1999, the closing price of our common stock was
$4.125.
These shares of common stock are being sold by the security holders listed
under the heading "Selling Shareholders." We will not receive any of the
proceeds from the sales of the shares by the selling shareholders.
This prospectus does not cover 3,143,582 shares of common stock which are
being distributed concurrently under a different prospectus.
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 the prospectus. Any representation to the
contrary is a criminal offense.
_______________
The date of this prospectus is _____________, 1999.
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TABLE OF CONTENTS
Page
----
About DATA RACE, Inc................. 2
Risk Factors......................... 2
Forward-Looking Statements........... 9
Use of Proceeds...................... 10
Selling Shareholders................. 10
Plan of Distribution................. 15
Legal Opinions....................... 17
Experts.............................. 17
Where You Can Find More Information.. 17
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 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 would 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 affect 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 expect our limited
existing cash to last about six to nine 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.
Sales May Not Improve If We Do Not Increase Our Sales and Distribution
Capabilities
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 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.
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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.
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 delays 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
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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 materially and adversely affect 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 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.
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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 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.
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
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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 the preferred stock.
Our failure to pay those penalties could also result in redemption of the
preferred stock.
We May Not Have Sufficient Capital If We Are Required to Redeem the Outstanding
Preferred Stock
If we are required to redeem the preferred stock, we may not have
sufficient cash available to effect the redemption and our financial condition
could be adversely affected. The holders of the 2,500 outstanding shares of
Series D, E and F preferred stock have the right to require us to redeem their
shares at a redemption price of $1,200 per share, plus accrued dividends, 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;
. 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, we
would most likely be forced to attempt to quickly find other sources of
financing. If we could find other financing at all, it is not likely that the
financing would be on favorable terms. The inability to find other financing or
to obtain favorable terms and our resulting lack of liquidity could force us to
discontinue portions or all of our operations.
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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 3,688,778 shares of common
stock. We have also previously registered for resale 3,143,582 additional shares
of common stock, including 1,084,959 shares underlying preferred stock and
warrants, which have not yet been sold into the market. In the case of the
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 March 22, 1999, we had reserved approximately 2,351,835 shares of
common stock for issuance under currently approved employee benefit plans,
including 1,776,256 shares 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.
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
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realizing a premium to the then 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 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.
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
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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. We are not under
any duty to update publicly any forward-looking statements, whether as a result
of new information, future events or for other reasons.
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 issuable on
conversion of the preferred stock and exercise of the warrants issued to selling
shareholders in the second closing under our July 1998 $4 million private
placement. This prospectus also covers the resale of the common stock, and the
common stock issuable on exercise of the warrants, issued to selling
shareholders in our November 1998 $2.2 million private placement. Finally, this
prospectus covers the resale of the common stock issued to a selling shareholder
in connection with the extension of our investor relations consulting agreement
with the selling shareholder.
Following are summaries of these various transactions and descriptions of
the material relationships we have had with the selling shareholders in the last
three years.
SUMMARY OF JULY 1998 PRIVATE PLACEMENT
Issuance of Preferred Stock and Warrants
On July 24, 1998, as part of a $4 million private placement of convertible
preferred stock and warrants, we signed a securities purchase agreement and a
registration rights agreement with three investors: Sovereign Partners L.P.,
Dominion Capital Fund, Ltd., and First Capital Group of Texas II, L.P. Jeffrey
P. Blanchard, a managing director and owner of the company which serves as the
general partner of First Capital, has been a director of our company since
August 1985 and the chairman of the board since October 1996.
At the first closing in July 1998, Sovereign and Dominion bought Series D
preferred stock and Class A warrants, and First Capital bought Series E
preferred stock and Class B warrants. The three investors were also required to
purchase additional preferred stock and warrants at a second closing if we met
various conditions. We met those conditions. As part of the second closing,
Sovereign and Dominion bought additional shares of Series D preferred stock and
Class A warrants in December 1998, and First Capital bought shares of Series F
preferred stock and Class B warrants in January 1999. The following table
summarizes the number of shares and warrants issued, and the purchase price
paid, in the first and second closings:
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First Closing:
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<CAPTION>
Investor Shares of Preferred Stock Warrants Purchase Price
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<S> <C> <C> <C>
Sovereign Partners L.P. 1,000 Series D 226,415 Class A $1,000,000
Dominion Capital Fund, Ltd. 500 Series D 113,208 Class A $ 500,000
First Capital Group of Texas II, L.P. 750 Series E 140,625 Class B $ 750,000
Second Closing:
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Investor Shares of Preferred Stock Warrants Purchase Price
-------- ------------------------- -------- --------------
<S> <C> <C> <C>
Sovereign Partners L.P. 667 Series D 151,019 Class A $667,000
Dominion Capital Fund, Ltd. 333 Series D 75,396 Class A $333,000
First Capital Group of Texas II, L.P. 750 Series F 140,625 Class B $750,000
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The Series D preferred stock and the Class A warrants issued to Sovereign
and Dominion in the first closing have already been fully converted and
exercised for common stock. The Series D preferred stock and Class A warrants
issued in the second closing to Sovereign and Dominion, and the Series E and F
preferred stock and Class B warrants issued to First Capital are still
outstanding.
At our annual shareholders meeting in November 1998, pursuant to the
Nasdaq Marketplace Rules, our shareholders approved the issuance of common stock
upon conversion of the preferred stock and exercise of the warrants.
Pursuant to the securities purchase agreement, each investor agreed not
to engage in short sales of our common stock during the one-year period after
the second closing.
Material Terms of Preferred Stock
The outstanding Series D preferred stock is convertible into common stock
at a conversion price of $3.00 at any time. The Series D preferred stock
conversion price was determined based on the average market price of the common
stock on March 16, 1999, the date on which the preferred stock became
convertible. The Series E preferred stock is convertible into common stock at a
conversion price of $1.00 at any time after July 24, 1999. The Series F
preferred stock is convertible into common stock at a conversion price of
$3.43125 at any time after January 22, 2000. The Series E and F preferred stock
will become convertible earlier than those dates on the occurrence of any event
that would also trigger a redemption right. The number of shares of common
stock issuable on conversion of one share of preferred stock is computed by
dividing the share's stated value of $1,000 by the conversion price. Based on
their conversion prices, the outstanding Series D preferred stock is convertible
into 333,333 shares of common stock, the Series E preferred stock is convertible
into 750,000 shares of common stock, and the Series F preferred stock is
convertible into 218,579 shares of common stock.
The preferred stock bears an 8% cumulative dividend, payable upon
conversion of the preferred stock. We have the choice to pay the dividend either
in cash or common stock. We currently intend to pay the dividend in stock,
rather than cash.
The investors can require us to redeem their preferred stock for a
redemption price of $1,200 per share, plus accrued dividends, if any of the
following happens:
11
<PAGE>
. 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;
. 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;
If our common stock is delisted from the Nasdaq National Market, we must
either pay a penalty of up to 24% of the stated value of the preferred stock or
we must redeem the preferred stock.
The preferred stock does not vote on ordinary matters submitted to a
shareholder vote except for limited matters affecting the terms of the preferred
stock. In liquidation, the preferred stock is entitled to a liquidation
preference, before any distributions on the common stock, equal to the stated
value of $1,000 per share, plus accrued dividends.
Material Terms of Class A and B Warrants
The Class A warrants entitle the holders to purchase common stock any time
at a price of $0.6625 per share. The Class B warrants entitle the holders to
purchase common stock any time after one year from their issuance date at a
price of $0.80 per share of common stock. The exercise prices were based on
common stock prices when the securities purchase agreement was signed in July
1998. The warrants expire two years after their issuance dates.
Registration Rights Agreement
At the first closing we signed a registration rights agreement in which we
agreed to use our best efforts to register for resale the shares of common stock
underlying the preferred stock and warrants issued under the securities purchase
agreement. We have previously registered for resale the shares of common stock
underlying the preferred stock and warrants issued in the first closing. This
prospectus covers the resale of the common stock, including dividend shares,
delivered on conversion of the preferred stock issued in the second closing and
the common stock delivered on exercise of the warrants issued in the second
closing. Pursuant to the registration rights agreement, in order to permit the
resale of shares we issue in payment of the dividends on the preferred stock, we
are registering 200% of the number of shares issuable on conversion of the
Series D preferred stock and 150% of the number of shares issuable on conversion
of the Series F preferred stock. We are obligated to pay all of the
registration expenses. We must also pay penalties, at the monthly rate of 2% of
the stated value of the Series D and E preferred stock, for each day after April
15, 1999 that the registration statement is not declared effective by the SEC.
Placement Agent Fees
Michael Rosenblum and Steven Nehorayoff assisted us in arranging the sale
of preferred stock and warrants to Sovereign and Dominion. As compensation for
Mr. Rosenblum's services, in the first closing we paid a cash fee of $90,000 and
Class A warrants for 60,000 shares, and in the second closing we paid a cash fee
of $43,500 and Class A warrants for 22,968 shares. As compensation for Mr.
Nehorayoff's services, in the first closing we issued Class A warrants for
12
<PAGE>
279,623 shares, and in the second closing we issued Class A warrants for 148,683
shares. This prospectus covers the resale of the common stock underlying the
warrants issued to these persons in the second closing.
Summary of Consulting Agreement with Liviakis Financial Communications, Inc.
In July 1998 we entered into a consulting agreement with Liviakis Financial
Communications, Inc. Under the agreement, Liviakis Financial provides a wide
variety of public and investor relations services for us. As full compensation
for the services, in July 1998 we issued 1,406,475 shares of common stock to
Liviakis Financial and 468,825 shares of common stock to Robert Prag, senior
vice president of Liviakis Financial. We have previously registered these
shares of common stock for resale. Pursuant to the agreement we are required to
pay Liviakis Financial a fee of 2.5% of proceeds from any financing with persons
introduced to us by Liviakis Financial and a fee of 2% of the consideration paid
in an acquisition by us of a company introduced to us by Liviakis Financial.
As compensation for introducing us to Liviakis Financial and assisting us
in completing the agreement, we issued to Steven Nehorayoff 150,000 shares of
common stock. We have previously registered these shares of common stock for
resale.
In November 1998, we extended the consulting agreement with Liviakis
Financial from March 15, 1999 to January 1, 2000. As compensation for services
under the extended agreement, we issued an additional 200,000 shares of common
stock to Liviakis Financial. This prospectus covers the resale of these
additional shares by Liviakis Financial.
Pursuant to the consulting agreement, Liviakis Financial agreed that,
unless we consent, it will not sell any of the 1,606,475 shares issued to it
before January 1, 2000.
Summary of November 1998 Private Placement
On November 16, 1998, we entered into an agreement for the sale in a
private placement of $2.2 million of common stock and warrants to Liviakis
Financial and up to four other accredited investors. We sold a total of 977,776
shares of common stock and warrants for 977,776 shares of common stock. The
investors included Dr. W. B. Barker, our president and chief executive officer
since April 1995 and a director since May 1995. The following table summarizes
the number of shares and warrants issued, and the purchase price paid, in the
private placement:
<TABLE>
<CAPTION>
Investor Shares of Common Stock Warrants Purchase Price
-------- ---------------------- -------- --------------
<S> <C> <C> <C>
Liviakis Financial Communications, Inc. 488,889 488,889 $1,100,000
Robert S. London 355,555 355,555 $ 800,000
W. B. Barker 44,444 44,444 $ 100,000
Timothy D. Wilson, Sr. 44,444 44,444 $ 100,000
Anthony Altavilla 44,444 44,444 $ 100,000
</TABLE>
The warrants are exercisable for two years at a price of $2.25 per share.
The investors have agreed not to sell their shares, including the common stock
underlying the warrants, for the one-year period following closing. The
investors other than Dr. Barker were introduced to us by Liviakis Financial.
Pursuant to our consulting agreement with Liviakis Financial, we issued
approximately 11,666 shares of common stock and warrants for 11,666 shares of
common stock, on the same terms as the private placement, to each of Liviakis
Financial and Robert Prag.
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
March 22, 1999, and the number of
13
<PAGE>
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 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. This prospectus will
not be used to offer or sell more than 3,688,778 shares of common stock. At
March 22, 1999, there were 17,378,372 shares of common stock outstanding.
<TABLE>
<CAPTION>
Shares Beneficially Owned
Shares After the Offering
Beneficially Shares ----------------------------
Owned Prior Being Percent of
Selling Shareholder to Offering Offered(1) Number Outstanding
------------------- ----------- ---------- ------- -----------
<S> <C> <C> <C> <C>
Sovereign Partners L.P....................... 373,352(2) 595,685 -- --
Dominion Capital Fund, Ltd................... 186,396(3) 297,396 -- --
First Capital Group of Texas II, L.P......... 1,249,829(4) 468,494 890,625 4.9%
Steven Nehorayoff............................ 426,306(5) 148,683 277,623 1.6%
Michael S. Rosenblum......................... 58,368(6) 22,968 35,400 *
Liviakis Financial Communications, Inc....... 2,751,453(7) 1,177,778 1,507,875 9.1%
Robert S. London............................. 1,126,910(8) 711,110 415,800 2.4%
Timothy D. Wilson, Sr........................ 114,138(9) 88,888 25,250 *
Anthony Altavilla............................ 88,888(10) 88,888 -- --
Dr. W. B. Barker............................. 163,065(11) 88,888 74,177 *
</TABLE>
____________________
*Less than 1%
(1) In the case of Sovereign and Dominion, the shares being offered includes
200% of the number of shares issuable on conversion of the Series D
preferred stock. In the case of First Capital, the shares being offered
includes 150% of the number of shares issuable on conversion of the Series
F preferred stock.
(2) Represents 222,333 shares issuable on conversion of the Series D preferred
stock and 151,019 shares issuable on exercise of Class A warrants.
(3) Represents 111,000 shares issuable on conversion of the Series D preferred
stock and 75,396 shares issuable on exercise of Class A warrants.
(4) Includes 750,000 shares issuable on conversion of the Series E preferred
stock, 218,579 shares issuable on conversion of the Series F preferred
stock and 281,250 shares issuable on exercise of Class B warrants.
Although First Capital may not convert or exercise its Class B warrants
before July 24, 1999, its beneficial ownership assumes the full conversion
and exercise of its preferred stock and warrants on March 22, 1999. Does
not include 74,615 shares beneficially owned by Jeffrey P. Blanchard, a
managing director and owner of the company which serves as the general
partner of the selling shareholder. The selling shareholder disclaims any
beneficial ownership in those shares.
(5) Includes 148,683 shares issuable on exercise of Class A warrants. Also
includes 94,300 shares owned by the selling shareholder's mother.
(6) Represents shares issuable on exercise of Class A warrants.
14
<PAGE>
(7) Includes 488,889 shares issuable on exercise of warrants acquired in the
November 1998 private placement. Does not include 61,400 shares owned by
John M. Liviakis, an officer, director and owner of the selling
shareholder. The selling shareholder disclaims any beneficial ownership in
those shares.
(8) Includes 355,555 shares issuable on exercise of warrants acquired in the
November 1998 private placement.
(9) Includes 44,444 shares issuable on exercise of warrants acquired in the
November 1998 private placement.
(10) Includes 44,444 shares issuable on exercise of warrants acquired in the
November 1998 private placement.
(11) Includes 44,444 shares issuable on exercise of warrants acquired in the
November 1998 private placement, and 37,500 shares subject to exercisable
stock options. Does not include 342,750 shares subject to options not
exercisable currently or within 60 days.
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.
15
<PAGE>
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.
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 July 1998 private
placement of preferred stock and warrants, we have agreed to indemnify
Sovereign, Dominion and First Capital 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.
16
<PAGE>
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.
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.
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;
. Current Report on Form 8-K filed August 4, 1998; and
17
<PAGE>
. 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
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
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. 333-71319). 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.
18
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses (other than underwriting discounts and commissions) in
connection with the issuance and distribution of the common stock registered
hereby are as follows:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee..................................... $8,422
Nasdaq Listing of Additional Shares filing fee........... 35,000
Legal fees and expenses.................................. 30,000*
Accounting fees and expenses............................. 5,000*
Miscellaneous............................................ 1,578*
----------
Total................................................ $ 80,000*
==========
</TABLE>
_______________
* 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.
II-1
<PAGE>
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.
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. (h)
3.8 Statement of Designation, Preferences and Rights of Series F
Convertible Preferred Stock. (h)
3.9 Bylaws of the Company and Amendments to Bylaws. (a)(d)
4.1 Form of Class A Common Stock Purchase Warrant for July 1998 Private
Placement. (c)
4.2 Form of Class B Common Stock Purchase Warrant for July 1998 Private
Placement. (c)
5. Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (h)
10.1 Purchase Agreement, dated July 24, 1998, between the Company,
Sovereign Partners L.P., Dominion Capital Fund, Ltd. and First Capital
Group of Texas II, L.P. (c)
10.2 Registration Rights Agreement, dated July 24, 1998, between the
Company, Sovereign Partners L.P., Dominion Capital Fund, Ltd., and
First Capital Group of Texas II, L.P. (c)
10.3 Modification Agreement, dated November 5, 1998, between the Company,
Sovereign Partners L.P., Dominion Capital Fund, Ltd., and First
Capital Group of Texas II, L.P. (e)
10.4 Consulting Agreement, dated July 13, 1998, between the Company and
Liviakis Financial Communications, Inc. (f)
10.5 Amendment No. 1 to Consulting Agreement, dated November 19, 1998,
between the Company and Liviakis Financial Communications, Inc. (g)
10.6 Subscription Agreements between the Company and Liviakis Financial
Communications, Inc., Robert S. London, Anthony Altavilla, Timothy D.
Wilson, Sr. and Dr. W.B. Barker. (g)
23.1 Consent of KPMG LLP. (i)
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in
opinion filed as Exhibit 5)
24. Power of Attorney. (h)
________________________________
(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.
II-2
<PAGE>
(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 as an exhibit to Form S-3 Registration Statement No. 333-62147,
effective November 7, 1998.
(f) Filed as an exhibit to Form 10-Q Quarterly Report for the quarter
ended September 30, 1998.
(g) Filed an exhibit to Form 10-Q Quarterly Report for the quarter ended
December 31, 1998.
(h) Previously filed as an exhibit to this Registration Statement.
(i) 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.
(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.
II-3
<PAGE>
(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 Amendment No. 1 to
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Antonio, State of Texas, on April
19, 1999.
DATA RACE, INC.
By: /s/ Dr. W. B. Barker
-----------------------------------------
Dr. W. B. Barker
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to this Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Dr. W. B. Barker President, Chief Executive Officer and April 19, 1999
- -------------------------------- Director
Dr. W. B. Barker
/s/ Gregory T. Skalla Senior Vice President-Finance, Chief April 19, 1999
- -------------------------------- Financial Officer, Treasurer and Secretary
Gregory T. Skalla (Principal Financial and Accounting Officer)
/s/ Jeffrey P. Blanchard* Chairman of the Board of Directors April 19, 1999
- --------------------------------
Jeffrey P. Blanchard
/s/ Matthew A. Kenny* Director April 19, 1999
- --------------------------------
Matthew A. Kenny
/s/ George R. Grumbles* Director April 19, 1999
- --------------------------------
George R. Grumbles
/s/ Dwight E. Lee* Director April 19, 1999
- --------------------------------
Dwight E. Lee
/s/ Edward A. Masi* Director April 19, 1999
- --------------------------------
Edward A. Masi
/s/ Gregory T. Skalla
- --------------------------------
* By Gregory T. Skalla, as attorney-in-fact pursuant to power of attorney previously filed.
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
Exhibits
3.1 Articles of Amendment to and Restatement of the Articles of Incorporation
of the Company, filed December 27, 1991. (a)
3.2 Articles of Correction to Articles of Amendment to and Restatement of the
Articles of Incorporation of the Company, filed August 13, 1992. (a)
3.3 Articles of Amendment to the Articles of Incorporation of the Company,
filed August 21, 1992. (a)
3.4 Statement of Resolution Establishing Series B Participating Cumulative
Preferred Stock. (b)
3.5 Statement of Designation, Preferences and Rights of Series D Convertible
Preferred Stock. (c)
3.6 Statement of Designation, Preferences and Rights of Series E Convertible
Preferred Stock. (c)
3.7 Articles of Amendment to the Articles of Incorporation of the Company,
filed January 21, 1999. (h)
3.8 Statement of Designation, Preferences and Rights of Series F Convertible
Preferred Stock. (h)
3.9 Bylaws of the Company and Amendments to Bylaws. (a)(d)
4.1 Form of Class A Common Stock Purchase Warrant for July 1998 Private
Placement. (c)
4.2 Form of Class B Common Stock Purchase Warrant for July 1998 Private
Placement. (c)
5. Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (h)
10.1 Purchase Agreement, dated July 24, 1998, between the Company, Sovereign
Partners L.P., Dominion Capital Fund, Ltd. and First Capital Group of Texas
II, L.P. (c)
10.2 Registration Rights Agreement, dated July 24, 1998, between the Company,
Sovereign Partners L.P., Dominion Capital Fund, Ltd., and First Capital
Group of Texas II, L.P. (c)
10.3 Modification Agreement, dated November 5, 1998, between the Company,
Sovereign Partners L.P., Dominion Capital Fund, Ltd., and First Capital
Group of Texas II, L.P. (e)
10.4 Consulting Agreement, dated July 13, 1998, between the Company and Liviakis
Financial Communications, Inc. (f)
10.5 Amendment No. 1 to Consulting Agreement, dated November 19, 1998, between
the Company and Liviakis Financial Communications, Inc. (g)
10.6 Subscription Agreements between the Company and Liviakis Financial
Communications, Inc., Robert S. London, Anthony Altavilla, Timothy D.
Wilson, Sr. and Dr. W.B. Barker. (g)
23.1 Consent of KPMG LLP. (i)
23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in opinion
filed as Exhibit 5)
24. Power of Attorney. (h)
________________________________
(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 as an exhibit to Form S-3 Registration Statement No. 333-62147,
effective November 7, 1998.
(f) Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended
September 30, 1999
(g) Filed as an exhibit to Form 10-Q Quarterly Report for the quarter ended
December 31, 1998
(h) Previously filed as an exhibit to this Registration Statement.
(i) Filed herewith.
<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
April 19, 1999
