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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
December 31, 1998 0-20706
DATA RACE, Inc.
(Exact name of registrant as specified in its charter)
Texas 74-2272363
(State of Incorporation) (I.R.S. Employer Identification No.)
12400 Network Boulevard
San Antonio, Texas 78249
Telephone (210) 263-2000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
----- -----
On February 5, 1999, there were 17,044,235 outstanding shares of Common Stock,
no par value.
1
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DATA RACE, Inc.
INDEX TO FORM 10-Q
Page
Number
------
PART I. FINANCIAL INFORMATION
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Item 1. Interim Condensed Financial Statements (Unaudited):
Condensed Balance Sheets as of December 31, 1998 and June 30, 1998.. 3
Condensed Statements of Operations for the Three Months
and Six Months Ended December 31, 1998 and 1997..................... 4
Condensed Statements of Cash Flows for the Six Months
Ended December 31, 1998 and 1997.................................... 5
Notes to Interim Condensed Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 13
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings................................................... 14
Item 2. Changes in Securities............................................... 14
Item 3. Defaults Upon Senior Securities..................................... 16
Item 4. Submission of Matters to a Vote of Security Holders................. 16
Item 5. Other Information................................................... 17
Item 6. Exhibits and Reports on Form 8-K.................................... 18
SIGNATURES.................................................................. 19
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. INTERIM CONDENSED FINANCIAL STATEMENTS
- -----------------------------------------------
DATA RACE, INC.
CONDENSED BALANCE SHEETS
UNAUDITED
<TABLE>
<CAPTION>
AS OF
-------------------------------------------------
DEC. 31, 1998 JUNE 30, 1998
----------------------- ----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 3,726,374 $ 1,644,294
Accounts receivable, net....................................... 442,056 321,103
Inventory...................................................... 568,333 542,963
----------------------- ----------------------
Total current assets......................................... 4,736,763 2,508,360
Property and equipment, net...................................... 1,302,489 1,475,132
Other assets, net................................................ 25,389 25,389
Total assets................................................. $ 6,064,641 $ 4,008,881
======================= ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 444,828 $ 346,973
Accrued expenses............................................... 463,634 1,104,910
----------------------- ----------------------
Total current liabilities.................................... 908,462 1,451,883
Series D convertible preferred stock............................. 339,966 -
Commitments and contingencies....................................
Shareholders' equity:
Series A convertible preferred stock........................... - 224,970
Series C convertible preferred stock........................... - 1,380,001
Series E convertible preferred stock........................... 641,712 -
Common stock................................................... 40,609,052 33,334,779
Additional paid in capital..................................... 4,836,495 1,882,303
Retained earnings (deficit).................................... (41,271,047) (34,265,055)
Total shareholders' equity................................... 4,816,213 2,556,998
Total liabilities and shareholders' equity.................. $ 6,064,641 $ 4,008,881
======================= ======================
</TABLE>
See accompanying notes to interim condensed financial statements
3
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DATA RACE, Inc.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Dec. 31, Six Months Ended Dec. 31,
-------------------------------------------- -------------------------------------------
1998 1997 1998 1997
--------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Total revenue........................... $ 787,583 $ 1,574,317 $ 1,698,607 $ 2,728,242
Cost of revenue......................... 553,666 1,179,688 1,152,862 2,184,292
--------------------- ------------------- ------------------- --------------------
Gross profit......................... 233,917 394,629 545,745 543,950
--------------------- ------------------- ------------------- --------------------
Operating expenses:
Engineering and product 584,479 1,177,660 1,179,011 2,251,079
development...........................
Sales and marketing.................... 531,913 1,126,264 1,152,088 2,213,326
General and administration............. 1,380,104 580,218 2,822,732 1,339,756
--------------- ----------------
Total operating expenses............. 2,496,496 2,884,142 5,153,831 5,804,161
--------------------- ------------------- ------------------- --------------------
Operating loss....................... (2,262,579) (2,489,513) (4,608,086) (5,260,211)
--------------------- ------------------- ------------------- --------------------
Other income............................ 28,748 32,752 56,129 79,261
--------------------- ------------------- ------------------- --------------------
Loss before income taxes........... (2,233,831) (2,456,761) (4,551,957) (5,180,950)
Net loss............................. $ (2,233,831) $ (2,456,761) $ (4,551,957) $ (5,180,950)
===================== =================== =================== ====================
Per share data:
Net loss............................. (2,233,831) (2,456,761) (4,551,957) (5,180,950)
Effect of beneficial conversion
feature of convertible preferred
stock............................... (1,172,488) (107,292) (2,454,035) (250,523)
--------------------- ------------------- ------------------- --------------------
Net loss applicable to common
stock............................... (3,406,319) (2,564,053) (7,005,492) (5,431,473)
Net basic and diluted loss per
share applicable to common stock $ (0.22) $ (0.46) $ (0.48) $ (1.00)
===================== =================== =================== ====================
Weighted average shares outstanding..... 15,645,000 5,549,000 14,741,000 5,407,000
--------------------- ------------------- ------------------- --------------------
</TABLE>
See accompanying notes to interim condensed financial statements
4
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DATA RACE, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Six Months Ended Dec. 31,
----------------------------------------------------
1998 1997
------------------------- ----------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (4,551,957) $ (5,180,950)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Depreciation and amortization.................................. 175,503 294,515
Non-cash consulting fee........................................ 1,890,813 -
Gain on sales of property and equipment........................ - (1,639)
Changes in assets and liabilities:
Accounts receivable............................................ (120,953) 1,213,254
Inventory...................................................... (25,370) 175,368
Prepaid expenses, deposits, and other assets................... - 23,189
Accounts payable............................................... 97,855 (373,276)
Accrued expenses............................................... (641,276) (126,703)
Other current liabilities...................................... - (932)
------------------------- ----------------------
Net cash used in operating activities......................... (3,175,385) (3,977,174)
------------------------- ----------------------
Cash flows from investing activities:
Purchase of property and equipment.............................. (5,695) (30,909)
Proceeds from sale of property and equipment.................... 2,835 2,420
------------------------- ----------------------
Net cash used in investing activities......................... (2,860) (28,489)
------------------------- ----------------------
Cash flows from financing activities:
Net proceeds from the issuance of preferred stock............... 2,859,346 4,616,724
Net proceeds from the issuance of common stock.................. 2,400,979 85,828
------------------------- ----------------------
Net cash provided by financing activities..................... 5,260,325 4,702,552
------------------------- ----------------------
Net increase (decrease) in cash and cash equivalents............. 2,082,080 696,889
Cash and cash equivalents at beginning of period................. 1,644,294 4,535,768
------------------------- ----------------------
Cash and cash equivalents at end of period....................... $ 3,726,374 $ 5,232,657
========================= ======================
</TABLE>
See accompanying notes to interim condensed financial statements
5
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DATA RACE, Inc.
NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS
UNAUDITED
1) Summary of Significant Accounting Policies
- ----------------------------------------------
Description of Business
DATA RACE, Inc. ("DATA RACE" or the "Company") designs, manufactures, and
markets a line of communication products for remote access to the corporate
environment. Its unique client/server product, the Be There! Remote Access
System, gives teleworkers access to all elements of corporate communications
networks, including the PBX, Intranet, and Internet. Through Be There!, remote
workers send and receive e-mail, fax and phone calls simultaneously over a
single phone line. The Company also designs and manufactures advanced custom
modem products and network multiplexers that carry data, network, voice, and fax
traffic among a company's multiple offices.
Basis of Presentation
The unaudited interim financial statements reflect all adjustments (consisting
of normal recurring accruals) that in the opinion of management are necessary
for a fair presentation of the financial position, results of operations and
cash flows for such periods. These financial statements should be read in
conjunction with the Company's financial statements and notes thereto included
in the June 30, 1998 Annual Report and the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998. The condensed balance sheet data as of June
30, 1998 included herein has been derived from such audited financial
statements. Interim period results are not necessarily indicative of the
results to be expected for any future periods or the full year.
2) Earnings Per Share
- -----------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share. FASB
Statement No. 128 supersedes APB Opinion No. 15, Earnings Per Share, and
specifies the computation, presentation, and disclosure requirements for
earnings per share ("EPS"). It replaces Primary EPS and Fully Diluted EPS with
Basic EPS and Diluted EPS, respectively. Basic EPS, unlike Primary EPS,
excludes all dilution while Diluted EPS, like Fully Diluted EPS, reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted loss per share approximates basic loss per share as no potential common
shares are to be included in the computation when a loss from continuing
operations available to common shareholders exists. The Company had
approximately 1,585,000 and 1,475,000 options outstanding as of December 31,
1998 and 1997 respectively. The Company had 1,000 shares of Series D Convertible
Preferred Stock and 750 shares of Series E Convertible Participating Preferred
6
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Stock outstanding as of December 31, 1998. The Company had 705 shares of Series
A Convertible Preferred Stock and 5,000 shares of Series C Convertible
Participating Preferred Stock outstanding as of December 31, 1997. The Company
had warrants to purchase 713,089 shares of common stock at $.06625, 140,625
shares of common stock at $0.80, 933,334 shares of common stock at $2.25, 25,274
shares of common stock at $16.375 and 53,977 shares of common stock at $6.435
outstanding at December 31, 1998. The Company had warrants to purchase 45,800
shares of common stock at $16.375 and 139,861 shares of common stock at $6.435
outstanding at December 31, 1997. No Series D or Series E Convertible Preferred
Stock and related warrants were outstanding as of December 31, 1997. All
previously reported per share amounts have been restated to conform to the new
presentation.
3) Inventory
- -------------
Inventory is valued at the lower of standard cost (approximates first-in, first-
out) or market (net realizable value). Inventory consists of the following:
December 31, June 30,
1998 1998
------------ ------------
Finished goods $ 12,356 $ 13,859
Work in process 405,151 256,285
Raw materials 150,826 272,819
------------ ------------
Total inventory $ 568,333 $ 542,963
============ ============
4) Convertible Preferred Stock
- ------------------------------
In July 1998, the Company completed the first closing of a private placement
(the "July Private Placement") of its Series D Convertible Preferred Stock
("Series D Preferred Stock") and related Common Stock Purchase Warrants ("Class
A Warrants") to Sovereign Partners L.P. and Dominion Capital Fund, Ltd. (the
"Class A Investors"), for an aggregate price of $1,500,000, and its Series E
Convertible Preferred Stock ("Series E Preferred Stock") and related Common
Stock Purchase Warrants ("Class B Warrants") to First Capital Group of Texas II,
L.P. (the "Class B Investor"), an investment firm managed by the Company's
Chairman of the Board, for a price of $750,000.
On December 17, 1998, the Company completed the second closing of the July
Private Placement of Series D Preferred Stock and related Class A Warrants to
the Class A Investors for an aggregate price of $1,000,000. On January 7, 1999,
the Company issued its call to the Class B Investor and on January 22, 1999
completed the second closing of the July Private Placement of Series F Preferred
Stock and related Class B Warrants for an aggregate price of $750,000. The
Company has used and intends to use the proceeds for general corporate purposes,
primarily for working capital to promote and further develop the Be There!
remote access system product line.
7
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Each of the Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock (the "Preferred Stock") has a stated value of $1,000 per share;
bears an 8% premium payable upon conversion or redemption or in liquidation (in
the case of conversion the Company may elect to pay such premium in Common
Stock); is non-voting except in limited circumstances; ranks senior to the
Common Stock in liquidation; and is redeemable at a premium at the option of the
holder upon the occurrence of certain major corporate transactions and
triggering events.
The Series D Preferred Stock is convertible into Common Stock of the Company
("Common Stock") at the option of the holder beginning March 17, 1999 (subject
to acceleration in certain events), at a conversion price equal to 80% of the
trailing five-day average closing bid price of the Common Stock on the
conversion date, subject to a minimum conversion price equal to the trailing 15-
day average closing bid price of the Common Stock 90 days after issuance and
subject to a maximum conversion price equal to the lesser of $3.00 or the
trailing five-day average closing bid price of the Common Stock 90 days after
issuance. The Series E Preferred Stock is convertible into Common Stock at the
option of the holder beginning July 24, 1999 (subject to acceleration in certain
events), at a conversion price equal to $1.00 (which represents a premium to the
Common Stock closing price of $0.5938 on July 8, 1998, the date the Company
reached an agreement in principle with the Investors regarding the terms of the
July Private Placement). The Series F Preferred Stock is convertible into Common
Stock at the option of the holder beginning on January 22, 2000 (subject to
acceleration in certain events), at a conversion price of $3.4313 (representing
the trailing five-day average closing bid price of the Common Stock on the date
the Company issued the call notice to the Class B Investor). In each case, the
number of shares of Common Stock issuable upon conversion of one share of
Preferred Stock is computed by dividing the share's stated value of $1,000 by
the applicable conversion price (plus any premium to the extent paid in shares).
The Class A Warrants issued at the first closing have been exercised in full.
The Class A Warrants issued at the second closing are exercisable for an
aggregate of 226,415 shares of Common Stock at a price of $0.6625 per share,
beginning on the earlier of the effective date of the applicable registration
statement or March 17, 1999 (subject to acceleration in certain events). The
Class B Warrants issued at the first and second closing are exercisable for an
aggregate of 281,250 shares of Common Stock at a price of $0.80 per share, one
year after their respective issuance dates (subject to acceleration in certain
events). These warrant exercise prices for the Class A and Class B Warrants
represent a premium to the Common Stock closing price of $0.5938 on July 8,
1998, the date the Company reached an agreement in principle with the Investors
regarding the terms of the July Private Placement.
As of November 18, 1998 all shares of the initial 1,500 shares of Series D
Preferred Stock had been converted into 779,386 shares of Common Stock. As of
February 5, 1999 none of the 1,000 shares of Series D Preferred Stock issued in
the second closing had been converted. As of February 5, 1999 none of the 750
shares of Series E Preferred Stock or 750 shares of Series F Preferred Stock had
been converted.
8
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5) Restricted Common Stock
- --------------------------
On November 15, 1998, the Company obtained a binding commitment for a private
placement (the "November Private Placement") of its restricted common stock and
common stock purchase warrants to up to five accredited investors, for an
aggregate price of $2,200,000. The purchase price for one share of common stock
and one warrant was $2.25. Each warrant entitles the holder to purchase one
share of common stock at an exercise price of $2.25 per share, at any time on or
before the second anniversary of the closing date.
The investors included the Company's President and CEO and Liviakis Financial
Communications Inc. ("LFC"). The investors other than LFC are prohibited from
selling any common stock or warrants from the November Private Placement prior
to the first anniversary date of the closing. LFC is prohibited from selling
any common stock or warrants from the November Private Placement prior to
January 1, 2000.
As of February 5, 1999, 977,778 restricted common stock shares and 977,778
restricted purchase warrants were outstanding, of which 488,889 restricted
common stock shares and 488,889 restricted purchase warrants belong to LFC and
44,444 restricted common stock shares and 44,444 restricted purchase warrants
belong to the Company's President and CEO. In addition as described in Note 7,
the Company issued restricted common stock to LFC in connection with the
extension of the LFC consulting agreement.
6) Accounting Treatment for Convertible Preferred Securities
- ------------------------------------------------------------
The value attributed to the Warrants and the non-cash offering costs of the
Series D and Series E Preferred Stock have been recognized by allocating a
portion of the proceeds to additional paid-in-capital. The beneficial
conversion feature of the Series E Preferred Stock has not been allocated a
portion of the offering proceeds, rather, the beneficial conversion feature will
be accreted into additional paid-in-capital over the one year holding period.
The beneficial conversion feature is calculated, at the date of issuance, as the
difference between the conversion price and the fair value of the common stock
into which the security is convertible at the date the transaction closed. The
computation is made using the conversion terms most beneficial to the investor,
regardless of the actual discount applied upon conversion. The value of the
Warrants is calculated using a Black-Scholes model and may or may not correspond
to a market value.
The calculated intrinsic value of the beneficial conversion features of the
Series D and Series E Preferred Stock, the offering costs and the premium will
result in non-cash charges of approximately $3,729,000 to earnings (loss)
available to common shareholders in the computation of earnings (loss) per
common share over the conversion period as required by the SEC guidelines. As of
December 31, 1998 approximately $2,454,000 has been charged. As a result, the
Company will show these non-cash charges to earnings (loss) available to common
shareholders in the computation of earnings (loss) per common share over the
period from July 1998 through June 1999.
The Series D Preferred Stock issued in the December 1998 second closing is
presented in the accompanying balance sheet as debt to the Company because the
registration statement registering the resale of Common Stock into which such
Series D Preferred Stock is convertible has not been declared effective by the
SEC. At such time as the registration statement is declared effective, the
Series D Preferred Stock will be reclassified as equity of the Company.
9
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7) Consulting Agreement
- -----------------------
In July 1998, the Company entered into a consulting agreement with Liviakis
Financial Communications Inc. ("LFC"). The Company issued shares of Common Stock
pursuant to this consulting agreement and recorded a non-cash expense of
approximately $1,266,000.
In November 1998, the Company extended the consulting agreement with LFC in
exchange for 200,000 shares of restricted Common Stock. As a result the Company
recorded a $625,000 non-cash expense in the quarter ended December 31, 1998. As
part of the consulting agreement extension, LFC agreed to extend the lock-up on
its portion of the original consulting agreement shares until January 1, 2000
and Prag agreed to extend the lock-up on his portion of the original consulting
agreement shares until January 1, 2000, or until he is no longer an officer of
the LFC, whichever comes first.
8) Subsequent Events
- --------------------
On January 15, 1999, the Company held a special shareholders meeting to consider
a proposal to approve an amendment to the Company's Articles of Incorporation,
increasing the authorized number of shares of Common Stock. The proposal was
approved.
On January 22, 1999, the Company completed the second closing of the Private
Placement of Series F Preferred Stock and related Class B Warrants to the Class
B Investor for an aggregate price of $750,000. See Note 4.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
- -------------
Results of Operations
Total revenue for the three months ended December 31, 1998 decreased 50% to
$788,000 from $1,574,000 in the comparable period of the prior fiscal year.
Revenue for the six months ended December 31, 1998 decreased 38% to $1,699,000
from $2,728,000 in the comparable period of the prior fiscal year. These
decreases were primarily due to the completion during the second quarter of the
prior year of substantially all shipments under existing custom modem contracts.
Gross profit margin was 30% and 32% for the three and six months ended December
31, 1998, up from 25% and 20% from the comparable periods of the prior fiscal
year. The increased gross margins are primarily due to decreased manufacturing
variances primarily attributable to reduced manufacturing spending and inventory
obsolescence reserve adjustments consistent with the Company's current inventory
levels and projected activity levels.
Engineering and product development expenses for the three and six months ended
December 31, 1998 decreased 50% and 48% respectively from the comparable periods
of the prior fiscal year. These decreases were primarily due to reductions in
outside development contracts for Be There! products and reduced development
payroll for the custom modem and network multiplexer products.
Sales and marketing expenses for the three and six months ended December 31,
1998 decreased 53% and 48% respectively from the comparable periods of the prior
fiscal year. These decreases were primarily due to the Company's suspension of
most outside advertising.
General and administrative expenses for the three and six months ended December
31, 1998 increased 138% and 111% respectively from the comparable periods of the
prior fiscal year. These increases were attributable to non-cash expenses
associated with a consulting agreement, and legal expenses associated with the
patent infringement lawsuit. This was offset in part by spending reductions
over the six-month period, and accrual and reserve adjustments consistent with
the Company's current activity levels.
Income tax benefits related to the losses for the three and six months ended
December 31, 1998 were not recognized because the utilization of such benefits
is not assured. As of December 31, 1998, the Company had federal tax net
operating loss carryforwards of approximately $40,000,000, which expire
beginning in 2009. The value of these net operating loss carryforwards is
dependent on future events and complex tax code provisions, and cannot be
assured or stated with certainty.
11
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Liquidity and Capital Resources
Operating losses have had and continue to have a substantial negative effect on
the Company's cash balance. At December 31, 1998, the Company had approximately
$3,726,000 in cash and cash equivalents.
The Company received proceeds of approximately $2,200,000 from the issuance of
the November Private Placement of restricted common stock and warrants. See
Item 2 of this report for a more complete description of the terms of the
transaction. In December 1998, the Company completed the second closing of the
private placement of the Series D Preferred Stock and related Class A Warrants
for an aggregate price of $1,000,000. In January 1999, the Company completed
the second closing of the private placement of the Series F Preferred Stock and
related Class B Warrants for an aggregate price of $750,000. The Preferred
Stock is redeemable under certain circumstances.
In January 1999, the Company had a hearing before the Nasdaq Listing
Qualifications Panel concerning non-compliance with the net tangible asset
requirement for continued listing on the Nasdaq National Market. In February
1999, the Company was notified that the Panel determined that the Company had
demonstrated compliance with all requirements for continued listing and the
Panel decided to continue the listing of the Company's securities on the Nasdaq
National Market.
The Company's ability to sustain operations, make future capital expenditures
and fund the development and marketing of new or enhanced products is highly
dependent on existing cash, the ability to raise additional capital, and the
ability to successfully attract a strategic partner. The timing and amount of
the Company's future capital requirements can not be accurately predicted. The
Company does not anticipate a return to profitability as long as its
expenditures on the Be There! system remain disproportionate to attendant
revenue. The Company will likely require additional financing in the future; the
failure to obtain such financing when needed would have a substantial adverse
effect on the Company.
Year 2000 Compliance
The Company has been evaluating and adjusting all known date-sensitive systems
and equipment for the Year 2000 compliance. The assessment phase of the Year
2000 project is substantially complete. Company personnel performed virtually
all of the compliance. The total estimated cost of the Year 2000 conversion is
not deemed material to the Company and is being expensed as incurred.
In addition to internal Year 2000 implementation activities, the Company is in
communication with certain third party suppliers, vendors and customers to
determine the extent to which those companies are addressing their Year 2000
compliance problems. There can be no assurance that there will not be an
adverse effect on the Company if third
12
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parties, such as suppliers, service providers or customers, do not bring their
systems into compliance in a timely manner. However, management believes that
ongoing communication with, assessment of, and coordination with these parties
will help minimize these risks.
Although the Company anticipates minimal business disruption will occur as a
result of Year 2000 issues, possible consequences include, but are not limited
to, disruption of voice mail communications, purchase order processing, and
other normal business activities. The Company can not be certain that unexpected
Year 2000 compliance problems of its products, or its computer systems or the
systems of its vendors, customers and service providers, will not materially and
adversely affect the Company's business, financial condition or operating
results.
To date, the Company has not established a contingency plan for possible Year
2000 issues. Where needed, the Company will establish contingency plans by June
30, 1999, based on its actual testing experience and assessment of outside
risks. The cost of and the completion dates are based on management's best
estimates and may be updated, as additional information becomes available.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------------------------------------------------------------------
The Company does not believe that it is currently exposed to material risks
associated with market risk sensitive instruments.
13
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PART II - OTHER INFORMATION
DATA RACE, INC.
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
NONE.
ITEM 2. CHANGES IN SECURITIES
- ------------------------------
On December 17, 1998, the Company completed the second closing of the July
Private Placement of Series D Preferred Stock and related Class A Warrants to
the Sovereign Partners L.P. and Dominion Capital Funds Ltd. (the "Class A
Investors") for an aggregate price of $1,000,000. The Company has used and
intends to use the proceeds for general corporate purposes, primarily for
working capital to promote and further develop the Be There! remote access
system product line.
The Series D Preferred Stock has a stated value of $1,000 per share; bears an 8%
premium payable upon conversion or redemption or in liquidation (in the case of
conversion the Company may elect to pay such premium in Common Stock); is non-
voting except in limited circumstances; ranks senior to the Common Stock in
liquidation; and is redeemable at a premium at the option of the holder upon the
occurrence of certain major corporate transactions and triggering events,
including (i) the change of control or sale of the Company, (ii) the failure of
the registration statement covering the resale of Common Stock underlying the
Series D Preferred Stock to be declared effective before May 16, 1999, (iii) the
failure of the registration statement to be available for the resale of shares
for 30 trading days, (iv) the Company's voluntary termination of the listing of
the Common Stock on the Nasdaq National Market, (v) the Company's failure to
deliver Common Stock upon conversion of Series D Preferred Stock, (vi)
bankruptcy filing by the Company, or (vii) the Company's failure to pay
penalties resulting from a delisting of the Common Stock from the Nasdaq
National Market.
The Series D Preferred Stock is convertible into Common Stock of the Company
("Common Stock") at the option of the holder beginning March 17, 1999 (subject
to acceleration in certain events), at a conversion price equal to 80% of the
trailing five-day average closing bid price of the Common Stock on the
conversion date, subject to a minimum conversion price equal to the trailing 15-
day average closing bid price of the Common Stock 90 days after issuance and
subject to a maximum conversion price equal to the lesser of $3.00 or the
trailing five-day average closing bid price of the Common Stock 90 days after
issuance. Subject to certain limitations all Series D Preferred Stock
outstanding on December 17, 20003, will convert automatically into common stock.
The number of shares of Common Stock issuable upon conversion of one share of
Series D Preferred Stock is computed by dividing the share's stated value of
$1,000 by the applicable conversion price (plus any premium to the extent paid
in shares).
14
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If the Common Stock ceases to be listed on the Nasdaq National Market, the
Company must pay the holders of the Series D Preferred Stock a cash penalty of
1% per day for up to 24 days, of the stated value of the Series D Preferred
Stock outstanding. If the Company does not pay such penalty, the holders may
require the Company to redeem their shares of Series D Preferred Stock.
The Class A Warrants issued at the second closing are exercisable for an
aggregate of 226,415 shares of Common Stock at a price of $0.6625 per share,
beginning on the earlier of the effective date of the applicable registration
statement or March 17, 1999 (subject to acceleration in certain events). The
warrant exercise price for the Class A Warrants represents a premium to the
Common Stock closing price of $0.5938 on July 8, 1998, the date the Company
reached an agreement in principle with the Investors regarding the terms of the
July Private Placement.
The Company has filed a registration statement under the Securities Act covering
the resale of the shares underlying the Series D Preferred Stock and Warrants.
The failure of such registration statement to be declared effective by April 16,
1999 will result in cash penalties payable by the Company to the holders of
Preferred Stock. The Class A Investors have agreed not to effect any short
sales of Common Stock prior to December 17, 1999, and the Class B Investor has
agreed not to effect any short sales of the Common Stock prior to January 22,
2000.
Two persons assisted the Company in arranging the Private Placement with the
Class A Investors. As compensation for the investment by the Class A Investors
in the second closing, the Company agreed to pay a cash fee equal to 3% of the
gross proceeds received from the Class A Investors and to issue Class A Warrants
to purchase approximately one-half of the number of shares that may be purchased
pursuant to the Class A Warrants issued to the Class A Investors.
THE SUMMARY OF THE JULY PRIVATE PLACEMENT SET FORTH ABOVE IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE PURCHASE AGREEMENTS AND THE OTHER DOCUMENTS
EXECUTED BY THE COMPANY IN CONNECTION WITH THE PRIVATE PLACEMENT. SUCH
DOCUMENTS ARE FILED (OR INCORPORATED BY REFERENCE) AS EXHIBITS TO THIS FORM 10-Q
OR THE 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998.
On November 15, 1998, the Company obtained a binding commitment for a $2.2
million private placement of securities (the "November Private Placement"). The
securities were sold to five accredited investors including Liviakis Financial
Communications Inc. and Dr. W. Barker. The private placement involved the
issuance by the Company of 977,778 shares of Common Stock and two-year warrants
to purchase additional 977,778 shares of Common Stock at a warrant price of
$2.25 per share. The investors agreed to a minimum of a one-year lock-up on the
resale of the shares. The Company has filed a registration statement covering
the resale of the shares.
15
<PAGE>
THE SUMMARY OF THE NOVEMBER PRIVATE PLACEMENT SET FORTH ABOVE IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE SUBSCRIBTION AGREEMENTS AND THE OTHER DOCUMENTS
EXECUTED BY THE COMPANY IN CONNECTION WITH THE PRIVATE PLACEMENT. SUCH
DOCUMENTS ARE FILED AS EXHIBITS TO THIS FORM 10-Q.
The offer and sale by the Company of the securities in the July and November
Private Placements were made in reliance upon Section 4(2) of the Securities
Act, the non-public offering exemption from the registration requirements of the
Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
NONE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
An annual meeting of shareholders of the Company was held on November 13, 1998.
Dr. W. B. Barker, Jeffery P. Blanchard, Matthew A. Kenny, George R. Grumbles,
Dwight E. Lee and Edward A. Masi were elected as directors of the Company, each
to hold office until the next annual meeting of shareholders or until his
successor has been elected and qualified, subject to earlier resignation or
removal. Additionally, the shareholders approved the DATA RACE, Inc. 1998 Stock
Option Plan, authorized the issuance of certain securities of the Company and
ratified the appointment of KPMG LLP as independent accountants for the 1999
fiscal year. The Company did not receive the requisite vote of holders of two-
thirds of the Company's outstanding shares for the proposal to increase the
Company's authorized shares. The Company called a special meeting of
shareholders for January 15, 1999 to consider a similar proposal to increase
authorized shares. The proposal to approve an amendment to the Company's
Articles of Incorporation, increasing the authorized number of shares of Common
Stock, was approved at the special meeting.
16
<PAGE>
The results of the voting at the annual shareholders meeting held on November
13, 1998 were as follows:
Proposal No. 1
(Election of Directors)
Company Nominee For Withheld Non-Votes
- --------------- --- -------- ----------
Dr. W. B. Barker 13,839,187 141,023 -
Jeffery P. Blanchard 13,841,257 138,953 -
Matthew A. Kenny 13,396,557 583,653 -
George R. Grumbles 13,396,525 583,685 -
Dwight E. Lee 13,396,025 584,185 -
Edward A. Masi 13,840,025 140,185 -
Proposal No. 2
(Approval of DATA RACE, Inc. 1998 Stock Option Plan)
For Against Abstain Non-Votes
5,224,933 784,020 73,809 7,897,448
Proposal No. 3
(Approval of amendment to the Company's Articles of Incorporation increasing
the authorized number of shares of capital stock)
For Against Abstain Non-Votes
5,846,312 423,876 76,970 7,633,052
Proposal No. 4
(Authorization of issuance of certain securities of the Company)
For Against Abstain Non-Votes
5,790,657 238,541 53,564 7,897,448
Proposal No. 5
(Ratification of KPMG LLP as independent accountants)
For Against Abstain Non-Votes
13,868,852 60,434 50,924 -
ITEM 5. OTHER INFORMATION
- --------------------------
None.
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits.
- --------------
Exhibit Description
- ------- -----------
3.1 Articles of Amendment to the Articles of Incorporation of the Company,
filed January 21, 1999. (a)
3.2 Statement of Designation, Preferences and Rights of Series F Convertible
Preferred Stock. (a)
10.1 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. (b)
10.2 Subscription Agreements between DATA RACE, Inc. and Liviakis Financial
Communications, Inc., Robert S. London, Anthony Altavilla, Timothy D.
Wilson, Sr. and Dr. W. B. Barker. (c)
10.3 Amendment No. 1 to Consulting Agreement Between the Company and Liviakis
Financial Communications, Inc. (c)
27.0 Financial Data Schedule. (c)
- --------------------
(a) Filed as an exhibit to Form S-3 Registration Statement filed on January 28,
1999.
(b) Filed as an exhibit to Form S-3 Registration Statement filed on November 6,
1998.
(c) Filed herewith
(b) Reports on Form 8-K.
- --------------------------
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATA RACE, INC.
By: /s/ Gregory T. Skalla
---------------------
Gregory T. Skalla, Senior Vice President, Finance
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
Date: February 12, 1999
19
<PAGE>
EXHIBIT 10.2
DATA RACE, INC.
SUBSCRIPTION AGREEMENT
----------------------
CONFIDENTIAL
- ------------
DATA RACE, Inc.
12400 Network Boulevard
San Antonio, Texas 78249
ATTN: President
1. SUBSCRIPTION. Liviakis Financial Communications, Inc. ("LFC") hereby agrees
------------
to purchase 977,778 shares (the "Shares") of common stock, no par value
("Common Stock"), of DATA RACE, Inc., a Texas corporation (the "Company"),
and 977,778 common stock purchase warrants (the "Warrants") to purchase an
aggregate of 977,778 shares of Common Stock (the "Warrant Shares"), on the
terms and conditions described herein. The purchase price for one Share and
one Warrant is $2.25. LFC agrees to purchase at least $1,100,000 of Shares
and Warrants on November 16, 1998, and agrees to purchase $1,100,000 of
additional Shares and Warrants on or before November 20, 1998. The date of
any respective purchase is referred to herein as the closing date.
2. ADDITIONAL PURCHASERS. The Company acknowledges that LFC has identified up
---------------------
to four other investors interested in participating in the purchase of the
Shares and Warrants. The Company agrees that, subject to the limitations
described herein, LFC may assign its right to purchase up to $1,100,000 of
Shares and Warrants to up to four other investors, provided that each such
other investor (i) is an "accredited investor" within the meaning of
Regulation D promulgated pursuant to the Securities Act of 1933, as amended
(the "Securities Act"), (ii) executes and delivers to the Company a
subscription agreement substantially in the same form as this Subscription
Agreement, and (iii) delivers to the Company the aggregate purchase price
for the Shares and Warrants purchased by such other investor.
Notwithstanding LFC's right to permit other investors to participate in the
purchase of the Shares and Warrants, LFC hereby irrevocably commits to
purchase on or before November 20, 1998, the additional $1,100,000 of Shares
and Warrants to the extent not purchased by such other investors as provided
herein.
3. ADDITIONAL TERMS OF PURCHASE.
----------------------------
(a) Except as provided herein, each Warrant shall entitle the holder to
purchase one Warrant Share at an exercise price of $2.25 per share, at any
time on or before the second anniversary of the closing date.
Notwithstanding the foregoing, the Warrants may be exercised only if the
Company obtains shareholder approval to increase its
<PAGE>
authorized shares of Common Stock (in the manner described in the
Company's recent proxy statement), failing which approval the Warrants shall
not be exercisable. Subject to the specific terms described herein, the
Warrants shall be evidenced by a Warrant Agreement in form similar to that
delivered to the purchasers in the Company's July 24, 1998 private
placement, except that the Warrant Agreement shall contain customary anti-
dilution provisions for stock splits, reverse stock splits and stock
dividends and shall contain a net cashless exercise provision permitting the
holder to pay the exercise price using shares of Common Stock otherwise
issuable upon exercise of the Warrants evidenced by the Warrant Agreement .
(b) The Company agrees to uses its best efforts to register the Shares and
the Warrant Shares for resale under the Securities Act by the holders
thereof on or before the first anniversary of the closing date. If the
Company files a Form S-3 registration statement under the Securities Act
covering the resale of other shares of Common Stock of the Company on or
after the date of the increase in the Company's authorized shares, then the
Company shall include in such registration statement the Shares and the
Warrant Shares for resale by the holders thereof.
(c) LFC agrees to enter into a "lock-up agreement" pursuant to which LFC
will be prohibited from selling any Shares or Warrant Shares prior to
January 1, 2000. Any other investor purchasing Shares and Warrants shall
enter into a "lock-up agreement" pursuant to which such investor will be
prohibited from selling any Shares or Warrant Shares prior to the first
anniversary of the closing date.
(d) LFC agrees to enter into an agreement with the Company extending its
consulting agreement with the Company to January 1, 2000, in consideration
for the Company's issuance of 200,000 shares of Common Stock (such issuance
being subject to the increase in the Company's authorized shares). LFC
agrees that the lock-up on its original consulting agreement shares and the
additional consulting compensation shares shall be extended to January 1,
2000.
4. CERTAIN INVESTMENT RISKS. LFC acknowledges that an investment in the
-------------------------
Company involves a high degree of risk which may result in the loss of the
entire amount of its investment. LFC acknowledges that there are numerous
risks associated with an investment in the Company, including, but not
limited to, those set forth in the Company's filings with the Securities and
Exchange Commission during the last 12 months (the "SEC Filings"). LFC
acknowledges that LFC has had full opportunity to review the Company's SEC
Filings, including, but not limited to, the Company's 10-K filed September
28, 1998, the Company's definitive proxy statement filed October 14, 1998
and the Company's Form S-3 Registration Statement filed November 6, 1998,
and LFC has reviewed the Company's quarterly earnings release for September
30, 1998. Without limiting the foregoing, LFC acknowledges that the Company
is not currently in compliance with the Nasdaq National Market net tangible
assets requirement and LFC acknowledges receipt of a copy of Nasdaq's letter
to the Company, dated November 4, 1998, notifying the Company of such non-
compliance. LFC further acknowledges that the issuance of the Shares
hereunder will require substantially all remaining authorized, but unissued
shares of Common Stock, and
<PAGE>
there can be no assurance that the Company will receive requisite
shareholder approval to increase its authorized shares.
5. INVESTOR REPRESENTATIONS AND WARRANTIES. LFC represents and warrants to the
---------------------------------------
Company that:
(a) The undersigned is an "accredited investor" within the meaning of
Regulation D promulgated pursuant to the Securities Act (insofar as LFC is a
Company, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000). The undersigned has such
knowledge and experience in financial and business matters that the undersigned
is capable of evaluating the merits and risks of an investment in the Company.
The undersigned has made other investments and, by reason of its business and
financial experience, and skill in investments, the undersigned has the capacity
to protect its own interest in investments of this nature. The undersigned has
carefully evaluated its financial resources and investment position, and the
risks associated with this investment and acknowledges that it is able to bear
the economic risks of this investment. The undersigned represents and warrants
that the investment being made does not exceed 20% of its net worth.
(b) All documents, records and books pertaining to the undersigned's
proposed undersigned and its advisors. The undersigned has had an opportunity to
ask questions of and receive satisfactory answers from the Company concerning
the Company and its business and the terms and conditions of an investment in
the Company, and all such questions have been answered to the undersigned's full
satisfaction.
(c) The undersigned is not acting on the basis of any promotional sales
materials, or representations and warranties by any person or contained in any
document, except for this document and the SEC Filings and any other documents
or information furnished by the Company upon request by the undersigned. The
undersigned has had full opportunity to be represented by its own legal and tax
counsel.
(d) The securities for which the undersigned is subscribing will be
acquired for its own account for investment purposes only and not with a view
to, or for resale in connection with, any distribution of securities within the
meaning of the Securities Act, and the undersigned does not now have any reason
to anticipate any change in circumstances or other particular occasion or event
which would cause the undersigned to sell or transfer such securities.
(e) The address and Social Security number (or, if a Company, partnership
or other form of business, the federal employer identification number) set forth
herein are true and correct. The undersigned is presently a bona fide resident
of the state set forth on the signature page hereof and has no present intention
of becoming a resident of any other state or jurisdiction. If a Company,
partnership, trust or other form of business, the undersigned represents and
warrants that its principal place of business is
<PAGE>
within such state. The securities subscribed for have been offered and will be
purchased in such state.
(f) The undersigned understands that the undersigned must bear the economic
risk of an investment in the Shares and Warrant Shares for an indefinite period
of time because neither the Shares nor the Warrant Shares have been registered
under any securities laws and therefore cannot be sold without registration
under applicable securities laws or an exemption from such registration is
available.
(g) The execution and delivery of this Subscription Agreement and the
purchase of the securities of the Company hereunder is within the undersigned's
power and authority, and have been duly authorized by all necessary action.
Assuming due execution and delivery by the Company, this Subscription Agreement
constitutes a valid and binding obligation, enforceable against the undersigned.
(h) The information provided to the Company herein is true and correct in
all respects as of the date hereof. The undersigned agrees to notify the Company
immediately if any of the statements made herein shall become untrue.
6. RESTRICTIONS ON TRANSFER. The undersigned understands that it
------------------------
must bear the economic risk of the purchase of the Shares and Warrant Shares for
an indefinite period of time, because (a) the securities have not been
registered under the Securities Act or applicable state securities laws; (b) the
Shares and Warrant Shares may therefore not be sold, transferred, pledged or
otherwise disposed of unless the shares are subsequently so registered or, in
the opinion of counsel for or satisfactory to the Company, registration under
the Securities Act or any applicable state securities laws is not required; and
(c) the Company is under no obligation to perfect any exemption for resale of
the Common Stock. The Shares, the Warrants and the Warrant Shares will bear
appropriate legends setting forth such restrictions on transfer.
7. GENERAL. This Agreement sets forth the entire understanding
-------
between the parties hereto concerning the subject matter contained herein.
Provisions of this Agreement may be amended or waived only by written instrument
executed by the party against whom enforcement is sought. This Agreement shall
be binding upon the parties and the respective successors and assigns. The
parties agree to execute such additional documents and take such additional
actions as may be reasonably necessary to give effect to the purposes and intent
of this Agreement. This Agreement may be executed in one or more counterparts,
any of which shall be deemed to be an original, all of which taken together
shall constitute one and the same instrument. In the event any provision of this
Agreement is held to be unenforceable or invalid by any court of competent
jurisdiction, the validity and enforceability of the remaining provisions shall
not be affected thereby. This Agreement shall be governed by the laws of the
State of Texas without regard to conflicts of law rules.
<PAGE>
THE SECURITIES SUBSCRIBED FOR HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES ACT AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ABSENT SUCH REGISTRATION OR AN
EXEMPTION THEREFROM.
THIS SIGNATURE PAGE SHOULD BE DULY EXECUTED BY THE PURCHASER AND THE ENTIRE
EXECUTED SUBSCRIPTION AGREEMENT SHOULD BE DELIVERED TO DATA RACE, INC., ATTN:
PRESIDENT, AT 12400 NETWORK BOULEVARD, SAN ANTONIO, TEXAS 78216.
================================================================================
The undersigned hereby irrevocably subscribes for 977,778 Shares and
977,778 Warrants (as defined in the Subscription Agreement), at an aggregate
price of $2,200,000.
The undersigned represents that the undersigned has read the above
Subscription Agreement and the representations therein made by me are true and
correct.
IN WITNESS WHEREOF, this Subscription Agreement has been executed by the
undersigned as of November 15, 1998.
LIVIAKIS FINANCIAL COMMUNICATIONS, INC.
By: /s/ John Liviakis
___________________________
Name: John Liviakis
------------------------
Title: President
_______________________
Address: 2420 K Street, Suite 200
Sacramento, California 95816
SUBSCRIPTION ACCEPTED:
DATA RACE, INC.
By: /s/ Dr. W. B. Barker
------------------------------
Dr. W.B. Barker, President and
Chief Executive Officer
Date: November 15, 1998
<PAGE>
DATA RACE, INC.
SUBSCRIPTION AGREEMENT
----------------------
CONFIDENTIAL
- ------------
DATA RACE, Inc.
12400 Network Boulevard
San Antonio, Texas 78249
ATTN: President
1. SUBSCRIPTION. The undersigned investor ("Investor") hereby agrees to
------------
purchase 355,555 shares (the "Shares") of common stock, no par value
("Common Stock"), of DATA RACE, Inc., a Texas corporation (the "Company"),
and 355,555 common stock purchase warrants (the "Warrants") to purchase an
aggregate of 355,555 shares of Common Stock (the "Warrant Shares"), on the
terms and conditions described herein. The purchase price for one Share and
one Warrant is $2.25. Investor shall, upon execution hereof, forward payment
to the Company for the Shares and Warrants in immediately available funds.
2. ADDITIONAL TERMS OF PURCHASE.
----------------------------
(a) Except as provided herein, each Warrant shall entitle the holder to
purchase one Warrant Share at an exercise price of $2.25 per share, at any
time on or before the second anniversary of the closing date.
Notwithstanding the foregoing, the Warrants may be exercised only if the
Company obtains shareholder approval to increase its authorized shares of
Common Stock (in the manner described in the Company's recent proxy
statement), failing which approval the Warrants shall not be exercisable.
Subject to the specific terms described herein, the Warrants shall be
evidenced by a Warrant Agreement in form similar to that delivered to the
purchasers in the Company's July 24, 1998 private placement, except that the
Warrant Agreement shall contain customary anti-dilution provisions for stock
splits, reverse stock splits and stock dividends and shall contain a net
cashless exercise provision permitting the holder to pay the exercise price
using shares of Common Stock otherwise issuable upon exercise of the
Warrants evidenced by the Warrant Agreement.
(b) The Company agrees to use its best efforts to register the Shares and
the Warrant Shares for resale under the Securities Act by the holders
thereof on or before the first anniversary of the closing date. If the
Company files a Form S-3 registration statement under the Securities Act
covering the resale of other shares of Common Stock of the Company on or
after the date of the increase in the Company's authorized shares, then the
Company shall include in such registration statement the Shares and the
Warrant Shares for resale by the holders thereof.
<PAGE>
(c) Investor agrees to enter into a "lock-up agreement" pursuant to which
Investor will be prohibited from selling any Shares or Warrant Shares prior
to the first anniversary of the closing date.
3. CERTAIN INVESTMENT RISKS. Investor acknowledges that an investment in the
-------------------------
Company involves a high degree of risk which may result in the loss of the
entire amount of its investment. Investor acknowledges that there are
numerous risks associated with an investment in the Company, including, but
not limited to, those set forth in the Company's filings with the
Securities and Exchange Commission during the last 12 months (the "SEC
Filings"). Investor acknowledges that it has had full opportunity to review
the Company's SEC Filings, including, but not limited to, the Company's 10-
K filed September 28, 1998, the Company's definitive proxy statement filed
October 14, 1998 and the Company's Form S-3 Registration Statement filed
November 6, 1998, and Investor has reviewed the Company's quarterly
earnings release for the quarter ended September 30, 1998. Without limiting
the foregoing, Investor acknowledges that the Company is not currently in
compliance with the Nasdaq National Market net tangible assets requirement
and Investor acknowledges receipt of a copy of Nasdaq's letter to the
Company, dated November 4, 1998, notifying the Company of such non-
compliance. Investor further acknowledges that the issuance of the Shares
hereunder will require substantially all remaining authorized, but unissued
shares of Common Stock, and there can be no assurance that the Company will
receive requisite shareholder approval to increase its authorized shares.
4. INVESTOR REPRESENTATIONS AND WARRANTIES. Investor represents and warrants
---------------------------------------
to the Company that:
(a) The undersigned is an "accredited investor" within the meaning of
Regulation D promulgated pursuant to the Securities Act. If Investor is a
corporation, Investor has not been formed for the specific purpose of
acquiring the securities offered and Investor has total assets in excess of
$5,000,000. If Investor is an individual, Investor's net worth (or joint
net worth with Investor's spouse) exceeds $1,000,000, or Investor had
income in excess of $200,000 in each of the two most recent years (or joint
income with Investor's spouse in excess of $300,000 in each of those years)
and Investor has a reasonable expectation of reaching the same income level
in the current year. The undersigned has such knowledge and experience in
financial and business matters that the undersigned is capable of
evaluating the merits and risks of an investment in the Company. The
undersigned has made other investments and, by reason of its business and
financial experience, and skill in investments, the undersigned has the
capacity to protect its own interest in investments of this nature. The
undersigned has carefully evaluated its financial resources and investment
position, and the risks associated with this investment and acknowledges
that it is able to bear the economic risks of this investment. The
undersigned represents and warrants that the investment being made does not
exceed 20% of its net worth.
<PAGE>
(b) All documents, records and books pertaining to the undersigned's
proposed investment, which have been requested, have been made available to
undersigned and its advisors. The undersigned has had an opportunity to ask
questions of and receive satisfactory answers from the Company concerning the
Company and its business and the terms and conditions of an investment in the
Company, and all such questions have been answered to the undersigned's full
satisfaction.
(c) The undersigned is not acting on the basis of any promotional sales
materials, or representations and warranties by any person or contained in any
document, except for this document and the SEC Filings and any other documents
or information furnished by the Company upon request by the undersigned. The
undersigned has had full opportunity to be represented by its own legal and tax
counsel.
(d) The securities for which the undersigned is subscribing will be
acquired for its own account for investment purposes only and not with a view
to, or for resale in connection with, any distribution of securities within the
meaning of the Securities Act, and the undersigned does not now have any reason
to anticipate any change in circumstances or other particular occasion or event
which would cause the undersigned to sell or transfer such securities.
(e) The address and Social Security number (or, if a Company, partnership
or other form of business, the federal employer identification number) set forth
herein are true and correct. The undersigned is presently a bona fide resident
of the state set forth on the signature page hereof and has no present intention
of becoming a resident of any other state or jurisdiction. If a Company,
partnership, trust or other form of business, the undersigned represents and
warrants that its principal place of business is within such state. The
securities subscribed for have been offered and will be purchased in such state.
(f) The undersigned understands that the undersigned must bear the
economic risk of an investment in the Shares and Warrant Shares for an
indefinite period of time because neither the Shares nor the Warrant Shares have
been registered under any securities laws and therefore cannot be sold without
registration under applicable securities laws or an exemption from such
registration is available.
(g) The execution and delivery of this Subscription Agreement and the
purchase of the securities of the Company hereunder is within the undersigned's
power and authority, and have been duly authorized by all necessary action.
Assuming due execution and delivery by the Company, this Subscription Agreement
constitutes a valid and binding obligation, enforceable against the undersigned.
(h) The information provided to the Company herein is true and correct
in all respects as of the date hereof. The undersigned agrees to notify the
Company immediately if any of the statements made herein shall become untrue.
The undersigned understands that the Company is relying upon these
representations and warranties in completing this investment.
<PAGE>
5. RESTRICTIONS ON TRANSFER. The undersigned understands that it must
------------------------
bear the economic risk of the purchase of the Shares and Warrant Shares for an
indefinite period of time, because (a) the securities have not been registered
under the Securities Act or applicable state securities laws; (b) the Shares and
Warrant Shares may therefore not be sold, transferred, pledged or otherwise
disposed of unless the shares are subsequently so registered or, in the opinion
of counsel for or satisfactory to the Company, registration under the Securities
Act or any applicable state securities laws is not required; and (c) the Company
is under no obligation to perfect any exemption for resale of the Common Stock.
The Shares, the Warrants and the Warrant Shares will bear appropriate legends
setting forth such restrictions on transfer.
6. GENERAL. This Agreement sets forth the entire understanding between
-------
the parties hereto concerning the subject matter contained herein. Provisions of
this Agreement may be amended or waived only by written instrument executed by
the party against whom enforcement is sought. This Agreement shall be binding
upon the parties and the respective successors and assigns. The parties agree to
execute such additional documents and take such additional actions as may be
reasonably necessary to give effect to the purposes and intent of this
Agreement. This Agreement may be executed in one or more counterparts, any of
which shall be deemed to be an original, all of which taken together shall
constitute one and the same instrument. In the event any provision of this
Agreement is held to be unenforceable or invalid by any court of competent
jurisdiction, the validity and enforceability of the remaining provisions shall
not be affected thereby. This Agreement shall be governed by the laws of the
State of Texas without regard to conflicts of law rules.
[signature page follows]
<PAGE>
THE SECURITIES SUBSCRIBED FOR HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES ACT AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ABSENT SUCH REGISTRATION OR AN
EXEMPTION THEREFROM.
THIS SIGNATURE PAGE SHOULD BE DULY EXECUTED BY THE PURCHASER AND THE ENTIRE
EXECUTED SUBSCRIPTION AGREEMENT SHOULD BE DELIVERED TO DATA RACE, INC., ATTN:
PRESIDENT, AT 12400 NETWORK BOULEVARD, SAN ANTONIO, TEXAS 78216.
================================================================================
The undersigned hereby irrevocably subscribes for 355,555 Shares and
355,555 Warrants (as defined in the Subscription Agreement), at an aggregate
price of $800,000.
The undersigned represents that the undersigned has read the above
Subscription Agreement and the representations therein made by the undersigned
are true and correct.
IN WITNESS WHEREOF, this Subscription Agreement has been executed by the
undersigned as of November 16, 1998.
/s/ Robert S. London
-------------------------------
ROBERT S. LONDON
Address:
c/o Cruttenden Roth
809 Presidio Avenue, Suite B
Santa Barbara, CA 93101
(800) 873-4886 (phone)
(805) 966-9302 (fax)
SUBSCRIPTION ACCEPTED:
DATA RACE, INC.
By: /s/ Dr. W. B. Barker
----------------------------------
Dr. W.B. Barker, President and
Chief Executive Officer
Date: November 16, 1998
<PAGE>
DATA RACE, INC.
SUBSCRIPTION AGREEMENT
----------------------
CONFIDENTIAL
- ------------
DATA RACE, Inc.
12400 Network Boulevard
San Antonio, Texas 78249
ATTN: President
1. SUBSCRIPTION. The undersigned investor ("Investor") hereby agrees to
------------
purchase 44,444 shares (the "Shares") of common stock, no par value
("Common Stock"), of DATA RACE, Inc., a Texas corporation (the "Company"),
and 44,444 common stock purchase warrants (the "Warrants") to purchase an
aggregate of 44,444 shares of Common Stock (the "Warrant Shares"), on the
terms and conditions described herein. The purchase price for one Share and
one Warrant is $2.25. Investor shall, upon execution hereof, forward
payment to the Company for the Shares and Warrants in immediately available
funds.
2. ADDITIONAL TERMS OF PURCHASE.
----------------------------
(a) Except as provided herein, each Warrant shall entitle the holder to
purchase one Warrant Share at an exercise price of $2.25 per share, at any
time on or before the second anniversary of the closing date.
Notwithstanding the foregoing, the Warrants may be exercised only if the
Company obtains shareholder approval to increase its authorized shares of
Common Stock (in the manner described in the Company's recent proxy
statement), failing which approval the Warrants shall not be exercisable.
Subject to the specific terms described herein, the Warrants shall be
evidenced by a Warrant Agreement in form similar to that delivered to the
purchasers in the Company's July 24, 1998 private placement, except that
the Warrant Agreement shall contain customary anti-dilution provisions for
stock splits, reverse stock splits and stock dividends and shall contain a
net cashless exercise provision permitting the holder to pay the exercise
price using shares of Common Stock otherwise issuable upon exercise of the
Warrants evidenced by the Warrant Agreement.
(b) The Company agrees to use its best efforts to register the Shares and
the Warrant Shares for resale under the Securities Act by the holders
thereof on or before the first anniversary of the closing date. If the
Company files a Form S-3 registration statement under the Securities Act
covering the resale of other shares of Common Stock of the Company on or
after the date of the increase in the Company's authorized shares, then the
Company shall include in such registration statement the Shares and the
Warrant Shares for resale by the holders thereof.
<PAGE>
(c) Investor agrees to enter into a "lock-up agreement" pursuant to which
Investor will be prohibited from selling any Shares or Warrant Shares prior
to the first anniversary of the closing date.
3. CERTAIN INVESTMENT RISKS. Investor acknowledges that an investment in the
-------------------------
Company involves a high degree of risk which may result in the loss of the
entire amount of its investment. Investor acknowledges that there are
numerous risks associated with an investment in the Company, including, but
not limited to, those set forth in the Company's filings with the
Securities and Exchange Commission during the last 12 months (the "SEC
Filings"). Investor acknowledges that it has had full opportunity to review
the Company's SEC Filings, including, but not limited to, the Company's 10-
K filed September 28, 1998, the Company's definitive proxy statement filed
October 14, 1998 and the Company's Form S-3 Registration Statement filed
November 6, 1998, and Investor has reviewed the Company's quarterly
earnings release for the quarter ended September 30, 1998. Without limiting
the foregoing, Investor acknowledges that the Company is not currently in
compliance with the Nasdaq National Market net tangible assets requirement
and Investor acknowledges receipt of a copy of Nasdaq's letter to the
Company, dated November 4, 1998, notifying the Company of such non-
compliance. Investor further acknowledges that the issuance of the Shares
hereunder will require substantially all remaining authorized, but unissued
shares of Common Stock, and there can be no assurance that the Company will
receive requisite shareholder approval to increase its authorized shares.
4. INVESTOR REPRESENTATIONS AND WARRANTIES. Investor represents and warrants
---------------------------------------
to the Company that:
(a) The undersigned is an "accredited investor" within the meaning of
Regulation D promulgated pursuant to the Securities Act. If Investor is a
corporation, Investor has not been formed for the specific purpose of
acquiring the securities offered and Investor has total assets in excess of
$5,000,000. If Investor is an individual, Investor's net worth (or joint
net worth with Investor's spouse) exceeds $1,000,000, or Investor had
income in excess of $200,000 in each of the two most recent years (or joint
income with Investor's spouse in excess of $300,000 in each of those years)
and Investor has a reasonable expectation of reaching the same income level
in the current year. The undersigned has such knowledge and experience in
financial and business matters that the undersigned is capable of
evaluating the merits and risks of an investment in the Company. The
undersigned has made other investments and, by reason of its business and
financial experience, and skill in investments, the undersigned has the
capacity to protect its own interest in investments of this nature. The
undersigned has carefully evaluated its financial resources and investment
position, and the risks associated with this investment and acknowledges
that it is able to bear the economic risks of this investment. The
undersigned represents and warrants that the investment being made does not
exceed 20% of its net worth.
<PAGE>
(b) All documents, records and books pertaining to the undersigned's
proposed investment, which have been requested, have been made available to
undersigned and its advisors. The undersigned has had an opportunity to ask
questions of and receive satisfactory answers from the Company concerning the
Company and its business and the terms and conditions of an investment in the
Company, and all such questions have been answered to the undersigned's full
satisfaction.
(c) The undersigned is not acting on the basis of any promotional sales
materials, or representations and warranties by any person or contained in any
document, except for this document and the SEC Filings and any other documents
or information furnished by the Company upon request by the undersigned. The
undersigned has had full opportunity to be represented by its own legal and tax
counsel.
(d) The securities for which the undersigned is subscribing will be
acquired for its own account for investment purposes only and not with a view
to, or for resale in connection with, any distribution of securities within the
meaning of the Securities Act, and the undersigned does not now have any reason
to anticipate any change in circumstances or other particular occasion or event
which would cause the undersigned to sell or transfer such securities.
(e) The address and Social Security number (or, if a Company, partnership
or other form of business, the federal employer identification number) set forth
herein are true and correct. The undersigned is presently a bona fide resident
of the state set forth on the signature page hereof and has no present intention
of becoming a resident of any other state or jurisdiction. If a Company,
partnership, trust or other form of business, the undersigned represents and
warrants that its principal place of business is within such state. The
securities subscribed for have been offered and will be purchased in such state.
(f) The undersigned understands that the undersigned must bear the
economic risk of an investment in the Shares and Warrant Shares for an
indefinite period of time because neither the Shares nor the Warrant Shares have
been registered under any securities laws and therefore cannot be sold without
registration under applicable securities laws or an exemption from such
registration is available.
(g) The execution and delivery of this Subscription Agreement and the
purchase of the securities of the Company hereunder is within the undersigned's
power and authority, and have been duly authorized by all necessary action.
Assuming due execution and delivery by the Company, this Subscription Agreement
constitutes a valid and binding obligation, enforceable against the undersigned.
(h) The information provided to the Company herein is true and correct
in all respects as of the date hereof. The undersigned agrees to notify the
Company immediately if any of the statements made herein shall become untrue.
The undersigned understands that the Company is relying upon these
representations and warranties in completing this investment.
<PAGE>
5. RESTRICTIONS ON TRANSFER. The undersigned understands that it must
------------------------
bear the economic risk of the purchase of the Shares and Warrant Shares for an
indefinite period of time, because (a) the securities have not been registered
under the Securities Act or applicable state securities laws; (b) the Shares and
Warrant Shares may therefore not be sold, transferred, pledged or otherwise
disposed of unless the shares are subsequently so registered or, in the opinion
of counsel for or satisfactory to the Company, registration under the Securities
Act or any applicable state securities laws is not required; and (c) the Company
is under no obligation to perfect any exemption for resale of the Common Stock.
The Shares, the Warrants and the Warrant Shares will bear appropriate legends
setting forth such restrictions on transfer.
6. GENERAL. This Agreement sets forth the entire understanding between
-------
the parties hereto concerning the subject matter contained herein. Provisions of
this Agreement may be amended or waived only by written instrument executed by
the party against whom enforcement is sought. This Agreement shall be binding
upon the parties and the respective successors and assigns. The parties agree to
execute such additional documents and take such additional actions as may be
reasonably necessary to give effect to the purposes and intent of this
Agreement. This Agreement may be executed in one or more counterparts, any of
which shall be deemed to be an original, all of which taken together shall
constitute one and the same instrument. In the event any provision of this
Agreement is held to be unenforceable or invalid by any court of competent
jurisdiction, the validity and enforceability of the remaining provisions shall
not be affected thereby. This Agreement shall be governed by the laws of the
State of Texas without regard to conflicts of law rules.
[signature page follows]
<PAGE>
THE SECURITIES SUBSCRIBED FOR HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES ACT AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ABSENT SUCH REGISTRATION OR AN
EXEMPTION THEREFROM.
THIS SIGNATURE PAGE SHOULD BE DULY EXECUTED BY THE PURCHASER AND THE ENTIRE
EXECUTED SUBSCRIPTION AGREEMENT SHOULD BE DELIVERED TO DATA RACE, INC., ATTN:
PRESIDENT, AT 12400 NETWORK BOULEVARD, SAN ANTONIO, TEXAS 78216.
================================================================================
The undersigned hereby irrevocably subscribes for 44,444 Shares and 44,444
Warrants (as defined in the Subscription Agreement), at an aggregate price of
$100,000.
The undersigned represents that the undersigned has read the above
Subscription Agreement and the representations therein made by the undersigned
are true and correct.
IN WITNESS WHEREOF, this Subscription Agreement has been executed by the
undersigned as of November 17, 1998.
/s/ Anthony Altavilla
----------------------------------
ANTHONY ALTAVILLA
Address:
c/o Liviakis Financial Communications, Inc.
2420 "K" Street, Suite 220
Sacramento, CA 95816
Tel: (916) 448-6084
Fax: (916) 448-6089
SUBSCRIPTION ACCEPTED:
DATA RACE, INC.
By: Dr. W. B. Barker
------------------------------
Dr. W.B. Barker, President and
Chief Executive Officer
Date: November 17, 1998
<PAGE>
DATA RACE, INC.
SUBSCRIPTION AGREEMENT
----------------------
CONFIDENTIAL
- ------------
DATA RACE, Inc.
12400 Network Boulevard
San Antonio, Texas 78249
ATTN: President
1. SUBSCRIPTION. The undersigned investor ("Investor") hereby agrees to
------------
purchase 44,444 shares (the "Shares") of common stock, no par value
("Common Stock"), of DATA RACE, Inc., a Texas corporation (the "Company"),
and 44,444 common stock purchase warrants (the "Warrants") to purchase an
aggregate of 44,444 shares of Common Stock (the "Warrant Shares"), on the
terms and conditions described herein. The purchase price for one Share and
one Warrant is $2.25. Investor shall, upon execution hereof, forward
payment to the Company for the Shares and Warrants in immediately available
funds.
2. ADDITIONAL TERMS OF PURCHASE.
----------------------------
(a) Except as provided herein, each Warrant shall entitle the holder to
purchase one Warrant Share at an exercise price of $2.25 per share, at any
time on or before the second anniversary of the closing date.
Notwithstanding the foregoing, the Warrants may be exercised only if the
Company obtains shareholder approval to increase its authorized shares of
Common Stock (in the manner described in the Company's recent proxy
statement), failing which approval the Warrants shall not be exercisable.
Subject to the specific terms described herein, the Warrants shall be
evidenced by a Warrant Agreement in form similar to that delivered to the
purchasers in the Company's July 24, 1998 private placement, except that
the Warrant Agreement shall contain customary anti-dilution provisions for
stock splits, reverse stock splits and stock dividends and shall contain a
net cashless exercise provision permitting the holder to pay the exercise
price using shares of Common Stock otherwise issuable upon exercise of the
Warrants evidenced by the Warrant Agreement.
(b) The Company agrees to use its best efforts to register the Shares and
the Warrant Shares for resale under the Securities Act by the holders
thereof on or before the first anniversary of the closing date. If the
Company files a Form S-3 registration statement under the Securities Act
covering the resale of other shares of Common Stock of the Company on or
after the date of the increase in the Company's authorized shares, then the
Company shall include in such registration statement the Shares and the
Warrant Shares for resale by the holders thereof.
<PAGE>
(c) Investor agrees to enter into a "lock-up agreement" pursuant to which
Investor will be prohibited from selling any Shares or Warrant Shares prior
to the first anniversary of the closing date.
3. CERTAIN INVESTMENT RISKS. Investor acknowledges that an investment in the
-------------------------
Company involves a high degree of risk which may result in the loss of the
entire amount of its investment. Investor acknowledges that there are
numerous risks associated with an investment in the Company, including, but
not limited to, those set forth in the Company's filings with the
Securities and Exchange Commission during the last 12 months (the "SEC
Filings"). Investor acknowledges that it has had full opportunity to review
the Company's SEC Filings, including, but not limited to, the Company's 10-
K filed September 28, 1998, the Company's definitive proxy statement filed
October 14, 1998 and the Company's Form S-3 Registration Statement filed
November 6, 1998, and Investor has reviewed the Company's quarterly
earnings release for the quarter ended September 30, 1998. Without limiting
the foregoing, Investor acknowledges that the Company is not currently in
compliance with the Nasdaq National Market net tangible assets requirement
and Investor acknowledges receipt of a copy of Nasdaq's letter to the
Company, dated November 4, 1998, notifying the Company of such non-
compliance. Investor further acknowledges that the issuance of the Shares
hereunder will require substantially all remaining authorized, but unissued
shares of Common Stock, and there can be no assurance that the Company will
receive requisite shareholder approval to increase its authorized shares.
4. INVESTOR REPRESENTATIONS AND WARRANTIES. Investor represents and warrants
---------------------------------------
to the Company that:
(a) The undersigned is an "accredited investor" within the meaning of
Regulation D promulgated pursuant to the Securities Act. If Investor is a
corporation, Investor has not been formed for the specific purpose of acquiring
the securities offered and Investor has total assets in excess of $5,000,000. If
Investor is an individual, Investor's net worth (or joint net worth with
Investor's spouse) exceeds $1,000,000, or Investor had income in excess of
$200,000 in each of the two most recent years (or joint income with Investor's
spouse in excess of $300,000 in each of those years) and Investor has a
reasonable expectation of reaching the same income level in the current year.
The undersigned has such knowledge and experience in financial and business
matters that the undersigned is capable of evaluating the merits and risks of an
investment in the Company. The undersigned has made other investments and, by
reason of its business and financial experience, and skill in investments, the
undersigned has the capacity to protect its own interest in investments of this
nature. The undersigned has carefully evaluated its financial resources and
investment position, and the risks associated with this investment and
acknowledges that it is able to bear the economic risks of this investment. The
undersigned represents and warrants that the investment being made does not
exceed 20% of its net worth.
<PAGE>
(b) All documents, records and books pertaining to the undersigned's
proposed investment, which have been requested, have been made available to
undersigned and its advisors. The undersigned has had an opportunity to ask
questions of and receive satisfactory answers from the Company concerning the
Company and its business and the terms and conditions of an investment in the
Company, and all such questions have been answered to the undersigned's full
satisfaction.
(c) The undersigned is not acting on the basis of any promotional sales
materials, or representations and warranties by any person or contained in any
document, except for this document and the SEC Filings and any other documents
or information furnished by the Company upon request by the undersigned. The
undersigned has had full opportunity to be represented by its own legal and tax
counsel.
(d) The securities for which the undersigned is subscribing will be
acquired for its own account for investment purposes only and not with a view
to, or for resale in connection with, any distribution of securities within the
meaning of the Securities Act, and the undersigned does not now have any reason
to anticipate any change in circumstances or other particular occasion or event
which would cause the undersigned to sell or transfer such securities.
(e) The address and Social Security number (or, if a Company, partnership
or other form of business, the federal employer identification number) set forth
herein are true and correct. The undersigned is presently a bona fide resident
of the state set forth on the signature page hereof and has no present intention
of becoming a resident of any other state or jurisdiction. If a Company,
partnership, trust or other form of business, the undersigned represents and
warrants that its principal place of business is within such state. The
securities subscribed for have been offered and will be purchased in such state.
(f) The undersigned understands that the undersigned must bear the
economic risk of an investment in the Shares and Warrant Shares for an
indefinite period of time because neither the Shares nor the Warrant Shares have
been registered under any securities laws and therefore cannot be sold without
registration under applicable securities laws or an exemption from such
registration is available.
(g) The execution and delivery of this Subscription Agreement and the
purchase of the securities of the Company hereunder is within the undersigned's
power and authority, and have been duly authorized by all necessary action.
Assuming due execution and delivery by the Company, this Subscription Agreement
constitutes a valid and binding obligation, enforceable against the undersigned.
(h) The information provided to the Company herein is true and correct in
all respects as of the date hereof. The undersigned agrees to notify the Company
immediately if any of the statements made herein shall become untrue. The
undersigned understands that the Company is relying upon these representations
and warranties in completing this investment.
<PAGE>
5. RESTRICTIONS ON TRANSFER. The undersigned understands that it must
------------------------
bear the economic risk of the purchase of the Shares and Warrant Shares for an
indefinite period of time, because (a) the securities have not been registered
under the Securities Act or applicable state securities laws; (b) the Shares and
Warrant Shares may therefore not be sold, transferred, pledged or otherwise
disposed of unless the shares are subsequently so registered or, in the opinion
of counsel for or satisfactory to the Company, registration under the Securities
Act or any applicable state securities laws is not required; and (c) the Company
is under no obligation to perfect any exemption for resale of the Common Stock.
The Shares, the Warrants and the Warrant Shares will bear appropriate legends
setting forth such restrictions on transfer.
6. GENERAL. This Agreement sets forth the entire understanding between
-------
the parties hereto concerning the subject matter contained herein. Provisions of
this Agreement may be amended or waived only by written instrument executed by
the party against whom enforcement is sought. This Agreement shall be binding
upon the parties and the respective successors and assigns. The parties agree to
execute such additional documents and take such additional actions as may be
reasonably necessary to give effect to the purposes and intent of this
Agreement. This Agreement may be executed in one or more counterparts, any of
which shall be deemed to be an original, all of which taken together shall
constitute one and the same instrument. In the event any provision of this
Agreement is held to be unenforceable or invalid by any court of competent
jurisdiction, the validity and enforceability of the remaining provisions shall
not be affected thereby. This Agreement shall be governed by the laws of the
State of Texas without regard to conflicts of law rules.
[signature page follows]
<PAGE>
THE SECURITIES SUBSCRIBED FOR HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES ACT AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ABSENT SUCH REGISTRATION OR AN
EXEMPTION THEREFROM.
THIS SIGNATURE PAGE SHOULD BE DULY EXECUTED BY THE PURCHASER AND THE ENTIRE
EXECUTED SUBSCRIPTION AGREEMENT SHOULD BE DELIVERED TO DATA RACE, INC., ATTN:
PRESIDENT, AT 12400 NETWORK BOULEVARD, SAN ANTONIO, TEXAS 78216.
================================================================================
The undersigned hereby irrevocably subscribes for 44,444 Shares and 44,444
Warrants (as defined in the Subscription Agreement), at an aggregate price of
$100,000.
The undersigned represents that the undersigned has read the above
Subscription Agreement and the representations therein made by the undersigned
are true and correct.
IN WITNESS WHEREOF, this Subscription Agreement has been executed by the
undersigned as of November 17, 1998.
/s/ Timothy D. Wilson, Sr.
-------------------------------------
TIMOTHY D. WILSON, SR.
Address:
6633 East 1600th Road
Martinsville, IL 62442
Tel: (217) 382-4229
Fax: (217) 382-4630
SUBSCRIPTION ACCEPTED:
DATA RACE, INC.
By: /s/ Dr. W. B. Barker
------------------------------
Dr. W.B. Barker, President and
Chief Executive Officer
Date: November 17, 1998
<PAGE>
DATA RACE, INC.
SUBSCRIPTION AGREEMENT
----------------------
CONFIDENTIAL
- ------------
DATA RACE, Inc.
12400 Network Boulevard
San Antonio, Texas 78249
ATTN: President
1. SUBSCRIPTION. The undersigned investor ("Investor") hereby agrees to
------------
purchase 44,444 shares (the "Shares") of common stock, no par value
("Common Stock"), of DATA RACE, Inc., a Texas corporation (the "Company"),
and 44,444 common stock purchase warrants (the "Warrants") to purchase an
aggregate of 44,444 shares of Common Stock (the "Warrant Shares"), on the
terms and conditions described herein. The purchase price for one Share and
one Warrant is $2.25. Investor shall, upon execution hereof, forward
payment to the Company for the Shares and Warrants in immediately available
funds.
2. ADDITIONAL TERMS OF PURCHASE.
----------------------------
(a) Except as provided herein, each Warrant shall entitle the holder to
purchase one Warrant Share at an exercise price of $2.25 per share, at any
time on or before the second anniversary of the closing date.
Notwithstanding the foregoing, the Warrants may be exercised only if the
Company obtains shareholder approval to increase its authorized shares of
Common Stock (in the manner described in the Company's recent proxy
statement), failing which approval the Warrants shall not be exercisable.
Subject to the specific terms described herein, the Warrants shall be
evidenced by a Warrant Agreement in form similar to that delivered to the
purchasers in the Company's July 24, 1998 private placement, except that
the Warrant Agreement shall contain customary anti-dilution provisions for
stock splits, reverse stock splits and stock dividends and shall contain a
net cashless exercise provision permitting the holder to pay the exercise
price using shares of Common Stock otherwise issuable upon exercise of the
Warrants evidenced by the Warrant Agreement.
(b) The Company agrees to use its best efforts to register the Shares and
the Warrant Shares for resale under the Securities Act by the holders
thereof on or before the first anniversary of the closing date. If the
Company files a Form S-3 registration statement under the Securities Act
covering the resale of other shares of Common Stock of the Company on or
after the date of the increase in the Company's authorized shares, then the
Company shall include in such registration statement the Shares and the
Warrant Shares for resale by the holders thereof.
<PAGE>
(c) Investor hereby agrees that Investor shall be prohibited from selling
any Shares or Warrant Shares prior to the first anniversary of the closing
date.
3. CERTAIN INVESTMENT RISKS. Investor acknowledges that an investment in the
-------------------------
Company involves a high degree of risk which may result in the loss of the
entire amount of its investment. Investor acknowledges that there are
numerous risks associated with an investment in the Company, including, but
not limited to, those set forth in the Company's filings with the
Securities and Exchange Commission during the last 12 months (the "SEC
Filings"). Investor acknowledges that it has had full opportunity to review
the Company's SEC Filings, including, but not limited to, the Company's 10-
K filed September 28, 1998, the Company's definitive proxy statement filed
October 14, 1998 and the Company's Form S-3 Registration Statement filed
November 6, 1998, and Investor has reviewed the Company's quarterly
earnings release for the quarter ended September 30, 1998. Without limiting
the foregoing, Investor acknowledges that the Company is not currently in
compliance with the Nasdaq National Market net tangible assets requirement
and Investor acknowledges receipt of a copy of Nasdaq's letter to the
Company, dated November 4, 1998, notifying the Company of such non-
compliance. Investor further acknowledges that the issuance of the Shares
hereunder will require substantially all remaining authorized, but unissued
shares of Common Stock, and there can be no assurance that the Company will
receive requisite shareholder approval to increase its authorized shares.
4. INVESTOR REPRESENTATIONS AND WARRANTIES. Investor represents and warrants
---------------------------------------
to the Company that:
(a) The undersigned is an "accredited investor" within the meaning of
Regulation D promulgated pursuant to the Securities Act. If Investor is a
corporation, Investor has not been formed for the specific purpose of
acquiring the securities offered and Investor has total assets in excess of
$5,000,000. If Investor is an individual, Investor's net worth (or joint
net worth with Investor's spouse) exceeds $1,000,000, or Investor had
income in excess of $200,000 in each of the two most recent years (or joint
income with Investor's spouse in excess of $300,000 in each of those years)
and Investor has a reasonable expectation of reaching the same income level
in the current year. The undersigned has such knowledge and experience in
financial and business matters that the undersigned is capable of
evaluating the merits and risks of an investment in the Company. The
undersigned has made other investments and, by reason of its business and
financial experience, and skill in investments, the undersigned has the
capacity to protect its own interest in investments of this nature. The
undersigned has carefully evaluated its financial resources and investment
position, and the risks associated with this investment and acknowledges
that it is able to bear the economic risks of this investment. The
undersigned represents and warrants that the investment being made does not
exceed 20% of its net worth.
(b) All documents, records and books pertaining to the undersigned's proposed
investment, which have been requested, have been made available to
undersigned and its advisors. The undersigned has had an opportunity to
ask questions of and receive
<PAGE>
satisfactory answers from the Company concerning the Company and its
business and the terms and conditions of an investment in the Company, and
all such questions have been answered to the undersigned's full
satisfaction.
(c) The undersigned is not acting on the basis of any promotional sales
materials, or representations and warranties by any person or contained in
any document, except for this document and the SEC Filings and any other
documents or information furnished by the Company upon request by the
undersigned. The undersigned has had full opportunity to be represented by
its own legal and tax counsel.
(d) The securities for which the undersigned is subscribing will be acquired
for its own account for investment purposes only and not with a view to, or
for resale in connection with, any distribution of securities within the
meaning of the Securities Act, and the undersigned does not now have any
reason to anticipate any change in circumstances or other particular
occasion or event which would cause the undersigned to sell or transfer
such securities.
(e) The address and Social Security number (or, if a Company, partnership or
other form of business, the federal employer identification number) set
forth herein are true and correct. The undersigned is presently a bona
fide resident of the state set forth on the signature page hereof and has
no present intention of becoming a resident of any other state or
jurisdiction. If a Company, partnership, trust or other form of business,
the undersigned represents and warrants that its principal place of
business is within such state. The securities subscribed for have been
offered and will be purchased in such state.
(f) The undersigned understands that the undersigned must bear the economic
risk of an investment in the Shares and Warrant Shares for an indefinite
period of time because neither the Shares nor the Warrant Shares have been
registered under any securities laws and therefore cannot be sold without
registration under applicable securities laws or an exemption from such
registration is available.
(g) The execution and delivery of this Subscription Agreement and the purchase
of the securities of the Company hereunder is within the undersigned's
power and authority, and have been duly authorized by all necessary action.
Assuming due execution and delivery by the Company, this Subscription
Agreement constitutes a valid and binding obligation, enforceable against
the undersigned.
(h) The information provided to the Company herein is true and correct in all
respects as of the date hereof. The undersigned agrees to notify the
Company immediately if any of the statements made herein shall become
untrue. The undersigned understands that the Company is relying upon these
representations and warranties in completing this investment.
5. RESTRICTIONS ON TRANSFER. The undersigned understands that it must bear
------------------------
the economic risk of the purchase of the Shares and Warrant Shares for an
indefinite period of time, because (a) the securities have not been
registered under the Securities
<PAGE>
Act or applicable state securities laws; (b) the Shares and Warrant Shares
may therefore not be sold, transferred, pledged or otherwise disposed of
unless the shares are subsequently so registered or, in the opinion of
counsel for or satisfactory to the Company, registration under the
Securities Act or any applicable state securities laws is not required; and
(c) the Company is under no obligation to perfect any exemption for resale
of the Common Stock. The Shares, the Warrants and the Warrant Shares will
bear appropriate legends setting forth such restrictions on transfer.
6. GENERAL. This Agreement sets forth the entire understanding between the
-------
parties hereto concerning the subject matter contained herein. Provisions
of this Agreement may be amended or waived only by written instrument
executed by the party against whom enforcement is sought. This Agreement
shall be binding upon the parties and the respective successors and
assigns. The parties agree to execute such additional documents and take
such additional actions as may be reasonably necessary to give effect to
the purposes and intent of this Agreement. This Agreement may be executed
in one or more counterparts, any of which shall be deemed to be an
original, all of which taken together shall constitute one and the same
instrument. In the event any provision of this Agreement is held to be
unenforceable or invalid by any court of competent jurisdiction, the
validity and enforceability of the remaining provisions shall not be
affected thereby. This Agreement shall be governed by the laws of the State
of Texas without regard to conflicts of law rules.
[signature page follows]
<PAGE>
THE SECURITIES SUBSCRIBED FOR HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES ACT AND MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ABSENT SUCH REGISTRATION OR AN
EXEMPTION THEREFROM.
THIS SIGNATURE PAGE SHOULD BE DULY EXECUTED BY THE PURCHASER AND THE ENTIRE
EXECUTED SUBSCRIPTION AGREEMENT SHOULD BE DELIVERED TO DATA RACE, INC., ATTN:
SENIOR VICE PRESIDENT, AT 12400 NETWORK BOULEVARD, SAN ANTONIO, TEXAS 78216.
================================================================================
The undersigned hereby irrevocably subscribes for 44,444 Shares and 44,444
Warrants (as defined in the Subscription Agreement), at an aggregate price of
$100,000.
The undersigned represents that the undersigned has read the above
Subscription Agreement and the representations therein made by the undersigned
are true and correct.
IN WITNESS WHEREOF, this Subscription Agreement has been executed by the
undersigned as of January 4, 1999.
/s/ Dr. W. B. Barker
------------------------------
Dr. W. B. Barker
Address:
c/o DATA RACE, Inc.
12400 Network Boulevard
San Antonio, Texas 78249
Tel: (210) 263-2200
Fax: (210) 558-0363
SUBSCRIPTION ACCEPTED:
DATA RACE, INC.
By: /s/ Gregory T. Skalla
--------------------------------------------
Gregory T. Skalla, Senior Vice President and
Chief Financial Officer
Date: January 4, 1999.
<PAGE>
EXHIBIT 10.3
AMENDMENT NO. 1 TO
CONSULTING AGREEMENT
This Amendment No. 1 (this "Amendment") is entered into as of November 19,
1998, between DATA RACE, Inc., a Texas corporation (the "Company"); and Liviakis
Financial Communications, Inc., a California corporation ("Consultant").
RECITALS
WHEREAS, the Company and Consultant are parties to that certain Consulting
Agreement dated July 13, 1998 (the "Agreement"); and
WHEREAS, the Company and Consultant desire to extend the term and modify
certain provisions of the Agreement.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties to this Amendment
agree as follows:
AGREEMENT
1. Unless the context requires otherwise, capitalized terms used, but not
defined herein, shall have the applicable meanings given to them in the
Agreement.
2. The parties agree to amend the term of the Agreement, extending the
expiration date of the Agreement to January 1, 2000 from March 15,
1999. As amended, Section 1 of the Agreement will read as follows:
"1. Term of Consultancy. Company hereby agrees to retain the Consultant
-------------------
to act in a consulting capacity to the Company, and the Consultant hereby
agrees to provide services to the Company commencing immediately and ending
on January 1, 2000. The Agreement may be terminated by the Company with a
written notice of such desire to terminate the Agreement."
3. The Company agrees to issue and deliver to Consultant 200,000 shares
(the "Extension Bonus") of the Company's common stock ("Common Stock"),
provided that such issuance is contingent upon an increase in number of
the Company's authorized shares of Common Stock at the special meeting
of the Company's shareholders scheduled to be held on or about January
15, 1999.
4. The parties agree that, except as provided herein, the shares issued
as the Extension Bonus are treated as shares issued as part of the
"Commencement Bonus" for purposes of the Agreement. Without limiting
the foregoing (i) the Company acknowledges that the Bonus Shares are a
nonrefundable, non-
<PAGE>
apportionable, and non-ratable retainer and that such shares are
not a prepayment for future services and (ii) the Consultant
reaffirms the representations, warranties and covenants contained
in Sections 4.2 and 4.3 of the Agreement.
5. Company agrees that the shares issued as Additional Bonus will
carry piggy-back registration rights whereby such shares will be
included in the next resale registration statement filed under the
Securities Act of 1933, as amended (the "Securities Act") after the
issuance of the shares.
6. Notwithstanding Section 5 above, the Company agrees to file a
resale registration statement covering the shares issued as
Additional Bonus under the Securities Act no later than October 31,
1999.
7. Consultant agrees that it shall not sell or transfer any of the
shares issued as the Commencement Bonus (including the Extension
Bonus) during the term of the Agreement, as extended. Robert B.
Prag ("Prag") also agrees that he will not sell or transfer any of
the shares issued to him as a Commencement Bonus during the term of
the Agreement, as extended, as long as he is an officer and/or
director of the Consultant. Notwithstanding the preceding sentence,
Prag may sell or transfer, subject to compliance with applicable
securities laws, any of the shares issued to him as a Commencement
Bonus beginning on, but not prior to, March 16, 1999, provided that
he is no longer an officer or director of the Consultant at the
time of such transfer or sale.
8. The Agreement, as modified by this Amendment, sets forth the entire
understanding between the parties hereto concerning the subject
matter contained herein and, except as specifically modified
herein, all other provisions of the Agreement are hereby ratified
and affirmed. Provisions of the Agreement may be amended or waived
only by written instrument executed by the party against whom
enforcement is sought. The parties agree to execute such additional
documents and take such additional actions as may be reasonably
necessary to give effect to the purposes and the intent of the
Agreement, as modified by this Amendment.
9. This Amendment may be executed in one or more counterparts, any of
which shall be deemed to be an original, all of which taken
together shall constitute one and the same instrument.
[signatures on following page]
<PAGE>
IN WITNESS WHEREOF, each party has duly executed this Amendment as of the
date first written above.
COMPANY CONSULTANT
------- ----------
DATA RACE, INC. LIVIAKIS FINANCIAL COMMUNICATIONS INC.
By: /s/ Gregory T. Skalla By: /s/ John M. Liviakis
------------------------------ -------------------------
Gregory T. Skalla, Senior Vice John M. Liviakis
President-Financeand Chief Presidnet
Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DATA RACE,
INC FINANCIAL STATEMENTS AS OF AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,727
<SECURITIES> 0
<RECEIVABLES> 442
<ALLOWANCES> 0
<INVENTORY> 568
<CURRENT-ASSETS> 4,737
<PP&E> 4,059
<DEPRECIATION> 2,757
<TOTAL-ASSETS> 6,065
<CURRENT-LIABILITIES> 908
<BONDS> 0
0
1,637
<COMMON> 40,609
<OTHER-SE> (37,089)
<TOTAL-LIABILITY-AND-EQUITY> 6,065
<SALES> 1,699
<TOTAL-REVENUES> 1,699
<CGS> 1,153
<TOTAL-COSTS> 6,307
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,552)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,552)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,552)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
