SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) - July 24, 1998
DATA RACE, INC.
(Exact name of registrant as specified in its charter)
TEXAS
(State or other jurisdiction of incorporation)
0-20706 74-2272363
(Commission File Number) (I.R.S. Employer Identification No.)
12400 NETWORK BLVD.
SAN ANTONIO, TEXAS 78249
(210) 263-2000
(Address of Principal Executive Offices and
Telephone Number, Including Area Code)
1
ITEM 5. OTHER EVENTS.
On July 24, 1998, the Company completed the first closing of a private
placement (the "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. At such time, the Class A
Investors agreed to purchase at a second closing additional shares of Series D
Preferred Stock and Class A Warrants for an aggregate price of $1,000,000, and
the Class B Investor agreed to purchase at a second closing shares of Series F
Convertible Preferred Stock ("Series F Preferred Stock") and Class B Warrants
for a price of $750,000. The second closing is scheduled to occur on or before
January 31, 1999, and is subject the Company's satisfaction of certain
conditions, including, among others, the following: the average closing bid
price of the Company's Common Stock during the five trading days prior to the
closing is at least $1.50; in the case of the closing with respect to the Class
B Investor, the Company has a minimum of $750,000 in revenue for the quarter
ending September 30, 1998 or December 31, 1998; the shares of the Company's
Common Stock issuable upon conversion of the Preferred Stock ("Conversion
Shares") and upon exercise of the Warrants ("Warrant Shares") are registered for
resale pursuant to the Securities Act of 1933, as amended (the "Securities
Act"); the Company's shareholders approve the potential issuance of the
Conversion Shares and Warrant Shares in excess of certain limits imposed by
Nasdaq Marketplace Rules; the Company is in compliance with Nasdaq listing
requirements; and there is no material adverse change in the Company's financial
condition, business or prospects. The Company intends to use the proceeds from
the private placement primarily to promote its Be There! remote access system
product line and for working capital.
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 ranks equally with each other series of
Preferred Stock); and is redeemable at a premium at the option of the holder
under certain circumstances, including the occurrence of certain major corporate
transactions and the failure of the Company to register the Conversion Shares or
Warrant Shares within prescribed time periods.
The Series D Preferred Stock is convertible into Common Stock of the
Company ("Common Stock") at the option of the holder beginning 90 days after the
issuance date (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 the
issuance date 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 the issuance date. The Series E Preferred Stock is convertible into
Common Stock at the option of the holder beginning one year after the issuance
date (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
2
date the Company reached an agreement in principle with the Investors regarding
the terms of the Private Placement). The Series F Preferred Stock will be
convertible into Common Stock at the option of the holder beginning one year
after the second closing (subject to acceleration in certain events), at a
conversion price equal to the trailing five-day average closing bid price of the
Common Stock on the date of the second closing. Subject to certain limitations,
all Preferred Stock outstanding five years after the issuance date will convert
automatically into Common Stock at the applicable conversion price. 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. Pursuant to Nasdaq Marketplace Rules, in the
absence of shareholder approval, the aggregate number of shares of Common Stock
that are issued at a discount from the market price pursuant to the Private
Placement may not equal or exceed 20% of the outstanding shares of Common Stock
on July 24, 1998 (i.e., 2,905,782 shares); any Preferred Stock which may not be
converted or Warrants which may not be exercised because of such limitation must
be redeemed at a premium by the Company in cash. The Company intends to seek
shareholder approval at its next annual meeting of the issuance of the Common
Stock pursuant to the Private Placement.
If the Common Stock ceases to be listed on the Nasdaq National Market, the
Company must pay the holders of the Preferred Stock a cash penalty of 1% per
day, for up to 24 days, of the stated value of the Preferred Stock outstanding.
The holders may require the Company to redeem their shares of Preferred Stock if
the Company fails to pay such penalty.
The Class A Warrants are exercisable 90 days after issuance (subject to
acceleration in certain events), at an exercise price equal to 120% of the
average of the three lowest closing bid prices during the 22 trading days prior
to issuance date, up to a maximum price of $.80 per share (the "Class A Warrant
Exercise Price"), to purchase that number of shares of Common Stock equal to 15%
of the stated value of the Series D Preferred Stock issued at each closing,
divided by the Class A Warrant Exercise Price. Based on such formula, the
Company issued at the first closing Class A Warrants to purchase an aggregate of
339,623 shares of Common Stock at an exercise price of $0.6625 per share. The
Class B Warrants are exercisable one year after issuance (subject to
acceleration in certain events), at an exercise price of $0.80 per share (the
"Class B Warrant Exercise Price"), to purchase that number of shares of Common
Stock equal to 15% of the stated value of the Series E Preferred Stock and
Series F Preferred Stock issued at each closing, divided by the Class B Warrant
Exercise Price. Based on such formula, the Company issued at the first closing,
and is obligated to issue at the second closing, Class B Warrants to purchase
140,625 shares of Common Stock at an exercise price of $0.80 per share. On July
8, 1998, the date the Company reached an agreement in principle with the
Investors regarding the terms of the Private Placement, the closing price of the
Common Stock was $0.5938. The Class A Warrants and the Class B Warrants (the
"Warrants") each expire two years after the date of their issuance.
The Company has agreed to file a registration statement under the
Securities Act covering the resale of the Conversion Shares and Warrant Shares.
The failure of such registration statement to be filed and declared effective
within certain prescribed time periods will result in cash penalties payable by
the Company to the holders of Preferred Stock. The Class A Investors and the
Class B Investors (the "Investors") have agreed not to effect any short sales of
Common Stock during the one-year period following each closing.
3
A placement agent assisted the Company in arranging the Placement Placement
with the Class A Investors. As compensation for the investment by the Class A
Investors in the first closing, the Company paid a cash fee equal to 6% of the
gross proceeds received from the Class A Investors and issued Class A Warrants
to purchase the same number of shares that may be purchased pursuant to the
Class A Warrants issued to 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 one-half of the number of
shares that may be purchased pursuant to the Class A Warrants to be issued to
the Class A Investors.
The offer and sale of the Preferred Stock and Warrants were, and, in
connection with the second closing, will be, made in reliance upon Section 4(2)
of the Securities Act, the non-public offering exemption from the registration
requirements of the Securities Act.
THE SUMMARY OF THE PRIVATE PLACEMENT SET FORTH ABOVE IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE PURCHASE AGREEMENT AND THE OTHER DOCUMENTS EXECUTED
BY THE COMPANY IN CONNECTION WITH THE PRIVATE PLACEMENT. SUCH DOCUMENTS ARE
FILED AS EXHIBITS TO THIS FORM 8-K.
4
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
Exhibit Description
------- -----------
3.1 Statement of Designation, Preferences and Rights of
Series D Convertible Preferred Stock
3.2 Statement of Designation, Preferences and Rights of
Series E Convertible Preferred Stock
10.1 Purchase Agreement, dated July 24, 1998, between the
Company, Sovereign Partners L.P., Dominion Capital Fund,
Ltd., and First Capital Group of Texas II, L.P.
10.2 Registration Rights Agreement, dated July 24, 1998,
between the Company, Sovereign Partners L.P., Dominion
Capital Fund, Ltd., and First Capital Group of Texas II,
L.P.
10.3 Form of Class A Common Stock Purchase Warrant
10.4 Form of Class B Common Stock Purchase Warrant
10.5 Form of Statement of Designation, Preferences and Rights
of Series F Convertible Preferred Stock
5
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 hereunto duly authorized.
DATA RACE, Inc.
Date: August 3, 1998 By: /s/ Gregory T. Skalla
---------------------
Gregory T. Skalla,
Vice President-Finance,
Chief Financial Officer,
Treasurer and Secretary
6
EXHIBIT INDEX
Exhibit Description
------- -----------
3.1 Statement of Designation, Preferences and Rights of
Series D Convertible Preferred Stock
3.2 Statement of Designation, Preferences and Rights of
Series E Convertible Preferred Stock
10.1 Purchase Agreement, dated July 24, 1998, between the
Company, Sovereign Partners L.P., Dominion Capital Fund,
Ltd., and First Capital Group of Texas II, L.P.
10.2 Registration Rights Agreement, dated July 24, 1998,
between the Company, Sovereign Partners L.P., Dominion
Capital Fund, Ltd., and First Capital Group of Texas II,
L.P.
10.3 Form of Class A Common Stock Purchase Warrant
10.4 Form of Class B Common Stock Purchase Warrant
10.5 Form of Statement of Designation, Preferences and Rights
of Series F Convertible Preferred Stock
7