<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
Exchange Act of 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
DATA RACE, Inc.
---------------
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement
if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
DATA RACE, INC.
12400 NETWORK BLVD.
SAN ANTONIO, TEXAS 78249
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 13, 1998
An annual meeting of shareholders of DATA RACE, Inc., a Texas corporation (the
"Company"), will be held at the Company's corporate offices, 12400 Network
Blvd., San Antonio, Texas, on November 13, 1998, at 10:00 a.m., CST, for the
following purposes:
1. To elect six directors to serve for the ensuing year.
2. To approve the DATA RACE, Inc. 1998 Stock Option Plan.
3. To amend the Company's Articles of Incorporation to increase the
authorized number of shares of capital stock.
4. To authorize the issuance of certain securities of the Company.
5. To ratify the selection of KMPG Peat Marwick, LLP., as independent
accountants.
6. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on September 14, 1998
as the record date for the determination of shareholders entitled to vote at the
meeting.
We hope that you will be able to attend the meeting in person, but whether or
not you plan on attending, please fill in, sign and promptly mail back the
enclosed proxy form, using the return envelope provided. If, for any reason,
you should subsequently change your plans, you can, of course, revoke the proxy
at any time before it is actually voted.
By Order of the Board of Directors
Gregory T. Skalla
Secretary
San Antonio, Texas
October 12, 1998
<PAGE>
DATA RACE, INC.
PROXY STATEMENT
FOR THE
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 13, 1998
THE MEETING
This Proxy Statement is furnished to the shareholders of DATA RACE, Inc., a
Texas corporation (the "Company"), in connection with the solicitation of
proxies by the Board of Directors of the Company for use at the Annual Meeting
of Shareholders (the "Meeting") to be held November 13, 1998. This Proxy
Statement and the accompanying proxy are being sent or given to the shareholders
of the Company on or about October 16, 1998. The Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1998 is also being sent to the
shareholders of the Company with this Proxy Statement.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of the Company's Common Stock ("Common Stock") is necessary
to constitute a quorum at the Meeting. Only votes cast "for" a matter
constitute affirmative votes. Votes "withheld" or abstaining from voting are
counted for quorum purposes, but since they are not cast "for" a particular
matter, they will have the same effect as negative votes or votes "against" a
particular matter. The votes required with respect to the Items set forth in
the Notice of Annual Meeting of Shareholders are set forth in the discussion of
each Item herein. In deciding all questions, a holder of Common Stock is
entitled to one vote, in person or by proxy, for each share held in such
holder's name on the record date. Proxies in the form enclosed will be voted at
the Meeting, if properly executed, returned to the Company prior to the Meeting
and not revoked. A proxy may be revoked at any time before it is voted by
giving written notice to the Secretary of the Company prior to the convening of
the Meeting, or by presenting another proxy card with a later date. If you
attend the meeting and desire to vote in person, you may request that your
previously submitted proxy card not be used.
The record date for shareholders entitled to vote at the Meeting is
September 14, 1998. At the close of business on September 28, 1998, there were
14,537,140 shares of Common Stock issued and outstanding and entitled to vote at
the Meeting. As of September 28, 1998 the directors and executive officers of
the Company and their affiliates beneficially owned a total of 756,016 shares of
Common Stock, or approximately 4.6% of the total number of shares outstanding
and entitled to vote at the Meeting. The directors and executive officers and
their affiliates have indicated to the Company that they presently intend to
vote all of the shares of Common Stock owned by them for each of the Items set
forth in the Notice of Annual Meeting.
1
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership
of Common Stock as of September 28, 1998 by (i) each person known by the Company
to be the beneficial owner of more than 5% of the outstanding Common Stock; (ii)
each director and director nominee; (iii) each named executive officer and (iv)
all executive officers, directors and nominees as a group. Unless otherwise
noted, each shareholder has sole voting and investment power with respect to the
shares beneficially owned. Options included in the following table represent
options currently exercisable or exercisable within 60 days of September 28,
1998.
<TABLE>
<CAPTION>
Number Percent of
of Shares Class
Name ------------ -----
----
<S> <C> <C>
Dr. W. B. Barker....................................................... 356,177(1) 2.4%
Jeffrey P. Blanchard................................................... 74,615(2) *
George R. Grumbles..................................................... 39,500(3) *
Marcelo A. Gumucio..................................................... 40,000(4) *
Matthew A. Kenny....................................................... 39,500(5) *
Dwight E. Lee.......................................................... 46,000(6) *
Edward A. Masi......................................................... 42,500(7) *
George H. Bennett...................................................... 50,000(8) *
Dr. Paul J. Demko Jr................................................... 18,333(9) *
Gregory T. Skalla...................................................... 31,567(10) *
All Directors and Executive Officers as a Group
(11 persons)...................................................... 756,016(11) 5.0%
Liviakis Financial Communications, Inc.("LFC")(12)..................... 1,446,475 10.0%
John M. Liviakis("JML")(12)............................................ 1,507,875(13) 10.4%
Robert B. Prag ("RPG")(12)............................................. 1,915, 300(14) 13.2%
</TABLE>
- ----------------------
* Indicates less than 1%.
(1) Includes 319,500 shares subject to options held by Dr. Barker.
(2) Includes 22,500 shares subject to options held by Mr. Blanchard. Does not
include shares of Series E Preferred Stock and common stock purchase
warrants (or any underlying shares of common stock) purchased in the
Private Placement (as defined in Item 4) by First Capital Group of Texas
II, L.P., an investment fund managed by Mr. Blanchard. Such securities are
not currently convertible and exercisable, and Mr. Blanchard disclaims
beneficial ownership in such shares.
(3) Includes 39,500 shares subject to options held by Mr. Grumbles.
(4) Includes 430,000 shares subject to options held by Mr. Gumucio.
(5) Includes 39,500 shares subject to options held by Mr. Kenny.
(6) Includes 37,500 shares subject to options held by Mr. Lee.
(7) Includes 37,500 shares subject to options held by Mr. Masi.
(8) Includes 50,000 shares subject to options held by Mr. Bennett
(9) Includes 18,333 shares subject to options held by Dr. Demko.
(10) Includes 25,417 shares subject to options held by Mr. Skalla.
(11) Includes 646,750 shares subject to options held by such persons.
(12) Information with respect to the beneficial ownership of such shareholder
was obtained from the Schedule 13D filed September 1, 1998 by Liviakis
Financial Communications, Inc. ("LFC"). The address of such shareholder is
2420 K Street, Suite 220, Sacramento, California 95816.
(13) Includes 61,400 shares of Common Stock owned by Mr. Liviakis. Includes
1,446,475 shares of Common Stock owned by LFC over which Mr. Liviakis
shares voting and dispositive power by virtue of his position as an
officer and director of LFC.
(14) Includes 468,825 shares of Common Stock owned by Mr. Prag. Includes
1,446,475 shares of Common Stock owned by LFC over which Mr. Prag shares
voting and dispositive power by virtue of his position as an officer and
director of LFC.
2
<PAGE>
ITEM 1
ELECTION OF DIRECTORS
At the Meeting pursuant to which this Proxy Statement is being distributed,
six directors are to be elected by plurality of the votes cast by the holders of
shares entitled to vote. Votes withheld are not counted in the number of votes
cast in the election of directors. In tabulating the vote, broker non-votes will
have no effect on the vote. Each outstanding share of common stock entitles the
holder thereof to one vote with respect to the election of each of the six
director positions to be filled at this meeting. The nominees for director are
Dr. W. B. Barker, Jeffrey P. Blanchard, Matthew A. Kenny, George R. Grumbles,
Dwight E. Lee and Edward A. Masi. All of the nominees are presently directors of
the Company. Marcelo A. Gumucio has declined to stand for reelection. For
information concerning the backgrounds of the current directors, see "Directors
and Executive Officers" below.
THE ENCLOSED PROXY, IF PROPERLY SIGNED AND RETURNED, AND UNLESS AUTHORITY
TO VOTE IS WITHHELD, WILL BE VOTED FOR THE ELECTION OF THESE SIX NOMINEES. The
Board of Directors has no reason to believe that any of such nominees will be
unable to serve if elected. In the event any of such nominees become unavailable
for election, votes will be cast, pursuant to authority granted by the enclosed
Proxy, for such substitute nominee as may be designated by the Board of
Directors. All directors serve for a term of one year and until their successors
are elected.
MANAGEMENT
The following table sets forth certain information concerning the current
directors (representing all nominees for director, except Marcelo A. Gumucio who
is not standing for re-election) and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<S> <C> <C>
Dr. W. B. Barker......................... 51 President, Chief Executive Officer and Director
Gregory T. Skalla........................ 43 Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
George H. Bennett........................ 45 Senior Vice President-Sales and Marketing
Dr. Paul Demko Jr........................ 53 Vice President-Development
Joseph Karwowski......................... 53 Vice President-Manufacturing
Jeffrey P. Blanchard..................... 45 Chairman of the Board of Directors
Matthew A. Kenny......................... 64 Director
George R. Grumbles....................... 65 Director
Marcelo A. Gumucio....................... 61 Director
Dwight E. Lee............................ 51 Director
Edward A. Masi........................... 51 Director
</TABLE>
Dr. W. B. Barker has served as President and Chief Executive Officer since
April 1995 and as a Director since May 1995. Prior to joining the Company, Dr.
Barker was employed for 26 years by Bolt Beranek and Newman Inc. ("BBN"). At
BBN, he served in a variety of technical and management capacities, including
Senior Vice President, Chief Technology Officer, founder and President of
LightStream Corporation, an ATM switch company, and was responsible for the
acquisition of regional Internet service providers. While employed by BBN, he
held general management positions and was President of several subsidiaries,
where he was directly responsible for
3
<PAGE>
product strategies, development, marketing and manufacturing for many
communications and multiprocessor products. He holds Ph.D., M.S. and B.A.
degrees from Harvard University.
Gregory T. Skalla has served as Senior Vice President since August 11,
1998, and as Vice President-Finance, Chief Financial Officer, Secretary and
Treasurer since February 1995. Mr. Skalla has been employed by the Company
since 1992 when he joined the Company as Controller. From 1987 to 1992, Mr.
Skalla was Chief Financial Officer of Mil-Com Electronics Corporation in San
Antonio, Texas.
George H. Bennett joined the Company as Senior Vice President-Sales in
November 1997. From February 1997 until that time, Mr. Bennett served as Senior
Vice President-Sales and Marketing at ATC Communications. From May 1979 until
December 1996, Mr. Bennett served as a Senior Vice President at Memorex Telex
Corporation, a worldwide integrator of enterprise network and storage systems.
Dr. Paul Demko Jr. joined the Company as Vice President-Development in
January 1997. During 1996, Dr. Demko served as Vice President-Product
Development at Process Software Corp. Prior to this, Dr. Demko held executive
management positions at Centerline Software Inc. (1995-1996), Proteon, Inc.
(1992-1995), and Wang Laboratories, Inc. (1982-1992). He holds a Ph.D., M.S.
and B.S. in electrical engineering from the Massachusetts Institute of
Technology where, in the mid-1970's, he worked with the pioneers in voice coding
developing linear predictive and channel vocoders.
Joseph Karwowski has served as Vice President-Manufacturing since January
1998. Mr. Karwowski has been employed by the Company since January 1994 when he
joined the Company as Director of Manufacturing and Purchasing. From 1989 to
1993, Mr. Karwowski was Vice President of Manufacturing and Program Management
for Swearingen Aircraft.
Jeffrey P. Blanchard has served as a Director of the Company since August
1985 and as Chairman of the Board of Directors since October 1996. Mr.
Blanchard has been the Managing General Partner of First Capital Group of Texas,
Ltd., since January 1984. Since September 1995, Mr. Blanchard has been the
Managing General Partner of First Capital Group of Texas II, L.P., an investment
firm which provides private equity to middle-market companies throughout the
Southwest United States. From January 1989 to December 1994, Mr. Blanchard
served as Vice President and Investment Manager of Victoria Capital Corporation,
a venture capital investment company.
Matthew A. Kenny was elected to the Board of Directors in February 1995.
From 1984 until 1989, Mr. Kenny was President and CEO of RACAL-MILGO, a company
with revenues in excess of $300 million. Mr. Kenny joined Milgo in 1968. From
1989 to 1993, Mr. Kenny was Chairman of the Board and CEO of Physical Health
Devices, Inc. From 1989 to the present he has been a managing partner in
Venture Solutions, and since 1994 he has been President and CEO of Core
Technology Development, Inc., Fort Lauderdale, Florida.
George R. Grumbles was appointed to the Board of Directors in February
1995. From 1985 until his retirement in 1993, Mr. Grumbles served as a
corporate Vice President of Motorola and the President and CEO of Universal Data
Systems which he joined in 1972.
Marcelo A. Gumucio was elected to the Board of Directors in December 1995.
Mr. Gumucio has declined to stand for reelection as a director. From April 1996
to July 1997, Mr. Gumucio served as Chief Executive Officer of Micro Focus, Palo
Alto, California. From November 1992 until joining
4
<PAGE>
Micro Focus, Mr. Gumucio served as President and Chief Executive Officer of
Memorex Telex N.V., a publicly-held multinational computer company based in
Amsterdam, The Netherlands. Prior to joining Memorex Telex, Mr. Gumucio founded
and led, from August 1990 to November 1992, Gumucio, Burke and Associates, a
private investment firm in Minneapolis, Minnesota. From July 1983 to August
1990, Mr. Gumucio held various positions, including President, Chief Executive
Officer and Director, with Cray Research, Inc., a publicly-held manufacturer of
supercomputers.
Dwight E. Lee was appointed to the Board of Directors in January 1997.
Since October 1981, Mr. Lee has been a partner of Barker, Lee & Company, a New
York City-based investment management firm, of which Dr. Barker, the Company's
President, is also a partner. Mr. Lee was nominated for election because of his
extensive background in the investment community, and brings significant board
experience with both public and private companies.
Edward A. Masi was appointed to the Board of Directors in May 1997. Mr.
Masi is a veteran of the computer industry and is well-known in the high
performance computing market. From March 1992 to June 1997, Mr. Masi was a
corporate Vice President at Intel Corporation. Prior to joining Intel, Mr. Masi
worked for Cray Research from 1980 to 1992, ultimately holding the position of
Executive Vice President of Sales, Marketing and Service. Mr. Masi began his
career in 1969 at IBM, where he held various sales and marketing positions over
the course of eleven years.
BOARD AND COMMITTEE MEETINGS
During the fiscal year ended June 30, 1998, the Board of Directors held 15
meetings. Each director attended at least 75% of the meetings of the Board of
Directors held during the period for which he was a director.
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee, composed of Messrs. Blanchard (Chairman), Kenny and Lee, is
responsible for reviewing the Company's financial statements and overseeing the
Company's accounting practices and audit procedures. The Compensation
Committee, composed of Messrs. Blanchard (Chairman), Grumbles, and Masi, reviews
and makes recommendations to the Board of Directors regarding executive
compensation matters and administers the Company's stock option plans and
employee stock purchase plan. During fiscal 1998, the Audit Committee met one
time and the Compensation Committee met nine times. Each director attended at
least 75% of the meetings of each committee of which he was a member, held
during the period in which he was a committee member.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors, executive officers, and beneficial owners of more than 10% of any
class of securities of the Company to file certain forms regarding such persons'
ownership of equity securities of the Company. Based on Company records and
other information, the Company believes that its executive officers and
directors complied with all these filing requirements with respect to the fiscal
year ended June 30, 1998, except one report covering one transaction was filed
late by each of Mssrs. Blanchard, Grumbles and Masi.
5
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation information
for the fiscal years ended June 30, 1998, 1997 and 1996, for the Chief Executive
Officer and each of the other three most highly compensated executive officers
(hereinafter referred to as the "named executive officers").
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term
------------------- Compensation
Awards
------
Securities
Base Salary Underlying All Other
Year ($) Bonus ($) Options (#) Compensation ($)
---- --- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Dr. W. B. Barker................. 1998 $ 197,500 7,000 $ 1,952(1)
President and CEO 1997 188,125 - 30,000 3,822(1)
1996 175,000 $ 39,712(2) - 8,500(3)
George H. Bennett................ 1998 115,269(6) 22,500 100,000(4) 1,350(1)
Senior Vice PresidentSales and
Marketing
Dr. Paul J. Demko Jr............. 1998 150,000 - 36,666(4) 20,417(8)
Vice President - Development 1997 70,116(7) 15,000(5) 55,000 -
Gregory T. Skalla................ 1998 125,000 - 50,833(4) 2,604(1)
Senior Vice President, Chief 1997 112,500 - 25,000 2,063(1)
Financial Officer, Secretary 1996 92,331 10,000 - 2,506(1)
and Treasurer
</TABLE>
- -------------------
(1) Represents contributions made by the Company under the Company's 401(k)
plan.
(2) Represents guaranteed bonus pursuant to Dr. Barker's employment agreement.
(3) Represents reimbursement of relocation expenses.
(4) Effective April 21, 1998, Mr. Bennett, Dr. Demko and Mr. Skalla, elected to
reprice 150,000, 55,000 and 76,250 stock options, respectively, pursuant to
a repricing plan adopted by the Company's Board of Directors. In
connection with such repricing, 150,000 of Mr. Bennett's, 55,000 of Dr.
Demko's, and 76,250 of Mr. Skalla's existing stock options were canceled
and 100,000, 36,666 and 50,833 stock options, respectively, were granted.
(5) Represents a $15,000 signing bonus earned during the fiscal year.
(6) Represents compensation from commencement of employment on November 11,
1997.
(7) Represents compensation from commencement of employment on January 15,
1997.
(8) Represents reimbursement for tax liability associated with payment of
living expenses and contribution made by the Company under the Company's
401(K).
Perquisites and other personal benefits did not exceed the lesser of either
$50,000 or 10% of the total annual salary and bonus reported for any named
executive officer.
6
<PAGE>
DIRECTOR COMPENSATION
Matthew Kenny, George Grumbles, Marcelo Gumucio, Dwight E. Lee, and Edward
A. Masi each receive compensation of $1,000 for each Board of Directors meeting
attended. Outside directors are eligible to receive options under the Company's
stock option plans and are automatically granted options under the Company's
1997 stock option plan. Outside directors are reimbursed for their out-of-
pocket expenses involved in connection with their services as directors.
Certain outside directors also receive consulting fees for services rendered
from time to time to the Company. In fiscal 1998, no such person received in
excess of $60,000 for such services.
EMPLOYMENT AGREEMENTS
Dr. W. B. Barker entered into an employment agreement with the Company on
April 25, 1995. Pursuant to such agreement, Dr. Barker receives an annual base
salary of not less than $175,000. Dr. Barker is eligible to receive an
incentive bonus, pursuant to the Company's management incentive program, of up
to 50% of his base salary. Pursuant to the agreement, if Dr. Barker is
terminated without cause he may elect to receive severance pay equal to one
year's base salary, paid in monthly installments. During the period in which
such severance payments are made, Dr. Barker is prohibited from competing
directly with the Company.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan structured to qualify under
Section 423 of the Internal Revenue Code of 1986. Under the Purchase Plan, all
full-time employees of the Company possessing less than 5% of the voting power
of the Company may elect to participate in the Purchase Plan through a payroll
deduction program. Under the Purchase Plan, options to purchase up to 200,000
shares of Company common stock may be granted to participants. As of September
28, 1998, 88,024 shares of common stock had been issued under the Purchase Plan.
The Compensation Committee, which administers the Purchase Plan,
establishes offering periods for the Purchase Plan which may last up to 24
months. Prior to each offering period, participants may authorize payroll
deductions of up to 20% of their annual compensation. At the beginning of the
offering period, participants are granted an option to purchase the number of
shares of common stock that may be purchased with the total amount of the
participant's payroll deductions taken over the offering period at an exercise
price equal to the lesser of 85% of the fair market value of the common stock on
the first day of the offering period or the last day of the offering period.
Unless the participant has withdrawn from participation, the participant's
option will be exercised automatically on the last day of the offering period.
A participant may withdraw from the Purchase Plan at any time during an
offering period. If a participant's employment with the Company terminates for
any reason other than death, disability, or retirement, his or her option to
purchase common stock under the Purchase Plan will immediately terminate, and
the amount of such participant's payroll deductions will be paid to him or her
in cash. If a participant's employment with the Company terminates due to
death, disability, or retirement, such participant (or his or her legal
representative) will have the right to continue participation in the Purchase
Plan with respect to the offering period. No option granted under the Purchase
Plan may be transferred except by will or the laws of descent and distribution.
7
<PAGE>
STOCK OPTION PLANS
Under the Company's existing stock option plans (the "Plans"), as of
September 28, 1998, stock options covering an aggregate of 1,703,523 shares of
Common Stock were outstanding with a weighted average exercise price of $5.03
per share, and an aggregate of 202,325 shares of Common Stock were available for
issuance upon exercise of options which may be granted in the future under the
Plans.
Options under the Plans may either be incentive stock options or non-
qualified stock options (except in the case of the Company's non-qualified stock
option plan which permits only the issuance of non-qualified stock options).
Options under the Plans may be granted for a term not to exceed ten years (five
years with respect to incentive stock options granted to any person having 10%
or more voting power of the Company) and are not transferable other than by will
or the laws of descent and distribution. The exercise price of the options
under the Plans must be at least equal to the fair market value of the Common
Stock on the date of grant, or 110% of such value for incentive stock options
granted to any person having 10% or more of the voting power of the Company.
The aggregate fair market value of the Common Stock for which any employee may
be granted incentive stock options which first become exercisable in any one
calendar year may not exceed $100,000. Options may be exercised by payment of
cash or by tender of shares of common stock (valued at their then current market
value). The Plans are administered by the Compensation Committee of the Board
of Directors.
On August 19, 1998, the Company's Board of Directors adopted the DATA RACE,
Inc. 1998 Stock Option Plan, authorizing the grant of incentive stock options
and non-qualified stock options to employees, directors and certain other
persons. No options have been granted under the 1998 Stock Option Plan.
Shareholder approval of the 1998 Stock Option Plan is being sought in connection
with this Proxy Statement. See "Item 2 - 1998 Stock Option Plan".
STOCK OPTION GRANT TABLE
The following table sets forth certain information concerning options
granted to the named executive officers during the Company's fiscal year ended
June 30, 1998:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Number of Percent of Value at Assumed
Shares Total Options Annual Rates of Stock
Underlying Granted to Exercise or Price Appreciation For
Options Employees in Base Price Expiration Option Term(1)
Name Granted Fiscal Year ($/Sh) Date 5%($) 10%($)
---- ------- ----------- ------ ---- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Dr. W. B. Barker................... 7,000(2) 0.9% $10.1880 7/17/07 $ 44,884 $113,659
George H. Bennett.................. 100,000(3) 13.3% 1.7813 4/21/08 112,020 283,870
Dr. Paul J. Demko Jr............... 36,666(3) 4.9% 1.7813 4/21/08 41,073 104,084
Gregory T. Skalla.................. 50,833(3) 6.8% 1.7813 4/21/08 56,943 144,300
</TABLE>
- ----------------
(1) As required by rules of the SEC, potential values stated are based on the
assumption that the Company's Common Stock will appreciate in value from
the date of the grant to the end of the option term (ten years
8
<PAGE>
from the date of grant) at annualized rates of 5% and 10% (total
appreciation of approximately 63% and 159%), respectively, and therefore
are not intended to forecast possible future appreciation, if any, in the
price of the Common Stock. The exercise price of each option equals the
fair market value of the Common Stock on the grant date.
(2) Such options became exercisable on December 1, 1997.
(3) Effective April 21, 1998 Mr. Bennett, Dr. Demko and Mr. Skalla, elected to
reprice 150,000, 55,000 and 76,250 stock options, respectively, pursuant to
a repricing plan adopted by the Company's Board of Directors. In
connection with such repricing, 150,000 of Mr. Bennett's, 55,000 of Dr.
Demko's, and 76,250 of Mr. Skalla's existing stock options were canceled
and 100,000, 36,666 and 50,833 stock options, respectively, were granted.
The options vest in two equal installments on October 21, 1998 and April
21, 1999.
STOCK OPTION EXERCISES AND HOLDINGS TABLE
The following table shows stock options exercised by the named executive
officers during the fiscal year ended June 30, 1998, including the aggregate
value of gains on the date of exercise. In addition, the table includes the
number of shares covered by both exercisable and non-exercisable stock options
as of June 30, 1998. Also reported are the values of "in-the-money" options
which represent the positive spread between the exercise price of any such
existing stock options and the Common Stock price as of June 30, 1998.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUE
<TABLE>
<CAPTION>
Value of Unexercised In-the-
Shares Number of Unexercised Money Options at Fiscal
Acquired on Value Options at Fiscal Year-End (#) Year-End ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
---- ------------ ------------ ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Dr. W. B. Barker.......... - - 319,500 / 97,500 0 / 0(2)
George H. Bennett......... - - 0 / 100,000 0 / 0(2)
Dr. Paul J. Demko Jr...... - - 0 / 36,666 0 / 0(2)
Gregory T. Skalla......... - - 0 / 50,833 0 / 0(2)
</TABLE>
________________
(1) Values stated are based on the last sale price of $.5938 per share of the
Company's common stock on June 30, 1998, the last trading day of the fiscal
year, and equal the aggregate amount by which the market value of the
option shares exceeds the exercise price of such options at the end of the
fiscal year.
(2) The exercise price of the option exceeded the market value of such options
at fiscal year end.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 30, 1998, Messrs. Blanchard, Grumbles,
Gumucio (until January 1998) and Masi (from January 1998) served on the
Company's Compensation Committee.
On July 24, 1998, the Company completed the first closing of a Private
Placement (as defined in Item 4 below) involving, among other things, the sale
of its Series E Convertible Preferred Stock and related Common Stock Purchase
Warrants to First Capital Group of Texas II, L.P., an investment firm managed by
Jeffrey P. Blanchard, the Company's Chairman of the Board, at an aggregate price
of $750,000. At such time, First Capital Group of Texas II, L.P., agreed to
purchase at a second closing shares of Series F Convertible Preferred Stock and
additional related Common Stock Purchase
9
<PAGE>
Warrants at an aggregate price of $750,000. The second closing is scheduled to
occur on or before January 31, 1999, and is subject to the Company's
satisfaction of certain conditions. Additional information regarding the Private
Placement is set forth in Item 4 below.
The Company believes that the ability of Mr. Blanchard to make fair
compensation decisions have not and will not be compromised by the relationship
referred to above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On July 13, 1998, the Company entered into a Consulting Agreement (the
"Consulting Agreement") with Liviakis Financial Communications, Inc. ("LFC")
pursuant to which LFC agreed to provide the Company with consulting services in
matters concerning investor relations and public relations. Pursuant to the
Consulting Agreement, the Company issued 1,406,475 shares of Common Stock (the
"Consulting Shares") to LFC and to Robert B. Prag ("Prag"), an officer and
director of LFC, in consideration for the consulting services. LFC and Prag are
restricted from disposing of the Consulting Shares during the term of the
Consulting Agreement which expires on March 15, 1999. The Consulting Agreement
also provides for payment to LFC of fees in the event LFC facilitates certain
financing or acquisition transactions.
COMPENSATION COMMITTEE REPORT ON REPRICING OF OPTIONS
On April 21, 1998, the Compensation Committee approved a plan allowing for
the repricing of the Company's outstanding stock options. Under the repricing
plan, each employee, other than the executive officers of the Company, was given
the opportunity to elect to surrender up to 100% of his or her outstanding
options (whether or not vested) for repriced options, on a 1 for 1 basis, with
an exercise price of $1.7813 (the last sale price on April 21, 1998). The
executive officers of the Company, other than the Chief Executive Officer, were
given the opportunity to elect to surrender up to 100% of his or her outstanding
options (whether or not vested) for repriced options, on a 3 for 2 basis, with
an exercise price of $1.7813 (the last sale price on April 21, 1998). In each
case, the repriced options become exercisable in two equal installments on the
six-month and the one-year anniversary of the grant date, and expire on the
tenth anniversary of the grant date. All employees and executive officers
elected to surrender options in exchange for replacement options.
The Compensation Committee approved the repricing plan in order to promote
the interests of the Company and its shareholders by providing an effective
means to retain and increase the commitment of its employees and to provide such
individuals with additional incentive to contribute to the success of the
Company. The Compensation Committee considered a number of factors before
approving the repricing plan, including the importance of equity incentives to
the Company's overall compensation program; the fact that a number of optionees
held "out-of-the-money" options resulting from the decrease in the fair market
value of the Company's stock during the last fiscal year; and the fat that the
Company was vulnerable to the potential loss of key employees.
This report on the repricing of options is made by and on behalf of the
Company's Compensation Committee.
Respectfully submitted,
THE COMPENSATION COMMITTEE
Jeffrey P. Blanchard, George R. Grumbles, and Edward A. Masi
10
<PAGE>
TEN-YEAR OPTION REPRICINGS
The following table sets forth certain information concerning the
repricing, replacement or cancellation and regrant of options, within the last
ten fiscal years, of options held by executive officers of the Company:
<TABLE>
<CAPTION>
Length of
Original
Number of Option Term
Securities Market Price of Remaining at
Underlying Options Stock at Time of Exercise Price at New Exercise Date of
Name Date Repriced (#) Repricing ($) Time of Repricing ($) Price ($) Repricing
- ---- ---- ----------- ------------- --------------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
George H. Bennett.......... 4/21/98 100,000 (1) $ 1.7813 $ 4.75 $ 1.7813 9.5 years
Dr. Paul J. Demko Jr....... 4/21/98 33,333 (2) 1.7813 10.188 1.7813 8.5 years
3,333 (3) 1.7813 10.188 1.7813 9 years
Gregory T. Skalla.......... 4/21/98 3,000 (4) 1.7813 5.4667 1.7813 4 years
2,000 (5) 1.7813 10.188 1.7813 5 years
3,167 (6) 1.7813 9.25 1.7813 6 years
2,666 (7) 1.7813 4.875 1.7813 6.5 years
13,333 (8) 1.7813 4.00 1.7813 7 years
6,667 (9) 1.7813 8.75 1.7813 8 years
16,667 (10) 1.7813 7.625 1.7813 8.5 years
3,333 (11) 1.7813 10.188 1.7813 9 years
Joseph Karwowski........... 4/21/98 5,000 (12) 1.7813 9.25 1.7813 6 years
667 (13) 1.7813 4.875 1.7813 6.5 years
2,000 (14) 1.7813 4.50 1.7813 7 years
1,333 (15) 1.7813 10.188 1.7813 9 years
Walter D. Warren(16)....... 11/28/95 42,187 (17) 4.50 13.00 4.50 8 years
5,097 (18) 4.50 9.25 4.50 8 years
14,062 (19) 4.50 8.75 4.50 9 years
</TABLE>
_________________
(1) In exchange for these repriced options, Mr. Bennett surrendered 150,000
outstanding stock options.
(2) In exchange for these repriced options, Dr. Demko surrendered 50,000
outstanding stock options.
(3) In exchange for these repriced options, Dr. Demko surrendered 5,000
outstanding stock options.
(4) In exchange for these repriced options, Mr. Skalla surrendered 4,500
outstanding stock options.
(5) In exchange for these repriced options, Mr. Skalla surrendered 3,000
outstanding stock options.
(6) In exchange for these repriced options, Mr. Skalla surrendered 4,750
outstanding stock options.
(7) In exchange for these repriced options, Mr. Skalla surrendered 4,000
outstanding stock options.
(8) In exchange for these repriced options, Mr. Skalla surrendered 20,000
outstanding stock options.
(9) In exchange for these repriced options, Mr. Skalla surrendered 10,000
outstanding stock options.
(10) In exchange for these repriced options, Mr. Skalla surrendered 25,000
outstanding stock options.
(11) In exchange for these repriced options, Mr. Skalla surrendered 5,000
outstanding stock options.
(12) In exchange for these repriced options, Mr. Karwowski surrendered 7,500
outstanding stock options.
(13) In exchange for these repriced options, Mr. Karwowski surrendered 1,000
outstanding stock options.
(14) In exchange for these repriced options, Mr. Karwowski surrendered 3,000
outstanding stock options.
(15) In exchange for these repriced options, Mr. Karwowski surrendered 2,000
outstanding stock options.
(16) Mr. Warren is no longer employed with the Company.
(17) In exchange for these repriced options, Mr. Warren surrendered 56,250
outstanding stock options.
(18) In exchange for these repriced options, Mr. Warren surrendered 6,798
outstanding stock options.
(19) In exchange for these repriced options, Mr. Warren surrendered 18,750
outstanding stock options.
11
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Messrs. Blanchard, Grumbles, and Masi, in their capacity as the Board's
Compensation Committee, determine the cash and other incentive compensation, if
any, to be paid to the Company's executive officers and key employees, and are
responsible for the administration and award of stock options under the
Company's stock option plans. Each member of the Compensation Committee is a
non-employee director of the Company within the meaning of Rule 16b-3 of the
Securities Exchange Act of 1934.
Set forth below is a report submitted by the Compensation Committee
addressing the Company's compensation policies for fiscal 1998 as they affected
Dr. W. B. Barker, and as they affected George H. Bennett, Dr. Paul J. Demko Jr.,
and Gregory T. Skalla, the three executive officers other than Dr. Barker who,
for fiscal 1998, were the Company's most highly paid executives (collectively
with Dr. Barker, the "Senior Executives").
COMPENSATION PHILOSOPHY
The Compensation Committee's compensation policies are designed to provide
levels of compensation that align base salaries with the Company's annual and
long-term performance goals, recognize individual performance and achievements,
and assist the Company in attracting and retaining qualified executives. Target
levels of the Senior Executives' overall compensation are intended to be at the
median of the compensation paid to senior executives of companies in the
Company's industry which have attained a size comparable to that forecasted by
the Company in the Company's strategic plan ("comparable companies"), but
amounts paid are contingent upon the Company's annual and long-term operating
performance. As a result, in any particular year, the Company's Senior
Executives may be paid more or less than the executives of the comparable
companies, depending upon the Company's actual performance.
The Compensation Committee also endorses the position that stock ownership
by management and stock-based incentive compensation arrangements are beneficial
in aligning managements' and shareholders' interests in the enhancement of
shareholder value.
Compensation paid to the Company's Senior Executives in fiscal 1998
consisted primarily of three elements: base salary, cash bonuses and stock
options. The Compensation Committee's increasing emphasis on tying compensation
to performance criteria is reflected in the components of compensation received
by the Senior Executives in fiscal year 1998 as reflected in the summary
compensation table which precedes this report.
Base salaries. The base salaries paid to new management employees are
determined initially by evaluating the responsibilities of the position held and
the experience of the individual, and include references to the competitive
marketplace for management talent and comparison of base salaries for comparable
positions at comparable companies. Subject to an existing contractual
arrangement specifying a minimum annual base salary, Dr. Barker's periodic
salary adjustments are determined by evaluating the competitive marketplace, the
performance of the Company, and, to a certain extent, subjective measures of Dr.
Barker's performance.
Bonuses. Cash bonuses to employees are approved by the Compensation
Committee from time to time as they deem appropriate based on individual
contributions and Company performance. In determining the actual cash bonuses
paid to Senior Executives, the actual financial performance relative to the
Annual Operating Plan and the accomplishments of individual performance
objectives
12
<PAGE>
are considered. Only Dr. Demko, Vice President-Development, received a cash
bonus during fiscal 1998.
Stock Option Grants. Stock options are granted from time to time in order
to promote the interest of the Company and its shareholders by providing an
effective means to attract, retain and increase the commitment of certain
individuals and to provide such individuals with additional incentive to
contribute to the success of the Company. In fiscal 1998, stock options were
granted to retain and increase the commitment of existing employees and to
attract additional personnel to the Company.
Chief Executive Officer Compensation. The compensation paid to the Chief
Executive Officer differed from the other Senior Executives in two areas: base
salary and method of computation of cash bonus. Other than George Bennett, Dr.
Barker's base salary was higher than the other Senior Executives of the Company
and considered to be in line with the base salaries of other chief executive
officers of comparable companies. Pursuant to his employment agreement, Dr.
Barker is entitled to receive an annual bonus up to 50% of base salary, as
determined by the Compensation Committee in consideration of Company performance
and individual performance objectives mutually agreed upon by the Compensation
Committee and Dr. Barker. Based on the Company's performance during fiscal
1998, no bonus was paid to Dr. Barker for such year. The differences in the
Chief Executive Officer's compensation compared with that of the other Senior
Executives was attributable to the additional responsibilities associated with
that position.
The Compensation Committee welcomes written comment from the Company's
shareholders concerning these programs. Comments should be marked "personal and
confidential" and addressed to the Compensation Committee of the Board of
Directors, DATA RACE, Inc., 12400 Network Blvd., San Antonio, Texas 78249.
This Report on Executive Compensation is made by and on behalf of the
Company's Compensation Committee.
Respectfully submitted,
THE COMPENSATION COMMITTEE
Jeffrey P. Blanchard, George R. Grumbles,
and Edward A. Masi
13
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the percentage change in the cumulative total
shareholder return on the Company's common stock compared with the cumulative
total return of the Nasdaq National Market Index and the Telephone and Telegraph
Apparatus Industry Index (SIC Code 3661 Index) for the period of June 30, 1993
through June 30, 1998. The comparison graph assumes $100 invested on June 30,
1993, in the Company's common stock and each index.
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, INDUSTRY INDEX AND BROAD MARKET
<TABLE>
<CAPTION>
FISCAL YEAR ENDING COMPANY
1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C>
DATA RACE INC 100.00 32.35 62.50 39.34 75.00 3.49
SIC CODE INDEX 100.00 100.13 162.26 228.52 276.28 346.83
BROAD MARKET 100.00 109.66 128.61 161.89 195.02 258.52
</TABLE>
14
<PAGE>
ITEM 2
1998 STOCK OPTION PLAN
GENERAL
Effective August 19, 1998, the Board of Directors unanimously adopted the
DATA RACE, Inc. 1998 Stock Option Plan (the "1998 Option Plan") and directed
that the 1998 Option Plan be submitted to the shareholders for their approval.
The following summary of the 1998 Option Plan is qualified in its entirety by
reference to the text of such Plan, which is set forth in Appendix A.
SUMMARY OF THE 1998 OPTION PLAN
Under the 1998 Option Plan, options to purchase up to 1,000,000 shares of
Common Stock may be granted to employees and directors of, and consultants and
advisors to, the Company or any parent or subsidiary corporation or entity. The
1998 Option Plan is intended to permit the Company to retain and attract
qualified individuals who will contribute to its overall success. Shares that
by reason of the expiration of an option (other than by reason of exercise) or
which are no longer subject to purchase pursuant to an option granted under the
1998 Option Plan may be reoptioned thereunder. The 1998 Option Plan will be
administered by the Compensation Committee (the "Committee"), consisting of non-
employee directors. The Committee will set the specific terms and conditions of
options granted under the 1998 Option Plan. In addition to the automatic grants
to outside directors, as described below, the Committee is entitled to receive
non-qualified stock options in such amounts and on such terms as the full Board
of Directors may determine.
The Company's employees will be eligible to receive either incentive stock
options or non-qualified stock options or a combination of both, as the
Committee determines. Non-employee participants may be granted only non-
qualified stock options. Stock options may be granted for a term not to exceed
ten years (five years with respect to a holder of 10% or more of the Company's
shares in the case of an incentive stock option) and are not transferable other
than by will or the laws of descent and distribution. Subject to the
requirements under the Internal Revenue Code with respect to incentive stock
options, each option shall be exercisable at such times and during such period
as is determined by the Committee and set forth in the agreement evidencing the
option, but in no event shall an option be exercisable after the expiration to
ten years from the date of grant. Subject to such limitations, the committee
has broad discretion to determine the circumstances under which each option
shall become exercisable, remain exercisable and terminate, and the Committee
may waive any condition, restriction or limitation on the exercisability or
duration of any outstanding option. Upon a change of control (as defined in the
1998 Option Plan) all outstanding options, to the extent not vested, will
automatically vest and become exercisable in full.
The exercise price of all non-qualified stock options must be at least
equal to 100% of the fair market value of a share of common stock on the date of
grant. The exercise price of all incentive stock options must be at least equal
to 100% of the fair market value of a share of common stock on the date of
grant, or 110% of the fair market value with respect to any incentive stock
option issued to a holder of 10% or more of the Company's shares. Stock options
may be exercised by payment in cash of the exercise price with respect to each
share to be purchased or by delivering common stock of the Company already owned
by such optionee with a market value equal to the exercise price, or by a method
in which a concurrent sale of the acquired stock is arranged, with the exercise
price payable in cash from such sale proceeds.
15
<PAGE>
The 1998 Option Plan provides that each outside director (as defined
therein) will automatically receive a grant of 2,500 non-qualified stock options
each year on the fifth business day following the first public release of the
Company's earnings report on results of operations for the preceding fiscal
year. Each such option will become exercisable on the first anniversary of the
award and remain exercisable through the balance of its ten-year term. Subject
to availability of shares allocated to the 1998 Option Plan and not already
reserved for other outstanding stock options, outside directors who join the
Board in the future will in addition receive an initial grant of non-qualified
options for 20,000 shares, which will become exercisable in four equal
increments beginning on the first anniversary of the award and on each of the
next three succeeding anniversary dates. Such options will be for a term of ten
years. Options, once granted and to the extent exercisable, will remain
exercisable throughout their term, regardless of whether the director continues
to serve as a director. The option exercise price of the options is equal to
100% of the fair market value of the covered shares of common stock at the time
of grant. The options granted automatically to outside directors pursuant to
the 1998 Option Plan are in lieu of, and not in addition to, any additional
options (excluding currently outstanding options) which would otherwise have
been granted automatically to outside directors pursuant to the Company's 1997
Stock Option Plan.
The 1998 Option Plan will terminate on August 19, 2008. The Board of
Directors may, however, terminate the 1998 Option Plan at any time prior to such
date. Termination of the 1998 Option Plan will not alter or impair, without the
consent of the optionee, any of the rights or obligations pursuant to any option
granted under the 1998 Option Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general description of the federal income tax
consequences of options granted and exercised under the 1998 Option Plan based
upon present tax law which is subject to change. Each optionee should consult
with his or her own tax advisor with respect to the specific tax treatment of
his or her particular transactions under the Plan.
INCENTIVE STOCK OPTIONS
Incentive options issued to employees under the 1998 Option Plan are
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended from time to time (the "Code"). These
options may only be issued to employees.
Grant and Exercise. The granting of an incentive stock option is a non-
taxable event. The exercise of an incentive stock option is also a non-taxable
event provided the option is exercised during the employment of the optionee or
within three months after the optionee's employment has been terminated;
however, the "spread" between the fair market value of the optioned stock and
the exercise price is an adjustment to alternative minimum taxable income and
may be subject to the alternative minimum tax as discussed below.
Disposition. The optionee will recognize gain or loss in the year in which
the shares purchased under an incentive option are sold or otherwise made the
subject of disposition. Generally, a disposition of the purchased shares will
include any transfer of legal title, including a transfer by sale, exchange or
gift, but it will not include (i) a transfer into joint ownership with right of
survivorship if the optionee remains one of the joint owners, (ii) a pledge, or
(iii) a transfer by bequest or inheritance.
16
<PAGE>
For federal income tax purposes, dispositions of incentive option shares
are divided into two categories: (i) qualifying and (ii) disqualifying. A
qualifying disposition of the purchased shares will occur if the sale or other
disposition is made after the optionee has held such shares for more than two
years after the date the option is granted and more than one year after the date
the particular shares involved in the disposition are transferred to the
optionee. If the optionee fails to satisfy either of these two holding periods
prior to the sale or other disposition of the purchased shares, then a
disqualifying disposition will result.
Upon a qualifying disposition, the optionee will recognize gain or loss in
an amount equal to the amount realized upon the sale or disposition, less the
exercise price paid for such shares. Any gain recognized upon such disposition
will generally be subject to capital gain treatment. Upon a disqualifying
disposition, the optionee will recognize ordinary income in the year of
disposition in an amount equal to the excess of the fair market value of such
shares on the date of exercise over the exercise price paid for such shares. If
the disqualifying disposition is effected by means of an arms-length sale or
exchange to an unrelated party, the ordinary income will be limited to the
amount by which the amount realized, or the fair market value at the date of
exercise, whichever is less, exceeds the exercise price. The amount of ordinary
income recognized is added to the basis of the stock for purposes of determining
the additional gain, if any, on the disposition of the shares. If additional
gain is recognized, it will be subject to capital gain treatment.
Payments in Common Stock. Treasury Regulations provide the following
guidelines with respect to the delivery of shares of common stock in payment of
the exercise price of an incentive stock option:
(a) Delivered Shares-The use of shares of common stock acquired upon
the exercise of an earlier- granted incentive option to exercise an
outstanding incentive option will constitute a "disqualifying disposition"
of the delivered shares if such shares have not been held long enough to
satisfy the requisite two-year and one-year holding periods applicable to
incentive options. Such a disposition will generally render the optionee
subject to ordinary income taxation on the difference between (i) the fair
market value of the delivered shares at the time of their original purchase
and (ii) the purchase price paid for such shares. In all other cases, no
taxable income will be recognized with respect to the delivered shares.
(b) Purchased Shares-No Disqualifying Disposition. If an incentive
stock option is exercised with (i) shares of common stock acquired under an
incentive option and held for the requisite holding periods prior to
delivery, (ii) shares of common stock acquired under a non-qualified
option, or (iii) shares of common stock acquired through open-market
purchases, then the optionee will not recognize any taxable income with
respect to the shares of common stock purchased upon exercise of the
incentive stock option. To the extent the purchased shares equal in number
the shares of common stock delivered in payment of the option price, the
new shares will have the same basis and holding period as the delivered
shares. The balance of the purchased shares will have a zero basis for tax
purposes, and their holding period will commence on the date these shares
are transferred to the optionee. However, all the purchased shares will be
subject to the "disqualifying disposition" rules applicable to incentive
options, and the two-year and one-year holding periods will be measured,
respectively, from the date the incentive option was granted and the date
it was exercised.
(c) Purchased Shares-Disqualified Disposition. If the delivery of
shares acquired under an incentive option results in a disqualifying
disposition pursuant to the principles of
17
<PAGE>
paragraph (a) above, then the tax basis and holding periods for the new
shares transferred to the optionee upon exercise of the incentive option
will be determined as follows:
1. To the extent the number of new shares equals the number of
delivered shares as to which there was a disqualifying disposition,
the basis for such shares will be equal to the fair market value of
the delivered shares at the time they were originally purchased and
the holding period for these shares will, except for disqualifying
disposition purposes, include the period for which the delivered
shares were held; and
2. To the extent the number of new shares exceeds the number of
delivered shares, these shares will have a zero basis and a holding
period measured from the date of exercise of the option.
For disqualifying disposition purposes, all the shares received will be
subject to the two-year and one-year holding period requirements for incentive
option shares, measured, respectively, from the date the incentive option was
granted and the date it was exercised.
Special Rule. If the shares purchased under the incentive option are
subject to a substantial risk of forfeiture, such as the insider trading
restrictions of Section 16(b) of the Exchange Act, the amount of ordinary income
recognized by the optionee upon a disqualifying disposition will be based upon
the fair market value of such shares on the date such risk of forfeiture lapses
rather than the date the option is exercised. In the absence of final Treasury
regulations relating to incentive options, it is not certain whether such result
can be avoided by making a conditional election pursuant to Section 83(b) of the
Code at the time the incentive option is exercised.
Federal Tax Rates. Ordinary income is subject to a maximum federal tax
rate of 39.6% for dispositions occurring in 1998.
Net capital gains are subject to a maximum federal tax rate of 28% for
dispositions occurring in 1998 and, under the Taxpayer Relief Act of 1997, may
be less depending on the optionee's tax bracket, the date the asset was sold,
and the length of time the asset sold was held by the optionee.
Alternative Minimum Tax. Unless the optionee makes a disqualifying
disposition or his rights are not fully transferable or subject to a substantial
risk of forfeiture, the amount by which the value of the optioned stock at the
time of exercise exceeds the option price will increase the optionee's
alternative minimum taxable income in the year the option is exercised. If the
optionee makes a disqualifying disposition in the year in which the option is
exercised, the maximum amount that will be included in alternative minimum
taxable income is the gain on the disposition of the stock. Income triggered by
a disqualifying disposition in a year other than the year of exercise will not
affect the optionee's alternative minimum taxable income.
The alternative minimum tax will generally be equal to 26% of the amount by
which the optionee's taxable excess does not exceed $175,000 ($87,500 in the
case of a married taxpayer who files a separate return) plus 28% of the amount
by which the optionee's taxable excess exceeds $175,000 ($87,500 in the case of
a married taxpayer who files a separate return). If the optionee's taxable
excess consists of net capital gain, the rate applicable to such gain for
purposes of computing the optionee's alternative minimum tax may be less under
the Taxpayer Relief Act of 1997 depending on the optionee's tax bracket, the
date the asset was sold, and the length of time the asset sold was held. The
optionee's "taxable excess" is the amount by which the optionee's alternative
minimum
18
<PAGE>
taxable income exceeds the optionee's exemption amount which is $45,000 for
married individuals filing jointly, $33,750 for single individuals and $22,500
for married individuals filing separately.
The allowable exemption from the alternative minimum tax is reduced by 25%
of the excess of an individual's alternative minimum taxable income for the year
over $150,000 for a married taxpayer filing a joint return, $112,500 for an
unmarried taxpayer, and $75,000 for a married taxpayer filing a separate return.
A married taxpayer who files a separate return must increase his
alternative minimum taxable income by the lesser of (i) 25% of the excess of
alternative minimum taxable income (determined without regard to this sentence)
over $165,000 or (ii) $22,500.
For purposes of determining an individual's alternative minimum taxable
income (but not regular taxable income) for any subsequent year in which the
shares are sold, the basis of such shares will be their fair market value at the
time the incentive stock option was exercised. If an individual pays
alternative minimum taxes for one or more taxable years after December 31, 1986,
the amount of such taxes (subject to certain adjustments and reductions) will be
applied as a partial credit against the individual's regular tax liability (but
not alternative minimum tax liability) for subsequent taxable years.
Employer Deduction. If the optionee makes a disqualifying disposition and
the Company complies with the income tax withholding rules, then the Company
will be entitled to an income tax deduction, for the taxable year in which such
disposition occurs, equal to the amount by which the fair market value of such
shares on the date of exercise exceeded the option exercise price. Under
proposed regulations issued by the United States Treasury Department, the
withholding requirement would be deemed met if the Company satisfies the
applicable reporting requirements even if no cash or property is actually
withheld. However, these proposed regulations have not been finalized and are
currently not in effect.
NON-QUALIFIED STOCK OPTIONS
Options issued under the 1998 Option Plan which are intended not to qualify
as incentive stock options are referred to herein as "non-qualified stock
options."
The taxability of non-qualified stock options is governed by Section 83 of
the Code. The recipients of non-qualified stock options will not be taxed upon
the grant of such options, because such options, which will not be actively
traded on an established market, have no readily ascertainable fair market
value. The optionee will, in general, recognize ordinary income in the year in
which the non-qualified option is exercised, equal to the excess of the fair
market value of the purchased shares at the date of exercise over the exercise
price, and the optionee, if an employee, will be required to satisfy the income
tax withholding requirements. If the shares purchased by an optionee are
subject to the insider trading restrictions of Section 16(b) of the Exchange
Act, taxation of the income may be deferred from the date of exercise to the
date the optionee becomes free to sell the shares without liability under
Section 16(b). An optionee subject to Section 16(b) restrictions may, however,
elect under Section 83(b) of the Code to include as ordinary income in the year
of exercise the fair market value of the shares received on the date of
exercise. The Section 83(b) election must be made within 30 days following the
date the non-qualified stock option is exercised, and if made, the optionee will
not recognize additional income at the time the shares may first be sold free of
the Section 16(b) restrictions. The Company will be entitled to an income tax
deduction equal to the amount of ordinary income recognized by the optionee in
connection with the exercise of the non-qualified option,
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<PAGE>
provided the Company complies with applicable income tax withholding
requirements. The deduction will, in general, be allowed for the same taxable
year in which ordinary income is recognized by the optionee.
If the option price under any non-qualified option is paid in the form of
shares of common stock previously acquired either upon the exercise of stock
options (incentive, if held for the requisite holding period, or non-qualified)
or through open-market purchases, then the optionee will not recognize any
taxable income to the extent that the shares of common stock received upon the
exercise of the option equal the number of shares of common stock delivered in
payment of the option price. For federal income tax purposes, these newly
acquired shares will have the same basis and holding period as the delivered
shares. The fair market value of additional shares of common stock received
upon the exercise of the non-qualified option will, in general, have to be
reported as ordinary income for the year of exercise. These additional shares
will have a tax basis equal to such fair market value, and their holding period
will, in general, be measured from their date of transfer to the optionee.
VOTE REQUIRED
The affirmative vote of a majority of the shares of Common Stock present
and entitled to vote at the Meeting is required to approve the 1998 Option Plan.
The enclosed form of Proxy provides a means for shareholders to vote for the
1998 Option Plan, to vote against it or to abstain from voting with respect to
it. Each Proxy received in time for the Meeting will be voted as specified
therein. IF A SHAREHOLDER EXECUTES AND RETURNS A PROXY, BUT DOES NOT SPECIFY
HOW THE SHARES REPRESENTED BY SUCH SHAREHOLDER'S PROXY ARE TO BE VOTED, SUCH
SHARES WILL BE VOTED FOR THE APPROVAL OF THE 1998 OPTION PLAN. In determining
whether this Item has received the requisite number of affirmative votes,
abstentions will be counted and will have the same effect as a vote against this
proposal. Broker non-votes will not be counted and will have no effect.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" APPROVAL
OF THE 1998 STOCK OPTION PLAN.
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<PAGE>
ITEM 3
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION INCREASING
THE AUTHORIZED NUMBER OF SHARES OF CAPITAL STOCK
The current authorized capital stock of the Company consists of 2,000,000
shares of preferred stock, no par value (the "Preferred Stock"), and 20,000,000
shares of Common Stock. Of the 2,000,000 shares of Preferred Stock currently
authorized for issuance, 200,000 shares have been designated as Series B
Participating Cumulative Preferred Stock and are reserved for issuance pursuant
to the Company's shareholder rights plan, 2,500 shares have been designated as
Series D Convertible Preferred Stock (the "Series D Preferred Stock"), which are
issued or reserved for issuance in connection with the Private Placement (as
defined in Item 4 below), and 750 shares have been designated as Series E
Convertible Preferred Stock (the "Series E Preferred Stock"), which are issued
or reserved for issuance in connection with the Private Placement. In addition,
in connection with the Private Placement, the Company has reserved an additional
750 shares of Preferred Stock to be designated as "Series F Convertible
Preferred Stock". On August 19, 1998, the Board adopted a proposed amendment
(the "Amendment") to the Company's Articles of Incorporation (the "Articles of
Incorporation") increasing the authorized number of shares of Preferred Stock
from 2,000,000 shares to 5,000,000 shares and the authorized number of shares of
Common Stock from 20,000,000 shares to 100,000,000 shares for submission to the
shareholders at the Meeting.
The Board is authorized to issue shares of Preferred Stock, in one or more
series, and to fix the rights, preferences, privileges and qualifications
thereof, including but not limited to dividend or interest rates, conversion
prices, voting rights, redemption prices maturity dates, and similar matters
without any further vote or action by the shareholders. The issuance of
Preferred Stock could decrease the amount of earnings and assets available for
distribution to holders of Common Stock, and adversely affect the rights and
powers, including voting rights, of such holders and may have the effect of
delaying, deferring or preventing a change in control of the Company.
Holders of Common Stock are entitled to one vote per share on all matters
submitted to a vote of shareholders of the Company and ratably to receive
dividends, if any, as may be declared from time to time by the Board from funds
legally available therefore, subject to the payment of any outstanding
preferential dividends declared with respect to any Preferred Stock that from
time to time may be outstanding. Upon liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to share ratably in any assets
available for distribution to shareholders after payment of all obligations of
the Company, subject to the rights to receive preferential distributions of the
holders of any Preferred Stock then outstanding.
If the Amendment is approved, all or any part of the authorized but
unissued shares of Preferred Stock or Common Stock may thereafter be issued
without further approval from the shareholders, except as may be required by law
or the policies of the Nasdaq Stock Market or other market on which the shares
of stock of the Company may be listed or traded, for such purposes and on such
terms as the Board may determine. Holders of the capital stock of the Company
do not have any preemptive rights to subscribe for the purchase of any shares of
Common Stock, which means that current shareholders do not have a prior right to
purchase any new issue of Common Stock in order to maintain their proportionate
ownership.
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The Amendment will not affect the rights of existing holders of Common
Stock except to the extent that future issuances of Common Stock will reduce
each existing shareholders' proportionate ownership.
If the Amendment is adopted, Article Four, Section 4.1 of the Articles of
Incorporation would be amended to read as follows:
"4.1 General. The aggregate number of shares which the Corporation has
-------
authority to issue is One-Hundred Five Million (105,000,000), divided into: one
class of One-Hundred Million (100,000,000) shares of Common Stock, no par value,
and one class of Five Million (5,000,000) shares of Preferred Stock, no par
value, which may be divided into and issued in multiple series."
The Amendment will not change any other aspect of the Articles of
Incorporation.
The Board has determined that it would be appropriate for the Company to
increase the number of its authorized shares of Preferred Stock and Common Stock
in order to have additional shares available for possible future financing
transactions, stock splits, stock dividends and other issuances, or to satisfy
requirements for additional reservations of shares by reason of future
transactions which might require increased reservations.
The Company plans to issue or reserve for issuance additional shares of
Common Stock upon the conversion of shares of Preferred Stock and exercise of
Common Stock Purchase Warrants issued or issuable in connection with the Private
Placement. The Company also plans to issue additional shares of the previously
designated Series D Preferred Stock and to designate and issue shares of Series
F Convertible Preferred Stock (the "Series F Preferred Stock") in connection
with the second closing of the Private Placement. The Company will be required
to issue a progressively increasing number of shares of Common Stock upon
conversion of the Series D Preferred Stock as the market price of the Common
Stock decreases prior to 90 days after the respective issuance dates of the
Series D Preferred Stock (at which time a conversion price floor for such Series
D Preferred Stock will be established, based on the trailing 15-day average
closing price on the 90th day). In addition, the number of shares of Common
Stock issuable upon conversion of the Series F Preferred Stock will increase as
the market price of the Common Stock prior to the date of the second closing
decreases. As a result, it is possible that the current shareholders could incur
significant dilution in the value of their shares if the market price of the
Common Stock decreases. Shareholders should therefore consider the potential
dilution before approving the Amendment.
The Company currently has enough shares of Preferred Stock authorized for
issuance to consummate all issuances of Preferred Stock previously contemplated
and reserved for issuance without amending the Articles of Incorporation.
Furthermore, the Company currently has enough shares of Common Stock authorized
for issuance to consummate all issuances of Common Stock that have previously
been reserved for issuance under current reserve requirements without amending
the Articles of Incorporation. However, if the shareholders approve the
Securities Issuances (as defined in Item 4 below) without approving this
Amendment to the Articles of Incorporation, the Company will not have a
sufficient number of shares of Common Stock authorized and reserved for issuance
in order to meet the necessary reserve requirements for the currently
outstanding shares of Preferred Stock and Common Stock Purchase Warrants issued
in the Private Placement due to the removal of the restrictions imposed on the
Company by the National Association of Securities Dealers concerning the
issuance of shares in a private placement as more fully described in Item 4
below. Although approval of the Amendment would permit the Company to satisfy
the reserve requirements for all of the issued and to be issued shares of
Preferred Stock and Common Stock Purchase Warrants at the current prevailing
market price of the Common Stock, if the market price of the Common Stock
decreases, such reserve requirements will increase as described above. There
can be no assurance that the
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Company will be able to to satisfy all of the reserve requirements in the event
that the market price of the Common Stock significantly decreases even if
shareholder approval of the Amendment is obtained. Failure of the Company to
meet such reserve requirements could result in the payment of cash by the
Company to fund certain redemption obligations with respect to the Preferred
Stock and Common Stock Purchase Warrants. However, failure of the shareholders
to approve the Amendment may prevent the Company from completing the second
closing of the Private Placement. The lack of additional cash to be received in
the second closing and the cash requirements to fund the potential redemption of
shares of Preferred Stock and Warrants could have a material adverse effect on
the Company's ability to sustain operations, fund the development and marketing
of new products, including the Be There! remote access system, and make future
capital expenditures.
The affirmative vote of holders of at least two-thirds of the total
outstanding shares of Common Stock entitled to vote at the Meeting is required
in order to adopt the Amendment. Unless indicated to the contrary, the enclosed
proxy will be voted for the Amendment. Votes "withheld", abstaining from
voting and broker non-votes will each have the same effect as a negative vote or
a vote "against" the Amendment.
THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE AMENDMENT.
ITEM 4
APPROVAL OF THE SECURITIES ISSUANCES
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"), at 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
L.P. (the "Class B Investor"), an investment firm managed by the Company's
Chairman of the Board, at an aggregate 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 at 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 (the "Series F Preferred Stock")
and Class B Warrants at an aggregate price of $750,000. The second closing is
scheduled to occur on or before January 31, 1998, and is subject to the
Company's satisfaction of certain conditions, including, among others, the
following: (i) the approval of the securities issuances described in this Item
4; (ii) 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; (iii) 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; (iv)
the Company is in compliance with Nasdaq listing requirements; (v) there is no
material adverse change in the Company's financial condition, business or
prospects; and (vi) 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 Series D Preferred Stock,
Series E Preferred Stock, and Series F Preferred (the "Preferred Stock"), the
Class A Warrants and the Class B Warrants (the "Warrants"), and the underlying
shares of the Company's Common Stock have been and will be sold in reliance upon
Regulation D promulgated under the Securities Act of 1993, as amended. The
Company has filed a registration statement with the Securities and Exchange
Commission (the "SEC") seeking to register the Conversion Shares and the Warrant
Shares for resale. Such registration statement is currently being
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<PAGE>
reviewed by the SEC. There can be no assurance that the Company will be able to
adequately address the SEC's comments or that the registration statement will be
declared effective. As mentioned above, effectiveness of the registration
statement is a condition to the second closing.
The Board of Directors is requesting that the shareholders approve certain
issuances of Common Stock in connection with the Private Placement in accordance
with rules of the National Association of Securities Dealers, Inc. ("NASD")
applicable to Nasdaq National Market issuers.
As described in this Item 4, shareholder approval of this proposal is one
of the conditions to the Company's receipt of up to $1,750,000 in the second
closing of the Private Placement. In addition, failure to obtain such approval
may result in the payment of cash by the Company to fund certain redemption
obligations with respect to the Preferred Stock, and Warrants, and could result
in the delisting of the Common Stock from the Nasdaq National Market.
BACKGROUND OF INVESTMENT TRANSACTION
The Company has suffered substantial recurring losses and revenue to date
from the Company's Be There! products has not been significant. Until such time
as the Company returns to positive cash flow from operations, the Company's
ability to sustain operations, fund the development and marketing of new
products, including the Be There! remote access system, and make future capital
expenditures, is highly dependent on its ability to raise additional capital.
Accordingly, the Board of Directors believes that the Private Placement was and
is in the shareholders' best interests. The Company intends to use the proceeds
from the Private Placement to promote its Be There! remote access product line
and for general corporate working capital.
ADDITIONAL TERMS OF THE PRIVATE PLACEMENT
Each of the Series D Preferred Stock, Series E Preferred Stock, and Series
F Preferred Stock issued in the Private Placement has a stated value of $1,000
per share and a liquidation preference of $1,000 per share plus an 8% annual
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 Company's Common
Stock in liquidation; and is redeemable at a premium at the option of each
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 at the option of each 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 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 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
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<PAGE>
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, plus any
shares of Common Stock which the Company elects to issue in payment of the
accrued premium on the Preferred Stock. Consequently, the Company will be
required to issue a progressively increasing number of shares of Common Stock
upon conversion of the Series D Preferred Stock as the market price of the
Common Stock decreases prior to 90 days after the respective issuance dates of
the Series D Preferred Stock (at which time a conversion price floor for such
Series D Preferred Stock will be established, based on the trailing 15-day
average closing price on the 90th day). In addition, the number of shares of
Common Stock issuable upon conversion of the Series F Preferred Stock will
increase as the market price of the Common Stock prior to the date of the second
closing decreases. As a result, it is possible that the current shareholders
could incur significant dilution in the value of their shares if the market
price of the Common Stock decreases. Shareholders should therefore consider the
potential dilution before approving the Amendment.
As an example, assuming shareholder approval of the Amendment (as set forth
in Item 3 above) and the Securities Issuances, the table below sets forth the
total number of shares of Common Stock that would be issuable upon conversion
and exercise of all shares of Preferred Stock and Common Stock Purchase Warrants
(including the shares of Preferred Stock and Common Stock Purchase Warrants to
be issued in the second closing) if such conversions and exercises had occurred
on September 28, 1998 (excluding the issuance of any shares of Common Stock in
payment of the premium thereon) and the total number of shares of Common Stock
issuable upon conversion and exercise of such securities in the event the
applicable conversion prices decreased by 20% (only with respect to those
securities whose conversion prices were subject to adjustment based on
fluctuations in the market price of the Common Stock).
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NUMBER OF SHARES OF COMMON COMMON STOCK ISSUABLE UPON
STOCK ISSUABLE UPON CONVERSION OR EXERCISE
CONVERSION OR EXERCISE AT ASSUMING 20% DECREASE
CLASS OF CONVERTIBLE SECURITY CURRENT MARKET PRICES (1) IN MARKET PRICES(2)
----------------------------- ------------------------- -------------------
<S> <C> <C>
Series D Preferred Stock(3).................. 2,127,876 2,659,801
Series E Preferred Stock(4).................. 750,000 750,000
Series F Preferred Stock(5).................. 500,000 500,000
Class A Warrants(6).......................... 1,018,869 1,018,869
Class B Warrants(7).......................... 281,250 281,250
--------- ---------
Total................................... 4,677,995 5,209,920
========= =========
</TABLE>
______________
(1) Assumes conversion on September 28, 1998, at which time the average closing
bid price of the Common Stock for the preceding five day trading period was
$1.4686 per share.
(2) Assumes conversion following a 20% decrease in the average closing bid
price of the Common Stock for the five day trading period preceding
September 28, 1998 ($1.1749 per share). The assumption that the market
price of the Common Stock will decrease by 20% is not intended to forecast
possible future decreases, if any, in the price of the Common Stock.
(3) Assumes conversion of the 1,500 outstanding shares of Series D Preferred
Stock and an additional 1,000 shares of Series D Preferred Stock to be
issued at the second closing at a conversion price equal to 80% of the
average closing bid price of the Common Stock for the five day trading
period preceding the date of conversion.
(4) Assumes the conversion of the 750 outstanding shares of Series E Preferred
Stock at a conversion price $1.00 per share.
(5) Assumes conversion of 750 shares of Series F Preferred Stock to be issued
at the second closing at a conversion price of $1.50 per share (the minimum
conversion price possible since the second closing would
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<PAGE>
not occur if the average closing bid price of the Common Stock for the five
day trading period preceding the date of the second closing were less than
$1.50 per share).
(6) Assumes the exercise of 679,246 Class A Warrants currently outstanding and
an additional 339,623 Class A Warrants to be issued at the second closing.
(7) Assumes the exercise of 140,248 Class B Warrants currently outstanding and
an additional 140,625 Class B Warrants to be issued at the second closing.
The Class A Warrants are exercisable on the earlier of 90 days after
issuance on the first closing or second closing (as applicable), or the
effective date of the Registration Statement filed on August 24, 1998 with the
Securities and Exchange Commission (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 first closing, 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 $.6625 per share and is obligated to issue at the second
closing Class A Warrants to purchase 226,415 shares of Common Stock at an
exercise price of $.6625 per share. The Class B Warrants are exercisable one
year after issuance (subject to acceleration in certain events), at an exercise
price of $.80 per share, 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 an
aggregate of 140,625 shares of Common Stock at an exercise price of $.80 per
share.
Subject to certain exceptions, the investors are prohibited from effecting
short sales of the Company's Common Stock during the one-year period following
each closing of the Private Placement.
THE SECURITIES ISSUANCES
Pursuant to Rule 4460(i) of the NASD, issuers of securities listed on The
Nasdaq National Market must obtain shareholder approval prior to issuing shares
of common stock (or securities convertible into or exercisable for common
stock), in a private placement, equal to 20% or more of the common stock
outstanding prior to the issuance, at a price less than the greater of book or
market value of the stock. The issuance of Common Stock upon conversion of the
Preferred Stock and exercise of the Warrants could, under certain circumstances
(depending on the then-applicable conversion price of the Series D Preferred
Stock), result in the issuance of 20% or more of the outstanding Common Stock of
the Company immediately prior to the Private Placement. Accordingly, the
Company is seeking shareholder approval of the issuance of the shares of Common
Stock in the Private Placement upon conversion of the Preferred Stock and
exercise of the Warrants (the "Securities Issuances").
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 exceed 2,905,782 shares (representing 19.99% of the
outstanding shares of Common Stock on July 24, 1998). 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 for cash. In addition,
shareholder approval is a condition to the Second Closing of the Private
Placement.
Approval of the Securities Issuances would authorize the Company to issue
more than 2,905,782 shares of Common Stock pursuant to the Private Placement.
It is possible that the current
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<PAGE>
shareholders could incur significant dilution in the value of their shares.
Shareholders should therefore consider the potential dilution before approving
the Securities Issuances.
If the shareholders do not approve the Securities Issuances, the lack of
additional cash to be received in the second closing (subject to the other
conditions described above) and the cash requirements to fund the potential
redemption of shares of Preferred Stock and Warrants could have a material
adverse effect on the Company's ability to sustain operations, fund the
development and marketing of new products, including the Be There! remote access
system, and make future capital expenditures. In addition, failure to obtain
shareholder approval of the Securities Issuances could result in the delisting
of the Common Stock from the Nasdaq National Market. In order for the Common
Stock to continue to be listed on the Nasdaq National Market, the Company is
required to satisfy certain maintenance criteria, including minimum net tangible
asset requirements. Due to the character of the Preferred Stock and the manner
in which it must be accounted for, failure to obtain shareholder approval of the
Securities Issuances could have the effect of preventing the Company from
satisfying such minimum net tangible asset requirements. The termination of the
listing of the Common Stock on the Nasdaq National Market could have a material
adverse effect on the market price and liquidity of the Common Stock, the
Company's ability to raise additional capital and subject the Company to
significant penalties pursuant to the Private Placement.
VOTE REQUIRED
The affirmative vote of a majority of the shares of common stock present
and entitled to vote at the Meeting is required to approve the Securities
Issuances. The enclosed form of Proxy provides a means for shareholders to vote
for the approval of the Securities Issuances, to vote against it or to abstain
from voting with respect to it. Each Proxy received in time for the Meeting
will be voted as specified therein. IF A SHAREHOLDER EXECUTES AND RETURNS A
PROXY, BUT DOES NOT SPECIFY HOW THE SHARES REPRESENTED BY SUCH SHAREHOLDER'S
PROXY ARE TO BE VOTED, SUCH SHARES WILL BE VOTED FOR THE APPROVAL OF THE
SECURITIES ISSUANCES. In determining whether this Item has received the
requisite number of affirmative votes, abstentions will be counted and will have
the same effect as a vote against this proposal. Broker non-votes will not be
counted and will have no effect.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL
OF THE SECURITIES ISSUANCES.
ITEM 5
RATIFICATION OF SELECTION OF ACCOUNTANTS
The Board of Directors has selected KPMG Peat Marwick LLP as the
independent accountants of the Company for fiscal 1999. KPMG Peat Marwick LLP
has served as the independent accountants of the Company since June 1989. A
representative of KPMG Peat Marwick LLP will be present at the Meeting, will
have an opportunity to make a statement if he or she desires to do so and will
be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" RATIFICATION
OF THE SELECTION OF KPMG PEAT MARWICK LLP AS THE COMPANY'S INDEPENDENT
ACCOUNTANTS FOR FISCAL 1999. The affirmative vote of a majority of the shares
of common stock present and entitled to vote is required to ratify the selection
of the Company's accountants. The enclosed form of Proxy provides a means for
shareholders to vote for the ratification of selection of independent
accountants, to vote against it or to abstain from voting with respect to it.
IF A SHAREHOLDER EXECUTES AND RETURNS A PROXY, BUT DOES NOT SPECIFY HOW THE
SHARES REPRESENTED BY SUCH SHAREHOLDER'S PROXY ARE TO BE
27
<PAGE>
VOTED, SUCH SHARES WILL BE VOTED FOR THE RATIFICATION OF SELECTION OF
INDEPENDENT ACCOUNTANTS. In determining whether this item has received the
requisite number of affirmative votes, abstentions will be counted and will have
the same effect as a vote against this Item. Broker non-votes will not be
counted and will have no effect.
OTHER MATTERS
The Company's management knows of no other matters that may properly be, or
which are likely to be, brought before the meeting. However, if any other
matters are properly brought before the meeting, the persons named in the
enclosed proxy, or their substitutes, will vote in accordance with their best
judgment on such matters.
SHAREHOLDER PROPOSALS
The Company intends to conduct the next annual meeting for stockholders in
October 1999. Proposals by shareholders intended to be presented at the annual
meeting to be held in 1999 must be received by the Company by June 15, 1999 to
be included in the Company's proxy statement and form of proxy relating to that
meeting. Such proposals should be addressed to the Secretary of the Company at
the address indicated in this Proxy Statement.
COST AND METHOD OF PROXY SOLICITATION
The accompanying Proxy is being solicited on behalf of the Board of
Directors of the Company. The expense of preparing, printing and mailing the
form of Proxy and the material used in the solicitation thereof will be borne by
the Company. In addition to the use of the mails, proxies may be solicited by
personal interview, telephone and telegram by directors, officers and employees
of the Company, and also by a proxy solicitation firm engaged for such purpose.
In the event a proxy solicitation firm is engaged, the Company will pay to such
firm customary fees for the firm's services and will bear the firm's reasonable
out-of-pocket expenses. Arrangements may also be made with brokerage houses and
other custodians, nominees and fiduciaries for forwarding of solicitation
materials to the beneficial owners of stock held by such persons, and the
Company may reimburse them for reasonable outofpocket expenses incurred by them
in connection therewith.
BY ORDER OF THE BOARD OF DIRECTORS
GREGORY T. SKALLA, SECRETARY
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<PAGE>
APPENDIX A
DATA RACE, INC.
1998 STOCK OPTION PLAN
1. PURPOSE. The purpose of this Plan is to promote the interest of Data
-------
Race, Inc. (the "Company") and its shareholders by providing an effective means
to attract, retain and increase the commitment of certain individuals and to
provide such individuals with additional incentive to contribute to the success
of the Company.
2. ELIGIBILITY. Options may be granted under the Plan to directors and
-----------
employees of, and advisors and consultants to, the Company, or of any parent or
subsidiary of the Company (if any) provided, however, in the case of consultants
or advisors, that such grant be in consideration of bona fide services rendered
by such consultant or advisor and such services not be in connection with the
offer or sale of securities in a capital-raising transaction. The Committee
(defined below) shall select from such eligible class the individuals to whom
Options shall be granted from time to time.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered by a
--------------------------
committee (the "Committee") consisting of at least two outside "non-employee
directors," as defined in Rule 16b-3 ("Rule 16b-3") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). A quorum of such
Committee shall consist of a majority of the members of such Committee, or as
may be otherwise provided in the Company's bylaws. The Committee shall hold
meetings at such times and places and conduct its business at such meetings as
it may determine, subject to any express provisions of the Company's bylaws.
Acts of a majority of the Committee members attending at a meeting at which a
quorum is present, or such acts as are reduced to or approved in writing by the
majority of the members of the Committee, shall be the valid acts of the
Committee. The Committee shall from time to time in its discretion determine
which individuals shall be granted Options, the amount of shares covered by such
Options (as defined below), and certain other specific terms and conditions of
such Options subject to the terms and conditions contained herein, including
outside director Options as set forth in Section 5(F). Notwithstanding anything
in this Plan to the contrary, the full Board of Directors of the Company shall
determine whether any member of the Committee shall be granted Nonqualified
Stock Options (as defined below) under the Plan which are in addition to those
automatically granted pursuant to Section 5(F), the terms and provisions of the
respective agreements evidencing such options, the times at which such options
shall be granted, and the number of shares of Common Stock subject to each such
option and shall make all determinations under the Plan with respect to such
options (which determinations of the Board of Directors shall be conclusive).
The Committee shall have the sole authority and power, subject to the
express provisions and conditions hereof, to construe this Plan and the Options
granted hereunder, and to adopt, prescribe, amend, and rescind rules and
regulations relating to this Plan, and to make all determinations necessary or
advisable for administering this Plan. The Committee shall also have the
authority and power to modify any provision of this Plan to render the Plan
consistent with any amendments to Rule 16b-3 or Form S-8 of the Securities Act
of 1933, as amended (the "Securities Act"), including amendments which permit
the grant of Options on terms which are less restrictive than the terms set
forth herein. The interpretation by the Committee of any provision of this Plan
with respect to any incentive stock option granted hereunder shall be in
accordance with section 422 of the
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Internal Revenue Code of 1986 and the regulations issued thereunder, as amended
from time to time (the "Internal Revenue Code"), in order that the incentive
stock options granted hereunder ("Incentive Stock Options") shall constitute
"incentive stock options" within the meaning of section 422 of the Internal
Revenue Code. Options granted under the Plan which are not intended to be
Incentive Stock Options are referred to herein as "Nonqualified Stock Options."
The term "Options" as used herein shall refer to Incentive Stock Options and
Nonqualified Stock Options, either collectively or without distinction. The
interpretation and construction by the Committee, if any, of any provisions of
the Plan or of any Option granted hereunder shall be final and conclusive. No
member of the Committee shall be liable for any action or determination made in
good faith with respect to the Plan or any Option granted hereunder.
4. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Section 6,
--------------------------
the number of shares subject to Options granted hereunder shall not exceed
1,000,000 shares of the Company's authorized but unissued or reacquired Common
Stock (the "Common Stock"). Such number of shares shall be subject to
adjustment as provided in Section 7 below. Shares that by reason of the
expiration, termination, cancellation or surrender of an Option are no longer
subject to purchase pursuant to an Option granted under the Plan (other than by
reason of exercise of such Option) may be reoptioned hereunder. The maximum
number of shares of Common Stock for which Options granted hereunder to an
eligible person shall not exceed 75% of the total number of shares authorized
for issuance hereunder.
5. TERMS AND CONDITIONS.
--------------------
(A) OPTION PRICE. Each Option shall state the number of shares that
may be purchased thereunder, shall expressly designate such Option as an
Incentive Stock Option or a Nonqualified Stock Option, and shall state the
option price per share (the "Option Price") which shall be paid in the manner
specified in this Section 5(A) in order to exercise such Option. The Option
Price shall not be less than 100% of the fair market value of the shares on the
date the Option is granted with respect to any Incentive Stock Option granted
hereunder, and not less than 100% of the fair market value of the shares on the
date the Option is granted with respect to any Nonqualified Stock Option.
For purposes of the Plan, the fair market value per share of the
Common Stock on any date shall be deemed to be the closing price of the Common
Stock on the principal national securities exchange on which the Common Stock is
then listed or admitted to trading, if the Common Stock is then listed or
admitted to trading on any national securities exchange. The closing price
shall be the last reported sale price regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices regular
way, as reported by said exchange. If the Common Stock is not then so listed on
a national securities exchange, the fair market value per share of the Common
Stock on any date shall be deemed to be the closing price (the last reported
sale price regular way) in the over-the-counter market as reported by the Nasdaq
National Market, if the Common Stock closing price is then reported on the
Nasdaq National Market, or, if the Common Stock closing price of the Common
Stock is not then reported by the Nasdaq National Market, shall be deemed to be
the mean of the highest closing bid and lowest closing asked price of the Common
Stock in the over-the-counter market as reported on the Nasdaq Stock Market or,
if the Common Stock is not then quoted by Nasdaq Stock Market, as furnished by
any member of the National Association of Securities Dealers, Inc. selected from
time to time by the Company for that purpose. If no member of the National
Association of Securities Dealers, Inc. furnishes quotes with respect to the
Common Stock of the Company, such fair market value shall be determined by
resolution of the Committee. Notwithstanding the foregoing provisions of this
Section 5(A), if the Committee shall at any time
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determine that it is impracticable to apply the foregoing methods of determining
fair market value, the Committee is empowered to adopt other reasonable methods
for such purpose. The Committee may, if it deems it appropriate, engage the
services of an independent qualified expert or experts to appraise the value of
the Common Stock.
Options under the Plan may be exercised by payment of the Option Price
in cash or, if the Common Stock is then registered under the Exchange Act and
there is an established market exists for the Common Stock, by delivery of the
equivalent fair market value of Common Stock or by a "cashless exercise"
procedure in which an Optionee is permitted to exercise an Option by arranging
with the Company and his or her broker to deliver the appropriate Option Price
from the concurrent market sale of the acquired shares, or a combination of the
foregoing (subject to the discretion of the Committee). An employee's
withholding tax due upon exercise of a Nonqualified Stock Option may be
satisfied either by a cash payment or the retention from the exercise of a
number of shares of Common Stock with a fair market value equal to the required
withholding tax, as the Committee may permit.
In addition, with respect to the exercise of any Nonqualified Stock
Option, the Committee (or an authorized representative) shall advise the
Optionee, upon receipt of notice of intent to exercise such Option, of the
income tax withholding consequences to such Optionee of such exercise, the
amount of the appropriate withholding tax and any other payments due by reason
thereof. Such Optionee must satisfy all of the preceding payment requirements
in order to receive stock upon exercise of such Option.
(B) OPTION PERIOD. Any Options granted pursuant to this Plan must be
-------------
granted within ten years from the date the Plan was adopted by the Board of
Directors of the Company (August 19, 1998).
Each Option shall state the date upon which it is granted. Subject to
the requirements under the Internal Revenue Code with respect to Incentive Stock
Options, each Option shall be exercisable at such times and during such period
as is determined by the Committee and set forth in the agreement evidencing the
Option, but in no event shall an Option be exercisable after the expiration of
ten years from the date of grant. Subject to such limitations, the Committee
shall have broad discretion to determine the circumstances under which each
Option shall become exercisable, remain exercisable and terminate, and the
Committee may waive any condition, restriction or limitation on the
exercisability or duration of any outstanding Option.
(C) ASSIGNABILITY. An Option granted pursuant to this Plan shall be
-------------
exercisable during the Optionee's lifetime only by the Optionee and shall not be
assignable or transferable by the Optionee (except with the Committee's prior
written approval, and only in any such additional circumstances as shall not
affect the Plan's qualification with the requirements of the incentive stock
option provisions of the Internal Revenue Code, the requirements of Rule 16b-3
under the Exchange Act, or the plan eligibility requirements for the use of Form
S-8 of the Securities Act), and shall not be subject to levy, attachment or
similar process. Upon any other attempt to transfer, assign, pledge or
otherwise dispose of Options granted under this Plan, such Options shall
immediately terminate and become null and void.
(D) LIMIT ON 10% SHAREHOLDERS. No Incentive Stock Option may be
-------------------------
granted under this Plan to any individual who would, immediately after the grant
of such Incentive Stock Option directly or indirectly own more than 10% of the
total combined voting power of all classes of stock of the Company or of any
parent or subsidiary corporation unless (i) such Incentive Stock
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Option is granted at an Option Price not less than 110% of the fair market value
of the shares on the date the Incentive Stock Option is granted, and (ii) such
Incentive Stock Option expires on a date not later than five years from the date
the Incentive Stock Option is granted.
(E) LIMITS ON OPTIONS. Except as provided herein, an individual may
-----------------
be granted one or more Options, provided that the aggregate fair market value
(determined as of the time the Option is granted) of Common Stock for which an
individual may be granted Incentive Stock Options that are first exercisable in
any calendar year (under all stock option plans of the Company and any parent or
subsidiary corporations, if any) may not exceed $100,000.
(F) OUTSIDE DIRECTORS OPTIONS. Each outside director of the Company
-------------------------
(that is, each director who is not also an employee of the Company) shall be
automatically granted Nonqualified Options for 2,500 shares on an annual basis
on the fifth business day following the first public announcement, filing or
release of the Company's net income for the Company's preceding fiscal year.
Such annually awarded Options shall become exercisable in whole or in part from
time to time upon the first anniversary following the date of grant. In
addition to such automatic annual awards, each new outside director elected or
appointed to the Company's Board of Directors on or after the date of approval
of the Plan by the shareholders of the Company shall receive upon such election
or appointment an automatic award of Nonqualified Options for 20,000 shares of
Common Stock, which shall become exercisable in four equal annual installments,
beginning on the first anniversary of the date of grant. All of the foregoing
Options, once granted and to the extent they have become exercisable, shall
remain exercisable throughout their term, regardless of whether the holder
continues to serve as a director, and such term shall expire on the tenth
anniversary following the date of grant. To the extent any such Option is not
yet exercisable upon termination of service, such Option shall be terminated.
The Option Price for all such automatic awards shall be equal to 100% of the
fair market value of the covered shares of Common Stock at the time of grant.
The options granted to outside directors pursuant to this Section 5(F) shall be
in lieu of, and not in addition to, any additional options (excluding currently
outstanding options) which would otherwise have been granted to outside
directors pursuant to the Company's 1997 Stock Option Plan. Accordingly, upon
approval of this Plan by the shareholders of the Company, Section 5(f) of the
1997 Stock Option Plan (which provides for automatic grants to outside
directors) shall be deemed eliminated from the terms of such Stock Option Plan.
The provisions of this Plan regarding formula awards to outside directors shall
not be amended more than once every six months thereafter, other than to comport
with changes in the Internal Revenue Code, the Employee Retirement Income
Security Act, or the rules thereunder.
(G) RIGHTS AS SHAREHOLDER. An Optionee, or a transferee by will or
---------------------
inheritance of an Option, shall have no rights with respect to any shares
covered by an Option until the date of the issuance of a stock certificate for
such shares and the recording of such issuance upon the Company's stock ledger
by its duly appointed, regular transfer agent. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
such date, except as provided in Section 6 hereof.
(H) ADDITIONAL PROVISIONS. The Options authorized under this Plan
---------------------
shall contain such other provisions as the Board or Committee shall deem
advisable, including, without limitation, further restrictions upon the exercise
of the Option. Any Incentive Stock Option shall contain such limitations and
restrictions upon the exercise of the Option as shall be necessary in order that
the Option shall be an "incentive stock option" as defined in section 422 of the
Internal Revenue Code.
(I) COMPLIANCE WITH SECURITIES LAWS. At the time of exercise of any
-------------------------------
Option, the Company may require the Optionee to execute any documents or take
any action which may then
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be necessary to comply with the Securities Act and the rules and regulations
adopted thereunder, or any other applicable federal or state laws regulating the
sale and issuance of securities, and the Company may, if it deems necessary,
include provisions in the Options to assure such compliance. The Company may
from time to time change its requirements with respect to enforcing compliance
with federal and state securities laws, including the request for, or insistence
upon, letters of investment intent, such requirements to be determined by the
Company in its judgment as necessary to assure compliance with said securities
laws. Such changes may be made with respect to any particular Option or to any
stock issued upon exercise thereof.
(J) CHANGE OF CONTROL. In the event of a proposed Change of Control
-----------------
(as defined herein), the Company shall, to the extent practicable, give all
Option holders notice thereof at least 20 days prior to the effective date of
the Change of Control, and all Options granted hereunder shall become
exercisable immediately prior to the effective date of the Change of Control (or
if the Change of Control occurs without advance notice to the Company,
immediately upon the effective date of the Change of Control) as to the full
number of shares not previously purchased under such Options, without regard to
stated periods and installments of exercisability, and such Options shall remain
exercisable until their expiration or termination. If a Change of Control for
which notice is given as provided herein does not occur, the Options granted
hereunder shall continue (without becoming immediately exercisable) in
accordance with their stated terms, and such proposed Change of Control shall
have no effect. A "Change of Control," for purposes of this Plan, shall mean:
(i) the acquisition by a single entity or group of affiliated entities of more
than 50% of the Common Stock issued and outstanding immediately prior to such
acquisition; (ii) the dissolution or liquidation of the Company; or (iii) the
consummation of any merger or consolidation of the Company or any sale or other
disposition of all or substantially all of its assets, if the shareholders of
the Company immediately before such transaction own, immediately after
consummation of such transaction, equity securities (other than options and
other rights to acquire equity securities) possessing less than 50% of the
voting power of the surviving or acquiring corporation.
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any change
------------------------------------------
in the number of issued and outstanding shares of Common Stock which results
from a stock split, reverse stock split, the payment of a stock dividend or any
other change in the capital structure of the Company, such as a merger,
consolidation, reorganization or recapitalization, the Committee shall
appropriately adjust (a) the maximum number of shares which may be issued under
this Plan, (b) the number of shares subject to each outstanding Option, and (c)
the Option Price per share thereof, so that upon exercise of the Option the
Optionee shall receive the same number of shares the Optionee would have
received had the Optionee been the holder of all shares subject to such
outstanding Options immediately before the effective date of such change in the
number of issued shares of the Common Stock of the Company. Any such adjustment
shall not result in or entitle the Optionee to the issuance of fractional
shares. Instead, appropriate adjustments to any such Option and, in the
aggregate, all other options of the Company of the same class (that is,
Incentive Stock Options or Nonqualified Stock Options) held by each Optionee
shall be made so that such Option and other options of the same class, if any,
held by any such Optionee cover the greatest whole number of shares of the
Common Stock which does not exceed the number of shares which would be covered
applying such adjustments in the absence of any restriction on the issuance of
fractional shares. Any excess fractional share shall be redeemed in cash at the
then-current fair market value of the Common Stock (determined as provided in
Section 5(A) hereof) multiplied by the appropriate fraction of a share.
Notwithstanding the provisions of this Section or Section 5(J) hereof, the
Committee shall have the authority to grant individual Optionees additional
adjustment rights and/or rights in the event of a change of control, or to
further limit such adjustment rights and/or rights in the event of a change of
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control, which rights, to the extent granted or restricted, shall be evidenced
in such Optionee's option agreement.
7. TERMINATION OR AMENDMENT OF THE PLAN. The Board of Directors may at
------------------------------------
any time suspend, amend, or terminate this Plan. No amendment may be adopted
without shareholder approval that will: (a) increase the number of shares of
Common Stock which may be issued under this Plan; (b) materially modify the
requirements as to eligibility for participation in this Plan, or (c) effect any
other change requiring shareholder approval under the Internal Revenue Code. No
amendment or termination of the Plan shall, without the consent of the Optionee,
materially decrease any rights or benefits under any Option previously granted
under this Plan.
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THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR AN ANNUAL MEETING OF SHAREHOLDERS ON NOVEMBER 13, 1998
The undersigned hereby appoints Dr. W.B. Barker and Gregory T. Skalla, and
each of them, proxies, with the powers the undersigned would possess if
personally present, and with full power of substitution, to vote at the annual
meeting and at any adjournment thereof, all shares of Common Stock of DATA RACE,
Inc. held of record by the undersigned on the record date, upon all subjects
that may properly come before the meeting, including the matters described in
the proxy statement furnished herewith, subject to any directions indicated on
this proxy ballot. IF NO DIRECTIONS ARE GIVEN AND THE SIGNED PROXY BALLOT IS
RETURNED, THE PROXIES WILL VOTE FOR ITEMS 1 THROUGH 5, AND, AT THEIR DISCRETION,
ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT
THEREOF.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE FOLLOWING ITEMS, AS
MORE FULLY DESCRIBED IN THE ACCOMPANYING PROXY STATEMENT:
1. Election of directors.
" FOR all nominees listed below " WITHHOLD all nominees listed below
" Place an "X" in this box to withhold authority to vote for any individual
nominee and write that name from the list below on the line below.
---------------------------------
NOMINEES
Dr. W.B. Barker Jeffrey P. Blanchard Matthew A. Kenny
George R. Grumbles Dwight E. Lee Edward A. Masi
2. Approval of the DATA RACE , Inc. 1998 Stock Option Plan.
FOR: [ ] AGAINST: [ ] ABSTAIN: [ ]
3. Amendment to the Company's Articles of Incorporation increasing the
authorized number of shares of capital stock.
FOR: [ ] AGAINST: [ ] ABSTAIN: [ ]
4. Approval of the "Securities Issuances"
FOR: [ ] AGAINST: [ ] ABSTAIN: [ ]
5. Ratification of selection of independent accountants.
FOR: [ ] AGAINST: [ ] ABSTAIN: [ ]
