<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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:
[X] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-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)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(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):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] 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:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
<PAGE>
DATA RACE, INC.
12400 Network Blvd.
San Antonio, Texas 78249
Notice of Annual Meeting of Shareholders
To Be Held on November 4, 1999
An annual meeting of shareholders of Data Race, Inc., a Texas corporation
(the "Company"), will be held at the Omni Hotel, 9821 Colonnade Blvd., San
Antonio, Texas, on November 4, 1999, at 10:00 a.m., CST, for the following
purposes:
1. To elect five directors to serve for the ensuing year.
2. To approve the Data Race, Inc. 1999 Stock Option Plan.
3. To approve an amendment to the Company's Articles of Incorporation,
increaseing the authorized number of shares of Common Stock.
4. To ratify the selection of KMPG LLP, as independent accountants.
5. 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 16,
1999 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
September , 1999
<PAGE>
DATA RACE, INC.
PROXY STATEMENT
FOR THE
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 4, 1999
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 4, 1999. This Proxy
Statement and the accompanying proxy are being sent or given to the shareholders
of the Company on or about September 24, 1999. The Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1999 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 16, 1999. At the close of business on September 1, 1999, there were
20,224,830 shares of Common Stock issued and outstanding and entitled to vote at
the Meeting. As of September 1, 1999 the directors and executive officers of the
Company and their affiliates beneficially owned a total of 1,736,401 shares of
Common Stock, or approximately 7.9% 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 1, 1999 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 listed below 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 1, 1999.
<TABLE>
<CAPTION>
Name Number Percent of
---- of Shares Class
--------- -----
<S> <C> <C>
Dr. W. B. Barker.............................................. 308,745(1) 1.5%
Jeffrey P. Blanchard.......................................... 990,615(2) 4.7%
George R. Grumbles............................................ 36,562(3) *
Matthew A. Kenny.............................................. 36,562(4) *
Dwight E. Lee................................................. 46,437(5) *
George H. Bennett............................................. 150,000(6) *
Gregory T. Skalla............................................. 106,983(7) *
All Directors and Executive Officers as a Group
(8 persons).............................................. 1,736,401(8) 7.9%
Liviakis Financial Communications, Inc.("LFC")(9)............. 2,776,887(9) 13.4%
John M. Liviakis (9).......................................... 2,848,287(10) 13.7%
Renee A. Liviakis (9)......................................... 2,776,887(11) 13.4%
</TABLE>
- --------------
* Indicates less than 1%.
(1) Includes 227,624 shares subject to options held by Dr. Barker.
(2) Includes 40,937 shares subject to options held by Mr. Blanchard and
approximately 916,000 shares issuable upon conversion of outstanding Series
E Preferred Stock and exercise of outstanding warrants purchased in July
1998, by First Capital Group of Texas II, L.P., an investment fund managed
by Mr. Blanchard. Does not include approximately 359,000 shares issuable
upon conversion of outstanding Series F Preferred Stock and exercise of
outstanding warrants purchased in January 1999, by First Capital Group of
Texas II, L.P. which preferred stock and warrants are not convertible or
exercisable until January 2000 (subject to acceleration in certain cases).
(3) Includes 36,562 shares subject to options held by Mr. Grumbles.
(4) Includes 36,562 shares subject to options held by Mr. Kenny.
(5) Includes 38,437 shares subject to options held by Mr. Lee.
(6) Includes 150,000 shares subject to options held by Mr. Bennett.
(7) Includes 100,833 shares subject to options held by Mr. Skalla.
(8) Includes 691,452 shares subject to options held by such persons.
(9) Information with respect to the beneficial ownership of each shareholder
was derived from Amendment No. 4 to Schedule 13D filed March 15, 1999 by
Liviakis Financial Communications, Inc. ("LFC"), John M. Liviakis and Rene
A. Liviakis. The number of shares includes 500,556 shares subject to
warrants held by LFC, the exercise of which warrants are subject to certain
conditions. The address of such shareholders are 2420 K Street, Suite 220,
Sacramento, California 95816.
(10) Includes 2,776,887 shares owned by LFC (over which Mr. Liviakis shares
voting and dispositive power by virtue of his position as an officer and
director of LFC).
(11) Represents shares owned by LFC (over which Ms. Liviakis shares voting and
dispositive power by virtue of her 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,
five 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 five 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 and Dwight E. Lee. All of the nominees are presently directors of the
Company. Edward A. Masi resigned as director of the Company on August 2, 1999.
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 five 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 elected directors are intended to serve for terms 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) and executive officers of the
Company:
<TABLE>
<CAPTION>
Name Age Position with Company
---- --- ---------------------
<S> <C> <C>
Dr. W. B. Barker......................... 52 President, Chief Executive Officer and Director
Gregory T. Skalla........................ 44 Senior Vice President, Chief Operating and Financial
Officer, Secretary and Treasurer
Kenneth Rambo............................ 36 Vice President-Development
Kenneth L. Witt.......................... 36 Vice President-Marketing
Jeffrey P. Blanchard..................... 46 Chairman of the Board of Directors
Matthew A. Kenny......................... 65 Director
George R. Grumbles....................... 66 Director
Dwight E. Lee............................ 52 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 product strategies, development, marketing
and manufacturing for many communications and multiprocessor products. He holds
Ph.D., MS and BA degrees from Harvard University.
Gregory T. Skalla has served as Chief Operating Officer since August 1999,
Senior Vice President since August 1998 and as Vice President-Finance, Chief
Financial Officer, Secretary and
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Treasurer since February 1995. The Company has employed Mr. Skalla 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. He holds BS and MBA degrees from the University of Virginia.
Kenneth Rambo joined the Company as Vice President-Development in November
1998. From 1995 until that time, Mr. Rambo served as Senior Manager, Switch
Systems Planning and Engineering and Switch Network Architecture for MCI
Telecommunications Corp. and from 1992 to 1994 as Senior Engineer II, Wireless
Product Planning. He holds BS in Computer Science and Mathematical Science from
Southern Methodist University.
Kenneth L. Witt has served as Vice President - Marketing since December
1998 and as Director of Marketing since April 1997. The Company has employed
Mr. Witt since 1992 when he joined the Company as a software engineer.
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 Director of First Capital Group of Texas, Ltd., since
January 1984. Since September 1995, Mr. Blanchard has been the Managing Director
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.
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 has extensive background in the investment
community and brings significant board experience with both public and private
companies.
George H. Bennett, Senior Vice President - Sales and Marketing resigned
from the Company on August 20, 1999.
4
<PAGE>
Board and Committee Meetings
During the fiscal year ended June 30, 1999, the Board of Directors held 20
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. Lee (Chairman), and Kenny, (Mr. Masi
resigned as director of the Company and member of the Audit Committee on August
2, 1999), 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
Lee, 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.
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, 1999.
5
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The Summary Compensation Table shows certain compensation information
for the fiscal years ended June 30, 1999, 1998 and 1997, for the Chief Executive
Officer and of the two 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................. 1999 180,000 - 380,250(2) $3,550(1)
President and CEO 1998 197,500 - 7,000 1,952(1)
1997 188,125 - 30,000 3,822(1)
George H. Bennett................ 1999 216,000(5) - 50,000 3,895(1)
Senior Vice President-Sales and 1998 115,269(3) 22,500 100,000(4) 1,350(1)
Marketing
Gregory T. Skalla................ 1999 137,500 - 50,000 3,350(1)
Senior Vice President, Chief 1998 125,000 - 50,833(4) 2,604(1)
Operating and Financial 1997 112,500 10,000 25,000 2,063(1)
Officer, Secretary and Treasurer
</TABLE>
____________________
(1) Represents contributions made by the Company under the Company's 401(k)
plan.
(2) Effective December 10, 1998 Dr. Barker elected to reprice stock options
pursuant to a repricing plan adopted by the Company's Board of Directors.
In connection with such repricing 407,000 of Dr. Barker's existing
options were canceled and 305,250 were granted.
(3) Represents compensation from commencement of employment on November 11,
1997.
(4) Effective April 21, 1998, Mr. Bennett and Mr. Skalla elected to reprice
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 and 76,250 of Mr. Skalla's existing stock options were
canceled and 100,000 and 50,833 stock options, respectively, were
granted.
(5) George H. Bennett, Senior Vice President-Sales and Marketing resigned
from the Company on August 20, 1999.
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.
Director Compensation
Matthew Kenny, George Grumbles, Dwight E. Lee, and Edward A. Masi (Mr.
Masi resigned as a director of the Company on August 2, 1999) 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 1998 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
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time to time to the Company. In fiscal 1999, 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.
Consultant and Advisor Stock Plan
In April of 1999, the Company established a Consultant and Advisor Stock
Plan (the "Consultant and Advisor Stock Plan") for the purpose of providing
incentives to and compensating consultants and advisors for their contributions
to the Company. Under the Consultant and Advisor Stock Plan, the Company may
issue up to an aggregate of 500,000 shares of Common Stock to consultants and
advisors who are natural persons providing bona fide services to the Company.
Shares may not be issued under the Consultant and Advisor Stock Plan to
directors or officers of the Company, or for services rendered in promoting or
maintaining a market in the Company's securities. The number and type of shares
issuable under the Consultant and Advisor Stock Plan are subject to appropriate
adjustment for stock splits, stock dividends, mergers, reorganizations and other
similar capital changes. The Consultant and Advisor Stock Plan is administered
by the Company's Compensation Committee (or at the options of the Compensation
Committee, the full Board of Directors), which has the exclusive power to
construe and prescribe rules under the plan. The Board of Directors may at any
time modify, amend or terminate the Consultant and Advisor Stock Plan. As of
September 1, 1999, approximately 98,000 shares of common stock had been issued
under the Consultant and Advisor Stock Plan.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan") structured to qualify under Section 423 of the Internal Revenue
Code of 1986. Under the Employee Stock 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 Employee Stock Purchase Plan, options to purchase up to 200,000 shares
of Company common stock may be granted to participants. As of September 1,
1999, approximately 153,000 shares of common stock had been issued under the
Employee Stock Purchase Plan.
The Compensation Committee, which administers the Employee Stock Purchase
Plan, establishes offering periods for the Employee Stock 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.
7
<PAGE>
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.
Stock Option Plans
Under the Company's existing stock option plans (the "Plans"), as of
September 1, 1999, stock options covering an aggregate of 1,653,423 shares of
Common Stock were outstanding with a weighted average exercise price of $3.2111
per share, and an aggregate of 562,258 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. 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 $100,000. Options may be
exercised by payment of cash or by tender of shares of common stock (valued at
their then current market value). In the event of a change of control, all
unvested options vest and become exercisable. The Compensation Committee of the
Board of Directors administers the Plans, except that the full board administers
the stock option grants to members of the Compensation Committee.
On July 29, 1999, the Company's Board of Directors adopted the DATA RACE,
Inc. 1999 Stock Option Plan, authorizing the grant of incentive stock options
and non-qualified stock options to employees, directors and certain other
persons. No options have been granted under the 1999 Stock Option Plan.
Shareholder approval of the 1999 Stock Option Plan is being sought in connection
with this Proxy Statement. See "Item 2 - 1999 Stock Option Plan".
Stock Option Grant Table
The following table sets forth certain information concerning options
granted to the named executive officers during the Company's fiscal year ended
June 30, 1999:
Option Grants in Last Fiscal Year
<TABLE>
<S> <C> <C> <C>
Potential Realizable
Number of Percent of Value at Assumed
Shares Total Options Annual Rates of Stock
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Price Appreciation for
Underlying Granted to Exercise or Option Term(1)
Options Employees in Base Price Expiration 5%($) 10%($)
Name Granted Fiscal Year ($/Sh) Date
------ ---------- ------------ ----------- ---------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Dr. W. B. Barker................... 75,000(2) 5.8% $1.8750 7/27/08 $ 88,594 $ 223,594
305,250(3) 23.6% 3.6250 12/10/08 $697,115 1,759,385
George H. Bennett.................. 50,000(2) 3.9% 1.8750 7/27/08 59,063 149,063
Gregory T. Skalla.................. 50,000(2) 3.9% 1.8750 7/27/08 59,063 149,063
</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 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) Options vest in two equal installments on January 27, 1999 and July 27,
1999.
(3) Effective December 10, 1998, Dr. Barker elected to reprice stock options,
pursuant to a repricing plan adopted by the Company's Board of Directors.
In connection with such repricing, 407,000 of Dr. Barker's existing stock
options were canceled and 305,250 stock options were granted. The options
vest in two equal installments on June 10, 1999 and December 10, 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, 1999, 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, 1999. 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 market price of the Common Stock price as of June
30, 1999.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Value
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Shares Options at Fiscal In-the-Money Options at Fiscal
Acquired on Value Year-End (#) Year-End ($)
Name Exercise(#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
------ ------------ ----------- ------------------------- ------------------------------
<S> <C> <C> <C> <C>
Dr. W. B. Barker....... - - 190,124 /190,126 53,925 / 53,925(2)
George H. Bennett...... - - 125,000 /25,000 189,120 / 35,950
Gregory T. Skalla...... - - 75,833 /25,000 113,811 / 35,950
</TABLE>
________________
(1) Values stated are based on the last sale price of $3.313 per share of the
Company's common stock on June 30, 1999, 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 305,250 options exceeded the market value of such
options at fiscal year end.
Compensation Committee Interlocks and Insider Participation
9
<PAGE>
During the fiscal year ended June 30, 1999, Messrs. Blanchard, Grumbles,
Masi (until November 1998) and Lee (from November 1998) served on the Company's
Compensation Committee.
In July 1998 and January 1999, the Company completed the first closing and
second closing, respectively, of a private placement involving, among other
things, the sale of its Series E and F 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 for each closing. 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. 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 $3.43125. The Company issued at the first closing and
issued at the second closing, Common Stock Purchase Warrants to purchase an
aggregate of 140,625 shares of Common Stock at an exercise price of $.80 per
share.
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
In July 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 468,825 shares of Common Stock to Robert B. Prag
("Prag"), who was an officer and director of LFC, in consideration for the
consulting services.
In November 1998, the Company extended the Consulting Agreement with LFC to
January 1, 2000 in consideration for 200,000 additional shares of restricted
common stock. As part of the Consulting Agreement extension, LFC and Prag agreed
to extend the restriction from disposing of the Consulting Shares until January
1, 2000. The Consulting Agreement also provides for payment to LFC of fees in
the event LFC facilitates certain financing or acquisition transactions.
In November 1998, LFC purchased an additional 488,889 shares of the
Company's Common Stock and Warrants to acquire 488,889 shares of Common Stock
for an aggregate purchase price of $1,100,000.
10
<PAGE>
COMPENSATION COMMITTEE REPORT ON REPRICING OF OPTIONS
On December 10, 1998, the Compensation Committee approved a plan allowing
for the repricing of the Company's outstanding stock options. Under the
repricing plan, Dr. W. B. Barker, the Company's Chief Executive Officer, was
given the opportunity to surrender up to 100% of his outstanding options
(whether or not vested) for repriced options, on a four-to-three basis, with an
exercise price of $3.625 (the last sale price on December 10, 1998). The
repriced options become exercisable in two equal installments on the six-month
and the one-year anniversary of the grant date, and expire on the tenth
anniversary of the grant date. Dr. Barker elected to surrender options in
exchange for replacement options.
The Compensation Committee approved the repricing plan in order to promote
the interests of the Company and its shareholders by providing an effective
means to retain Dr. Barker and to provide Dr. Barker with additional incentive
to contribute to the success of the Company. The Compensation Committee
considered a number of factors before approving the repricing plan, including
the importance of equity incentives to the Company's overall compensation
program and the fact that Dr. Barker held "out-of-the-money" options resulting
from the decrease in the fair market value of the Company's stock during the
last fiscal year.
This report on the repricing of options is made by and on behalf of the
Company's Compensation Committee.
Respectfully submitted,
THE COMPENSATION COMMITTEE
Jeffrey P. Blanchard, George R. Grumbles, and Dwight E. Lee
Ten-Year Option Repricings
The following table sets forth certain information concerning the
repricing, replacement or cancellation and regrant of options, within the last
ten fiscal years, of options held by executive officers of the Company:
<TABLE>
<CAPTION>
Length of
Original
Option Term
Number of Securities Market Price of Exercise Price at Remaining at
Underlying Options Stock at Time of Time of Repricing New Exercise Date of
Name Date Repriced (#) Repricing ($) ($) Price ($) Repricing
- --------------------------- -------- -------------------- ----------------- ------------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Dr. W. B. Barker........... 12/10/98 277,500 (1) $ 3.625 $ 9.625 $ 3.625 6 years
22,500 (2) 3.625 7.625 3.625 7 years
5,250 (3) 3.625 10.188 3.625 8.5 years
George H. Bennett (19)..... 4/21/98 100,000 (4) 1.7813 4.75 $1.7813 9.5 years
Dr. Paul J. Demko Jr.(19).. 4/21/98 33,333 (5) 1.7813 10.188 1.7813 8.5 years
3,333 (6) 1.7813 10.188 1.7813 9 years
Gregory T. Skalla.......... 4/21/98 3,000 (7) 1.7813 5.4667 1.7813 4 years
2,000 (8) 1.7813 10.188 1.7813 5 years
3,167 (9) 1.7813 9.25 1.7813 6 years
2,666 (10) 1.7813 4.875 1.7813 6.5 years
13,333 (11) 1.7813 4.00 1.7813 7 years
6,667 (12) 1.7813 8.75 1.7813 8 years
16,667 (13) 1.7813 7.625 1.7813 8.5 years
</TABLE>
11
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
3,333 (14) 1.7813 10.188 1.7813 9 years
Joseph Karwowski(19)....... 4/21/98 5,000 (15) 1.7813 9.25 1.7813 6 years
667 (16) 1.7813 4.875 1.7813 6.5 years
2,000 (17) 1.7813 4.50 1.7813 7 years
1,333 (18) 1.7813 10.188 1.7813 9 years
Walter D. Warren(19)....... 11/28/95 42,187 (20) 4.50 13.00 4.50 8 years
5,097 (21) 4.50 9.25 4.50 8 years
14,062 (22) 4.50 8.75 4.50 9 years
</TABLE>
_________________
(1) In exchange for these repriced options, Dr. Barker surrendered 370,000
outstanding stock options.
(2) In exchange for these repriced options, Dr. Barker surrendered 30,000
outstanding stock options.
(3) In exchange for these repriced options, Dr. Barker surrendered 7,000
outstanding stock options.
(4) In exchange for these repriced options, Mr. Bennett surrendered 150,000
outstanding stock options.
(5) In exchange for these repriced options, Dr. Demko surrendered 50,000
outstanding stock options.
(6) In exchange for these repriced options, Dr. Demko surrendered 5,000
outstanding stock options.
(7) In exchange for these repriced options, Mr. Skalla surrendered 4,500
outstanding stock options.
(8) In exchange for these repriced options, Mr. Skalla surrendered 3,000
outstanding stock options.
(9) In exchange for these repriced options, Mr. Skalla surrendered 4,750
outstanding stock options.
(10) In exchange for these repriced options, Mr. Skalla surrendered 4,000
outstanding stock options.
(11) In exchange for these repriced options, Mr. Skalla surrendered 20,000
outstanding stock options.
(12) In exchange for these repriced options, Mr. Skalla surrendered 10,000
outstanding stock options.
(13) In exchange for these repriced options, Mr. Skalla surrendered 25,000
outstanding stock options.
(14) In exchange for these repriced options, Mr. Skalla surrendered 5,000
outstanding stock options.
(15) In exchange for these repriced options, Mr. Karwowski surrendered 7,500
outstanding stock options.
(16) In exchange for these repriced options, Mr. Karwowski surrendered 1,000
outstanding stock options.
(17) In exchange for these repriced options, Mr. Karwowski surrendered 3,000
outstanding stock options.
(18) In exchange for these repriced options, Mr. Karwowski surrendered 2,000
outstanding stock options.
(19) No longer employed with the Company.
(20) In exchange for these repriced options, Mr. Warren surrendered 56,250
outstanding stock options.
(21) In exchange for these repriced options, Mr. Warren surrendered 6,798
outstanding stock options.
(22) In exchange for these repriced options, Mr. Warren surrendered 18,750
outstanding stock options.
12
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Messrs. Blanchard, Grumbles, and Lee, 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. Mr. Blanchard abstains from voting on stock option
grants under the stock option plans.
Set forth below is a report submitted by the Compensation Committee
addressing the Company's compensation policies for fiscal 1999 as they affected
Dr. W. B. Barker and as they affected George H. Bennett (Mr. Bennett resigned
from the Company on August 20, 1999), and Gregory T. Skalla, the two executive
officers other than Dr. Barker who, for fiscal 1999, 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 the interest of management and shareholders in the enhancement of
shareholder value.
Compensation paid to the Company's Senior Executives in fiscal 1999
consisted primarily of two elements: base salary 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 1999 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 are considered. No cash bonuses were paid to Senior Executives in
fiscal year 1999.
13
<PAGE>
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 1999, stock options were
granted to retain and increase the commitment of existing employees and to
attract additional personnel to the Company.
Transaction Bonus Plan. In February 1999, the Board of Directors
established the Transaction Bonus Plan is established for the purpose of
retaining the Company's senior management and better aligning the interests of
management and shareholders in connection with a potential change of control
transaction involving the Company. In the event of a change of control, the
Transaction Bonus Plan entitles designated members of senior management to share
in a cash bonus pool equal to a percentage of the gross transaction price in
excess of a threshold amount. The threshold amount represents an average market
value of the Company for the 12 month period ended March 31, 1995 (preceding the
development of the Company's new technologies) plus capital raised after that
date. As of June 30, 1999 the threshold amount was $48.1 million. The percentage
of the gross transaction price in excess of the threshold amount ranges from a
low of 4% if the gross transaction price per share is $4 or less and increases
to a maximum of 8% if the gross transaction price per share is $8 or more.
Participants in the Transaction Bonus Plan consist of the Chairman, President
and Senior Vice President of Finance. The board of directors administers the
Transaction Bonus Plan and, in its discretion, may make modifications and
additions to the terms of the plan.
Chief Executive Officer Compensation. The determination of 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 being 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 cash 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 1999, no cash 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 executive compensation 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 Dwight E. Lee
14
<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 July 1, 1994
through June 30, 1999. The comparison graph assumes $100 invested on June 30,
1994, in the Company's common stock and each index.
<TABLE>
<CAPTION>
---------------------------------- FISCAL YEAR ENDING -------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMPANY/INDEX/MARKET 6/30/1994 6/30/1995 6/28/1996 6/30/1997 6/30/1998 6/30/1999
Data Race Inc 100.00 193.18 121.59 231.82 10.80 60.23
Telephone, Telegraph Apparatus 100.00 162.04 228.22 275.91 346.38 425.79
NASDAQ Market Index 100.00 117.28 147.64 177.85 235.75 300.37
</TABLE>
15
<PAGE>
ITEM 2
1999 STOCK OPTION PLAN
General
Effective July 29, 1999, the Board of Directors unanimously adopted the
DATA RACE, Inc. 1999 Stock Option Plan (the "1999 Option Plan") and directed
that the 1999 Option Plan be submitted to the shareholders for their approval.
The following summary of the 1999 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 1999 Option Plan
Under the 1999 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
1999 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
1999 Option Plan may be reoptioned thereunder. The 1999 Option Plan will be
administered by the Compensation Committee (the "Committee"). The Committee
will set the specific terms and conditions of options granted under the 1999
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
1999 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.
16
<PAGE>
The 1999 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 1999 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 1999 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
existing Stock Option Plans.
The 1999 Option Plan will terminate on July 29, 2009. The Board of
Directors may, however, terminate the 1999 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 1999 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 1999 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 1999 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 (one
year in the case of death or disability); 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 stock 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.
For federal income tax purposes, dispositions of incentive stock 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
17
<PAGE>
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 stock 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
stock options, and the two-year and one-year holding periods will be
measured, respectively, from the date the incentive stock option was
granted and the date it was exercised.
(c) Purchased Shares-Disqualified Disposition. If the delivery of
shares acquired under an incentive stock option results in a disqualifying
disposition pursuant to the principles of paragraph (a) above, then the tax
basis and holding periods for the new shares transferred to the optionee
upon exercise of the incentive stock option will be determined as follows:
18
<PAGE>
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
stock 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 stock 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 stock option is exercised.
Federal Tax Rates. Ordinary income is subject to a maximum federal tax
rate of 39.6% for dispositions occurring in 1999.
Sales of common stock of the Company held for more than 12 months are
subject to a maximum U. S. federal tax rate of 20% for dispositions occurring in
1999 and may be less depending on the optionee's tax bracket.
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
depending on the optionee's tax bracket, 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 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.
19
<PAGE>
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 1999 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, 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.
20
<PAGE>
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 1999 Option Plan.
The enclosed form of Proxy provides a means for shareholders to vote for the
1999 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 1999 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 1999 Stock Option Plan.
21
<PAGE>
ITEM 3
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION INCREASING
THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK
The current authorized number of shares of capital stock of the Company
consists of 2,000,000 shares of preferred stock, no par value (the "Preferred
Stock"), and 37,500,000 shares of Common Stock. For the reasons described
below, the Board of Directors adopted a proposed amendment (the "Share
Amendment") to the Company's Articles of Incorporation, for the purpose of
increasing the authorized number of shares of Common Stock from 37,500,000
shares to 70,000,000 shares, and directed that the Share Amendment be submitted
to a vote of the shareholders at the Meeting. The Share Amendment does not
propose to change the authorized number of shares of Preferred Stock or any
other aspect of the Articles of Incorporation.
The Board of Directors has determined that an increase in the authorized
number of shares of Common Stock is necessary to enable the Company to complete
future equity financings. Additionally, an increase in the authorized number of
shares of Common Stock would permit the Company to effect stock splits, stock
dividends and other issuances, as determined appropriate by the Board. The
Company's ability to sustain operations, make future capital expenditures and
fund the development and marketing of new or enhanced products is dependent to a
great extent on the Company's ability to raise additional capital.
If the Share Amendment is adopted by the shareholders, Article Four,
Section 4.1 of the Articles of Incorporation will be amended to read as follows:
4.1 General. The aggregate number of shares which the Corporation
-------
has authority to issue is Seventy Two Million (72,000,000), divided into:
one class of Seventy Million (70,000,000) shares of Common Stock, no par
value, and one class of Two Million (2,000,000) shares of Preferred Stock,
no par value, which may be divided into and issued in multiple series.
As of September 1, 1999, there were an aggregate of approximately
24,523,000 shares of Common Stock outstanding or reserved for issuance upon
exercise or conversion of outstanding options, warrants and convertible
securities. If the Share Amendment is approved, the Company may issue the
additional authorized shares in capital raising transactions, for general
corporate purposes, for acquisitions, pursuant to employee benefit plans and for
other purposes as the Board of Directors may deem appropriate.
If the Share Amendment is approved, all or any part of the additional
authorized but unissued shares of 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 Common 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. The Share 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 shareholder's proportionate ownership interest in the
Company.
22
<PAGE>
Approval of the Share Amendment requires the affirmative vote of holders of
at least two-thirds of the total outstanding shares of Common Stock. The
enclosed form of Proxy provides a means for shareholders to vote for the Share
Amendment, 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 voted, such shares will be
voted FOR the Share Amendment. In determining whether this item has received the
requisite number of affirmative votes, abstentions and broker non-votes will
have the same effect as a vote against this Item. The vote of each shareholder
is important. The failure to vote has the same effect as a negative vote.
The Board recommends that the shareholders vote "FOR" the Share Amendment.
ITEM 4
RATIFICATION OF SELECTION OF ACCOUNTANTS
The Board of Directors has selected KPMG LLP as the independent accountants
of the Company for fiscal 2000. KPMG LLP has served as the independent
accountants of the Company since June 1989. A representative of KPMG 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 LLP as the Company's independent accountants for fiscal
2000. 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 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 shareholders in
November 2000. Proposals by shareholders intended to be presented at the annual
meeting to be held in 2000 must be received by the Company by June 15, 2000 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.
23
<PAGE>
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 out-of-pocket expenses incurred by
them in connection therewith.
BY ORDER OF THE BOARD OF DIRECTORS
GREGORY T. SKALLA, SECRETARY
24
<PAGE>
APPENDIX A
DATA RACE, INC.
1999 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 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
A-1
<PAGE>
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 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.
A-2
<PAGE>
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 (July 29, 1999).
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 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
A-3
<PAGE>
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 existing Stock Option Plans. Accordingly,
upon approval of this Plan by the shareholders of the Company, Section 5(f) of
the 1998 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 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
A-4
<PAGE>
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
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.
A-5
<PAGE>
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.
A-6
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR AN ANNUAL MEETING OF SHAREHOLDERS ON NOVEMBER 4, 1999
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 4, 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
nominee, and write the name of such nominee(s) on the line below.
____________________________________
NOMINEES
Dr. W.B. Barker Jeffrey P. Blanchard Matthew A. Kenny
George R. Grumbles Dwight E. Lee
2. Approval of the Data Race, Inc. 1999 Stock Option Plan.
FOR: [_] AGAINST: [_] ABSTAIN: [_]
3. Amendment to the Company's Articles of Incorporation increasing the
authorized number of shares of Common Stock.
FOR: [_] AGAINST: [_] ABSTAIN: [_]
4. Ratification of selection of independent accountants.
FOR: [_] AGAINST: [_] ABSTAIN: [_]
The undersigned acknowledges receipt of the formal notice of such meeting and
the accompanying Proxy Statement.
Please sign exactly as name appears on the certificate. When shares are held by
joint tenants, both should sign. If a corporation, please sign in full corporate
name by president or other authorized officer. If a
<PAGE>
partnership, please sign in partnership name by authorized person. When signing
as attorney, executor, administrator, trustee, guardian, officer or partner,
please give full title as such.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY
BALLOT PROMPTLY USING THE ENCLOSED ENVELOPE.
_____________________________________________
_____________________________________________
_____________________________________________
SIGNATURE(S)
DATE: _______________________________________
