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 Rule 14a-11(c) or Rule 14a-12
DATA RACE, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-------------------------------------------------------------------------
(3) Filing Party:
-------------------------------------------------------------------------
(4) Date Filed:
-------------------------------------------------------------------------
DATA RACE, INC.
6509 Windcrest Drive, Suite 120
Plano, Texas 75024
Notice of Annual Meeting of Shareholders
To Be Held on November 9, 20007
An annual meeting of shareholders of DATA RACE, Inc., a Texas corporation
(the "Company"), will be held at the Westin StoneBriar Resort, Frisco, Texas
75034, on November 9, 20007, at 9:30 a.m., CST, for the following purposes:
1. To elect six directors to serve for the ensuing year.
2. To approve the DATA RACE, Inc. 2000 Stock Option Plan.
3. To amend the Company's Articles of Incorporation to change its name
from DATA RACE, Inc. to IP AXESS, Inc.
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 19,
2000 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
James G. Scogin
Secretary
Plano, Texas
September 20, 2000
DATA RACE, INC.
PROXY STATEMENT
FOR THE
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER 9, 2000
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 9, 2000. This Proxy
Statement and the accompanying proxy are being sent or given to the shareholders
of the Company on or about September 29, 2000. The Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 2000 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 19, 2000. At the close of business on September 19, 2000
there were 26,241,648 shares of Common Stock issued and outstanding
and entitled to vote at the Meeting. As of September 1, 2000 the directors and
executive officers of the Company and their affiliates beneficially owned a
total of 1,761,399, shares of Common Stock, or approximately 6.6% of the total
number of shares outstanding and entitled to vote at the Meeting. The directors
and executive officers and their affiliates have indicated to the Company that
they presently intend to vote all of the shares of Common Stock owned by them
for each of the Items set forth in the Notice of Annual Meeting.
1
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, 2000 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, 2000.
Number Percent of
Name of Shares Class
---- --------- -----------
Michael A. McDonnell.................................................. 82,499(1) *
Jeffrey P. Blanchard.................................................. 1,358,053(2) 5.2%
Tom Bishop............................................................ 0 *
George R. Grumbles.................................................... 128,125(3) *
Matthew A. Kenny...................................................... 128,125(4) *
Byron Smith........................................................... 0 *
James G. Scogin....................................................... 46,097(5) *
Jeffrey Kissell....................................................... 11,000(6) *
Bradley Frohman....................................................... 7,500(7) *
Dr. W. B. Barker...................................................... 458,000(8) 1.7%
Kenneth Witt.......................................................... 67,599(9) *
All Directors and Executive Officers as a Group
(9 persons)...................................................... 1,761,399(10) 6.6%
Cranshire Capital L.P. (11).......................................... 1,566,319(12) 5.9%
Liviakis Financial Communications, Inc.("LFC")(13).................... 2,749,420(14) 10.3%
____________________
* Indicates less than 1%.
(1) Includes 82,499 shares subject to options held by Mr. McDonnell.
(2) Includes 49,375 shares subject to options held by Mr. Blanchard and
approximately 1,275,000 shares held by First Capital Group of Texas II,
L.P., an investment fund managed by Mr. Blanchard.
(3) Includes 128,125 shares subject to options held by Mr. Grumbles.
(4) Includes 128,125 shares subject to options held by Mr. Kenny.
(5) Includes 45,750 shares subject to options held by Mr. Scogin.
(6) Includes 10,000 shares subject to options held by Mr. Kissell.
(7) Includes 7,500 shares subject to options held by Mr. Frohman.
(8) Includes 278,699 shares subject to options and 44,444 shares subject to
warrants held by Dr. Barker.
(9) Includes 56,209 shares subject to options held by Mr. Witt.
(10) Includes 451,374 shares subject to options held by such persons.
(11) Information with respect to the beneficial ownership of such shareholder
and certain affiliated persons was derived from Schedule 13G filed June 20,
2000 by Cranshire Capital L.P., EURAM CAP STRAT. "A" FUND LIMITED,
Downsview Capital, Inc., JMJ Capital, Inc. and Mitchell P. Kopin. The
address of such shareholders is 666 Dundee Road, Suite 1901, Northbrook, IL
60062.
(12) Includes 1,353,023 shares of common stock and warrants to purchase 213,296
shares of common stock.
(13) Information with respect to the beneficial ownership of such shareholder
and certain affiliated individuals was derived from Amendment No. 2 to
Schedule 13G filed February 25, 2000 by Liviakis Financial Communications,
Inc. ("LFC"), John M. Liviakis and Rene A. Liviakis. The address of such
shareholders is 495 Miller Avenue, Mill Valley, California 94941.
(14) Includes 2,668,020 shares owned by LFC (over which Mr. And Mrs. Liviakis
share voting and dispositive power by virtue of there position as officers
and directors of LFC) and 81,400 shares owned by John Liviakis. The number
of shares also includes 500,556 shares subject to warrants held by LFC, the
exercise of which warrants are subject to certain conditions.
2
ITEM 1
ELECTION OF DIRECTORS
At the Meeting pursuant to which this Proxy Statement is being distributed,
six directors are to be elected by plurality of the votes cast by the holders of
shares entitled to vote. Votes withheld are not counted in the number of votes
cast in the election of directors. In tabulating the vote, broker non-votes will
have no effect on the vote. Each outstanding share of common stock entitles the
holder thereof to one vote with respect to the election of each of the five
director positions to be filled at this meeting. The nominees for director are
Tom Bishop, Jeffrey P. Blanchard, Michael A. McDonnell, George R. Grumbles,
Matthew A. Kenny and Byron Smith. All of the nominees are presently directors of
the Company. For information concerning the backgrounds of the current
directors, see "Directors and Executive Officers" below.
The enclosed Proxy, if properly signed and returned, and unless authority
to vote is withheld, will be voted FOR the election of these six nominees. The
Board of Directors has no reason to believe that any of such nominees will be
unable to serve if elected. In the event any of such nominees become
unavailable for election, votes will be cast, pursuant to authority granted by
the enclosed Proxy, for such substitute nominee as may be designated by the
Board of Directors. All 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:
Name Age Position with Company
---- --- ---------------------
Michael A. McDonnell..................... 45 President, Chief Executive Officer and Director
James G. Scogin.......................... 39 Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
Jeffrey C. Kissell....................... 45 Senior Vice President of Product and Business
Development
Bradley Frohman.......................... 39 Vice President of Engineering
Jeffrey P. Blanchard..................... 47 Chairman of the Board of Directors
Thomas Bishop............................ 46 Director
George R. Grumbles....................... 66 Director
Matthew A. Kenny......................... 67 Director
Byron Smith.............................. Director
Michael A. McDonnell has served as President, Chief Executive Officer and
Director since April 2000 and as Chief Operating Officer since joining the
Company in November 1999. Prior to joining the Company, Mr. McDonnell served as
a vice president and general manager of GTE Communications Corporation ("GTE")
for three years. While employed by GTE, Mr. McDonnell was a member of a
business unit development team instrumental in creating a billion-dollar
division focused on the delivery of integrated communication services available
across GTE's strategic business units. From 1993 to 1996 Mr. McDonnell was a
national director with NEC America, were he assisted in the creation and launch
of NEC's Computer Telephony Integration initiative, along with
3
growing the Video Sales unit, and Data Communications group. He holds a BA
degree from San Diego State University.
James G. Scogin has served as Senior Vice President-Finance, Chief
Financial Officer, Secretary and Treasurer since January 2000. The Company has
employed Mr. Scogin since 1997 when he joined the Company as Controller. Prior
to joining the Company, Mr. Scogin was Vice President-Controller, Treasurer,
Secretary and Chief Accounting Officer of 50-OFF Stores, Inc. in San Antonio,
Texas from 1992 to 1997. He holds a BBA from Baylor University and is a CPA.
Jeffrey C. Kissell joined the Company as Senior Vice President, Product and
Business Development in July 2000. Prior to joining the Company, Mr. Kissell
served as Vice President of National Marketing for GTE Service Corporation
("GTES"). Mr. Kissell held various senior management positions with GTES during
his 22-year career there. Mr. Kissell responsibilities included the development
of marketing programs, product design, pricing and distribution for GTES's
domestic operations. He holds a BA degree from St. Francis College, a MBA from
Indiana University and is a CPA.
Bradley L. Frohman joined the Company as Vice President of Engineering in
July 2000. Prior to joining the Company, Mr. Frohman served as director of
advanced wireless infrastructure products for Motorola, Inc. ("Motorola"). Mr.
Frohman's responsibilities at Motorola during his 10-year career were exploring
and delivering prototypes for cellular VoIP, distributed processing environments
and multi-RF technologies on IP networks. He holds a BS degree in computer
science and mathematical science from Vanderbilt University and a MS degree in
computer science from Johns Hopkins University.
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.
Thomas Bishop was appointed to the Board of Directors in January 2000. Mr.
Bishop is the Chief Executive Officer of Compu-Care Management Systems, Inc., an
Internet-based application service provider. Prior to joining Compu-Care, Mr.
Bishop served as Vice President of Development and Chief Technology Officer for
Tivoli Systems.
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. 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 Vice
President of Motorola and the President and CEO of Universal Data Systems, which
he joined in 1972.
4
Byron Smith was appointed to the Board of Directors in January 2000. Mr.
Smith is the Executive Vice President, Consumer Broadband Services and Chief
Marketing Officer at Excite@Home. Mr. Smith oversees the @Home Service, media
sales, engineering and operations, Excite Studios, @Home Solutions, affiliate
marketing with cable partner, Customer Care, and all marketing for Excite@Home.
Prior to joining Excite@Home, Mr. Smith was Vice President, Consumer Long
Distance for AT&T Corp.
Dr. W.B. Barker, President and Chief Executive Officer retired from the
Company and resigned his Board position in April 2000.
Kenneth Witt, Vice President - Development, resigned from the Company in
July 2000.
Board and Committee Meetings
During the fiscal year ended June 30, 2000, the Board of Directors held 15
meetings. Each director attended at least 75% of the meetings of the Board of
Directors held during the period for which he was a director.
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee, composed of Messrs. Kenny (Chairman), Mr. Bishop and Mr.
Grumbles, 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
Smith, 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, 2000.
5
EXECUTIVE COMPENSATION
Summary Compensation Table
The Summary Compensation Table shows certain compensation information for
the fiscal years ended June 30, 2000, 1999 and 1998, for the Chief Executive
Officer and of the two most highly compensated executive officers (hereinafter
referred to as the "named executive officers").
Summary Compensation Table
Annual Compensation Long-Term
-------------------
Compensation
Awards
------
Securities
Base Salary Underlying All Other
Year ($) Bonus ($) Options (#) Compensation ($)
---- --- -------- ----------- ----------------
Michael A. McDonnell............. 2000 $207,019(2) - 250,000 -
President and CEO
Dr. W. B. Barker................. 2000 102,000(4) - 100,000 -
President and CEO 1999 180,000 - 380,250(3) $3,550(1)
1998 197,500 - 7,000 1,952(1)
Kenneth Witt..................... 2000 110,552(5) 15,000 150,000 3,317(1)
Vice President-Development 1999 96,375 - 35,000 2,343(1)
1998 83,188 - 8,000 1,664(1)
James G. Scogin.................. 2000 103,030 - 145,000 3,017(1)
Senior Vice President, Chief 1999 80,500 - 15,000 1,946(1)
Operating and Financial 1998 50,000(6) - 11,500 328(1)
Officer, Secretary and Treasurer
____________
(1) Represents contributions made by the Company under the Company's 401(k)
plan.
(2) Represents compensation from commencement of employment on November 23,
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 options
were canceled and 305,250 were granted.
(4) Dr. W. B. Barker, President and Chief Executive Officer retired from the
Company in April 2000.
(5) Kenneth Witt, Vice President resigned from the Company in July 2000.
(6) Represents compensation from commencement of employment on November 1,
1997.
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
Outside directors 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 1999 stock option plan. Outside directors
6
are reimbursed for their out-of-pocket expenses involved in connection with
their services as directors. Certain outside directors also receive consulting
fees for services rendered from time to time to the Company. In fiscal 2000, no
such person received in excess of $60,000 for such services, except for First
Capital Group of Texas Ltd., of which Mr. Blanchard is the Managing Director,
received approximately $71,000 for consulting services.
Employment Agreements
The Company does not have written employee agreements with the officers of
the Company. The officers of the Company work on a "at will basis".
Consultant and Advisor Stock Plan
In April 1999, the Company established a 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
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,
2000, approximately 250,000 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 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, 2000, approximately 103,000 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.
A participant may withdraw from the Purchase Plan at any time during an
offering period. If a
7
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, as of September 1, 2000,
stock options covering an aggregate of 2,733,708 shares of Common Stock were
outstanding with a weighted average exercise price of $3.77 per share, and an
aggregate of 1,373,145, shares of Common Stock were available for issuance upon
exercise of options which may be granted in the future under the option plans.
Options under the option plans may either be incentive stock options or
non-qualified stock options. Options under the option 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 $100,000. Options may be
exercised by payment of cash or by tender of shares of common stock (valued at
their then current market value). In the event of a change of control, all
unvested options vest and become exercisable. The Compensation Committee of the
Board of Directors administers the Plans, except that the full Board administers
the stock option grants to members of the Compensation Committee.
On September 12, 2000, the Company's Board of Directors adopted the DATA
RACE, Inc. 2000 Stock Option Plan, authorizing the grant of incentive stock
options and non-qualified stock options to employees, directors and certain
other persons. No options have been granted under the 2000 Stock Option Plan.
Shareholder approval of the 2000 Stock Option Plan is being sought in connection
with this Proxy Statement. See "Item 2 - 2000 Stock Option Plan".
Stock Option Grant Table
The following table sets forth certain information concerning options
granted to the named executive officers during the Company's fiscal year ended
June 30, 2000:
Option Grants in Last Fiscal Year
Potential Realizable
Number of Percent of Value at Assumed
Shares Total Options Annual Rates of Stock
Underlying Granted to Exercise or Price Appreciation for
Options Employees in Base Price Expiration Option Term(1)
Name Granted Fiscal Year ($/Sh) Date 5%($) 10%($)
---- ------- ----------- ------ ---- ---------------
Michael A. McDonnell............... 250,000(2) 13.9% $1.625 11/09/2009 255,488 647,458
8
Dr. W. B. Barker................... 100,000(3) 5.6% 2.50 9/28/2009 157,200 398,400
Kenneth Witt....................... 50,000(4) 2.8% 2.50 9/28/2009 78,600 199,200
100,000(5) 5.6% 2.84 1/03/2010 178,600 452,600
James G. Scogin.................... 10,000(4) .6% 2.50 9/28/2009 15,720 39,840
35,000(5) 1.9% 2.84 1/03/2010 62,510 158,410
100,000(6) 5.6% 4.875 5/01/2010 306,600 776,900
____________
(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 four equal installments on May 12, 2000, November 10, 2000,
May 12, 2001 and November 10, 2001.
(3) Options vest based on performance criteria.
(4) Options vest in two equal installments on December 15, 1999 and June 15,
2000.
(5) Options vest in four equal installments on July 5, 2000, January 3, 2001,
July 6, 2001 and January 4, 2002.
(6) Options vest 10% on May 1, 2000, 40% on May 1, 2001 and remaining 50% in
twelve monthly installments starting June 1, 2001 to May 1, 2002.
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, 2000, 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, 2000. 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, 2000.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year End Option Value
Number of Unexercised Value of Unexercised
Shares Options at Fiscal In-the-Money Options at
Acquired on Value Year-End (#) Fiscal Year-End ($)
Name Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
---- ----------- ----------- ------------------------- ---------------------------
Michael A. McDonnell...... - - 62,499/187,501 312,495/937,505
Dr. W. B. Barker........... - - 400,250/0 1,354,500/0
Kenneth Witt............... - - 61,176/100,000 239,778/284,400
37,000/119,750 120,351/301,085
James G. Scogin............ - -
________________
(1) Values stated are based on the last sale price of $6.625 per share of the
Company's common stock on June 30, 2000 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.
9
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended June 30, 2000, Messrs. Blanchard, Grumbles,
Smith (from April 2000) and Lee (until March 27, 2000) 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, 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 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 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 to First Capital at
an exercise price of $.80 per share in connection with such private placements.
In June 2000, First Capital Group of Texas converted its Series E and F
convertible preferred stock into Common Stock and exercised its first and second
closing common stock purchase warrants.
During fiscal 2000, First Capital Group of Texas Ltd., of which Mr.
Blanchard is the Managing Director, received approximately $71,000 for
consulting services.
The Company believes that the ability of Mr. Blanchard to make fair
compensation decisions have not and will not be compromised by the relationships
referred to above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1998, the Company entered into a 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 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 issued under
the arrangement 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.
10
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.
On January 1, 2000, the consulting agreement with LFC was terminated.
11
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Messrs. Blanchard, Grumbles, and Smith, 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 2000 as they affected
Michael A. McDonnell and as they affected Kenneth Witt (Mr. Witt resigned from
the Company in July 2000), and James G. Scogin, the two executive officers
other than Mr. McDonnell who, for fiscal 2000, were the Company's most highly
paid executives (collectively with Mr. McDonnell, 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
comparable to compensation paid to senior executives of other companies in the
Company's industry and with which the Company believes it may have to compete
for executive talent ("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 2000
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 2000 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. Mr. McDonnell's periodic salary adjustments
are determined by evaluating the competitive marketplace, the performance of the
Company, and, to a certain extent, subjective measures of Mr. McDonnell's
performance.
Bonuses. Cash bonuses to employees are approved by the Compensation
Committee from time to time as they deem appropriate based on individual
contributions and Company performance. In determining the actual cash bonuses
paid to Senior Executives, the actual financial performance relative to the
Annual Operating Plan and the accomplishments of individual performance
objectives
12
are considered. No cash bonuses were paid to Senior Executives in fiscal year
2000, except for Mr. Witt upon promotion to Vice President - Development.
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 2000, 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 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, 2000 the threshold amount was $58.1 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. 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. Mr. McDonnell's
base salary was higher than the other Senior Executives of the Company but is
considered to be in line with the base salaries of other chief executive
officers of comparable companies. 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., 6509 Windcrest, Suite 120,
Plano, Texas 75024.
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 Byron Smith
13
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, 1995
through June 30, 2000. The comparison graph assumes $100 invested on June 30,
1995, in the Company's common stock and each index.
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
-------------------------FISCAL YEAR ENDING--------------------------
COMPANY/INDEX/MARKET 6/30/1995 6/28/1996 6/30/1997 6/30/1998 6/30/1999 6/30/2000
Data Race Inc 100.00 62.94 120.00 5.59 31.18 62.35
Telephone, Telegraph Appartus 100.00 140.84 170.27 213.76 262.77 539.48
NASDAQ Market Index 100.00 125.88 151.64 201.01 281.68 423.84
14
ITEM 2
2000 STOCK OPTION PLAN
General
Effective September 12, 2000, the Board of Directors unanimously adopted
the DATA RACE, Inc. 2000 Stock Option Plan (the "2000 Option Plan") and directed
that the 2000 Option Plan be submitted to the shareholders for their approval.
The following summary of the 2000 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 2000 Option Plan
Under the 2000 Option Plan, options to purchase up to 1,250,000 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
2000 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
2000 Option Plan may be reoptioned thereunder. The 2000 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 2000 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 of
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 2000
Option Plan) all outstanding options, to the extent not vested, will
automatically vest and become exercisable in full.
The exercise price of all non-qualified stock options must be at least
equal to 100% of the fair market value of a share of common stock on the date of
grant. The exercise price of all incentive stock options must be at least equal
to 100% of the fair market value of a share of common stock on the date of
grant, or 110% of the fair market value with respect to any incentive stock
option issued to a holder of 10% or more of the Company's shares. Stock options
may be exercised by payment in cash of the exercise price with respect to each
share to be purchased or by delivering common stock of the Company already owned
by such optionee with a market value equal to the exercise price, or by a method
in which a concurrent sale of the acquired stock is arranged, with the exercise
price payable in cash from such sale proceeds.
15
The 2000 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 2000 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 75,000 shares, which will become exercisable one year from date of
grant. 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 2000 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 2000 Option Plan will terminate on September 12, 2010. The Board of
Directors may, however, terminate the 2000 Option Plan at any time prior to such
date.
Federal Income Tax Consequences
The following is a general description of the federal income tax
consequences of options granted and exercised under the 2000 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 2000 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
16
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
17
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:
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 stock 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.
Alternative Minimum Tax. The exercise of an incentive stock option will
result in an item of income for purposes of determining the alternative minimum
tax. Liability for tax under the alternative minimum tax rules will arise only
if the employee's tax liability determined under the alternative minimum tax
rules exceeds the employee's tax liability determined under the ordinary income
tax rules. 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.
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
(a) the Company timely reports the income to the Internal Revenue Service and
the optionee on IRS Form W-2 or IRS
18
Form 1099 or (b) the optionee actually reports the income on his original or
amended federal individual income tax return or the Internal Revenue Service
includes such amount on audit, 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.
Non-qualified Stock Options
Options issued under the 2000 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 stock 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 stock option, provided (a) the
Company timely reports the income to the Internal Revenue Service and the
optionee on IRS Form W-2 or IRS Form 1099 or (b) the optionee actually reports
the income on his original or amended federal individual income tax return or
the Internal Revenue Service includes such amount on audit. The deduction will,
in general, be allowed for the same taxable year in which ordinary income is
recognized by the optionee.
If the option price under any non-qualified stock 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 stock 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.
Additional Matters
Certain "disqualified individual" (i.e., officers, shareholders or highly
compensated employees) may be subject to an excise tax on certain change of
control compensation, including the
19
vesting of options, and the Company may not be able to deduct such change of
control compensation. The present value of the change of control compensation
payments to a disqualified individual is added together. If the total amount of
change of control compensation payments to a disqualified individual equals or
exceeds three times the disqualified individual's "base amount" (the average
annual taxable compensation of the disqualified individual for the five years
preceding the in which the change of control occurs), the payments are
considered "parachute payments," and the excess of the total amount of parachute
payments over the greater of (a) the base amount or (b) "reasonable
compensation" for services actually rendered prior to the change of control will
be considered "excess parachute payments." Excess parachute payments are subject
to a 20% nondeductible excise tax (payable by the disqualified individual) and
are not deductible by the employer.
The Company may not be allowed a deduction for federal income tax purposes
for employee remuneration with respect to its Chief Executive Officer or any of
its four other highest compensated officers for the taxable years to the extent
that the amount of the remuneration for the taxable year with respect to such
officer exceeds $1,000,000.
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 2000 Option Plan.
The enclosed form of Proxy provides a means for shareholders to vote for the
2000 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 2000 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 2000 Stock Option Plan.
20
ITEM 3
TO AMEND THE COMPANY'S ARTICLES OF INCORPORATION TO CHANGE ITS NAME FROM DATA
RACE, INC. TO IP AXESS, INC.
In April, 2000 the board of directors of the Company adopted a resolution
setting forth an amendment to Article I of the Company's Articles of
Incorporation, to change the Company's name to "IP AXESS, Inc." in order to
better reflect the Company's current business and business strategy, a copy of
such Amendment is set forth in Appendix B. Upon approval of the amendment by the
shareholders the Company will file the Amendment with the Secretary of State of
Texas, which will amend Article I of the Company's Articles of Incorporation to
read as follows:
"The name of the corporation shall be IP AXESS, Inc."
Stock certificates representing the Company's common stock issued prior to the
effective date of the change in the corporate name to "IP AXESS, Inc." will
continue to represent the same number of shares, remain authentic, and will not
be required to be returned to the Company or its transfer agent for reissuance.
New stock certificates issued upon transfer of shares of common stock after the
name change will bear the name "IP AXESS, Inc." Delivery of existing stock
certificates will continue to be accepted in a sale transaction made by a
shareholder after the corporate name is changed.
Approval of the name change 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
name change 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 name change 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 name change
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 2001. 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
2001. The
21
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 2001. Proposals by shareholders intended to be presented at the annual
meeting to be held in 2001 must be received by the Company by June 15, 2001 to
be included in the Company's proxy statement and form of proxy relating to that
meeting. Such proposals should be addressed to the Secretary of the Company at
the address indicated in this Proxy Statement.
COST AND METHOD OF PROXY SOLICITATION
The accompanying Proxy is being solicited on behalf of the Board of
Directors of the Company. The expense of preparing, printing and mailing the
form of Proxy and the material used in the solicitation thereof will be borne by
the Company. In addition to the use of the mails, proxies may be solicited by
personal interview, telephone and telegram by directors, officers and employees
of the Company, and also by a proxy solicitation firm engaged for such purpose.
In the event a proxy solicitation firm is engaged, the Company will pay to such
firm customary fees for the firm's services and will bear the firm's reasonable
out-of-pocket expenses. Arrangements may also be made with brokerage houses and
other custodians, nominees and fiduciaries for forwarding of solicitation
materials to the beneficial owners of stock held by such persons, and the
Company may reimburse them for reasonable out-of-pocket expenses incurred by
them in connection therewith.
BY ORDER OF THE BOARD OF DIRECTORS
JAMES G. SCOGIN, SECRETARY
22
APPENDIX A
DATA RACE, INC.
2000 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
A-1
Internal Revenue Code of 1986 and the regulations issued thereunder, as amended
from time to time (the "Internal Revenue Code"), in order that the incentive
stock options granted hereunder ("Incentive Stock Options") shall constitute
"incentive stock options" within the meaning of section 422 of the Internal
Revenue Code. Options granted under the Plan which are not intended to be
Incentive Stock Options are referred to herein as "Nonqualified Stock Options."
The term "Options" as used herein shall refer to Incentive Stock Options and
Nonqualified Stock Options, either collectively or without distinction. The
interpretation and construction by the Committee, if any, of any provisions of
the Plan or of any Option granted hereunder shall be final and conclusive. No
member of the Committee shall be liable for any action or determination made in
good faith with respect to the Plan or any Option granted hereunder.
4. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Section 6,
--------------------------
the number of shares subject to Options granted hereunder shall not exceed
1,250,000 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.
A-2
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.
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 (September 12, 2000).
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
A-3
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 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 75,000 shares of
Common Stock, which shall become exercisable one year after 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 1999 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.
A-4
(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 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
A-5
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. 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
APPENDIX B
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION OF
DATA RACE, INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporations Act, the undersigned corporation adopts the following Articles of
Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is DATA RACE, Inc.
ARTICLE TWO
The following amendments and additions were adopted by the shareholders of
the corporation to read as follows:
ARTICLE ONE
The name of the corporation is IP AXESS, Inc.
ARTICLE THREE
Each statement made by these Amended Articles of Incorporation has been
effected in conformity with the provisions of the Texas Business Corporations
Act. These Articles of Amendment to the Articles of Incorporation were adopted
by the Shareholders of the corporation on November 9, 2000.
ACTICLE FOUR
The number of shares of the Company outstanding at the time of the adoption
was 26,267,898 and the number of shares entitled to vote on the amendment was
26,267,898.
ARTICLE FIVE
The holders of ____________ shares outstanding entitled to vote on the
amendment voted for its approval.
A-7
DATA RACE, Inc.
By: /s/ Michael A. McDonnell
-------------------------------
Name: Michael A. McDonnell
Title: Chief Executive Officer
A-8
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR AN ANNUAL MEETING OF SHAREHOLDERS ON NOVEMBER 9, 2000
The undersigned hereby appoints Michael A. McDonnell and James G. Scogin,
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
Michael A. McDonnell Jeffrey P. Blanchard Tom Bishop
George R. Grumbles Matthew A. Kenny Byron Smith
2. Approval of the DATA RACE, Inc. 2000 Stock Option Plan.
FOR: [_] AGAINST: [_] ABSTAIN: [_]
3. To Amend the Company's Articles of Incorporation to change its name from
DATA RACE, Inc. to IP AXESS, Inc.
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 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: _________________________________