SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
Exchange Act of 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
DATA RACE, Inc.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------
(Name of Person(s) Filing Proxy Statement
if other than the Registrant)
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[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(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:
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(4) Date Filed:
DATA RACE, INC.
12400 NETWORK BLVD.
SAN ANTONIO, TEXAS 78249
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY 12, 1998
An annual meeting of shareholders of DATA RACE, Inc., a Texas corporation (the
"Company"), will be held at OMNI San Antonio Hotel, 9821 Colonnade Blvd., San
Antonio, Texas 78230, on January 12, 1998, at 10:00 a.m., CST, for the following
purposes:
1. To elect seven directors to serve for the ensuing year.
2. To approve the DATA RACE, Inc. 1997 Stock Option Plan.
3. To authorize the issuance of certain securities of the Company.
4. To ratify the selection of KMPG Peat Markwick, 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 December 9, 1997 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 if you are
unable to do so, please fill in, sign and promptly mail back the enclosed proxy
form, using the return envelope provided. If, for any reason, you should
subsequently change your plans, you can, of course, revoke the proxy at any time
before it is actually voted.
By Order of the Board of Directors
Gregory T. Skalla
Secretary
San Antonio, Texas
December 9, 1997
DATA RACE, INC.
PROXY STATEMENT
FOR THE
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 12, 1998
THE MEETING
This Proxy Statement is furnished to the shareholders of DATA RACE, Inc., a
Texas corporation, in connection with the solicitation of proxies by the Board
of Directors of the Company for use at the Annual Meeting of Shareholders to be
held January 12, 1998. This Proxy Statement and the accompanying proxy are
being sent or given to the shareholders of the Company on or about December 17,
1997. The Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1997 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 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 his 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 stockholders entitled to vote at the Meeting is
December 9, 1997. At the close of business on December 9, 1997, the Company had
5,569,806 shares of common stock issued and outstanding and entitled to vote at
the Meeting. As of December 9, 1997, the directors and executive officers of the
Company and their affiliates beneficially owned a total of 615,612 shares of the
Company's common stock, or approximately 10.12% 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.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of common stock as of December 9, 1997, 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; (iii) each named executive officer and
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(iv) all executive officers, directors and nominees as a group. Unless otherwise
noted, each shareholder has sole voting and investment power with respect to the
shares beneficially owned. Options included in the following table represent
options currently exercisable or exercisable within 60 days of December 9, 1997.
Number Percent of
Name of Shares Class
---- ---------- ----------
Dr. W. B. Barker................................ 308,677(1) 5.28%
Jeffrey P. Blanchard............................ 37,115(2) *
George R. Grumbles.............................. 13,000(3) *
Marcelo A. Gumucio.............................. 12,500(4) *
Matthew A. Kenny................................ 13,000(5) *
Dwight E. Lee................................... 23,500(6) *
Edward A. Masi.................................. - *
Walter D. Warren................................ 90,501(7) 1.60%
Gregory T. Skalla............................... 46,400(8) *
Haig A. Sarkissian.............................. 33,298(9) *
All Directors and Executive Officers as a Group
(13 persons)............................... 615,612(10) 10.12%
- ---------------
* Indicates less than 1%.
(1) Includes 272,000 shares subject to options held by Dr. Barker.
(2) Includes 10,000 shares subject to options held by Mr. Blanchard.
(3) Includes 13,000 shares subject to options held by Mr. Grumbles.
(4) Includes 12,500 shares subject to options held by Mr. Gumucio.
(5) Includes 13,000 shares subject to options held by Mr. Kenny.
(6) Includes 15,000 shares subject to options held by Mr. Lee.
(7) Includes 83,455 shares subject to options held by Mr. Warren.
(8) Includes 40,250 shares subject to options held by Mr. Skalla.
(9) Includes 17,500 shares subject to options held by Mr. Sarkissian.
(10) Includes 512,955 shares subject to options held by such persons.
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ITEM 1
ELECTION OF DIRECTORS
At the Annual Meeting pursuant to which this Proxy Statement is being
distributed, seven 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 not be considered present and 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 seven director positions to be
filled at this meeting. The nominees for director are Dr. W. B. Barker, Jeffrey
P. Blanchard, Matthew A. Kenny, George R. Grumbles, Marcelo A. Gumucio, Dwight
E. Lee and Edward A. Masi. 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 SEVEN NOMINEES. The
Board of Directors has no reason to believe that any of such nominees will be
unable to serve if elected. In the event any of such nominees become unavailable
for election, votes will be cast, pursuant to authority granted by the enclosed
Proxy, for such substitute nominee as may be designated by the Board of
Directors. All directors serve for a term of one year and until their successors
are elected.
MANAGEMENT
The following table sets forth certain information concerning the current
directors (representing all nominees for director) and executive officers of the
Company:
Name Age Position with Company
---- --- ---------------------
Dr. W. B. Barker.......... 50 President, Chief Executive Officer and Director
Walter D. Warren.......... 61 Senior Vice President-Operations
Gregory T. Skalla......... 42 Vice President-Finance, Chief Financial Officer,
Secretary and Treasurer
George H. Bennett......... 44 Senior Vice President-Sales
Haig A. Sarkissian........ 36 Vice President-Sales and Marketing-OEM Products
Gregory A. Williamson..... 47 Vice President-Human Resources
Curtis C. Fisher.......... 52 Vice President-Sales and Marketing
Dr. Paul J. Demko Jr...... 52 Vice President-Development
Jeffrey P. Blanchard...... 44 Chairman of the Board of Directors
Matthew A. Kenny.......... 63 Director
George R. Grumbles........ 64 Director
Marcelo A. Gumucio........ 60 Director
Dwight E. Lee............. 50 Director
Edward A. Masi............ 50 Director
Dr. W. B. Barker has served as President and Chief Executive Officer since
April 1995 and as a Director since May 1995. Prior to joining the Company, Dr.
Barker was employed for 26 years by
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Bolt Beranek and Newman Inc. ("BBN"). At BBN, he served in a variety of
technical and management capacities, including Senior Vice President, Chief
Technology Officer, founder and President of LightStream Corporation, an ATM
switch company, and was responsible for the acquisition of regional Internet
service providers. While employed by BBN, he held general management positions
and was President of several subsidiaries, where he was directly responsible for
product strategies, development, marketing and manufacturing for many
communications and multiprocessor products. He holds a Ph.D., M.S. and B.A.
degrees from Harvard University.
Walter D. Warren has served as Senior Vice President-Operations since June
1993. Prior to joining the Company, Mr. Warren served as Senior Vice President
of Technical Operations at Kinetic Concepts, a San Antonio-based manufacturer
and distributor of therapeutic hospital beds.
Gregory T. Skalla has served as Vice President-Finance, Chief Financial
Officer, Secretary and Treasurer since February 1995. Mr. Skalla has been
employed by the Company since 1992 when he joined the Company as Controller.
From 1987 to 1992, Mr. Skalla was Chief Financial Officer of Mil-Com Electronics
Corporation in San Antonio, Texas.
George H. Bennett joined the Company as Senior Vice President-Sales in
November 1997. From February 1997 until that time, Mr. Bennett served as Senior
Vice President-Sales and Marketing at ATC Communications. From May 1979 until
December 1996, Mr. Bennett served as a Senior Vice President at Memorex Telex
Corporation, a worldwide integrator of enterprise network and storage systems.
Haig A. Sarkissian has served as Vice President-Sales and Marketing-OEM
Products since August 1995. From 1990 until that time, Mr. Sarkissian was
employed by AT&T Microelectronics as Manager, World Wide Marketing, DSP Modem
Products. Prior to his tenure at AT&T, Mr. Sarkissian was a field applications
manager at Standard Microsystems Corporation.
Gregory A. Williamson was appointed Vice President-Human Resources in
October 1996. Mr. Williamson has been employed by the Company since September
1995, when he joined the Company as Director of Human Resources. From 1978 to
1995, Mr. Williamson served in a variety of technical, management and
administrative positions, including Corporate Manager-Benefits with SBC
Communications Inc., a publicly held telecommunications company.
Curtis C. Fisher joined the Company as Vice President-Sales and Marketing
in January 1997. During 1996, Mr. Fisher was Vice President of the channels
management group at Access Graphics, Inc. He also was Vice President of
worldwide partnership marketing at AT&T-Global Information Solutions from 1994
to 1996. Prior to this, Mr. Fisher was the director of channels marketing at
Sun Microsystems from 1988 to 1994.
Dr. Paul J. Demko Jr. joined the Company as Vice President-Development in
January 1997. During 1996, Dr. Demko served as Vice President-Product
Development at Process Software Corp. Prior to this, Dr. Demko held executive
management positions at Centerline Software Inc. (1995-1996), Proteon, Inc.
(1992-1995), and Wang Laboratories, Inc. (1982-1992). He holds a Ph.D., M.S.
and B.S. in electrical engineering from the Massachusetts Institute of
Technology where, in the mid-1970's, he worked with the pioneers in voice coding
developing linear predictive and channel vocoders.
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Jeffrey P. Blanchard has served as a Director of the Company since August
1985 and as Chairman of the Board of Directors since October 1996.
Mr. Blanchard has been the Managing General Partner of First Capital Group of
Texas, Ltd., since January 1984. Since September 1995, Mr. Blanchard has been
the Managing General Partner of First Capital Group of Texas II, L.P., an
investment firm which provides private equity to middle-market companies
throughout the Southwest United States. From January 1989 to December 1994, Mr.
Blanchard served as Vice President and Investment Manager of Victoria Capital
Corporation, a venture capital investment company.
Matthew A. Kenny was elected to the Board of Directors in February 1995.
From 1984 until 1989, Mr. Kenny was President and CEO of RACAL-MILGO, a company
with revenues in excess of $300 million. Mr. Kenny joined Milgo in 1968. From
1989 to 1993, Mr. Kenny was Chairman of the Board and CEO of Physical Health
Devices, Inc. From 1989 to the present he has been a managing partner in
Venture Solutions, and since 1994 he has been President and CEO of Core
Technology Development, Inc., Fort Lauderdale, Florida.
George R. Grumbles was appointed to the Board of Directors in February
1995. From 1985 until his retirement in 1993, Mr. Grumbles served as a
corporate Vice President of Motorola and the President and CEO of Universal Data
Systems which he joined in 1972.
Marcelo A. Gumucio was elected to the Board of Directors in December 1995.
From April 1996 to July 1997, Mr. Gumucio served as Chief Executive Officer of
Micro Focus, Palo Alto, California. From November 1992 until joining Micro
Focus, Mr. Gumucio served as President and Chief Executive Officer of Memorex
Telex N.V., a publicly-held multinational computer company based in Amsterdam,
The Netherlands. Prior to joining Memorex Telex, Mr. Gumucio founded and led,
from August 1990 to November 1992, Gumucio, Burke and Associates, a private
investment firm in Minneapolis, Minnesota. From July 1983 to August 1990, Mr.
Gumucio held various positions, including President, Chief Executive Officer and
Director, with Cray Research, Inc., a publicly-held manufacturer of
supercomputers.
Dwight E. Lee was appointed to the Board of Directors in January 1997.
Since October 1981, Mr. Lee has served as a managing partner of Barker, Lee &
Company, a New York City based investment management firm. Mr. Lee was nominated
for election because of his extensive background in the investment community,
and brings significant board experience with both public and private companies.
Edward A. Masi was appointed to the Board of Directors in May 1997. Mr.
Masi is a veteran of the computer industry and is well-known in the high
performance computing market. From March 1992 to June 1997, Mr. Masi was a
corporate Vice President at Intel Corporation. Prior to joining Intel, Mr. Masi
worked for Cray Research from 1980 to 1992, ultimately holding the position of
Executive Vice President of Sales, Marketing and Service. Mr. Masi began his
career in 1969 at IBM, where he held various sales and marketing positions over
the course of eleven years.
5
BOARD AND COMMITTEE MEETINGS
During the fiscal year ended June 30, 1997, the Board of Directors held six
meetings. Each director attended at least 75% of the meetings of the Board of
Directors held during the period for which he was a director.
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee, composed of Messrs. Blanchard (Chairman), Grumbles, and
Kenny, 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
Gumucio, reviews and makes recommendations to the Board of Directors regarding
executive compensation matters and administers the Company's stock option plans
and employee stock purchase plan. During fiscal 1997, the Audit Committee met
one time and the Compensation Committee met seven times. Each director attended
at least 75% of the meetings, of each committee of which he was a member, held
during the period in which he was a committee member.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
directors, executive officers, and beneficial owners of more than 10% of any
class of securities of the Company to file certain forms regarding such persons'
ownership of equity securities of the Company. Based on Company records and
other information, the Company believes that its executive officers and
directors complied with all these filing requirements with respect to the fiscal
year ended June 30, 1997, except that two reports covering two transactions were
filed late by Jeffrey P. Blanchard, one report covering two transactions was
filed late by Haig A. Sarkissian, and one initial report of ownership was filed
late by Curtis C. Fisher and Dr. Paul J. Demko Jr.
6
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The Summary Compensation Table shows certain compensation information
for the fiscal years ended June 30, 1997, 1996 and 1995, for the Chief Executive
Officer and each of the other three most highly compensated executive officers
during fiscal 1997 (hereinafter referred to as the "named executive officers").
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Annual Compensation ------------
--------------------------------------- Securities
Base Underlying All Other
Year Salary ($) Bonus ($) Options(#) Compensation
--------- ---------- --------- ------------ ------------
Dr. W. B. Barker......... 1997 $ 188,125 - 30,000 $3,822(1)
President and CEO 1996 175,000 $39,712(2) - 8,500(3)
1995 31,859 11,192(2) 400,000 -
Walter D. Warren......... 1997 137,500 - 20,000 2,625(1)
Senior Vice 1996 125,000 - 61,346(4) 1,250(1)
President--Operations 1995 125,000 31,250 25,000 1,138(1)
Gregory T. Skalla........ 1997 112,500 - 25,000 2,063(1)
Vice President-- 1996 92,331 - - 2,506(1)
Finance, Chief 1995 69,350 10,000 34,000 722(1)
Financial Officer,
Secretary and
Treasurer
Haig A. Sarkissian....... 1997 75,000 91,989 25,000 1,553(1)
Vice President--OEM 1996 69,038 84,431(5) 50,000(6) 1,138(1)
Sales and Marketing
_____________
(1) Represents contributions made by the Company under the Company's 401(k)
plan.
(2) Represents guaranteed bonus pursuant to Dr. Barker's employment agreement.
(3) Represents reimbursement of relocation expenses.
(4) Effective November 28, 1995, Mr. Warren elected to reprice 81,797 stock
options pursuant to a repricing plan adopted by the Company's Board of
Directors. In connection with such repricing, 81,797 of Mr. Warren's
existing stock options were canceled and 61,346 stock options were granted
in their place.
(5) Represents a $30,000 signing bonus and $54,431 in sales commissions earned
during the fiscal year.
(6) Represents 50,000 options granted as a signing bonus.
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DIRECTOR COMPENSATION
Matthew Kenny, George Grumbles, Marcelo Gumucio, Dwight E. Lee, and Edward
A. Masi each receive compensation of $1,000 for each Board of Directors meeting
attended. Outside directors are eligible to receive options under the Company's
stock option plans and are automatically granted options under the Company's
1995 stock option plan. Outside directors are reimbursed for their out-of-
pocket expenses involved in connection with their services as directors.
Certain outside directors also receive consulting fees for services rendered
from time to time to the Company. In fiscal 1997, no such person received in
excess of $60,000 for such services.
EMPLOYMENT AGREEMENTS
Dr. W. B. Barker entered into an employment agreement with the Company on
April 25, 1995. Pursuant to such agreement, Dr. Barker receives an annual base
salary of not less than $175,000. Dr. Barker is eligible to receive an
incentive bonus, pursuant to the Company's management incentive program, of up
to 50% of his base salary. Pursuant to the agreement, if Dr. Barker is
terminated without cause he may elect to receive severance pay equal to one
year's base salary, paid in monthly installments. During the period in which
such severance payments are made, Dr. Barker is prohibited from competing
directly with the Company.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan structured to qualify under
Section 423 of the Internal Revenue Code of 1986. Under the Purchase Plan, all
full-time employees of the Company possessing less than 5% of the voting power
of the Company may elect to participate in the Purchase Plan through a payroll
deduction program. Under the Purchase Plan, options to purchase up to 200,000
shares of Company common stock may be granted to participants. As of December
9, 1997, 70,641 shares of common stock had been issued under the Purchase Plan.
The Compensation Committee, which administers the Purchase Plan,
establishes offering periods for the Purchase Plan which may last up to 24
months. Prior to each offering period, participants may authorize payroll
deductions of up to 20% of their annual compensation. At the beginning of the
offering period, participants are granted an option to purchase the number of
shares of common stock that may be purchased with the total amount of the
participant's payroll deductions taken over the offering period at an exercise
price equal to the lesser of 85% of the fair market value of the common stock on
the first day of the offering period or the last day of the offering period.
Unless the participant has withdrawn from participation, the participant's
option will be exercised automatically on the last day of the offering period.
A participant may withdraw from the Purchase Plan at any time during an
offering period. If a participant's employment with the Company terminates for
any reason other than death, disability, or retirement, his or her option to
purchase common stock under the Purchase Plan will immediately terminate, and
the amount of such participant's payroll deductions will be paid to him or her
in cash. If a participant's employment with the Company terminates due to
death, disability, or retirement, such participant (or his or her legal
representative) will have the right to continue participation in the Purchase
Plan with respect to the offering period. No option granted under the Purchase
Plan may be transferred except by will or the laws of descent and distribution.
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STOCK OPTION PLANS
Under the Company's 1988 Amended and Restated Stock Option Plan ("1988
Plan"), 1994 Stock Option Plan ("1994 Plan"), and 1995 Stock Option Plan ("1995
Plan") (collectively the "Plans"), stock options to purchase up to 1,387,500,
250,000 and 500,000 shares, respectively, of common stock were originally
authorized to be granted to employees, directors, and certain other persons. As
of December 9, 1997, stock options covering 449,928, 240,000 and 455,065 shares
of common stock were outstanding under the 1988, 1994 and 1995 Plans,
respectively, with a weighted average exercise price of $7.82 per share, and
6,419 and 34,436 shares were available for issuance upon exercise of options
which may be granted in the future under the 1988 and 1995 Plans, respectively
(no shares are available under the 1994 Plan which are not currently subject to
outstanding options). In addition, as of December 9, 1997, stock options to
purchase up to 13,507 shares of common stock were outstanding under the
Company's 1985 Stock Option Plan (the "1985 Plan"). The 1985 Plan has expired,
but options currently outstanding remain exercisable until they are exercised or
expire on an individual basis.
Options under the Plans may either be incentive stock options or non-
qualified stock options. Options under the Plans may be granted for a term not
to exceed ten years (five years with respect to incentive stock options granted
to any person having 10% or more voting power of the Company) and are not
transferable other than by will or the laws of descent and distribution.
Incentive stock options may be exercised within 90 days after the optionee's
termination of employment (to the extent exercisable prior to such termination),
and one year after the optionee's disability. The exercise price of the options
under the Plans must be at least equal to the fair market value of the common
stock on the date of grant, or 110% of such value for incentive stock options
granted to any person having 10% or more of the voting power of the Company.
The aggregate fair market value of the common stock for which any employee may
be granted incentive stock options which first become exercisable in any one
calendar year may not exceed $100,000. Options may be exercised by payment of
cash or by tender of shares of common stock (valued at their then current market
value). The Plans are administered by the Compensation Committee of the Board
of Directors.
On October 17, 1997, the Company's Board of Directors adopted the 1997 Non-
Qualified Stock Option Plan (the "1997 Non-Qualified Plan"). Under the 1997 Non-
Qualified Plan, non-qualified stock options to purchase up to 250,000 shares of
common stock may be granted to non-officer employees and to officers as an
inducement to employment. As of December 9, 1997, stock options covering 85,000
shares of common stock were outstanding under the 1997 Non-Qualified Plan with a
weighted average exercise price of $4.75 per share, and 165,000 shares are
available for issuance. Options under the 1997 Non-Qualified Plan may be granted
for a term not to exceed ten years and are not transferable other than by will
or the laws of descent and distribution. The exercise price of the options under
the 1997 Non-Qualified Plan must be at least equal to the fair market value of
the common stock on the date of grant. Options may be exercised by payment of
cash or by tender of shares of common stock (valued at their then current market
value). The 1997 Non-Qualified Plan is administered by the Compensation
Committee of the Board of Directors.
On July 18, 1997, the Company's Board of Directors adopted the 1997 Stock
Option Plan, authorizing the grant of incentive stock options and non-qualified
stock options to employees, directors and certain other persons. No options have
been granted under the 1997 Stock Option Plan. Shareholder approval of the 1997
Stock Option Plan is being sought in connection with this Proxy Statement. See
"Item 2 - 1997 Stock Option Plan."
9
STOCK OPTION GRANT TABLE
The following table sets forth certain information concerning options
granted to the named executive officers during the Company's fiscal year ended
June 30, 1997:
OPTION GRANTS IN LAST FISCAL YEAR
Number of Percent of Potential Realizable Value
Shares Total Options at Assumed Annual Rates of
Underlying Granted to Exercise or Stock Price Appreciation for
Options Employees in Base Price Expiration Option Term*
Name Granted Fiscal Year ($/Sh) Date 5%($) 10%($)
---- ---------- ------------- ---------- ---------- ------------ ------------
Dr. W. B. Barker...................... 30,000 8.4% $7.625 9/26/06 $143,861 $364,559
Walter D. Warren...................... 20,000 5.6% 7.625 9/26/06 95,907 243,039
Gregory T. Skalla..................... 25,000 7.0% 7.625 9/26/06 119,884 303,799
Haig A. Sarkissian.................... 25,000 7.0% 7.625 9/26/06 119,884 303,799
- ------------------------
* As required by rules of the SEC, potential values stated are based on the
assumption that the Company's common stock will appreciate in value from the
date of the grant to the end of the option term (ten years from the date of
grant) at annualized rates of 5% and 10% (total appreciation of approximately
63% and 159%), respectively, and therefore are not intended to forecast
possible future appreciation, if any, in the price of the common stock. The
exercise price of each option equals the fair market value of the common
stock on the grant date.
STOCK OPTION EXERCISES AND HOLDINGS TABLE
The following table shows stock options exercised by the named executive
officers during the fiscal year ended June 30, 1997, including the aggregate
value of gains on the date of exercise. In addition, the table includes the
number of shares covered by both exercisable and non-exercisable stock options
as of June 30, 1997. Also reported are the values of "in-the-money" options
which represent the positive spread between the exercise price of any such
existing stock options and the common stock price as of June 30, 1997.
10
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION VALUE
Number of
Unexercised Options Value of Unexercised In-the-Money
Shares Acquired Value at Fiscal Year-End (#) Options at Fiscal Year-End ($)
Name on Exercise (#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
---- --------------- ------------ ------------------------- --------------------------------
Dr. W. B. Barker................ 10,000 $ 30,000 265,000 / 145,000 $828,125 / $513,155
Walter D. Warren................ - - 61,696 / 46,915 371,164 / 270,379
Gregory T. Skalla............... - - 27,500 / 43,750 168,815 / 254,861
Haig A. Sarkissian.............. 12,500 112,500 0 / 62,500 0 / 451,563
- ----------------------------
* Values stated are based on the last sale price of $12.75 per share of the
Company's common stock on June 30, 1997, 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 30, 1997, Messrs. Blanchard, Grumbles
(since December 1996), Kenny (until December 1996), and Gumucio served on the
Company's Compensation Committee.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Messrs. Blanchard, Grumbles, and Gumucio in their capacity as the Board's
Compensation Committee determine the cash and other incentive compensation, if
any, to be paid to the Company's executive officers and key employees, and are
responsible for the administration and award of stock options under the
Company's stock option plans. Each member of the Compensation Committee is a
non-employee director of the Company within the meaning of Rule 16b-3 of the
Securities Exchange Act of 1934.
Set forth below is a report submitted by the Compensation Committee
addressing the Company's compensation policies for fiscal 1997 as they affected
Dr. W. B. Barker, and as they affected Haig Sarkissian, Walter D. Warren, and
Gregory T. Skalla, the three executive officers other than Dr. Barker who, for
fiscal 1997, were the Company's most highly paid executives (collectively with
Dr. Barker, the "Senior Executives").
COMPENSATION PHILOSOPHY
The Compensation Committee's compensation policies are designed to provide
levels of compensation that align base salaries with the Company's annual and
long-term performance goals, recognize individual performance and achievements,
and assist the Company in attracting and
11
retaining qualified executives. Target levels of the Senior Executives' overall
compensation are intended to be at the median of the compensation paid to senior
executives of companies in the Company's industry which have attained a size
comparable to that forecasted by the Company in the Company's strategic plan
("comparable companies"), but amounts paid are contingent upon the Company's
annual and long-term operating performance. As a result, in any particular year,
the Company's Senior Executives may be paid more or less than the executives of
the comparable companies, depending upon the Company's actual performance.
The Compensation Committee also endorses the position that stock ownership
by management and stock-based incentive compensation arrangements are beneficial
in aligning managements' and shareholders' interests in the enhancement of
shareholder value.
Compensation paid to the Company's Senior Executives in fiscal 1997
consisted primarily of three elements: base salary, cash bonuses and stock
options. The Compensation Committee's increasing emphasis on tying compensation
to performance criteria is reflected in the components of compensation received
by the Senior Executives in fiscal year 1997 as reflected in the summary
compensation table which precedes this report.
Base salaries. The base salaries paid to new management employees are
determined initially by evaluating the responsibilities of the position held and
the experience of the individual, and include references to the competitive
marketplace for management talent and comparison of base salaries for comparable
positions at comparable companies. Subject to an existing contractual
arrangement specifying a minimum annual base salary, Dr. Barker's periodic
salary adjustments are determined by evaluating the competitive marketplace, the
performance of the Company, and, to a certain extent, subjective measures of Dr.
Barker's performance.
Annual Bonuses. The Company has existing management incentive programs in
which Senior Executives participate. Performance objectives are set for both
the Company and for individual performance of the Senior Executives which form
the criteria on which the actual payments of cash bonuses are based. In
determining the actual cash bonuses paid to Senior Executives, the actual
financial performance relative to the Annual Operating Plan and the
accomplishment of individual performance objectives are weighted equally. In
fiscal 1997, because of the Company's disappointing operating results, no
discretionary bonuses were paid to the Senior Executives, regardless of
individual performance.
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 1997, stock options were
granted to retain and increase the commitment of existing employees and to
attract additional personnel to the Company.
Chief Executive Officer Compensation. The compensation paid to the Chief
Executive Officer differed from the other Senior Executives in two areas: base
salary and method of computation of cash bonus. Dr. Barker's base salary was
higher than the other Senior Executives of the Company and considered to be in
line with the base salaries of other chief executive officers of comparable
companies. Additionally, his target bonus was 50% of his base salary. 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.
12
The Compensation Committee welcomes written comment from the Company's
shareholders concerning these programs. Comments should be marked "personal and
confidential" and addressed to the Compensation Committee of the Board of
Directors, DATA RACE, Inc., 12400 Network Blvd., San Antonio, Texas 78249.
This Report on Executive Compensation is made by and on behalf of the
Company's Compensation Committee.
Respectfully submitted,
THE COMPENSATION COMMITTEE
Jeffrey P. Blanchard, George R. Grumbles,
and Marcelo A. Gumucio
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 October 7, 1992
through June 30, 1997. The Company's common stock began trading on the Nasdaq
National Market on October 7, 1992, the date of the Company's initial public
offering. In previous years, the Company compared the cumulative total
shareholder return on the its common stock to the following industry
representative peer companies: (1) Microcom Inc., (2) Penril Datacomm Networks,
(3) U.S. Robotics Inc., (4) Xircom, Inc., and (5) Zoom Telephonics Inc. However,
during the fiscal year ended June 30, 1997, Microcom Inc. was acquired by Compaq
Computer, Penril Datacomm Networks was acquired by Bay Networks, and U.S.
Robotics Inc. was acquired by 3Com Corporation. As a result of these
acquisitions, the industry representative peer companies used in the past no
longer provide a meaningful comparison against the cumulative total shareholder
return on the Company's common stock. Therefore, in the future, the Company will
compare the total cumulative shareholder return on the Company's common stock to
the cumulative total return of the Telephone and Telegraph Apparatus Industry
Index (SIC Code 3661 Index). However, as required, the following graph also
shows the cumulative total return of the two remaining industry representative
peer group companies used in previous years, Xircom, Inc. and Zoom Telephonics
Inc., for the period of October 7, 1992 through June 30, 1997. The comparison
graph assumes $100 invested on October 7, 1992, in the Company's common stock
and each index.
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, INDUSTRY INDEX AND BROAD MARKET
FISCAL YEAR ENDING
COMPANY 1992 1993 1994 1995 1996 1997
DATA RACE INC 100 115.25 37.29 72.03 45.34 86.44
SIC CODE INDEX 100 157.36 157.57 255.32 359.59 434.74
BROAD MARKET 100 121.53 133.27 156.30 196.75 237.01
CUSTOM PEER GROUP 100 160.77 133.41 92.78 146.85 112.01
14
ITEM 2
1997 STOCK OPTION PLAN
GENERAL
Effective July 18, 1997, the Board of Directors unanimously adopted the
DATA RACE, Inc. 1997 Stock Option Plan (the "1997 Option Plan") and directed
that the 1997 Option Plan be submitted to the shareholders for their approval.
The following summary of the 1997 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 1997 OPTION PLAN
Under the 1997 Option Plan, options to purchase up to 500,000 shares of
Common Stock may be granted to employees and directors of, and consultants and
advisors to, the Company or any subsidiary corporation or entity. The 1997
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 1997
Option Plan may be reoptioned thereunder. The 1997 Option Plan will be
administered by the Compensation Committee (the "Committee"), consisting of non-
employee directors. The Committee will set the specific terms and conditions of
options granted under the 1997 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. Each option may be
exercised within the term of the option pursuant to which it is granted (so long
as the optionee, if an employee, continues to be employed by the Company). In
addition, unless a shorter period is specified in a particular option agreement,
an option may be exercised within 90 days after the termination of employment of
the optionee (subject to any limitations in the particular option), within one
year after termination in case of termination because of disability, or
throughout the term of the option in the event of the optionee's death, to the
extent in each case the option was exercisable at the termination date. Upon a
change of control (as defined in the 1997 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
15
method in which a concurrent sale of the acquired stock is arranged, with the
exercise price payable in cash from such sale proceeds.
The 1997 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 1997 Option Plan and not
already reserved for other outstanding stock options, outside directors who join
the Board in the future will in addition receive an initial grant of non-
qualified options for 20,000 shares, which will become exercisable in four equal
increments beginning on the first anniversary of the award and on each of the
next three succeeding anniversary dates. Such options will be for a term of ten
years. Options, once granted and to the extent exercisable, will remain
exercisable throughout their term, regardless of whether the director continues
to serve as a director. The option exercise price of the options is equal to
100% of the fair market value of the covered shares of common stock at the time
of grant. The options granted automatically to outside directors pursuant to
the 1997 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 1995
Stock Option Plan. Consequently, upon approval of the 1997 Option Plan, the
portion of the Company's 1995 Stock Option Plan providing for automatic grants
to outside directors shall be deemed eliminated from such Plan.
The 1997 Option Plan will terminate on July 18, 2007. The Board of
Directors may, however, terminate the 1997 Option Plan at any time prior to such
date. Termination of the 1997 Option Plan will not alter or impair, without the
consent of the optionee, any of the rights or obligations pursuant to any option
granted under the 1997 Option Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general description of the federal income tax
consequences of options granted and exercised under the 1997 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 1997 Option Plan are
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code of 1986, as amended from time to time (the "Code"). These
options may only be issued to employees.
Grant and Exercise. The granting of an incentive stock option is a non-
taxable event. The exercise of an incentive stock option is also a non-taxable
event provided the option is exercised during the employment of the optionee or
within three months after the optionee's employment has been terminated;
however, the "spread" between the fair market value of the optioned stock and
the exercise price is an adjustment to alternative minimum taxable income and
may be subject to the alternative minimum tax as discussed below.
16
Disposition. The optionee will recognize gain or loss in the year in which
the shares purchased under an incentive option are sold or otherwise made the
subject of disposition. Generally, a disposition of the purchased shares will
include any transfer of legal title, including a transfer by sale, exchange or
gift, but it will not include (i) a transfer into joint ownership with right of
survivorship if the optionee remains one of the joint owners, (ii) a pledge, or
(iii) a transfer by bequest or inheritance.
For federal income tax purposes, dispositions of incentive option shares
are divided into two categories: (i) qualifying and (ii) disqualifying. A
qualifying disposition of the purchased shares will occur if the sale or other
disposition is made after the optionee has held such shares for more than two
years after the date the option is granted and more than one year after the date
the particular shares involved in the disposition are transferred to the
optionee. If the optionee fails to satisfy either of these two holding periods
prior to the sale or other disposition of the purchased shares, then a
disqualifying disposition will result.
Upon a qualifying disposition, the optionee will recognize gain or loss in
an amount equal to the amount realized upon the sale or disposition, less the
exercise price paid for such shares. Any gain recognized upon such disposition
will generally be subject to capital gain treatment. Upon a disqualifying
disposition, the optionee will recognize ordinary income in the year of
disposition in an amount equal to the excess of the fair market value of such
shares on the date of exercise over the exercise price paid for such shares. If
the disqualifying disposition is effected by means of an arms-length sale or
exchange to an unrelated party, the ordinary income will be limited to the
amount by which the amount realized, or the fair market value at the date of
exercise, whichever is less, exceeds the exercise price. The amount of ordinary
income recognized is added to the basis of the stock for purposes of determining
the additional gain, if any, on the disposition of the shares. If additional
gain is recognized, it will be subject to capital gain treatment.
Payments in Common Stock. Treasury Regulations provide the following
guidelines with respect to the delivery of shares of common stock in payment of
the exercise price of an incentive stock option:
(a) Delivered Shares-The use of shares of common stock acquired upon
the exercise of an earlier- granted incentive option to exercise an
outstanding incentive option will constitute a "disqualifying disposition"
of the delivered shares if such shares have not been held long enough to
satisfy the requisite two-year and one-year holding periods applicable to
incentive options. Such a disposition will generally render the optionee
subject to ordinary income taxation on the difference between (i) the fair
market value of the delivered shares at the time of their original purchase
and (ii) the purchase price paid for such shares. In all other cases, no
taxable income will be recognized with respect to the delivered shares.
(b) Purchased Shares-No Disqualifying Disposition. If an incentive
stock option is exercised with (i) shares of common stock acquired under an
incentive option and held for the requisite holding periods prior to
delivery, (ii) shares of common stock acquired under a non-qualified
option, or (iii) shares of common stock acquired through open-market
purchases, then the optionee will not recognize any taxable income with
respect to the shares of common stock purchased upon exercise of the
incentive stock option. To the extent the purchased shares equal in number
the shares of common stock delivered in payment of the
17
option price, the new shares will have the same basis and holding period as
the delivered shares. The balance of the purchased shares will have a zero
basis for tax purposes, and their holding period will commence on the date
these shares are transferred to the optionee. However, all the purchased
shares will be subject to the "disqualifying disposition" rules applicable
to incentive options, and the two-year and one-year holding periods will be
measured, respectively, from the date the incentive option was granted and
the date it was exercised.
(c) Purchased Shares-Disqualified Disposition. If the delivery of
shares acquired under an incentive option results in a disqualifying
disposition pursuant to the principles of paragraph (a) above, then the tax
basis and holding periods for the new shares transferred to the optionee
upon exercise of the incentive option will be determined as follows:
1. To the extent the number of new shares equals the number of
delivered shares as to which there was a disqualifying disposition,
the basis for such shares will be equal to the fair market value of
the delivered shares at the time they were originally purchased and
the holding period for these shares will, except for disqualifying
disposition purposes, include the period for which the delivered
shares were held; and
2. To the extent the number of new shares exceeds the number of
delivered shares, these shares will have a zero basis and a holding
period measured from the date of exercise of the option.
For disqualifying disposition purposes, all the shares received will be
subject to the two-year and one-year holding period requirements for incentive
option shares, measured, respectively, from the date the incentive option was
granted and the date it was exercised.
Special Rule. If the shares purchased under the incentive option are
subject to a substantial risk of forfeiture, such as the insider trading
restrictions of Section 16(b) of the Exchange Act, the amount of ordinary income
recognized by the optionee upon a disqualifying disposition will be based upon
the fair market value of such shares on the date such risk of forfeiture lapses
rather than the date the option is exercised. In the absence of final Treasury
regulations relating to incentive options, it is not certain whether such result
can be avoided by making a conditional election pursuant to Section 83(b) of the
Code at the time the incentive option is exercised.
Federal Tax Rates. Ordinary income is subject to a maximum federal tax
rate of 39.6% for dispositions occurring in 1997.
Net capital gains are subject to a maximum federal tax rate of 28% for
dispositions occurring in 1997 and, under the Taxpayer Relief Act of 1997, may
be less depending on the optionee's tax bracket, the date the asset was sold,
and the length of time the asset sold was held by the optionee.
Alternative Minimum Tax. Unless the optionee makes a disqualifying
disposition or his rights are not fully transferable or subject to a substantial
risk of forfeiture, the amount by which the value of the optioned stock at the
time of exercise exceeds the option price will increase the optionee's
alternative minimum taxable income in the year the option is exercised. If the
optionee makes a
18
disqualifying disposition in the year in which the option is exercised, the
maximum amount that will be included in alternative minimum taxable income is
the gain on the disposition of the stock. Income triggered by a disqualifying
disposition in a year other than the year of exercise will not affect the
optionee's alternative minimum taxable income.
The alternative minimum tax will generally be equal to 26% of the amount by
which the optionee's taxable excess does not exceed $175,000 ($87,500 in the
case of a married taxpayer who files a separate return) plus 28% of the amount
by which the optionee's taxable excess exceeds $175,000 ($87,500 in the case of
a married taxpayer who files a separate return). If the optionee's taxable
excess consists of net capital gain, the rate applicable to such gain for
purposes of computing the optionee's alternative minimum tax may be less under
the Taxpayer Relief Act of 1997 depending on the optionee's tax bracket, the
date the asset was sold, and the length of time the asset sold was held. The
optionee's "taxable excess" is the amount by which the optionee's alternative
minimum taxable income exceeds the optionee's exemption amount which is $45,000
for married individuals filing jointly, $33,750 for single individuals and
$22,500 for married individuals filing separately.
The allowable exemption from the alternative minimum tax is reduced by 25%
of the excess of an individual's alternative minimum taxable income for the year
over $150,000 for a married taxpayer filing a joint return, $112,500 for an
unmarried taxpayer, and $75,000 for a married taxpayer filing a separate return.
A married taxpayer who files a separate return must increase his
alternative minimum taxable income by the lesser of (i) 25% of the excess of
alternative minimum taxable income (determined without regard to this sentence)
over $165,000 or (ii) $22,500.
For purposes of determining an individual's alternative minimum taxable
income (but not regular taxable income) for any subsequent year in which the
shares are sold, the basis of such shares will be their fair market value at the
time the incentive stock option was exercised. If an individual pays
alternative minimum taxes for one or more taxable years after December 31, 1986,
the amount of such taxes (subject to certain adjustments and reductions) will be
applied as a partial credit against the individual's regular tax liability (but
not alternative minimum tax liability) for subsequent taxable years.
Employer Deduction. If the optionee makes a disqualifying disposition and
the Company complies with the income tax withholding rules, then the Company
will be entitled to an income tax deduction, for the taxable year in which such
disposition occurs, equal to the amount by which the fair market value of such
shares on the date of exercise exceeded the option exercise price. Under
proposed regulations issued by the United States Treasury Department, the
withholding requirement would be deemed met if the Company satisfies the
applicable reporting requirements even if no cash or property is actually
withheld. However, these proposed regulations have not been finalized and are
currently not in effect.
NON-QUALIFIED STOCK OPTIONS
Options issued under the 1997 Option Plan which are intended not to qualify
as incentive stock options are referred to herein as "non-qualified stock
options."
19
The taxability of non-qualified stock options is governed by Section 83 of
the Code. The recipients of non-qualified stock options will not be taxed upon
the grant of such options, because such options, which will not be actively
traded on an established market, have no readily ascertainable fair market
value. The optionee will, in general, recognize ordinary income in the year in
which the non-qualified option is exercised, equal to the excess of the fair
market value of the purchased shares at the date of exercise over the exercise
price, and the optionee, if an employee, will be required to satisfy the income
tax withholding requirements. If the shares purchased by an optionee are
subject to the insider trading restrictions of Section 16(b) of the Exchange
Act, taxation of the income may be deferred from the date of exercise to the
date the optionee becomes free to sell the shares without liability under
Section 16(b). An optionee subject to Section 16(b) restrictions may, however,
elect under Section 83(b) of the Code to include as ordinary income in the year
of exercise the fair market value of the shares received on the date of
exercise. The Section 83(b) election must be made within 30 days following the
date the non-qualified stock option is exercised, and if made, the optionee will
not recognize additional income at the time the shares may first be sold free of
the Section 16(b) restrictions. The Company will be entitled to an income tax
deduction equal to the amount of ordinary income recognized by the optionee in
connection with the exercise of the non-qualified option, provided the Company
complies with applicable income tax withholding requirements. The deduction
will, in general, be allowed for the same taxable year in which ordinary income
is recognized by the optionee.
If the option price under any non-qualified option is paid in the form of
shares of common stock previously acquired either upon the exercise of stock
options (incentive, if held for the requisite holding period, or non-qualified)
or through open-market purchases, then the optionee will not recognize any
taxable income to the extent that the shares of common stock received upon the
exercise of the option equal the number of shares of common stock delivered in
payment of the option price. For federal income tax purposes, these newly
acquired shares will have the same basis and holding period as the delivered
shares. The fair market value of additional shares of common stock received
upon the exercise of the non-qualified option will, in general, have to be
reported as ordinary income for the year of exercise. These additional shares
will have a tax basis equal to such fair market value, and their holding period
will, in general, be measured from their date of transfer to the optionee.
VOTE REQUIRED
The affirmative vote of a majority of the shares of common stock present
and entitled to vote at the Meeting is required to approve the 1997 Option Plan.
The enclosed form of Proxy provides a means for shareholders to vote for the
1997 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 1997 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 1997 STOCK OPTION PLAN.
20
ITEM 3
APPROVAL OF SECURITIES ISSUANCES
On November 12, 1997, the Company completed the first closing of a private
placement (the "Private Placement") of its Series C Convertible Participating
Preferred Stock ("Preferred Stock") and Stock Purchase Warrants ("Warrants")
with four institutional investors (the "Investors"), at an aggregate price
of $5,000,000. At such time, the Investors agreed, subject to the Company's
satisfaction of certain conditions (including shareholder approval of the
proposal described herein), to purchase at a second closing, on or before
January 29, 1998, additional shares of Preferred Stock and Warrants at an
aggregate price of $3,000,000. The Preferred Stock and Warrants and underlying
shares of the Company's Common Stock ("Common Stock") have been and will be sold
in reliance upon Regulation D promulgated under the Securities Act of 1933, as
amended.
The Board of Directors is requesting that the shareholders approve certain
issuances of Common Stock in connection with the Private Placement in accordance
with rules of the National Association of Securities Dealers, Inc. ("NASD")
applicable to Nasdaq National Market issuers.
As described below, shareholder approval of this proposal is a condition to the
Company's receipt of $3,000,000 in the second closing of the Private Placement.
In addition, failure to obtain such approval may result in the payment of cash
by the Company to fund certain redemption obligations with respect to the
Preferred Stock and Warrants, and could result in the delisting of the Common
Stock from the NASDAQ National Market.
BACKGROUND OF INVESTMENT TRANSACTION
The Company has incurred and continues to incur negative cash flows from
operations, primarily due to expenditures on the Company's new Be There!
personal multiplexer product line which are disproportionate to attendant
revenue. Until such time as the Company returns to positive cash flow from
operations, the Company's ability to sustain operations, fund the development
and marketing of new products, including the Be There! personal multiplexer, and
make future capital expenditures, is highly dependent on its ability to raise
additional capital. Accordingly, the Board of Directors believes that the
Private Placement was and is in the shareholders' best interests. The Company
intends to use the proceeds from the Private Placement to promote its Be There!
personal multiplexer product line and for general corporate working capital.
ADDITIONAL TERMS OF THE PRIVATE PLACEMENT
The Preferred Stock issued in the Private Placement does not bear dividends; has
a stated value of $1,000 per share and a liquidation preference of $1,000 per
share plus an 8% annual premium; is non-voting except in limited circumstances;
ranks junior to the 1997 Series A Convertible Preferred Stock and senior to the
Company's Common Stock in liquidation; and is redeemable by the Company at the
option of each holder upon the failure of the Company to obtain shareholder
approval of the Securities Issuances described below. In addition, the Preferred
Stock is redeemable at the option of each holder upon the occurrence of certain
major corporate transactions, the failure to register the shares of Common Stock
issuable pursuant to the Private Placement, or the breach of certain
representations, warranties or covenants of the Company under the Private
Placement documents.
The Preferred Stock is convertible into Common Stock at the option of each
holder beginning on the earlier of (i) three months after the issuance date or
(ii) the effective date of the registration statement covering the shares of
Common Stock issuable pursuant to the
21
Private Placement, at a conversion price equal to the lesser of (a) a fixed
price equal to 120% of the average of the closing bid prices of the Common Stock
for the five trading days preceding the issuance date (the "Fixed Conversion
Price ") or (b) a floating conversion price equal to 100% (subject to downward
adjustment if the Common Stock is not listed for trading on certain markets) of
the average of the three lowest closing bid prices for the Common Stock over the
22 trading days preceding the conversion date. The initial Fixed Conversion
Price is $6.435. If the average of the closing bid prices of the Common Stock
for the five trading days preceding the effective date of the registration
statement covering the shares of Common Stock issuable in the Private Placement
is less than 90% of the average of the closing bid prices of the Common Stock
for the five trading days preceding the issuance date of the Preferred Stock,
then the Fixed Conversion Price will be reduced to a price equal to 120% of such
lower five-day average price. Subject to certain limitations, all Preferred
Stock outstanding 24 months after the issuance date will convert automatically
into Common Stock at the then-applicable conversion price. The number of shares
of Common Stock issuable upon conversion of a share of Preferred Stock will
equal the share's stated value of $1,000, plus an 8% annual premium, divided by
the applicable conversion price.
The Warrants issued at the first closing are exercisable for an aggregate of
139,861 shares of Common Stock at a price of $6.435 per share. The Warrants to
be issued at the second closing will be exercisable for an aggregate number of
shares of Common Stock equal to 15% of the purchase price of the Preferred Stock
purchased at the second closing, divided by the average closing price of the
Common Stock for the five trading days preceding the issuance date, at a price
equal to the Fixed Conversion Price of the Preferred Stock purchased on such
date. The Warrants become exercisable in two equal installments on 150 days
from the date of issuance, and 270 days from the date of issuance, but only in
the same proportion which the number of shares of Preferred Stock then
outstanding bears to the number of shares of Preferred Stock initially issued.
The Warrants expire three years after the date of issuance.
Subject to certain exceptions, the investors are prohibited from effecting short
sales of the Company's Common Stock during the six-month period following the
initial closing of the Private Placement.
THE SECURITIES ISSUANCES
Pursuant to Rule 4460(i) of the NASD, issuers of securities listed on The Nasdaq
National Market must obtain shareholder approval prior to issuing shares of
common stock (or securities convertible into or exercisable for common stock),
in a private placement, equal to 20% or more of the common stock outstanding
prior to the issuance, at a price less than the greater of book or market value
of the stock. The issuance of Common Stock upon conversion of the Preferred
Stock and exercise of the Warrants could, under certain circumstances (depending
on the then-applicable conversion price of the Preferred Stock), result in the
issuance of 20% or more of the outstanding Common Stock of the Company
immediately prior to the Private Placement. Accordingly, the Company is seeking
shareholder approval of the issuance of the shares of Common Stock in the
Private Placement upon conversion of the Preferred Stock and exercise of the
Warrants (the "Securities Issuances").
In the absence of shareholder approval, the aggregate number of shares of Common
Stock that are issued at a discount from the market price pursuant to the
Private Placement may not exceed 1,108,335 shares (representing 19.99% of the
outstanding shares of Common Stock
22
on November 12, 1997). Any Preferred Stock which may not be converted or
Warrants which may not be exercised because of such limitation must be redeemed
by the Company for cash. In addition, shareholder approval is a condition to the
second closing of the Private Placement.
Approval of the Securities Issuances would authorize the Company to issue more
than 1,108,335 shares of Common Stock pursuant to the Private Placement. It is
possible that the current shareholders could incur significant dilution in the
value of their shares. Shareholders should therefore consider the potential
dilution before approving the Securities Issuances.
If the shareholders do not approve the Securities Issuances, the lack of
additional cash to be received in the second closing (subject to the other
conditions described above) and the cash requirements to fund the potential
redemption of shares of Preferred Stock and Warrants could have a material
adverse effect on the Company's ability to sustain operations, fund the
development and marketing of new products, including the Be There! personal
multiplexer, and make future capital expenditures. In addition, failure to
obtain shareholder approval of the Securities Issuances could result in the
delisting of the Common Stock from the Nasdaq National Market. In order for the
Common Stock to continue to be listed on the Nasdaq National Market, the Company
is required to satisfy certain maintenance criteria, including minimum net
tangible asset requirements. Due to the character of the Preferred Stock and the
manner in which it must be accounted for, failure to obtain shareholder approval
of the Securities Issuances could have the effect of preventing the Company from
satisfying such minimum net tangible asset requirements. The termination of the
listing of the Common Stock on the Nasdaq National Market could have a material
adverse effect on the market price and liquidity of the Common Stock and the
Company's ability to raise additional capital.
VOTE REQUIRED
The affirmative vote of a majority of the shares of common stock present and
entitled to vote at the Meeting is required to approve the Securities Issuances.
The enclosed form of Proxy provides a means for shareholders to vote for the
approval of the Securities Issuances, to vote against it or to abstain from
voting with respect to it. Each Proxy received in time for the Meeting will be
voted as specified therein. IF A SHAREHOLDER EXECUTES AND RETURNS A PROXY, BUT
DOES NOT SPECIFY HOW THE SHARES REPRESENTED BY SUCH SHAREHOLDER'S PROXY ARE TO
BE VOTED, SUCH SHARES WILL BE VOTED FOR THE APPROVAL OF THE SECURITIES
ISSUANCES. In determining whether this Item has received the requisite number of
affirmative votes, abstentions will be counted and will have the same effect as
a vote against this proposal. Broker non-votes will not be counted and will have
no effect.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE APPROVAL OF
THE ISSUANCES SECURITIES.
23
ITEM 4
RATIFICATION OF SELECTION OF ACCOUNTANTS
The Board of Directors has selected KPMG Peat Marwick LLP as the
independent accountants of the Company for fiscal 1998. KPMG Peat Marwick LLP
has served as the independent accountants of the Company since June 1989. A
representative of KPMG Peat Marwick LLP will be present at the Meeting, will
have an opportunity to make a statement if he or she desires to do so and will
be available to respond to appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" RATIFICATION
OF THE SELECTION OF KPMG PEAT MARWICK LLP AS THE COMPANY'S INDEPENDENT
ACCOUNTANTS FOR FISCAL 1998. The affirmative vote of a majority of the shares
of common stock present and entitled to vote is required to ratify the selection
of the Company's accountants. The enclosed form of Proxy provides a means for
shareholders to vote for the ratification of selection of independent
accountants, to vote against it or to abstain from voting with respect to it.
IF A SHAREHOLDER EXECUTES AND RETURNS A PROXY, BUT DOES NOT SPECIFY HOW THE
SHARES REPRESENTED BY SUCH SHAREHOLDER'S PROXY ARE TO BE VOTED, SUCH SHARES WILL
BE VOTED FOR THE RATIFICATION OF SELECTION OF INDEPENDENT ACCOUNTANTS. In
determining whether this item has received the requisite number of affirmative
votes, abstentions will be counted and will have the same effect as a vote
against this Item. Broker non-votes will not be counted and will have no
effect.
OTHER MATTERS
The Company's management knows of no other matters that may properly be, or
which are likely to be, brought before the meeting. However, if any other
matters are properly brought before the meeting, the persons named in the
enclosed proxy, or their substitutes, will vote in accordance with their best
judgment on such matters.
SHAREHOLDER PROPOSALS
The Company intends to conduct the next annual meeting for stockholders in
October 1998. Proposals by shareholders intended to be presented at the annual
meeting to be held in 1998 must be received by the Company by June 15, 1998 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.
24
COST AND METHOD OF PROXY SOLICITATION
The accompanying Proxy is being solicited on behalf of the Board of
Directors of the Company. The expense of preparing, printing and mailing the
form of Proxy and the material used in the solicitation thereof will be borne by
the Company. In addition to the use of the mails, proxies may be solicited by
personal interview, telephone and telegram by directors, officers and employees
of the Company, and also by a proxy solicitation firm engaged for such purpose.
In the event a proxy solicitation firm is engaged, the Company will pay to such
firm customary fees for the firm's services and will bear the firm's reasonable
out-of-pocket expenses. Arrangements may also be made with brokerage houses and
other custodians, nominees and fiduciaries for forwarding of solicitation
materials to the beneficial owners of stock held by such persons, and the
Company may reimburse them for reasonable outofpocket expenses incurred by them
in connection therewith.
BY ORDER OF THE BOARD OF DIRECTORS
GREGORY T. SKALLA, SECRETARY
25
APPENDIX A
DATA RACE, INC.
1997 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, and certain other specific terms and conditions of such Options subject
to the terms and conditions contained herein, including outside director Options
as set forth in Section 5(F). Notwithstanding anything in this Plan to the
contrary, the full Board of Directors of the Company shall determine whether any
member of the Committee shall be granted Nonqualified Stock Options (as defined
below) under the Plan which are in addition to those automatically granted
pursuant to Section 5(F), the terms and provisions of the respective agreements
evidencing such options, the times at which such options shall be granted, and
the number of shares of Common Stock subject to each such option and shall make
all determinations under the Plan with respect to such options (which
determinations of the Board of Directors shall be conclusive).
The Committee shall have the sole authority and power, subject to the
express provisions and conditions hereof, to construe this Plan and the Options
granted hereunder, and to adopt, prescribe, amend, and rescind rules and
regulations relating to this Plan, and to make all determinations necessary or
advisable for administering this Plan. The Committee shall also have the
authority and power to modify any provision of this Plan to render the Plan
consistent with any amendments to Rule 16b-3 or Form S-8 of the Securities Act
of 1933, as amended (the "Securities Act"), including amendments which permit
the grant of Options on terms which are less restrictive than the terms set
forth herein. The interpretation by the Committee of any provision of this Plan
with respect to any incentive stock option granted hereunder shall be in
accordance with section 422 of the
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Internal Revenue Code of 1986 and the regulations issued thereunder, as amended
from time to time (the "Internal Revenue Code"), in order that the incentive
stock options granted hereunder ("Incentive Stock Options") shall constitute
"incentive stock options" within the meaning of section 422 of the Internal
Revenue Code. Options granted under the Plan which are not intended to be
Incentive Stock Options are referred to herein as "Nonqualified Stock Options."
The term "Options" as used herein shall refer to Incentive Stock Options and
Nonqualified Stock Options, either collectively or without distinction. The
interpretation and construction by the Committee, if any, of any provisions of
the Plan or of any Option granted hereunder shall be final and conclusive. No
member of the Committee shall be liable for any action or determination made in
good faith with respect to the Plan or any Option granted hereunder.
4. SHARES SUBJECT TO THE PLAN. Subject to the provisions of Section 6,
--------------------------
the number of shares subject to Options granted hereunder shall not exceed
500,000 shares of the Company's authorized but unissued or reacquired Common
Stock (the "Common Stock"). 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.
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
day 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 System, if the Common Stock closing price is then reported on
the NASDAQ National Market System, or, if the Common Stock closing price of the
Common Stock is not then reported by the NASDAQ National Market System, 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 by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") or, if
the Common Stock is not then quoted by NASDAQ, as furnished by any member of the
National Association of Securities Dealers, Inc. selected from time to time by
the Company for that purpose. If no member of the National Association of
Securities Dealers, Inc. furnishes quotes with respect to the Common Stock of
the Company, such fair market value shall be determined by resolution of the
Committee. Notwithstanding the foregoing provisions of this Section 5(A), if
the Committee shall at any time determine that it is impracticable to apply the
foregoing methods of determining fair market value, the
A-2
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 is then traded on NASDAQ or one or more securities exchanges, by delivery of
the equivalent fair market value of Common Stock or by a "cashless exercise"
procedure in which an Optionee is permitted to exercise an Option by arranging
with the Company and his or her broker to deliver the appropriate Option Price
from the concurrent market sale of the acquired shares, or a combination of the
foregoing (subject to the discretion of the Committee). An employee's
withholding tax due upon exercise of a Nonqualified Stock Option may be
satisfied either by a cash payment or the retention from the exercise of a
number of shares of Common Stock with a fair market value equal to the required
withholding tax, as the Committee may permit.
In addition, with respect to the exercise of any Nonqualified Stock
Option, the Committee (or an authorized representative) shall advise the
Optionee, upon receipt of notice of intent to exercise such Option, of the
income tax withholding consequences to such Optionee of such exercise, the
amount of the appropriate withholding tax and any other payments due by reason
thereof. Such Optionee must satisfy all of the preceding payment requirements
in order to receive stock upon exercise of such Option.
(B) OPTION PERIOD. Any Options granted pursuant to this Plan must be
-------------
granted within ten years from the date the Plan was adopted by the Board of
Directors of the Company (July 18, 1997).
Each Option shall state the date upon which it is granted. Each
Option shall be exercisable during such period as is provided under the terms of
the Option, but in no event shall an Option be exercisable after the expiration
of ten years from the date of grant. Except in the case of death or disability,
Incentive Stock Options may be exercised within 90 days (or for such shorter
period as may be specified in the particular Option) after termination of
employment to the extent such Options were exercisable at the date of
termination, and Nonqualified Stock Options may be exercised after termination
of employment or other service to the Company for such period as may be
specified in the particular Option. In the event of the disability of an
Optionee, Incentive Stock Options may be exercised for up to one year after
disability of the Optionee, to the extent exercisable prior to the date of
disability. Nonqualified Stock Options may be exercised following the
Optionee's death or disability and Incentive Stock Options may be exercised
following the Optionee's death by such Optionee or by his or her estate, heirs,
or devisees, as the case may be, for such period thereafter as may be specified
in the particular 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.
A-3
(D) LIMIT ON 10% SHAREHOLDERS. No Incentive Stock Option may be
-------------------------
granted under this Plan to any individual who would, immediately after the grant
of such Incentive Stock Option directly or indirectly own more than 10% of the
total combined voting power of all classes of stock of the Company or of any
parent or subsidiary corporation unless (i) such Incentive Stock Option is
granted at an Option Price not less than 110% of the fair market value of the
shares on the date the Incentive Stock Option is granted, and (ii) such
Incentive Stock Option expires on a date not later than five years from the date
the Incentive Stock Option is granted.
(E) LIMITS ON OPTIONS. An individual may be granted one or more
-----------------
Options, provided that the aggregate fair market value (determined as of the
time the Option is granted) of Common Stock for which an individual may be
granted Incentive Stock Options that are first exercisable in any calendar year
(under all stock option plans of the Company and any parent or subsidiary
corporations, if any) may not exceed $100,000.
(F) OUTSIDE DIRECTORS OPTIONS. Each outside director of the Company
-------------------------
(that is, each director who is not also an employee of the Company) shall be
automatically granted Nonqualified Options for 2,500 shares on an annual basis
on the fifth business day following the first public announcement, filing or
release of the Company's net income for the Company's preceding fiscal year.
Such annually awarded Options shall become exercisable in whole or in part from
time to time upon the first anniversary following the date of grant. In
addition to such automatic annual awards, each new outside director elected or
appointed to the Company's Board of Directors on or after the date of approval
of the Plan by the shareholders of the Company shall receive upon such election
or appointment an automatic award of Nonqualified Options for 20,000 shares of
Common Stock, which shall become exercisable in four equal annual installments,
beginning on the first anniversary of the date of grant. All of the foregoing
Options, once granted and to the extent they have become exercisable, shall
remain exercisable throughout their term, regardless of whether the holder
continues to serve as a director, and such term shall expire on the tenth
anniversary following the date of grant. To the extent any such Option is not
yet exercisable upon termination of service, such Option shall be terminated.
The Option Price for all such automatic awards shall be equal to 100% of the
fair market value of the covered shares of Common Stock at the time of grant.
The options granted to outside directors pursuant to this Section 5(F) shall be
in lieu of, and not in addition to, any additional options (excluding currently
outstanding options) which would otherwise have been granted to outside
directors pursuant to the Company's 1995 Stock Option Plan adopted in October
1995. Accordingly, upon approval of this Plan by the shareholders of the
Company, Section 5(F) of the 1995 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,
A-4
further restrictions upon the exercise of the Option. Any Incentive Stock Option
shall contain such limitations and restrictions upon the exercise of the Option
as shall be necessary in order that the Option shall be an "incentive stock
option" as defined in section 422 of the Internal Revenue Code.
(I) COMPLIANCE WITH SECURITIES LAWS. At the time of exercise of any
-------------------------------
Option, the Company may require the Optionee to execute any documents or take
any action which may then be necessary to comply with the Securities Act and the
rules and regulations adopted thereunder, or any other applicable federal or
state laws regulating the sale and issuance of securities, and the Company may,
if it deems necessary, include provisions in the Options to assure such
compliance. The Company may from time to time change its requirements with
respect to enforcing compliance with federal and state securities laws,
including the request for, or insistence upon, letters of investment intent,
such requirements to be determined by the Company in its judgment as necessary
to assure 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 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
A-5
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.
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,
impair any rights under any Option previously granted under this Plan.
A-6
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR AN ANNUAL MEETING OF SHAREHOLDERS ON JANUARY 12, 1998
The undersigned hereby appoints Dr. W.B. Barker and Gregory T. Skalla, and
each of them, proxies, with the powers the undersigned would possess if
personally present, and with full power of substitution, to vote at the annual
meeting and at any adjournment thereof, all common shares of the undersigned in
DATA RACE, Inc. held of record 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
individual nominee and write that name from the list below on the line
below.
____________________________________
NOMINEES
Dr. W.B. Barker Jeffrey P. Blanchard Matthew A. Kenny
George R. Grumbles Marcelo A. Gumucio Dwight E. Lee Edward A. Masi
2. 1997 Stock Option Plan.
FOR: [_] AGAINST: [_] ABSTAIN: [_]
3. Approval of Securities Issuances.
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.
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SIGNATURE(S)
DATE:
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