SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
ELXSI CORPORATION
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: NA
(2) Aggregate number of securities to which transaction applies: NA
(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): NA
(4) Proposed maximum aggregate value of transaction: NA
(5) Total fee paid: NA
[ ] 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: NA
(2) Form, Schedule or Registration Statement No.: NA
(3) Filing Party: NA
(4) Date Filed: NA
<PAGE>
[Preliminary Copies]
ELXSI CORPORATION
3600 RIO VISTA AVENUE, SUITE A
ORLANDO, FLORIDA 32805
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY __, 1999
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of ELXSI
Corporation, a Delaware corporation (the "Company"), will be held at the
Company's headquarters, located at 3600 Rio Vista Avenue, Suite A, Orlando,
Florida 32805, on __________, May ___, 1999, at 9:00 a.m. (local time), for the
following purposes:
1. To elect a Board of Directors.
2. To approve the ELXSI Corporation 1999 Incentive Stock Option
Plan.
3. To approve an amendment to the Company's charter in order to
effect: (i) a 1-for-100 reverse stock split of the outstanding
shares of Common Stock in order to cash-out of stockholders
holding less than 100 shares, and (ii) immediately thereafter,
a 100-for-1 forward stock split resulting in the stock
ownership of all non-cashed out stockholders being restored to
pre-existing levels.
4. To ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for the current fiscal year.
5. To transact such other and further business as may properly
come before the meeting or any adjournment or adjournments
thereof.
Common stockholders of record at the close of business on March 31,
1999 are entitled to notice of and to vote at the meeting. A complete list of
such stockholders is open to the examination of any stockholder for any purpose
germane to the meeting, during ordinary business hours, at the offices of the
Company, located at 3600 Rio Vista Avenue, Suite A, Orlando, Florida 32805.
Stockholders of record can vote their shares by using the Internet or the
telephone. Instructions for using these convenient services are set forth on the
enclosed form of Proxy. Of course, you may also vote your shares by marking your
vote on the enclosed form of Proxy, signing it and dating it, and mailing it in
the enclosed envelope.
A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 is enclosed herewith.
By Order of the Board of Directors,
Thomas R. Druggish, Secretary
Dated: April ___, 1999
YOU ARE URGED TO FILL IN, SIGN, DATE AND MAIL THE ENCLOSED FORM OF
PROXY. IF YOU ATTEND THE MEETING AND VOTE IN PERSON, YOUR PROXY WILL NOT BE
USED. PLEASE VOTE BY USING THE INTERNET, THE TELEPHONE OR BY SIGNING AND DATING
THE ENCLOSED FORM OF PROXY. IF YOUR PROXY IS MAILED IN THE UNITED STATES IN THE
ENCLOSED ENVELOPE, NO POSTAGE IS REQUIRED. THE PROMPT RETURN OF YOUR PROXY WILL
SAVE THE COMPANY THE EXPENSE INVOLVED IN FURTHER COMMUNICATION.
<PAGE>
[Preliminary Copies]
ELXSI CORPORATION
3600 RIO VISTA AVENUE, SUITE A
ORLANDO, FLORIDA 32805
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY __, 1999
April __, 1999
To the Stockholders:
This Proxy Statement is furnished to you in connection with the
solicitation by the Board of Directors of ELXSI Corporation, a Delaware
corporation (the "Company"), of Proxies in the accompanying form to be used at
the Annual Meeting of Stockholders to be held at the Company's headquarters,
located at 3600 Rio Vista Avenue, Suite A, Orlando, Florida 32805, on _________,
May __, 1999, at 9:00 a.m. (local time), and at any subsequent time which may be
made necessary by the adjournment thereof.
If you were a holder of record of Common Stock, par value $.001 per
share, of the Company (the "Common Stock") at the close of business on March 31,
1999, you are entitled to vote at the meeting, and your presence is desired. If,
however, you cannot be present in person, a form of Proxy (Proxy card) is
enclosed, which the Board of Directors of the Company requests that you execute
and return as soon as possible. You can, of course, revoke your Proxy at any
time before it is voted if you so desire, either in person at the meeting or by
delivery to the Secretary of the Company of a duly executed written statement to
that effect or of a later-dated Proxy.
The Company is paying all costs of the solicitation of Proxies,
including the expenses of printing and mailing to its stockholders this Proxy
Statement, the accompanying Notice of Annual Meeting of Stockholders, the form
of Proxy, and the Annual Report on Form 10-K. The Company has engaged
Continental Stock Transfer & Trust Company to assist the Company in the
distribution and solicitation of Proxies and has agreed to pay Continental Stock
Transfer & Trust Company a fee of $3,000 plus expenses for its services. The
Company will also reimburse brokerage houses and other custodians, nominees and
fiduciaries for their expenses, in accordance with the regulations of the
Securities and Exchange Commission (the "Commission"), in sending Proxies and
proxy materials to the beneficial owners of the Common Stock. Officers or
employees of the Company may also solicit Proxies in person, or by mail, E-mail,
facsimile or telephone, but such persons will receive no compensation for such
work, other than their normal compensation as such officers or employees.
At the close of business on March 31, 1999, 4,453,463 shares of Common
Stock were outstanding and are entitled to vote at the Annual Meeting. Each
outstanding share of Common Stock is entitled to one vote. This Proxy Statement
and the enclosed form of Proxy are first being mailed to the stockholders of the
Company on or about April __, 1999.
<PAGE>
PROXIES AND VOTE REQUIRED
The persons named in the accompanying form of Proxy intend to vote
Proxies FOR the election of the nominees for director named herein, except to
the extent authority to vote for any such nominee is withheld. In the event that
any nominee at the time of election shall be unable to serve, for good cause is
unwilling to serve or is otherwise unavailable for election (which contingency
is not now contemplated or foreseen), and in consequence thereof another
individual shall be nominated, the persons named in the accompanying form of
Proxy shall have the discretion and authority to vote or to refrain from voting
in accordance with their judgment on the substitute(s) for such nominee. The
persons named in the accompanying form of Proxy also intend to vote Proxies FOR
the approval of the ELXSI Corporation 1999 Incentive Stock Option Plan (Proposal
No. 2 herein), FOR the charter amendments to effect a 1-for-100 reverse stock
split followed by a 100-for-1 forward stock split (Proposal No. 3 herein) and
FOR the ratification of the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants (Proposal No. 4 herein), unless (in each case)
contrary voting instructions are indicated on such Proxies.
The presence in person or by proxy of a majority of the shares of
Common Stock outstanding and entitled to vote at the meeting is required for a
quorum. If a quorum is present, those nominees receiving a plurality of the
votes cast will be elected. Accordingly, shares not voted in the election of
directors (including shares covered by a Proxy as to which authority is withheld
to vote for all nominees) and shares not voted for any particular nominee
(including shares covered by a Proxy as to which authority is withheld to vote
for only one or less than all of the nominees) will not prevent the election of
any of the nominees for director. Approval of Proposal No. 3 requires the
affirmative vote of a majority of the outstanding shares of Common Stock. For
all other matters submitted to stockholders at the meeting, including Proposal
Nos. 2 and 4, if a quorum is present the affirmative vote of a majority of the
shares voted is required for approval. As a result, abstention votes with
respect to Proposal No. 2, 3 or 4 will have the effect of a vote against such
Proposal.
Shares of Common Stock held by brokers and other stockholder nominees
are sometimes voted on certain matters but not others. This can occur, for
example, when a broker is instructed by the beneficial owner, or has
discretionary authority, to vote on a particular matter or matters (such as the
election of directors and appointment of accountants) but is not instructed, and
does not have such authority, to vote on others. These are known as "non-voted"
shares. Non-voted shares will be counted for purposes of determining whether
there is a quorum at the meeting, but will have no effect upon the outcome of
the vote on any matter as to which they are "non-voted."
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
(ITEM 1 ON PROXY CARD)
The Board of Directors of the Company currently consists of five
individuals, each of whom has been nominated for election at the meeting.
Directors are to be elected to hold office until the next Annual Meeting of
Stockholders and until their respective successors shall have been elected and
qualified, or until their resignation, removal or death or otherwise as provided
in the Bylaws of the Company. The names of the five directors of the Company,
and certain information regarding the Common Stock holdings of each such
individual, of the one non-director executive officer of the Company who is
named in the "Executive Compensation" section hereinbelow and of the executive
officers and directors of the Company as a group, based on information which
such persons have furnished to the Company, are set forth below.
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<PAGE>
COMMON STOCK OF THE
COMPANY BENEFICIALLY OWNED
AS OF APRIL 12, 1999(1)
--------------------------
DIRECTOR NUMBER OF PERCENT
NAME SINCE SHARES OF CLASS
- ---- -------- ------------- ---------
Farrokh K. Kavarana ...... 1989 56,600(2) 1.3%
Kevin P. Lynch ........... 1989 112,697 2.7%
Alexander M. Milley ...... 1989 2,219,697(3) 46.5%
Robert C. Shaw ........... 1989 83,978 1.9%
Denis M. O'Donnell ....... 1996 29,900 0.8%
Daniel E. Bloodwell ...... N/A 8,083 0.2%
All executive officers and
directors as a group (7 persons) 2,533,537(2)(3) 49.7%
- ---------------
(1) Numbers and percents in the table and footnotes are calculated in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934,
as amended ("Rule 13d-3"). Each of the named persons and group has sole
voting and dispositive power with respect to the shares shown, except
as otherwise indicated. Includes shares issuable upon exercise of stock
options granted by the Company that are exercisable currently or within
60 days, as follows: Farrokh K. Kavarana: 55,000 shares; Kevin P.
Lynch: 116,000 shares; Alexander M. Milley: 199,000 shares; Robert C.
Shaw: 72,500 shares; Denis M. O'Donnell: 22,500 shares; Daniel E.
Bloodwell: 6,943 shares; and all executive officers and directors as a
group: 524,543 shares. Excludes shares issuable upon exercise of stock
options granted by the Company that become exercisable in more than 60
days, as follows: Kevin P. Lynch: 14,000 shares; Alexander M. Milley:
6,000 shares; Daniel E. Bloodwell: 4,588 shares; and all executive
officers and directors as a group: 32,588 shares.
(2) Excludes an aggregate of 325,940 shares of Common Stock held by Aggel
Enterprises, Ltd. and certain affiliated entities. Mr. Kavarana is
affiliated with the controlling shareholders of Aggel Enterprises, Ltd.
and its affiliates. See "Security Ownership of Certain Beneficial
Owners." Also excludes 3,334 shares of Common Stock issuable upon
exercise of stock options held by Tata International AG, with which Mr.
Kavarana is affiliated. Mr. Kavarana disclaims beneficial ownership of
all of the foregoing shares.
(3) Includes: (i) 112,347 outstanding shares and 118,762 shares of Common
Stock issuable upon the exercise of currently exercisable warrants held
by Eliot Kirkland L.L.C., of which Mr. Milley is the sole manager, the
President and a member; (ii) 215,288 shares held by Cadmus Corporation,
of which Mr. Milley is the Chairman, President and an indirect
controlling shareholder; (iii) 590,200 shares held by ELX Limited
Partnership, of which Mr. Milley is the sole general partner; (iv)
228,200 shares held by Azimuth Corporation, of which Mr. Milley is the
Chairman, President and (in combination with Cadmus Corporation) a
controlling stockholder; and (v) 730,900 shares held by Peter R.
Kellogg or other "Kellogg Persons" party to the Kellogg Standstill
Agreement (see "Certain Transactions - Rights Agreement Amendment;
Kellogg Standstill Agreement"), over which Mr. Milley has sole voting
power but no dispositive power. Excludes 60,004 shares of Common Stock
held by The Alexander M. Milley Irrevocable Trust I (the "Milley
Trust"), a trust for the benefit of certain members of Mr. Milley's
immediate family, and 150,500 shares of Common Stock issuable upon the
exercise of currently exercisable warrants held by the Milley Trust.
Under Rule 13d-3, shares beneficially owned by the Milley Trust as
determined thereunder are deemed not to be beneficially owned by Mr.
Milley. Also includes and excludes shares issuable upon exercise of
stock options granted by the Company to Mr. Milley as indicated in
footnote 1 above.
3
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is certain biographical information regarding the
directors and executive officers of the Company, some of whom hold positions
with the Company's wholly-owned subsidiary, ELXSI ("ELXSI"), ELXSI's Bickford's
Family Restaurants Division ("Bickford's") and/or ELXSI's Cues Division
("Cues"). Each individual's biographical information was furnished by him to the
Company.
NAME AGE POSITION
- ---- --- --------
Alexander M. Milley(1)(2) 46 Chairman, President and Chief Executive
Officer of the Company and ELXSI,
President of Cues
Farrokh K. Kavarana(2)(3) 54 Director
Kevin P. Lynch(1)(3) 40 Director, Vice President of the Company
and ELXSI
Denis M. O'Donnell(2)(3) 45 Director
Robert C. Shaw(1) 46 Director, Vice President of the Company
and ELXSI
Thomas R. Druggish 43 Vice President of the Company,
Treasurer and Secretary of the Company
and ELXSI
Daniel E. Bloodwell 48 Vice President of ELXSI, President of
Bickford's
- ----------
(1) Member of the Executive Committee of the Board.
(2) Member of the Compensation Committee of the Board.
(3) Member of the Audit Committee of the Board.
Alexander M. Milley became Chairman of the Board of Directors and Chief
Executive Officer of the Company on September 25, 1989 and was elected President
of the Company in August 1990. He serves in the same positions for ELXSI and is
also President and Chief Executive Officer of Cues. Mr. Milley is the founder,
President, sole director and majority shareholder of Milley Management
Incorporated ("MMI"), a private investment and management consulting firm. Mr.
Milley is also the President of Cadmus Corporation ("Cadmus"), another private
investment and management consulting firm that is the former owner of Cues and
with which ELXSI has a management agreement. See "Certain Transactions -
Management Agreement." From August 1985 to May 1986, Mr. Milley was Chairman of
Neoax, Inc., now an environmental services company known as Envirosource, Inc.
and then a diversified custom vehicle and precision metal manufacturing company.
Mr. Milley was Senior Vice President-Acquisitions from December 1983 until July
1986 of The Dyson-Kissner-Moran Corporation, a private investment company. Mr.
Milley is also a director of Bell National Corporation ("Bell National"),
formerly a distributor of high quality fabrics used in draperies and furniture
and now a
4
<PAGE>
development-stage entity primarily engaged in the design, development and
marketing of a series of instruments, disposables, and tests to provide "Point
of Care" enhanced cervical cancer screening, and Chairman of the Board of
Azimuth Corporation ("Azimuth"). Cadmus and Azimuth are significant stockholders
of the Company. See "Security Ownership of Certain Beneficial Owners."
Farrokh K. Kavarana became a director of the Company on September 25,
1989. Since 1994 he has been an Executive Director of the Tata Engineering and
Locomotive Company, Limited (TELCO), a member of the Tata Group of India. Prior
to that he had been Vice-Chairman and Managing Director of Tata International
AG, an international holding company, which owns the Tata Group's overseas
holdings and investments. Mr. Kavarana is a director of numerous non-U.S.
companies, including Tata Industries Ltd., Tata Sons Ltd. of India, Tata
International AG, Switzerland, and Tata Technologies, Ptc. Ltd., Singapore
(formerly Tata-ELXSI). Mr. Kavarana is affiliated with the Tata Group, whose
overseas affiliates are controlling shareholders of Aggel Enterprises, Ltd., an
investment holding company. See "Security Ownership of Certain Beneficial
Owners."
Kevin P. Lynch became a director of the Company on September 25, 1989
and has served as Vice President of the Company since September 24, 1991 and
Vice President of ELXSI since June 25, 1991. He has served as a Vice President
of MMI since September 1988 and of Cadmus since January 1994. See "Certain
Transactions - Management Agreement." From October 1986 until September 1988,
Mr. Lynch was a Corporate Development executive at Macmillan, Inc., a publishing
company.
Denis M. O'Donnell became a director of the Company on May 23, 1996.
Since 1997, he has been Managing Director of Seaside Advisors, L.L.P., an
investment fund specializing in small capitalization private placements. Since
1998, Mr. O'Donnell has been a director of Novavax, Inc., a company engaged in
the development of pharmaceutical products. Prior thereto, he was a Senior
Advisor to Novavax from 1997 and its President from 1995 to 1997. Since 1998,
Mr. O'Donnell has been a director of Bell National, and since 1999, Mr.
O'Donnell has been a director of Columbia Laboratories, Inc., a pharmaceutical
company.
Robert C. Shaw became Vice President and a director of the Company on
September 25, 1989 and Executive Vice President on December 19, 1989. He also
served as Treasurer of the Company from September 1989 to January 1990. Mr. Shaw
has been a Vice President of MMI since March 1989, an officer and/or director of
Azimuth and/or certain subsidiaries thereof since November 1990, a director of
Cadmus since January 1992 and a director of Bell National since November 1989.
See "Certain Transactions - Management Agreement." Prior to March 1989, he was
Vice President of Berkeley Softworks Incorporated ("Berkeley") from September
1987 until March 1989. From January 1987 until September 1987 he was Vice
President, and from July 1985 until January 1987 he was Director of Finance and
Operations, of Ansa Software Incorporated ("Ansa"). Berkeley and Ansa developed
and produced personal computer software.
Thomas R. Druggish became Vice President of the Company on January 2,
1990 and was elected Secretary of the Company on September 11, 1990. He also has
been Secretary and Treasurer of MMI since September 1990, Vice President and
Secretary of Cadmus since November 1992 and an officer and/or director of
Azimuth and/or certain subsidiaries thereof since November 1990. See "Certain
Transactions - Management Agreement." Mr. Druggish was Assistant Controller at
Borland International from April 1987 to December 1989.
Daniel E. Bloodwell became a Vice President of ELXSI on September 24,
1991, and has served as President of Bickford's since July 1, 1991. From July
1987 to June 1991 Mr. Bloodwell was Vice President of Operations for Marriott
Family Restaurants Inc., which then owned the Bickford's operations. From July
1985 to June 1987, Mr. Bloodwell was Vice President of Operations of Sizzler
Restaurants, Inc.
5
<PAGE>
COMMITTEES; BOARD AND COMMITTEE MEETINGS
The Board of Directors has an Executive Committee, a Compensation
Committee and an Audit Committee, whose members are elected each year by the
entire Board.
The Executive Committee's function is to act in place of the Board
between meetings of the full Board. During the year ended December 31, 1998 the
Executive Committee did not meet. The members of the Committee are Messrs.
Milley, Lynch, and Shaw.
The Compensation Committee's function is to administer the Company's
stock option and other compensation plans and to act upon such other
compensation matters as may be referred to it by the Board. The current members
of the Committee are Messrs. Milley, Kavarana, and O'Donnell. During the year
ended December 31, 1998, the Compensation Committee met one time.
The Audit Committee oversees the Company's internal accounting
procedures and consults with, and reviews the reports of, the Company's
independent accountants. The current members of the Committee are Messrs.
Kavarana, Lynch, and O'Donnell. During the year ended December 31, 1998, the
Audit Committee met one time. At such meeting, the Company's auditors presented
a report to the Audit Committee indicating (among other things) there were no
irregularities involving the Company's accounting.
During the year ended December 31, 1998 the Board of Directors of the
Company met four times. All directors attended all of the meetings.
From time to time the Board of Directors is asked to consider and vote
upon matters which may present a conflict of interest for certain members. It is
the Company's practice to not disqualify any Board member from voting with
respect to such matters. In bringing conflict-of-interest (as well as other)
matters before the Board, management generally seeks to secure the unanimous
approval of directors; such unanimous approval has been obtained on virtually
all matters heretofore voted upon by present Board members.
COMPENSATION OF DIRECTORS
CASH COMPENSATION. Since 1989 the directors of the Company have
received no cash compensation for their services as such, except for
reimbursement of reasonable expenses of attending meetings. There are currently
no plans to begin paying cash compensation to directors.
OTHER COMPENSATION. During 1998 each director of the Company received
as compensation for his services as such options to purchase 7,500 shares
granted under the Company's 1998 Incentive Stock Option Plan. Each such option
is exercisable at a price of $8.125 per share, the market price of the Common
Stock on the date of the grant, and expires on October 8, 2008.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee believes that offering its executive
officers a compensation package consisting of a balanced combination of fixed,
formula-based, long-term and discretionary components is the best way of
ensuring that (a) executive compensation is appropriately linked to the creation
of shareholder value, and (b) the Company will be able to attract, motivate and
retain executives of outstanding abilities. Fixed compensation is paid through
base salaries, which the Committee believes should be and are maintained at
levels comparable to those generally paid to executives with similar
responsibilities at similarly-sized companies. The
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<PAGE>
other parts of total compensation are realized through the Company's bonus
arrangements, its stock option plans and its Bickford's Division Phantom Stock
Option Plan (the "Phantom Stock Option Plan"). The Committee also is of the view
that its executives' compensation should be tied both directly and materially to
the actual operating performance.
During 1997, Mr. Milley and ELXSI, with the approval of the full Board
of Directors, entered into an employment agreement that increased his annual
salary to $150,000 plus an additional 5% per year and secures his services
through at least June 2005 (since extended to June 2007). In 1998, Mr. Milley's
cash compensation was $150,000. See "Executive Compensation - Employment
Agreement" below. The Compensation Committee feels that this increased salary
level and long-term commitment is justified, given that Mr. Milley's devotion of
substantial time and efforts to the Cues operations has led to a significant,
continued improvement in that division's operations and that the Company overall
has experienced continued and steady growth since 1989 under Mr. Milley's
leadership. The Company pays management fees to Cadmus, a company controlled by
Mr. Milley, pursuant to a written agreement approved by the Board of Directors
of the Company. These fees are based on the achievement of certain minimum
levels of operating income, which have been achieved, and the fees will be
discontinued if operating targets cease to be met. See "Certain Transactions -
Management Agreement" below.
Mr. Milley's employment agreement allows for ELXSI to pay compensation
over and above the amounts committed to thereunder. It is the present intention
of the Compensation Committee to evaluate the compensation of Mr. Milley for his
services as an officer of the Company on an annual basis. Additional
compensation may be awarded to Mr. Milley in the form of stock options, cash
bonuses or other incentives. Any such payments would be at the discretion of the
Board rather than through a formula-based plan.
The 1998 compensation of Daniel E. Bloodwell, President of the
Bickford's Division of ELXSI, consisted primarily of base salary and
compensation related to the Phantom Stock Option Plan. The Committee believes
that Mr. Bloodwell's compensation should be heavily weighted toward increasing
shareholder value and, accordingly, a significant portion of his compensation is
in the form of phantom stock options granted under the Phantom Stock Option
Plan, described below.
Through his participation in the Phantom Stock Option Plan, which was
put into effect in connection with the Company's 1991 acquisition of Bickford's,
Mr. Bloodwell has the opportunity to earn compensation equal to a specified
maximum percentage of a certain measure of the value of this division (less an
exercise price). The maximum percentage, 4.9%, was earned by Mr. Bloodwell
because Bickford's achieved targeted levels of earnings before interest, taxes
and depreciation during the two-year period from July 1, 1991 through June 30,
1993 and because Mr. Bloodwell remained with the Company through June 30, 1996.
Mr. Bloodwell received 1.0% of the 4.9% maximum amount at the inception of the
Phantom Stock Option Plan in 1991 in consideration of his payment of $40,833
(which is non-refundable and will be credited against any future exercise price
payment), and he earned an additional 1.0% in each of 1992 and 1993 due to the
achievement of the targeted results for applicable periods. The remaining 1.9%
was earned by Mr. Bloodwell upon his remaining with the Company through June 30,
1996. The percentage earned by Mr. Bloodwell will be multiplied by the fair
market value of Bickford's assets on the measure date less certain liabilities
of or related to that division. The result of this calculation, less an exercise
price, will represent the payment to be received by Mr. Bloodwell on or after
July 1, 2001. During and after the measurement period, Mr. Bloodwell will
benefit from increases in the value of the Bickford's division, as this is the
fundamental component used to determine the value of his phantom stock options.
THE COMPENSATION COMMITTEE
Alexander M. Milley
Farrokh K. Kavarana
Denis M. O'Donnell
7
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes the total compensation of the Chief
Executive Officer of the Company and of the only other executive officer of the
Company who earned in excess of $100,000 for the year ended December 31, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-term
Annual Compensation Compensation
-------------------------- ---------------------
No. of
Shares of
Fiscal Common
Year Stock All Other
Name and Ended Underlying Compen-
Principal Position Dec.31 Salary Bonus Options sation
- ------------------ ------ -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Alexander M. Milley 1998 $150,000 -- 7,500 --
Chairman, President 1997 120,000 -- 72,500 --
& Chief Executive Officer 1996 120,000 -- 25,000 --
Daniel E. Bloodwell 1998 $135,000 $ 15,000 1,400 $317,266(1)
Vice President of ELXSI, 1997 122,692 0 2,150 264,388(1)
President of Bickford's 1996 120,000 15,000 2,100 193,885(1)
Division
</TABLE>
- ----------
(1) Represents an estimate by the Company of the increase during the
applicable year in the value of the Phantom Stock Options held at the
end of such year. See "Phantom Stock Option Plan" below.
8
<PAGE>
PHANTOM STOCK OPTION PLAN
The following table sets forth information with respect to the Phantom
Stock Option Plan (the Company's only long-term incentive plan) and the
executive officers named in the table above.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
Number of Estimated Future Payout Under
Phantom Stock Phantom Stock Option Plan
Option Rights Payout -----------------------------
Name ("PSOR's") Date Threshold Target Maximum
- ---- ---------- ---- --------- ------ -------
Alexander M
Milley -- -- -- -- --
Daniel E
Bloodwell -- -- 4.9 4.9 4.9
The Phantom Stock Option Plan was implemented by the Company in 1991.
Its only participants are Mr. Bloodwell and three other Bickford's employees. At
the inception of this Plan, ELXSI granted to these individuals PSOR's (each
representing one percentage point) for an initial investment ranging from
$25,000 to $40,833 (in the case of Mr. Bloodwell). Each holder of a Phantom
Stock Option is entitled to receive, upon exercise, a cash payment equal to (a)
the product of (i) the sum of the appraised value of Bickford's assets at the
time of exercise less (x) all then existing liabilities of the Company or ELXSI
related to Bickford's, including any debt incurred to acquire Bickford's, debt
incurred for Bickford's-related acquisitions and debt used for the working
capital needs of Bickford's, and (ii) a percentage equal to the PSOR's then held
by the holder, minus (b) an exercise price of approximately $74,000 per PSOR
less such holder's initial investment. No PSOR may be exercised until the
earliest to occur of (1) July 1, 2001, (2) the termination of the holder's
employment, or (3) the sale (if any) of the Bickford's division. All increases
in value of the Phantom Stock Options are treated as compensation expense by the
Company in the year in which the increase occurs.
At December 31, 1998, Mr. Bloodwell held 4.9 PSOR's. He earned his
final 0.9 PSOR's on June 30, 1996.
COMMON STOCK OPTIONS
The following table sets forth the number of shares of Common Stock
subject to options granted by the Company during 1998 to each executive officer
named in the table above, and certain other relevant information.
9
<PAGE>
OPTION GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
No. of Percent of Value At Assumed
Shares of Total Annual Rates of Stock
Common Stock Options Price Appreciation for
Underlying Granted to Option Term
Options Employees Exercise Expiration ----------------------
Name Granted in 1998 Price Date 5% 10%
- ---- ------- ------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Alexander M. Milley 7,500(1) 10.0% $8.125(2) 10/08/08 $38,323 $97,119
Daniel E. Bloodwell 1,400(1) 1.9% $8.125(2) 10/08/08 $7,924 $20,081
</TABLE>
- ----------
(1) Options were granted on October 8, 1998. Mr. Milley's options
became 100% exercisable on April 8, 1999. Mr. Bloodwell's
options became 25% exercisable on April 8, 1999 and become
exercisable as to an additional 25% on each October 8 from
1999 through 2001.
(2) The market value of the Common Stock on the date of grant.
The following table presents information as to the value of unexercised
in-the-money options granted under the Company's incentive stock option plans
and held at year-end by the executive officers named in the above table.
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR-END OPTION VALUES
Value of Unexercised
Number of Unexercised Options In-the-money Options At Fiscal
Shares At Fiscal Year-end Year-end (1)
Acquired Value -------------------------------- -------------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Alexander M. Milley -- -- 199,000 6,000 $1,255,875 $ 39,750
Daniel E. Bloodwell -- -- 6,943 4,588 45,833 22,186
</TABLE>
- ----------
(1) Assumes a fair market value per share of Common Stock of
$12.625, the December 31, 1998 closing price.
10
<PAGE>
EMPLOYMENT AGREEMENT
In mid-1997 ELXSI and Mr. Milley entered into an Employment Agreement,
dated as of June 30, 1998 (the "Employment Agreement"), which, in the main: (i)
provides for the employment of Mr. Milley as the Chairman of the Board,
President and Chief Executive Officer of both the Company and ELXSI and as
President and Chief Executive Officer of Cues, (ii) requires Mr. Milley to
devote substantially his entire professional time, attention and energies
(reasonable vacation, periods of illness and the like excepted) to the
performance of all the duties, responsibilities and functions incident to those
offices, and (iii) accordingly, places on Mr. Milley primary executive
responsibility for each of the Company, ELXSI and Cues. Prior to the time that
the Employment Agreement became effective, there was no formal employment or
similar agreement between the Company or any of its subsidiaries and Mr. Milley.
The term of the Employment Agreement commenced on June 30, 1997, originally
extended until June 30, 2005 (the "Initial Term") and can renewed or extended
with the approval of the Board of Directors of the Company and the consent of
Mr. Milley, on such terms and conditions as they may agree. During 1998, ELXSI
and Mr. Milley, with the approval of the Board of Directors of the Company,
agreed to extend the Initial Term by two years, until June 30, 2007.
Pursuant to the Employment Agreement, Mr. Milley's base salary
compensation was increased in 1997 to (i) $150,000 per annum PLUS (ii) an
additional, cumulative 5% increase that becomes effective on each subsequent
June 30 during its term. Notwithstanding the foregoing, Mr. Milley agreed to
defer the effectiveness and payment of this salary increase until January 1,
1998. The Employment Agreement also entitles Mr. Milley: (a) to participate in
such stock option, profit sharing and bonus plans as are made available to other
senior executives of ELXSI, (b) to be covered (together with his spouse and
minor children) by any and all group health, dental, life insurance and
disability plans made available to senior executives of ELXSI, the Company or
any of its subsidiaries or divisions generally, (c) to the use of a suitable
executive company car, (d) to take four weeks of paid vacation during each year,
and (e) to reimbursement for his reasonable travel, lodging, entertainment,
professional promotion and other appropriate business expenses incurred in the
course of his duties on behalf of ELXSI, the Company or any of its subsidiaries
or divisions. The Employment Agreement does not limit or restrict the right or
ability of ELXSI (acting with the authorization of the Board of Directors of the
Company or the Compensation Committee thereof) to grant or award other or
additional compensation to Mr. Milley, in whatever form at any time, or to limit
or restrict the right or ability of ELXSI to prospectively or conditionally
grant or award any such other or additional compensation.
The Employment Agreement also provides that if Mr. Milley's employment
thereunder is terminated at any time for any reason (including by reason of a
failure to renew or extend prior to the expiration of the Initial Term), then
prior to (and as a condition to) such termination, ELXSI must pay to Mr. Milley
a lump-sum amount equal to: (i) the amount of base salary compensation that
would have been (but for such termination) paid over the one-year period
commencing with the effective date of such termination, PLUS (ii) if such
termination is to take effect prior to the expiration of the Initial Term, the
amount of base salary compensation that would have been (but for such
termination) paid over the remaining Initial Term, LESS (iii) a present value
discount calculated at an annual rate of 6% and taking into account the timing
of the base salary payments that would have been made to Mr. Milley during the
remaining term of the Employment Agreement (and, in the case of the foregoing
clause (i), during the one-year period commencing with the effective date of the
termination) assuming (for this purpose) that the employment of Mr. Milley under
the Employment Agreement had not been terminated.
Also in the event that Mr. Milley's employment under the Employment
Agreement is terminated at any time for any reason, Mr. Milley (if he is alive)
and his spouse and minor children shall continue, for the period of time from
and after the effective date of such termination until the date specified
hereinbelow, to be covered, at ELXSI's expense, by any and all insurance plans
made available to senior executives of the ELXSI, the Company
11
<PAGE>
or any of its subsidiaries or divisions generally. Such period of time shall
end: (i) in the case of a termination on or after the expiration of the Initial
Term, on the earlier to occur of (x) the first anniversary of such termination
and (y) the date that Mr. Milley shall have obtained other employment with
insurance benefits equivalent to (or in excess of) those provided for under the
Employment Agreement; and (ii) in the case of a termination prior to the
expiration of the Initial Term, on the earlier to occur of (x) the June 30, 2008
and (y) the date that Mr. Milley shall have obtained other employment with such
equivalent (or excess) insurance benefits.
Under the Employment Agreement, Mr. Milley agreed that during the term
thereof and for a period of one year thereafter he will not engage in, or be
employed or retained by or have certain other proscribed connections with, any
business or enterprise that competes with any business or enterprise being
pursued by the Company or any subsidiary or division thereof; PROVIDED that the
foregoing will not apply if Mr. Milley's employment is terminated by him with
good legal reason, by ELXSI without good legal cause or due to the expiration of
the Employment Agreement term. The Employment Agreement also contains provisions
prohibiting the disclosure or use by Mr. Milley of non-public information
confidential and/or proprietary to the Company or any of its subsidiaries or
divisions.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of March 31, 1998, the Company had outstanding 4,453,463 shares of
Common Stock. The following table sets forth certain information regarding the
ownership of the Company's Common Stock by all those persons and entities known
by the Company to be beneficial owners of more than five percent (5%) of the
Common Stock, based upon information furnished by the respective beneficial
owners.
Common Stock of the
Company Beneficially Owned
as of April 12, 1999(1)
---------------------------
Number of Percent
Name Shares of Class
- ---- ------ --------
Alexander M. Milley
3600 Rio Vista Avenue, Suite A*
Orlando, Florida 32805 2,219,697(2) 46.5%
Peter R. Kellogg
Spear, Leeds & Kellogg
120 Broadway
New York, New York 10271 730,900(3) 16.4%
Aggel Enterprises, Ltd.
11 Duddell Street
12th Floor
Hong Kong 325,940(4) 7.3%
Fidelity Management & Research
Company/FMR Corp.
82 Devonshire Street
Boston, Massachusetts 02109 286,000(5) 6.4%
12
<PAGE>
- ----------
(1) Except as otherwise indicated the persons and
entities named in this table have sole voting and
dispositive power with respect to all shares of the
Company's Common Stock shown as beneficially owned by
them. Numbers and percents are calculated in
accordance with Rule 13d-3.
(2) Includes: (i) 112,347 outstanding shares and 118,762
shares of Common Stock issuable upon the exercise of
currently exercisable warrants held by Eliot Kirkland
L.L.C. ("EKLLC"), of which Mr. Milley is the sole
manager, the President and a member; (ii) 215,288
shares held by Cadmus, of which Mr. Milley is the
Chairman, President and an indirect controlling
shareholder; (iii) 590,200 shares held by ELX Limited
Partnership ("ELXLP"), of which Mr. Milley is the
sole general partner; (iv) 228,200 shares held by
Azimuth, of which Mr. Milley is the Chairman,
President and (in combination with Cadmus) an
indirect controlling stockholder; and (v) 730,900
shares held by Peter R. Kellogg or other "Kellogg
Persons" party to the Kellogg Standstill Agreement
(see "Certain Transactions - Rights Agreement
Amendment; Kellogg Standstill Agreement" below), over
which Mr. Milley has sole voting power but no
dispositive power. Also includes 199,000 shares
issuable upon exercise of stock options granted by
the Company that are exercisable currently or within
60 days and excludes 6,000 shares issuable upon
exercise of stock options granted by the Company that
become exercisable in more than 60 days. Excludes
60,004 shares of Common Stock held by The Alexander
M. Milley Irrevocable Trust I (the "Milley Trust"), a
trust for the benefit of certain members of Mr.
Milley's immediate family, and 150,500 shares of
Common Stock issuable upon the exercise of currently
exercisable warrants held by the Milley Trust. Under
Rule 13d-3, shares beneficially owned by the Milley
Trust as determined thereunder are deemed not to be
beneficially owned by Mr. Milley. EKLLC's and
Azimuth's shares each constitute approximately 5.1%
of the outstanding Common Stock, and ELXLP's shares
constitute approximately 13.3% of the outstanding
Common Stock. Cadmus (in combination with Mr. Milley)
is a controlling stockholder of Azimuth and so may be
deemed to share the voting and dispositive power with
respect to shares of Common Stock held by Azimuth;
consequently, Cadmus may be deemed to beneficially
own 443,488 shares, or approximately 9.9%, of the
outstanding Common Stock. MMI, of which Mr. Milley is
President, sole director and majority stockholder, is
a controlling stockholder of Cadmus and so may be
deemed to share the voting and dispositive power with
respect to shares of Common Stock held by Cadmus
and/or Azimuth; consequently, MMI may be deemed to
beneficially own 443,488 shares, or approximately
9.9%, of the outstanding Common Stock. The address of
each of EKLLC, Cadmus, ELXLP, Azimuth and MMI is the
same as that indicated above for Mr. Milley.
(3) Includes: (i) 125,000 shares held by Cynthia Kellogg,
Mr. Kellogg's wife; (ii) 255,900 shares held by
I.A.T. Reinsurance Syndicate Ltd. ("IAT"), of which
Mr. Kellogg is the sole holder of voting stock, and
subsidiaries of IAT; (iii) 200,000 shares held by the
Peter R. Kellogg & Cynthia Kellogg Foundation (the
"Kellogg Foundation"), of which Mr. Kellogg is a
trustee; and (iv) 50,000 shares held by the NOM Trust
U/W/O James C. Kellogg III (the "Kellogg Trust"), of
which Mr. Kellogg is a trustee. Mr. Kellogg: (a) has
sole dispositive power with respect to the shares
held by IAT and shared dispositive power with respect
to the shares held by Mrs. Kellogg, the Kellogg
13
<PAGE>
Foundation and the Kellogg Trust, and (b) disclaims
beneficial ownership of all of the foregoing shares.
Mr. Kellogg, Mrs. Kellogg, IAT and its subsidiaries
holding Common Stock, the Kellogg Foundation and the
Kellogg Trust are the current "Kellogg Persons" party
to the Kellogg Standstill Agreement and, pursuant
thereto, have granted to Mr. Milley an irrevocable
right to vote the shares of Common Stock held by
them. See "Certain Transactions - Rights Agreement
Amendment; Kellogg Standstill Agreement."
(4) Includes 69,784 shares owned of record or
beneficially by other entities under common control
with Aggel Enterprises, Ltd. Mr. Kavarana, a director
of the Company, is affiliated with the controlling
shareholders of Aggel Enterprises, Ltd. and its
affiliates. Mr. Kavarana disclaims beneficial
ownership of all shares beneficially owned by Aggel
Enterprises, Inc.
(5) Shares reported herein as held by Fidelity Management
& Research Company ("FMRC")/FMR Corp. are owned by
the Fidelity Low-Priced Stock Fund (the "Fund"), of
which FMRC, a wholly-owned subsidiary of FMR Corp.,
is investment advisor. FMR Corp., through its control
of FMRC, and the Fund have sole dispositive power
with respect to these shares; the Fund, acting under
the guidelines established by its Board of Trustees,
has sole voting power with respect to these shares.
CERTAIN TRANSACTIONS
MANAGEMENT AGREEMENT
In connection with its 1989 restructuring, the Company entered into a
Management Agreement, dated September 25, 1989 (as amended, the "Management
Agreement"), with Winchester National, Inc. ("Winchester"), a private investment
and management consulting firm owned by Mr. Milley. In July 1991 the Company
transferred its rights and duties under the Management Agreement to ELXSI, its
wholly-owned subsidiary, and Winchester transferred its rights and duties under
the Management Agreement to MMI, of which Mr. Milley is the President and the
sole director and of which Mr. Milley and The Alexander M. Milley Irrevocable
Trust I (the "Milley Trust"), a trust for the benefit of certain members of Mr.
Milley's immediate family, are the only stockholders. The Management Agreement
initially was scheduled to expire on September 30 1992; in that year MMI and
ELXSI agreed to an extension of its term (i) through September 30, 1995 (the
"Initial Term") and (ii) thereafter, until terminated by either party with the
approval of a majority of its Board of Directors on not less than 90 days prior
written notice to the other party. Effective January 1, 1994, MMI transferred
its rights and obligations under the Management Agreement to Cadmus. Under an
amendment entered into by ELXSI and Cadmus in 1997 (the "1997 Amendment") the
date for the earliest expiration of the Initial Term was extended from September
30, 1995 to June 30, 2005, and under another amendment agreed to by ELXSI and
Cadmus in 1998 the date for the earliest expiration of the Initial Term was
further extended to June 30, 2007.
The terms of the Management Agreement provide for ELXSI to be provided
with advice and services with respect to ELXSI's business and financial
management and long-range planning, including: (i) furnishing the services of
certain executive officers and other employees of Cadmus; (ii) advising and
assisting in connection with financing arrangements; (iii) assisting management
in preparing and submitting to the Board of Directors analyses of the business
and operations of ELXSI; (iv) assisting management in the preparation of
financial and operating records; and (v) assisting in the retention of other
persons, firms and corporations to render professional and technical services to
ELXSI. Specific examples of services historically rendered to under the
Management Agreement include: (a) ongoing evaluation of division management; (b)
preparing and reviewing division
14
<PAGE>
operating budgets and plans; (c) evaluating new restaurant locations and menu
changes; (d) identifying, and assisting in the divestiture of, under-performing
assets; (e) evaluating financing options and negotiating with lenders; (f)
assisting in the compliance with securities laws and other public reporting
requirements; (g) communicating with stockholders; (h) negotiating and arranging
insurance programs; (i) monitoring tax compliance; (j) evaluating capital
spending; (k) cash management services; (l) preparing market research; (m)
developing and improving management reporting systems; and (n) identifying and
evaluating acquisition candidates and investment opportunities. In addition,
Cadmus provides the Company with general administrative services, for which it
did not charge the Company for 1998.
Under the Management Agreement, the management services provider became
entitled to receive, in addition to reimbursement for reasonable expenses, fee
compensation commencing upon ELXSI's having first achieved operating income (as
defined) of $1,250,000 for a fiscal quarter. Those fees may be discontinued
following any fiscal year in which such operating income is less than
$4,000,000, but shall be reinstated following the first fiscal quarter
thereafter in which ELXSI again attains quarterly operating income of at least
$1,250,000. Under these terms, the Management Agreement counterparty
(Winchester, MMI or Cadmus) has been receiving Management Agreement fees
continuously since October 1991.
Prior to the 1997 Amendment, the fee compensation payable by ELXSI
under the Management Agreement was $500,000 per annum. Pursuant to the 1997
Amendment, this compensation was increased, effective April 1, 1997, to (i)
$600,000 per annum PLUS (ii) an additional, cumulative 5% increase that becomes
effective on each April 1 during its term. Cadmus may request an increase in
such fee or escalator, but any such increase must be approved by a majority of
the independent directors of the Company.
The Management Agreement provides that if Cadmus's services under the
Management Agreement are terminated at any time for any reason (including by
reason of a failure to renew or extend prior to the expiration of the Initial
Term), then prior to (and as a condition to) such termination, ELXSI must pay to
Cadmus a lump-sum amount equal to: (i) the amount of fees that would have been
(but for such termination) paid over the one-year period commencing with the
effective date of such termination, PLUS (ii) if such termination is to take
effect prior to the expiration of the Initial Term, the amount of fees that
would have been (but for such termination) paid over the remaining Initial Term,
LESS (iii) a present value discount calculated at an annual rate of 6% and
taking into account the timing of the fee payments that would have been made to
Cadmus during the remaining Initial Term (and, in the case of the foregoing
clause (i), during the one-year period commencing with the effective date of the
termination) assuming (for this purpose) that the services of Cadmus under the
Management Agreement had not been terminated. For purposes of the foregoing,
ELXSI's operating income for all relevant periods will be deemed to be in excess
of $4,000,000 if operating income for the full fiscal year most recently
completed prior to the relevant termination was equal to or in excess of such
amount.
It is through the Management Agreement that the Company is provided the
services of Thomas R. Druggish, the Company's Vice President, Treasurer and
Secretary, and the non-director services of Kevin P. Lynch, a Vice President and
director of the Company. Each of Messrs. Milley, Shaw and Druggish is an officer
and/or director of Cadmus;. Messrs. Shaw, Druggish and Lynch are shareholders of
Cadmus; and through MMI (a direct Cadmus stockholder) Mr. Milley is a
controlling shareholder of Cadmus. See "Directors and Executive Officers of the
Company"
LOANS TO CADMUS, ELX AND AZIMUTH
On June 30, 1997, ELXSI loaned to Cadmus $2,000,000 to finance its
purchase from Bank of America National Trust and Savings Association (then named
Bank of America Illinois) ("BofA"), ELXSI's lending bank,
15
<PAGE>
6,517 shares of Series AAA preferred stock of Azimuth that it had issued in
December 1996 under a Recapitalization Agreement to which Azimuth, its
subsidiaries, BofA and ELXSI were parties. This loan matures on the second
anniversary of its origination (I.E., June 30, 1999), requires quarterly
payments of interest at a rate of 15% per annum and is secured by a pledge of
the shares of Azimuth Series AAA preferred stock financed thereby. The funds for
ELXSI's loan to Cadmus were provided by BofA, under ELXSI's credit agreement.
Each of Messrs. Milley, Shaw and Druggish is an officer and/or director of
Azimuth; Messrs. Shaw and Druggish are stockholders of Azimuth; and Mr. Milley
(in combination with Cadmus) is a controlling stockholder of Azimuth.
In December 1994, the Company made a three-year loan of $1,155,625 to
ELX Limited Partnership ("ELXLP"), of which Mr. Milley is the sole general
partner and Messrs. Lynch, Shaw and Druggish are limited partners, to finance
ELXLP's exercise of an option to purchase 369,800 shares of Common Stock from
The Airlie Group, L.P. In December 1996, the Company made another three-year
loan to ELXLP, of $909,150, utilized by it to exercise an option to purchase
110,200 shares of Common Stock held by BankAmerica Capital Corporation ("BACC"),
an affiliate of BofA, and to purchase from BACC an additional 110,200 shares of
Common Stock. Funding for these loans were obtained by the Company through
ELXSI's credit agreement with BofA. Both Company loans to ELX require no
principal or interest payments until their respective maturity dates and bear
interest at a rate equal to the Company's cost of funds (under ELXSI's BofA
credit agreement) plus 0.5%. In December 1997, the Company agreed to a
three-year extension of the maturity date of its December 1994 loan to ELX, and
ELX paid in full all interest accrued on such loan through the original maturity
date, totaling approximately $330,000.
In March 1998, an individual stockholder of the Company sold to the
Company and Azimuth 90,000 and 10,000 shares, respectively, of Common Stock at a
price of $13.50 per share. The funds for these purchases were obtained by the
Company through ELXSI's credit agreement with BofA. The Company loaned to
Azimuth the amount required to complete its 10,000-share purchase, or $135,000.
This loan will mature on the third anniversary of its origination (I.E., in
March 2001), with no principal or interest payments being required to be earlier
made, and bears interest at a rate equal to the Company's cost of funds (under
ELXSI's BofA credit agreement) plus 0.5%.
ODD-LOT OFFERS
In October 1997, Cadmus began a process of making formal offers
("Odd-Lot Offers") to purchase shares of Common Stock, at prevailing market
prices, to stockholders of the Company that own 100 shares or less of Common
Stock (after giving effect to the Company's May 1992 1-for-25 reverse split of
outstanding shares) ("Odd-Lot Holders"). The Company has in excess of 5,000
record Odd-Lot Holders (out of a total of approximately 5,600 record holders),
and together they own approximately 115,000 shares of Common Stock. Odd-Lot
Holders benefit from the Odd-Lot Offer by being given the opportunity to sell
their shares at market prices free of brokerage commissions and special charges
that may apply for the handling of odd-lot holdings. The Company benefits from
acceptances of Odd-Lot Offers through reductions in the burden and expense of
communicating with Odd-Lot Holders who may (in any event) wish to sell their
shares.
The Odd-Lot Offers have generally been made by letter, on ELXSI
letterhead, individually addressed and sent to those stockholders who, according
to the Company's stock record books, are Odd-Lot Holders. The terms of the
Odd-Lot Offers are that Cadmus will purchase shares at the closing sale price of
the Common Stock on the trading day immediately preceding the post-mark or other
date of forwarding by a tendering Odd-Lot Holder of his or her return materials.
In addition, in no event will Cadmus purchase pursuant to the Odd-Lot Offers a
number of shares of Common Stock that, together with all other shares of Common
Stock purchased by Cadmus in the preceding 12 months, would constitute more than
2% of the outstanding shares of Common Stock. As of
16
<PAGE>
December 31, 1998, Cadmus purchased 11,923 shares of Common Stock from more than
100 Odd-Lot Holders pursuant to its Odd-Lot Offers.
WARRANTS EXTENSION
The Company has outstanding 200,500 Series A Warrants to Purchase
Common Stock ("Series A Warrants") and 68,762 Series C Warrants to Purchase
Common Stock (the "Series C Warrants"). Fifty Thousand (50,000) Series A
Warrants and all of the Series C Warrants are held by Eliot Kirkland L.L.C., of
which Mr. Milley is the sole manager, the President and a member. The remaining
150,500 Series A Warrants are held by the Milley Trust. See "-Management
Agreement" above. Under their original terms, the Series A Warrants were
exercisable at $3.125 per shares and expired on September 30, 1996, and the
Series C Warrants were exercisable at $4.36 per share and expired on January 31,
1997. In 1996, the Company and the holders of the Series A Warrants and Series C
Warrants agreed to, and in March 1997 the Company's Board of Directors approved,
a two-year extension of the expiration dates of the Series A Warrants and Series
C Warrants, in consideration of which the holders thereof agreed to an increase
in their exercise prices to $3.75 and $5.23, respectively. In 1998, the Company
and the holders of the Series A Warrants and Series C Warrants agreed to, and in
December 1998 the Company's Board of Directors approved, an additional two-year
extension of the expiration dates of the Series A Warrants and Series C
Warrants, in consideration of which the holders thereof agreed to an increase in
their exercise prices to $4.50 and $6.278, respectively.
RIGHTS AGREEMENT AMENDMENT; KELLOGG STANDSTILL AGREEMENT
In 1997, the Company entered into a Rights Agreement, dated as of June
4, 1997 (as amended, the "Rights Agreement"), with Continental Stock Transfer &
Trust Company, as Rights Agent (the "Rights Agent"), pursuant to which (among
other things) the Board of Directors of the Company declared a dividend of one
Common Stock Purchase Right (each, a "Right") for each share of Common Stock
outstanding at the opening of business on June 16, 1997. All shares of Common
Stock issued on or after such date also have or will have one attached Right.
Generally speaking, each Right will detach from the Common Stock, and become
exercisable at $25.00 for shares of Common Stock having twice that value, ten
business days after (a) the public announcement that any person, entity or
"group", together with the respective affiliates and associates thereof, has
become the beneficial owner of 15% or more of the outstanding Common Stock (such
a person, entity or group, an "Acquiring Person"), or (b) the commencement of a
tender or exchange offer that would result in any person, entity or "group"
beneficially owning 15% or more of the outstanding Common Stock (as such terms
are defined, and determinations made, under applicable Commission rules);
PROVIDED that the percentage applicable to Mr. Milley and other "Milley Group
Members" (as defined in the Rights Agreement, and which includes Azimuth,
Cadmus, Eliot Kirkland L.L.C., ELXLP and MMI) is 35%.
In January 1999, after Peter R. Kellogg disclosed to the Company that
he and certain related persons and entities, in the aggregate, owned in excess
of 650,000 shares of Common Stock, they commenced negotiations that culminated
in the entering into by: (a) the Company and the Rights Agent of a Rights
Agreement Amendment, dated as of March 16, 1999 (the "Rights Agreement
Amendment"), and (b) the Company, Alexander M. Milley, Mr. Kellogg and such
related persons and entities (who are identified in footnote 3 to the "Security
Ownership of Certain Beneficial Owners" table hereinabove) (collectively with
Mr. Kellogg, the "Kellogg Persons"), of a Standstill Agreement, dated as of
March 16, 1999 (the "Kellogg Standstill Agreement").
The most significant amendments to the Rights Agreement effected under
the Rights Agreement Amendment were certain modifications to the definition of
"Acquiring Person" that, in essence: (a) permit "Kellogg Group Members" (as
defined in the Rights Agreement Amendment, and which includes all the present
Kellogg Persons), under certain circumstances and subject to certain
limitations, to beneficially own in excess of
17
<PAGE>
15% of the outstanding Common Stock without becoming "Acquiring Persons" under
the Rights Agreement (the "Kellogg Rights Agreement Amendments"), and (b)
exclude from the determination of the Milley Group Members' beneficial ownership
of Common Stock shares beneficially owned by Kellogg Group Members or by other
Peter R. Kellogg-related persons and entities that are within the definition
therein of "Kellogg Related Persons" that may, under applicable Commission
rules, be deemed to be beneficially owned by Mr. Milley by virtue of the
Kellogg-to-Milley Proxy granted pursuant to the Kellogg Standstill Agreement and
described hereinbelow. The limited in-excess-of-15% permission granted to
Kellogg Group Members under the Rights Agreement Amendment is embodied in the
definition therein of "Kellogg Group Member Limit", which is the greater of: (i)
1,000,000 shares of Common Stock (subject to adjustment for stock splits, stock
dividends, etc.) LESS the number of shares of Common Stock beneficially owned by
all Kellogg Related Persons and all of their respective affiliates and
associates, and (ii) 15% of the outstanding Common Stock; PROVIDED that if at
any time it is established that any Kellogg Group Member or any affiliate or
associate of any Kellogg Group Member who is a beneficial owner of Common Stock
acquired those securities with the purpose or effect of changing or influencing
the control of the Company, or in connection with or as a participant in any
transaction having that purpose or effect, then the foregoing clause (i) will no
longer be effective and the "Kellogg Group Member Limit" will be 15% of the
outstanding Common Stock. Under the Kellogg Standstill Agreement, the Kellogg
Persons have represented and warranted that their shares of Common Stock were
not acquired and are not held for the purpose of or with the effect of changing
or influencing the control of the Company, or in connection with or as a
participant in any transaction having that purpose or effect.
The determination by the Board of Directors of the Company to implement
the Kellogg Rights Agreement Amendments was based upon, in part, the
representations, warranties, covenants and agreements of the Kellogg Persons
under the Kellogg Standstill Agreement. Consistent therewith, the Rights
Agreement Amendment provides that in the event that at any time any Kellogg
Person is in breach of or default under the Kellogg Standstill Agreement, the
effectiveness of the Kellogg Rights Agreement Amendments may, at the election of
the Company, be suspended or terminated. Under the Kellogg Standstill Agreement,
the Company has agreed that, for so long as there is not any breach of or
default under the Kellogg Standstill Agreement on the part of any Kellogg
Person, it will not suspend or terminate any of the Kellogg Rights Agreement
Amendments, terminate the Rights Agreement Amendment or take any other action
having the purpose or effect of modifying or altering the Kellogg Rights
Agreement Amendments.
Under the Kellogg Standstill Agreement, the Kellogg Persons have agreed
that if after the date thereof any Kellogg Group Member or any affiliate or
associate thereof who (in each case) is not already a "Kellogg Person" party
thereto purchases or otherwise acquires any shares of Common Stock or other
voting securities of the Company ("Other Voting Securities"), that person or
entity will promptly thereafter take the actions specified therein to become a
"Kellogg Person" party to the Kellogg Standstill Agreement.
Pursuant to the Kellogg Standstill Agreement, each Kellogg Person has
irrevocably constituted and appointed Mr. Milley the attorney-in-fact and proxy
of such Kellogg Person, with full power of substitution, to vote all shares of
Common Stock and Other Voting Securities which such Kellogg Person is entitled
to vote at any annual or special meeting of the stockholders of the Company, and
to express consent or dissent to any corporate action in writing without a
meeting of the stockholders of the Company, in such manner as Mr. Milley or his
substitute may determine (the "Kellogg-to-Milley Proxy"). The Kellogg-to-Milley
Proxy: (a) is stated to be coupled with an interest and irrevocable; (b) covers
any and all shares of Common Stock and Other Voting Securities owned by any
Kellogg Person, whenever acquired; and (c) will remain in effect for so long any
Rights are outstanding under the Rights Agreement. No Kellogg Person may grant
any proxy or power of attorney to any person or entity which conflicts with the
Kellogg-to-Milley Proxy.
18
<PAGE>
Under the Kellogg Standstill Agreement, the Kellogg Persons have
granted to Mr. Milley certain rights of first refusal over any shares of Common
Stock or Other Voting Securities owned by them that they may determine to sell
or otherwise dispose of, subject to certain exceptions. Mr. Milley has the right
to designate a different person or entity to effect the purchase of any such
shares or Other Voting Securities as to which such rights may be exercised.
Under the Kellogg Standstill Agreement, each Kellogg Person has agreed
that, unless and to the extent otherwise consented to in writing by the Company,
such Kellogg Person will not: (a) solicit proxies with respect to any Common
Stock or Other Voting Securities, actively oppose any action approved by a
majority of the Continuing Directors (as defined in the Rights Agreement) of the
Company, or become a "participant" in any "election contest" relating to the
election of directors of the Company; (b) propose, make or initiate, or solicit
stockholders of the Company for the approval of, one or more stockholder
proposals; (c) propose, or make, initiate or solicit any proposals from, or
provide any information or participate in any discussions or negotiations with,
or otherwise cooperate in any way with or assist, any person or entity
concerning any merger, consolidation, other business combination, tender or
exchange offer, recapitalization, liquidation or dissolution or any purchase or
other acquisition or sale or other disposition of assets (other than in the
ordinary course of business) or shares of capital stock of the Company or any of
its subsidiaries or divisions or any similar transaction involving the Company
or any subsidiary or division of the Company or any subsidiary; (d) take any
other action for the purpose of or with the effect of changing or influencing
the control of the Company, or in connection with or as a participant in any
transaction having that purpose or effect; (e) form, join or in any way
participate in any "group" with respect to any securities of the Company (except
a group consisting entirely of Kellogg Group Members, Kellogg Related Persons,
Milley Group Members and/or their respective affiliates or associates); or (f)
induce, attempt to induce, encourage or solicit, or cooperate with, any other
person or entity to do any of the foregoing.
Under the Kellogg Standstill Agreement, if after the date thereof any
Kellogg Related Person or any affiliate or associate thereof acquires any
additional shares of Common Stock or Other Voting Securities, that person or
entity must promptly thereafter take the actions specified therein in order to
make applicable to such shares the Kellogg-to-Milley Proxy, the above-described
rights of first refusal and the covenants and agreements described in the
immediately preceding paragraph hereof.
Under the Kellogg Standstill Agreement, Peter R. Kellogg indemnifies
the Company, Mr. Milley, the other Milley Group Members and their respective
officers, directors, employees, agents, professional advisors and controlling
persons, for the period of time specified therein, from and against any and all
Losses (as defined therein) incurred or suffered by any of them as a result of
or arising out of or in connection with the Rights Agreement Amendment and/or
Kellogg Standstill Agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Throughout 1998, the Company's Compensation Committee was comprised of
Messrs. Milley, Kavarana and O'Donnell. Throughout 1998, Mr. Milley also served
as Chairman, President and Chief Executive Officer of the Company and ELXSI and
as President and Chief Executive Officer of its Cues division. Throughout 1998,
Messrs. Druggish, Milley and Shaw all served as directors and/or executive
officers of Azimuth. Messrs. Milley, Druggish and Shaw were directors and/or
executive officers of Bell National throughout 1998. Messrs. Milley and Shaw
were directors and executive officers of Cadmus throughout 1998.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
In April 1998, Mr. Milley filed with the Commission a Statement of
Changes in Beneficial Ownership on
19
<PAGE>
Form 4 ("Form 4"), as required under rules promulgated under Section 16(a)
("Section 16(a)")of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), in order to report certain purchases of Common Stock by Cadmus
and Azimuth. This filing disclosed, for the first time for purposes of Section
16(a), three private purchases by Cadmus of Common Stock odd-lots covering 68
shares in the aggregate consummated in July and November 1996. The foregoing
transactions should have been reported on a Form 4 filed with the Commission by
the tenth day of the month following their respective consummation dates.
STOCK PERFORMANCE GRAPH
Presented below is a stock performance graph which shows a comparison
of the performance of the Company's Common Stock over the five-year period from
December 31, 1992 through December 31, 1997 versus The Nasdaq Stock Market
("Nasdaq") Index and the Nasdaq Non-Financial Stocks Index. The Nasdaq
Non-Financial Stocks Index was chosen as an appropriate industry index because
the Company operates in two distinct business segments: restaurants and
equipment manufacturing and servicing. Thus, a broad definition of industry such
as "Non-Financial" was deemed appropriate by the Company and has been used for
this Proxy Statement sentence since 1993. The closing price of the Common Stock
on December 31, 1998 was $12.625.
[GRAPHIC CHART OMITTED - PLOT POINTS LISTED BELOW]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nasdaq Index 100 98 138 170 209 293
- ------------------------------------------------------------------------------------------------------------
ELXSI Corporation 100 65 75 82 142 155
- ------------------------------------------------------------------------------------------------------------
Nasdaq Non-Financial 100 96 134 163 191 280
- ------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
PROPOSAL NO. 2 -- APPROVAL OF THE
ELXSI CORPORATION 1998 INCENTIVE STOCK OPTION PLAN
(ITEM 2 ON THE PROXY CARD)
The Board of Directors adopted the ELXSI Corporation 1999 Incentive
Stock Option Plan (the "1999 Option Plan") on March 15, 1999. The purpose and
terms of the 1999 Option Plan, which is reprinted in full in Annex A hereto, are
described generally below, but that description is qualified in its entirety by
reference to such Annex A hereto.
The 1999 Option Plan, which if approved by the stockholders of the
Company at the Annual Meeting of Stockholders will become effective on the date
thereof, provides for the grant to selected directors, officers and executive,
managerial and administrative employees of the Company or any of its
subsidiaries ("Eligible Persons") of either incentive stock options (within the
meaning of ss.422 of the Internal Revenue Code (the "Code")) or nonqualified
options (intended not to qualify as incentive stock options) to purchase Common
Stock of the Company. However, only employees within the meaning of Code
ss.3401(c) are entitled to receive incentive stock options under the 1999 Option
Plan. The 1999 Option Plan is to be administered by a committee appointed by the
Board of Directors consisting of at least two directors of the Company (the
"Committee"). In the absence of such appointment, the Compensation Committee of
the Board of Directors will serve as the Committee; it is currently intended
that the Compensation Committee will serve that function.
As of the date of this Proxy Statement, there are approximately 28
Eligible Persons, two of whom are non-executive directors, three of whom are
executive directors and two of whom are non-director executive officers of the
Company or ELXSI. Because the number of shares that may be made subject to
options under the 1999 Option Plan ("Options"), as well as the option price per
share of Common Stock, depend on contingent and variable factors, it is not
possible to estimate or otherwise determine the Options likely to be granted
pursuant to the 1999 Option Plan. The market value of the Common Stock at the
close of business on March 31, 1998 was $10.25 per share.
The maximum number of shares of Common Stock that may be made subject
to Options is 75,000 shares. Each Eligible Person who is selected by the
Committee will be offered an Option to purchase a specified maximum number of
shares of Common Stock of the Company at a specified price. The exercise price
per share of an incentive stock Option may not be less than the fair market
value per share of Common Stock as of the date of grant, and the exercise price
per share of a nonqualified Option may not be less that 75% of such fair market
value; in either case, however, the per share exercise price may not be less
than the per share book value of the Common Stock. An Eligible Person to whom an
Option is granted must execute an option agreement evidencing that Option in the
form prescribed by the Committee no later than 30 days from the date the Option
is granted or, if later, 10 days after the Eligible Person receives an option
agreement evidencing the Option. All Options will be nontransferable except by
will or the laws of descent and distribution.
Except in the event of a nonqualified stock Option holder's death or
disability (as described below), no Option may be exercised more than 10 years
after its date of grant. An Option may contain terms making it exercisable in
increments over a specified interval of time or in whole after the lapse of a
specified period of time.
An optionee may exercise an Option on any date that is more than six
months after the date of grant to the extent the Option is exercisable on that
date (but for not fewer than 25 shares, or the total number of shares
exercisable, if less). The option price payable on exercise of an Option may be
paid in cash, in shares or other securities of the Company, partly in each, or
by a broker-assisted "cashless" exercise involving an immediate sale of a
sufficient number of the shares being acquired to pay the Option exercise price.
21
<PAGE>
An outstanding Option that is wholly or partially unexercisable at a
given time shall become immediately exercisable in full upon a change in control
of the Company. A change in control is defined generally as (i) the sale of all
or substantially all of the Company's assets, (ii) an election of new directors
if a majority of the directors immediately thereafter consists of persons who
were not nominated by management to stand for election, (iii) the sale in a
single transaction of at least 50% of the outstanding Common Stock, consummation
of a tender offer for more than 50% of the outstanding Common Stock, or the
consummation of a merger or consolidation of the Company, if immediately after
any such event a majority of directors consists of persons who were not
directors immediately prior to the event. However, in the event of a merger or
consolidation in which the Company does not survive, the Committee may negate
the accelerated exercisability of Options, but only if the agreement of merger
or consolidation requires that each optionee on that date receives the same
merger consideration as he or she would have received as a stockholder of the
Company had the exercisability of the Option been accelerated and had the
optionee, immediately prior to the merger or consolidation, exercised the Option
for the full number of shares subject thereto, paid the option price in full,
and satisfied all other conditions for the exercise of the Option.
The 1999 Option Plan provides for adjustment in the maximum number of
shares of Common Stock that may be granted thereunder and in the number of
shares of Common Stock subject to outstanding Options in the event of any stock
dividend, stock split, stock combination, merger, consolidation, reorganization,
recapitalization or other change in the capital structure of the Company
affecting the Common Stock. The Board of Directors may amend, suspend or
terminate the 1999 Option Plan at any time, except that no such change in the
1999 Option Plan can adversely affect any Options outstanding on the date of
such change without the optionee's consent. Furthermore, any such change that
requires stockholder approval to comply with applicable provisions of the Code,
applicable federal or state securities laws or Nasdaq or exchange listing
requirements will not be effective if stockholder approval is not obtained as
required. Unless sooner terminated, the 1999 Option Plan will terminate on March
15, 2009.
For federal income tax purposes, the grant to an optionee of a
nonqualified stock option will not constitute a taxable event to the optionee or
to the Company. Upon exercise of a nonqualified stock option (or, in certain
cases, a later tax recognition date), the optionee will recognize compensation
income taxable as ordinary income, measured by the excess of the fair market
value of the Common Stock purchased on the exercise date (or later tax
recognition date) over the amount paid by the optionee for such Common Stock,
and will be subject to tax withholding. The Company may claim a deduction for
the amount of such compensation. The optionee will have a tax basis in the
Common Stock purchased equal to the amount paid plus the amount of ordinary
income recognized upon exercise of the nonqualified stock option. Upon the
subsequent sale of the Common Stock received upon exercise of the nonqualified
Option, an optionee will recognize capital gain or loss equal to the difference
between the amount realized on such sale and his or her tax basis in the Common
Stock, which may be long-term capital gain or loss if the optionee holds the
Common Stock for more than one year from the exercise date.
For federal income tax purposes, neither the grant nor the exercise of
an incentive stock Option will constitute a taxable event to the optionee or to
the Company, assuming the Option qualifies as an incentive stock Option under
Code ss.422. If an optionee does not dispose of the Common Stock acquired upon
exercise of an incentive stock option during the statutory holding period, any
gain or loss upon subsequent sale of the Common Stock will be long-term capital
gain or loss, assuming the shares represent a capital asset in the optionee's
hands. The statutory holding period is the later of two years from the date the
incentive stock Option is granted or one year from the date the Common Stock is
transferred to the optionee pursuant to the exercise of the Option. If the
statutory holding period requirements are satisfied, the Company may not claim
any federal income tax deduction upon either the exercise of the incentive stock
Option or the subsequent sale of the Common Stock received upon exercise
thereof. If the statutory holding period requirement is not satisfied, the
optionee will recognize compensa-
22
<PAGE>
tion income taxable as ordinary income on the date the Common Stock is sold (or
later tax recognition date) in an amount equal to the lesser of (i) the fair
market value of the Common Stock on that date less the amount paid by the
optionee for such Common Stock, or (ii) the amount realized on the disposition
of the Common Stock less the amount paid by the optionee for such Common Stock;
the Company may then claim a deduction for the amount of such compensation
income.
The federal income tax consequences summarized hereinabove are based
upon current law and are subject to change.
The 1999 Option Plan is being submitted to the stockholders of the
Company for approval in order to comply with certain Nasdaq rules applicable to
the Company and in order to satisfy one of the Code's conditions to qualifying
certain Options granted thereunder as incentive stock options. In the event that
the 1999 Option Plan is not approved by stockholders, it will not be effective;
however, the Board of Directors may consider readoption of the 1999 Option Plan
or another similar plan.
The Board of Directors recommends that stockholders vote FOR the
approval of the 1999 Option Plan.
PROPOSAL NO. 3 -- APPROVAL OF CHARTER AMENDMENT
TO EFFECT A 1-FOR-100 REVERSE STOCK SPLIT FOLLOWED
IMMEDIATELY BY A 100-FOR-1 FORWARD STOCK SPLIT
(ITEM 3 ON THE PROXY CARD)
GENERAL
The Board of Directors has authorized, and recommends for your
approval, a reverse 1-for-100 stock split of the outstanding shares of the
Company's Common Stock (the "Reverse Split") followed immediately by a forward
100-for-1 stock split of the outstanding shares Company's Common Stock (the
"Forward Split"). As permitted under Delaware corporate law, stockholders whose
shares are converted in the Reverse Split into less than one (1) share will be
eligible to receive, in lieu of such fractional share interests, cash payments
equal to their fair value, as more particularly described hereinbelow. The
Reverse Split and the Forward Split (collectively, the "Stock Splits") are to be
effected by means of an amendment to the Restated Certificate of Incorporation
of the Company, as previously amended (the "Charter"), the form of which is
reprinted at Annex B hereto. Consequently, the Stock Splits require the approval
of a majority of the outstanding shares of Common Stock in order to become
effective. If so approved, the Stock Splits will become effective approximately
one month after the 1999 Annual Meeting date, on June __, 1999. Set forth below
is a discussion of certain material features of the Stock Splits and related
matters. Similar information, in "Question and Answer" format, may be found at
Annex C hereto. In this section of the Proxy Statement, the term "stockholder"
refers to: (i) record holders of the Common Stock as reflected in the stock
record books of the Company; and (ii) beneficial holders of Common Stock whose
shares are held in "street name" through a bank, broker or other nominee.
STOCKHOLDERS ARE REMINDED THAT ALL SHARE NUMBERS MENTIONED IN THIS
SECTION ARE AFTER GIVING EFFECT TO THE COMPANY'S 1-FOR-25 REVERSE STOCK SPLIT
EFFECTED IN MAY 1992 (THE "1992 REVERSE STOCK SPLIT"). A LARGE NUMBER OF RECORD
HOLDERS OF COMMON STOCK HAVE YET TO EXCHANGE THEIR PRE-1992 REVERSE STOCK SPLIT
COMMON STOCK CERTIFICATES (BEARING CUSIP NO. 268613-10-6) FOR POST-1992 REVERSE
STOCK SPLIT CERTIFICATES (BEARING CUSIP NO. 268613-20-5). ANY STOCKHOLDER
WISHING TO DETERMINE THE NUMBER OF CURRENTLY OUTSTANDING SHARES OF COMMON STOCK
REPRESENTED BY A PRE-REVERSE STOCK SPLIT COMMON STOCK CERTIFICATE SHOULD DIVIDE
THE NUMBER OF SHARES
23
<PAGE>
APPEARING THEREON BY 25 AND THEN ROUND UP THE RESULTING QUOTIENT TO THE NEAREST
WHOLE SHARE NUMBER.
EFFECT ON STOCKHOLDERS
If approved at the meeting, the Stock Splits will affect the Company's
stockholders as follows after completion:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Stockholder as of June __, 1999 Net Effect After Completion of Stock Splits
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Stockholders holding 100 or more shares of Common Stock in a None
in a given record or beneficial ownership account
- ---------------------------------------------------------------------------------------------------------------------
Stockholders holding fewer than 100 shares of Common Stock in a Shares will be cashed out at a price based on the
given record or beneficial ownership account trading value of the shares at that time (see
"Determination of Trading Value" below). These
stockholders will not have to pay any service
charges to the Company or its transfer or exchange
agent or any brokerage fees or commissions.
Holders of these shares will not have any
continuing equity interest in the Company.
- ---------------------------------------------------------------------------------------------------------------------
REASONS FOR THE STOCK SPLITS
The Stock Splits are being proposed for the following reasons, among
other things (as described in more detail under "Background and Purpose of the
Transaction" below):
- ---------------------------------------------------------------------------------------------------------------------
Issue Proposed Solution
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
As a result of the Company's various equity capital raising The Stock Splits will reduce the number of record
efforts prior to current management's taking control in 1989 and beneficial holders with small, "odd-lot"
and the 1992 Reverse Stock Split, there are large number of accounts and thereby result in significant cost
holders of small, "odd-lots" of the Company's Common Stock. The savings for the Company.
Company believes that there are approximately 7,100 stockholder
accounts holding fewer than 100 shares of Common Stock.
Continuing to maintain accounts for these stockholders has cost
and will continue to cost the Company approximately $______per
year.
- ---------------------------------------------------------------------------------------------------------------------
In many cases, it is both more expensive (per share) and The Stock Splits will "cash out" record and
difficult for stockholders with fewer than 100 shares to sell beneficial stockholders with small, "odd-lot"
their shares in the open market as compared to stockholders accounts without transaction costs such as
holding 100 shares or more. brokerage fees and commissions. However, if these
stockholders do not want their Common Stock
holdings to be "cashed out," they may: (1)
purchase additional shares in the open market to
increase their record and/or beneficial account(s)
to at least 100 shares, or (2) if applicable,
consolidate/transfer their record and/or
beneficial accounts prior to June __, 1999 so that
at least 100 shares are held in such account(s).
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
STRUCTURE OF THE STOCK SPLITS
The Stock Splits comprise a reverse stock split (the Reverse Split) and
a forward stock split (the Forward Split) of the outstanding shares of Common
Stock. If the Stock Splits are approved and become effective, the Reverse Split
will occur at 6:00 p.m. (New York City time) on June __, 1999. All stockholders
at that time will receive one (1) share of Common Stock for every 100 shares of
Common Stock held in their record or beneficial accounts at that time,
determined on an account-by-account basis. However, any stockholder who holds
fewer than 100 shares of Common Stock in a record or beneficial account at that
time (such shares, "Cashed-Out Shares;" and a holder of Cashed-Out Shares, as
such, a "Cashed-Out Stockholder") will have his or her Cashed-Out Shares
converted into the right to receive a cash payment instead of fractional shares.
This cash payment will be based on the trading value of the Cashed-Out Shares at
that time. See "Determination of Trading Value" below for a description of how
the trading value will be determined. Immediately following the Reverse Split,
at 6:01 p.m. (New York City time) on June __ 1999, all non-Cashed-Out
Stockholders will receive 100 shares of Common Stock for each whole share of
stock that they were entitled to receive as a result of Reverse Split. If a
stockholder holds 100 or more shares immediately prior to the effective time on
June __, 1999 of the Reverse Split: (i) any fractional share in the account will
not be cashed out in the Reverse Split, and (ii) the total number of shares held
in that account will not change as a result of the Stock Splits.
In general, the Stock Splits can be illustrated by the following
examples:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Hypothetical Scenario Result
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Mr. A is a stockholder who holds 99 shares of Common Stock in Instead of receiving a fractional share (99/100 of
either a record or beneficial account as of 6:00 p.m. (New York a share) of Common Stock as a result of the
City time) on June __, 1999. Assume that the trading value of Reverse Split, Mr. A's 99 shares will be converted
one (1) share of the Company's Common Stock at that time (see into the right to receive cash. Using the
"Determination of Trading Value" below ) is $10.00. hypothetical trading value of $10.00 per share,
Mr. A will receive $990 ($10.00 X 99 shares).
NOTE: If Mr. A wants to continue his investment in
the Company, he can buy at least one (1) more
share of Common Stock and hold it in his relevant
account. But Mr. A would have to act far enough in
advance of June __, 1999 so that the purchase is
complete by the close of business on that date.
- ---------------------------------------------------------------------------------------------------------------------
Mrs. B has two (2) record or beneficial accounts. As of June ALL of Mrs. B's shares in BOTH accounts will be
__, 1999, she holds 50 shares of the Company's Common Stock in converted into the right to receive cash instead
one account and 70 shares in the other. Assume that the trading of receiving fractional shares (1/2 share and 7/10
value of one (1) share of the Company's Common Stock at that share). Using the hypothetical trading value of
time (see "Determination of Trading Value" below) is $10.00. $10.00 per share, Mrs. B would receive two checks
totaling $1,200 (50 X $10.00 = $500 PLUS 70 X
$10.00 = $700; $500 + $700 = $1,200). NOTE: If
Mrs. B wants to continue her investment in the
Company, she can consolidate her two record or
beneficial accounts prior to June __, 1999. In
that case, her holdings will not be cashed out
because she will hold at least 100 shares in one
record or beneficial account. But she would have
to act far enough in advance so that the
consolidation is complete by the close of business
on June __, 1999.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------
Mr. C holds 150 shares of the Company's Common Stock in his After the Stock Splits, Mr. C will continue to
record or beneficial account as of June ___, 1999. hold all 150 shares of the Company's Common Stock.
- ---------------------------------------------------------------------------------------------------------------------
NOTE: The numbers in the above table are after giving effect to the 1992 Reverse Stock Split. See "General" above.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
BACKGROUND AND PURPOSE OF THE STOCK SPLITS
The Company has an unusually large base of stockholders who hold less
that 100 shares, principally as a result of the Company's various equity capital
raising efforts prior to current management's taking control in 1989, and the
1992 Reverse Stock Split. In the equity capital raising transactions, the shares
of the Company's Common Stock were distributed to a relatively wide stockholder
base. At present, the Company believes that its Common Stock is held in more
than 4,700 odd-lot record accounts and not less than 2,385 odd-lot beneficial
accounts. These represent over 92.5% of the record accounts and over 71% of the
beneficial accounts known to the Company, but these accounts together hold only
approximately 170,000, or less than 4%, shares of the total number of
outstanding shares of Common Stock.
The Stock Splits will provide stockholders with fewer than 100 shares
with a cost-effective way to cash out their investments, because the Company
will pay all transaction costs in connection therewith. In most other cases,
odd-lot stockholders would likely incur brokerage fees disproportionately high
relative to the market value of their shares if they wanted to sell their stock.
In addition, some small stockholders might even have difficulty finding a broker
willing to handle such small transactions. The Stock Splits, however, would
eliminate these problems for most small stockholders.
Moreover, the Company will benefit from substantial cost savings as a
result of the Stock Splits. The costs of administering each stockholder's
account is the same regardless of the number of shares held in those accounts.
Therefore, the Company's costs to maintain thousands of small accounts are
disproportionately high when compared to the total number of shares involved. In
1999, the Company expects that each stockholder will cost the Company
approximately $____ for transfer agent fees and the printing and postage costs
to mail proxy materials and the annual report. The Company expects that these
costs will only increase over time. In light of these disproportionate costs,
the Board of Directors believes that it is in the best interests of the Company
and its stockholders as a whole to eliminate the administrative burden and costs
associated with approximately 7,100 stockholder accounts with fewer than 100
shares of the Common Stock. In the past, the Company has taken other steps to
help eliminate its relatively large number of odd-lot stockholder accounts, but
with only limited success. See "Certain Transactions - Odd-Lot Offers" above.
Unlike the Odd-Lot Offers described in that section of this Proxy Statement, the
success of the Stock Splits in eliminating these accounts will not depend on
stockholders' taking affirmative steps to forward stock certificates or other
materials to the Company. The Company expects that if the Stock Splits are
approved completed, its total direct cost of administering stockholder accounts
will be reduced by approximately $______ per year. If the Stock Splits are not
approved or completed, the Company may in the future pursue alternative methods
of reducing its stockholder base. However, there can be no assurance that the
Company will decide to pursue any such methods or engage in any related such
activities.
26
<PAGE>
EFFECT OF THE STOCK SPLITS ON STOCKHOLDERS
STOCKHOLDERS WITH RECORD OR BENEFICIAL ACCOUNTS OF FEWER THAN 100 SHARES
If the Stock Splits are approved and completed, Cashed-Out Stockholders
(I.E., those holding fewer than 100 shares of Common Stock in a record or
beneficial account immediately prior thereto):
o Will not receive a fractional share of Common Stock as a result of the
Stock Splits;
o Will instead have fractional shares of Common Stock (Cashed-Out Shares)
converted in the Reverse Split into the right to receive cash equal to
their trading value (see "Determination of Trading Value" below),
without any interest;
o After the Reverse Split, will have no further interest in the Company
with respect to their Cashed-Out Shares. Cashed-Out Shares will no
longer be outstanding and, consequently, will not entitle holders
thereof to any right to vote as a stockholder of the Company or to
share in the Company's assets, earnings, or profits. In other words,
Cashed-Out Stockholders will no longer hold their Cashed-Out Shares;
rather, they will have only the right to receive cash therefor.
o Will not have to pay any service charges or brokerage fees or
commissions in connection with the Stock Splits.
o As soon as practicable after June __, 1999, will be entitled to receive
cash for their Cashed-Out Shares in accordance with the procedures
described below;
o Will be subject to applicable federal and state income taxes and state
abandoned property laws with respect to the cash payable for their
Cashed-Out Shares; and
o Will not receive any interest on cash payments owed to them as a result
of the Stock Splits.
Stockholders will receive a Letter of Transmittal from the Company as
soon as practicable after June __, 1999, containing instructions on how to
surrender their certificate(s) for Cashed-Out Shares to the Company's exchange
agent for the Stock Splits, Continental Stock Transfer & Trust Company, in
exchange for their cash payment. CASHED-OUT STOCKHOLDERS WILL NOT RECEIVE THEIR
CASH PAYMENTS UNTIL THEY SURRENDER THEIR CERTIFICATE(S) REPRESENTING CASHED-OUT
SHARES TO CONTINENTAL STOCK TRANSFER & TRUST COMPANY, TOGETHER WITH A COMPLETED
AND EXECUTED COPY OF THE LETTER OF TRANSMITTAL. Please do not send your
certificates until you receive your Letter of Transmittal. If Cashed-Out Shares
are held beneficially through a bank, broker or other nominee, Cashed-Out
Stockholders should follow the instructions provided by such nominee to effect
the exchange thereof for cash.
For further information, see "New Stock Certificates" below.
- --------------------------------------------------------------------------------
NOTE: If you want to continue to hold Common Stock in the Company after the
Stock Splits, you may do so by taking either of the following actions, far
enough in advance so that it is complete by June __, 1999:
(1) Purchase a sufficient number of shares of Common Stock on the open
market and have them consolidated with your record or beneficial
account(s) so that you hold at least 100 shares in your record or
beneficial account(s) immediately prior to the Reverse Split; or
(2) If applicable, consolidate your record and/or beneficial account(s) so
that you hold at least 100 shares of Common Stock in one or all such
record or beneficial account(s) immediately prior to the Reverse Split.
- --------------------------------------------------------------------------------
STOCKHOLDERS WITH 100 OR MORE SHARES
If the Stock Splits are approved and completed, each share owned by a
stockholder with 100 or more shares of Common Stock in his or her record or
beneficial account as of 6:00 p.m. (New York City time) on June __, 1999, will
first be converted into one-hundredth (1/100th) of the number of shares such
stockholder held immediately prior to the Reverse Split. One minute after the
Reverse Split, at 6:01 p.m. (New York City time) on the same date, those shares
will again be converted, pursuant to the Forward Split, into 100 times the
number of shares held as a result of the Reverse Split. In other words, these
stockholders will after the Stock Splits hold the
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same number of shares that they did before the Stock Splits. For example, a
record holder of 250 shares of Common Stock immediately prior to the Reverse
Split would have his or her shares converted into 2.5 shares in the Reverse
Split and back to 250 shares in the Forward Split. Accordingly, the Stock Splits
will not affect the number of shares held by stockholders with 100 or more
shares of Common Stock in a record or beneficial account immediately prior to
the Reverse Split. These stockholders will receive a request to surrender their
stock certificate(s) with a properly executed Letter of Transmittal to the
Company's transfer agent, Continental Stock Transfer & Trust Company, in order
to receive a new certificate bearing the Common Stock's new CUSIP number after
the Stock Splits. For further information, see "New Stock Certificates" below.
DETERMINATION OF TRADING VALUE
Under Delaware corporate law, the Company may, in lieu of issuing
fractional shares resulting from the Stock Splits, pay the fair value of such
fractional shares as of the time that the Stock Splits are effected. If
stockholders approve the Stock Splits and they are completed, the Company will
pay cash for Cashed-Out Shares based on the trading value of the shares of
Common Stock that are cashed-out. The trading value of each outstanding share of
Common Stock at that time will be based on the average of the closing sales
prices per share of Common Stock, as reported by The Nasdaq Stock Market, on
each of the 20 consecutive Nasdaq trading days ending with the Nasdaq trading
date immediately prior to the June __, 1999, without any interest.
EFFECT OF THE TRANSACTION ON THE COMPANY
The Stock Splits will not affect the public registration of the Common
Stock with the Commission under the Act. Similarly, the Company does not expect
that the Stock Splits will affect the Company's listing of the Common Stock on
The Nasdaq Stock Market's National Market system. The Company's Charter
currently authorizes the issuance of 60,000,000 million shares of Common Stock.
The number of authorized shares of Common Stock will not change as a result of
the Stock Splits. On March 31, 1999, there were 4,453,463 shares of Common Stock
outstanding. As a result of the cashing-out of fractional shares held by
Cashed-Out Stockholders, the total number of outstanding shares of Common Stock
will be reduced by the number of Cashed-Out Shares. The Company believes that if
the Stock Splits took place on the date hereof, the number of outstanding shares
of Common Stock would have be reduced to approximately 4,280,000 shares, or by
approximately 170,000 shares. In addition, the number of accounts holding Common
Stock would be reduced from in excess of 8,000 by approximately 7,100
stockholders. The total number of Cashed-Out Shares and the total cash to be
paid by the Company are unknown at this time. However, if the Stock Splits were
completed as of the date hereof, when the average daily closing price per share
of the Company's Common Stock on Nasdaq for the 20 trading days immediately
preceding was $___, then the cash payments that would be payable to Cashed-Out
Stockholders would have been approximately $_._ million. The actual amounts will
depend on the number of Cashed-Out Shares on June __, 1999, which could vary
from the number of such stockholders on the date hereof. The Company also cannot
know now what the average daily closing price per share of Common Stock on
Nasdaq for the 20 trading days prior to and including June ___, 1999 will be.
The par value of the Common Stock will be unaffected as a result of the
Stock Splits.
NEW STOCK CERTIFICATES
The Company will obtain a new CUSIP number to identify certificates
representing post-Stock Splits shares of Common Stock. Any stockholder with 100
or more shares immediately prior to the Reverse Split will receive a Letter of
Transmittal with instructions on how to receive a new certificate bearing the
new CUSIP number. Please do not send your certificates until you receive your
Letter of Transmittal. After June __, 1999, an
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old certificate presented to the transfer agent in settlement of a trade or for
a restrictive legend removal will be exchanged for a new certificate bearing the
new CUSIP number.
As described above, Cashed-Out Stockholders will receive a Letter of
Transmittal after the Stock Splits are completed. These stockholders must
complete and sign their Letter of Transmittal and return it with their stock
certificate(s) representing Cashed-Out Shares to the Company's exchange agent
before they can receive the cash payment for those Cashed-Out Shares.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a brief a summary of certain federal income tax
consequences to the Company and stockholders resulting from the Stock Splits.
This summary is based on existing U.S. federal income tax law, which may change,
even retroactively. This summary does not discuss all aspects of federal income
taxation which may be important to stockholders in light of their individual
circumstances. Many stockholders (such as financial institutions, insurance
companies, broker-dealers, tax-exempt organization, and foreign persons) may be
subject to special tax rules. Other stockholders may also be subject to special
tax rules, including but not limited to: stockholders who received Common Stock
as compensation for services or pursuant to the exercise of an employee stock
option, and stockholders who have held, or will hold, stock as part of a
straddle, hedging, or conversion transaction for federal income tax purposes. In
addition, this summary does not discuss any state, local, foreign or other tax
considerations. This summary assumes that stockholders are U.S. citizens and
have held, and will hold, their shares of Common Stock as capital assets for
investment purposes under the Code. Stockholders should consult with their own
tax advisors as to the particular federal, state, local, foreign and other tax
consequences, in light their specific circumstances.
The Company believes that the Stock Splits will be treated as a
tax-free "recapitalization" for federal income tax purposes. This will result in
no material federal income tax consequences to the Company, including material
adverse consequences related to its net operating loss carryforwards (NOLs).
FEDERAL INCOME TAX CONSEQUENCES TO STOCKHOLDERS WHO ARE NOT CASHED-OUT BY THE
STOCK SPLITS
Stockholders who (1) continue to hold Common Stock immediately after
the Stock Splits, and (2) receive no cash as a result of the Stock Splits will
not recognize any gain or loss as a result of the Stock Splits and will have the
same adjusted tax basis and holding period in their Common Stock as they had in
such Common Stock immediately prior to the Stock Splits.
FEDERAL INCOME TAX CONSEQUENCES TO CASHED-OUT STOCKHOLDERS
The tax consequences to Cashed-Out Stockholders will depend on whether,
in addition to being entitled to receive cash, they or any person or entity
related to them continues to hold Common Stock immediately after the Stock
Splits, as more particularly described below.
Cashed-Out Stockholders who (1) are entitled to receive cash in
exchange for Cashed-Out Shares as a result of the Stock Splits, (2) do not
continue to hold any Common Stock immediately after the Stock Splits, and (3)
are not related to any person or entity who holds Common Stock immediately after
the Stock Splits will recognize capital gain or loss. The amount of capital gain
or loss that they recognize will equal the difference between the cash they are
entitled to receive for their Cashed-Out Shares and their aggregate adjusted tax
basis in such Cashed-Out Shares.
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Cashed-Out Stockholders who are related to a person or entity who
continues to hold Common Stock immediately after the Stock Splits will recognize
gain in the same manner as set forth in the previous paragraph, provided that
the Cashed-Out Stockholder's right to receive cash either (i) is "not
essentially equivalent to a dividend," or (ii) is a "substantially
disproportionate redemption of stock," as described below.
o "NOT ESSENTIALLY EQUIVALENT TO A DIVIDEND." Cashed-Out Stockholders
will satisfy the "not essentially equivalent to a dividend" test if the
reduction in their proportionate interest in the Company resulting from
the Stock Splits is considered a "meaningful reduction" given their
particular facts and circumstances. The Internal Revenue Service has
ruled that a small reduction by a minority stockholder whose relative
stock interest is minimal and who exercises no control over the affairs
of the corporation will meet this test.
o "SUBSTANTIALLY DISPROPORTIONATE REDEMPTION OF STOCK." The right to
receive cash in the Stock Splits will be a "substantially
disproportionate redemption of stock" for a Cashed-Out Stockholder if
the percentage of the outstanding shares of Common Stock owned by such
stockholder immediately after the Stock Splits is less than 80% of the
percentage of shares of Common Stock owned by such stockholder
immediately prior to the Stock Splits.
In applying these tests, Cashed-Out Stockholders will be treated as
owning shares actually or constructively owned by certain persons and entities
related to them. If the taxable amount is not treated as capital gain under
either of the tests, it will be treated first as ordinary dividend income to the
extent of their ratable share of the Company's undistributed earnings and
profits, and then as a tax-free return of capital to the extent of their
aggregate adjusted tax basis in their shares; any remaining gain will be treated
as capital gain. See "Maximum Tax Rates Applicable to Capital Gain" below.
Cashed-Out Stockholders who both are entitled to receive cash in
exchange for their Cashed-Out Shares and continue to hold Common Stock
immediately after the Stock Splits generally will recognize gain, but not loss,
in an amount equal to the lesser of: (1) the excess of the sum of aggregate fair
market value of their shares of Common Stock of the Company plus the cash that
they are entitled to receive as a result of the Stock Splits over their adjusted
tax basis in those shares, and (2) the amount of cash that they are entitled to
receive as a result of the Stock Splits. In determining whether they continue to
hold stock immediately after the Stock Splits, Cashed-Out Stockholders will be
treated as owning shares actually or constructively owned by certain individuals
and entities related to them. Their aggregate adjusted tax basis in their shares
of Common Stock held immediately after the Stock Splits will be equal to their
aggregate adjusted tax basis in their shares of Common Stock held immediately
prior to the Stock Splits, increased by any gain recognized in the Stock Splits,
and decreased by the amount of cash that they are entitled to receive as a
result of the Stock Splits.
Any gain recognized as a result of the Stock Splits will be treated,
for federal income tax purposes, as capital gain, provided that Cashed-Out
Stockholder's right to receive cash either: (1) is "not essentially equivalent
to a dividend" with respect to such Cashed-Out Stockholder or (2) is a
"substantially disproportionate redemption of stock" with respect to such
Cashed-Out Stockholder. (See above.) In applying these tests, Cashed-Out
Stockholders may possibly take into account sales of shares of Common Stock of
the Company that occur substantially contemporaneously with the Stock Splits. If
their gain is not treated as capital gain under any of these tests, the gain
will be treated as ordinary dividend income to you to the extent of the
Cashed-Out Stockholder's ratable share of the Company's undistributed earnings
and profits, and then as a tax-free return of capital to the extent of his or
her aggregate adjusted tax basis in his or her your shares; any remaining gain
will be treated as a capital gain.
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MAXIMUM TAX RATES APPLICABLE TO CAPITAL GAIN
Under current law, the net capital gain (defined generally as your
total capital gains in excess of capital losses for the year) recognized upon
the sale of capital assets that have been held for more than 12 months generally
will be subject to tax at a rate not to exceed 20%. Net capital gain recognized
from the sale of capital assets that have been held for 12 months or less will
continue to be subject to tax at ordinary income tax rates. In addition, capital
gain recognized by a corporate taxpayer will continue to be subject to tax at
the ordinary income tax rates applicable to corporations.
As described above, the amounts paid to a Cashed-Out Stockholder as a
result of the Transaction may result in dividend income, capital gain income,
capital loss or some combination of dividend and capital gain income depending
on individual circumstances. STOCKHOLDERS SHOULD CONSULT WITH THEIR TAX ADVISORS
AS TO THE PARTICULAR FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES
OF THE STOCK SPLITS, IN LIGHT OF THEIR SPECIFIC CIRCUMSTANCES.
APPRAISAL RIGHTS
Dissenting stockholders do not have appraisal rights under Delaware
corporate law or under the Company's Charter or Bylaws in connection with the
Transaction.
RESERVATION OF RIGHTS
The Board of Directors reserves the right to abandon the Stock Splits
without further action by the stockholders at any time before the filing of the
Charter amendment with the Delaware Secretary of State, even if the Stock Splits
have been authorized by the stockholders at the meeting.
The Board of Directors recommends that stockholders vote FOR the
approval of the Charter amendment to effect the Stock Splits.
PROPOSAL NO. 4 -- RATIFICATION OF APPOINTMENT OF
INDEPENDENT ACCOUNTANTS
(ITEM 4 ON PROXY CARD)
The Board of Directors of the Company has appointed the firm of
PricewaterhouseCoopers LLP as its independent accountants for the fiscal year
ending December 31, 1999. PricewaterhouseCoopers LLP served in such capacity for
the Company's preceding fiscal year. The Company has been advised by
PricewaterhouseCoopers LLP that neither it nor any member thereof has any
financial interest, direct or indirect, in the Company in any capacity. A
representative of PricewaterhouseCoopers LLP is expected to be present at the
Annual Meeting of Stockholders, will be given an opportunity to make a statement
if he or she desires to do so and is expected to be available to respond to
appropriate questions.
The Board of Directors recommends that stockholders vote FOR the
ratification of the appointment of PricewaterhouseCoopers LLP as the Company's
independent accountants for the current fiscal year.
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OTHER MATTERS; PROPOSALS OF STOCKHOLDERS
The Company's Bylaws require that any business or proposals to be
considered or voted upon at any meeting of stockholders, if not offered by the
Board of Directors, on behalf of the Board of Directors by an authorized
committee thereof or by the Chairman of the meeting, be offered by a stockholder
of the Company entitled to vote thereon at such meeting, but only if written
notice thereof, containing specified information, is delivered to the Secretary
of the Company so as to be received not less than 30 nor more than 60 days prior
to the meeting; PROVIDED, HOWEVER, that: (a) if less than 35 days notice of the
meeting is given to stockholders, such notice must be so delivered not later
than the seventh day following the date on which such notice of the meeting was
mailed; and (b) such notice is not be required with respect to any stockholder
proposal that is included in the Company's proxy materials in accordance with
Rule 14a-8 under the Exchange Act ("Rule 14a-8"). There is no stockholder
proposal included in these proxy materials and the Secretary of the Company has
not received notice in accordance with the foregoing of any other business or
proposal (not disclosed in this Proxy Statement) to be considered or voted upon
at the 1999 Annual Meeting of Stockholders. If any business, proposal or other
matter not described in these proxy materials should be brought before such
meeting for a vote, it is the intention of the persons named in the enclosed
form of Proxy to vote in accordance with their discretion.
Proposals of stockholders intended to be presented at the 2000 Annual
Meeting of Stockholders and included in the Company's proxy materials therefor
in accordance with Rule 14a-8 must be received at the Company's executive
offices on or before December __, 1999. Other stockholder business and proposals
intended to be presented at such meeting must be received by the Secretary of
the Company within the time-frames described in the immediately preceding
paragraph.
ELXSI CORPORATION
By Alexander M. Milley
Chairman of the Board,
President & Chief Executive Officer
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE,
STOCKHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE URGED TO FILL
IN, SIGN, DATE AND RETURN THE ENCLOSED FORM OF PROXY OR VOTE VIA THE INTERNET OR
BY TELEPHONE.
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1998, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, MAY
BE OBTAINED WITHOUT CHARGE BY ANY STOCKHOLDER OF THE COMPANY OF RECORD AS OF
MARCH 31, 1999 BY WRITING TO: ELXSI CORPORATION, 3600 RIO VISTA AVENUE, SUITE A,
ORLANDO, FLORIDA 32805, ATTENTION: THOMAS R. DRUGGISH.
THE COMPANY'S STOCK TRANSFER AGENT IS CONTINENTAL STOCK TRANSFER &
TRUST COMPANY, 2 BROADWAY, NEW YORK, NEW YORK 10004; TELEPHONE: (212) 509-4000.
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ANNEX A
ELXSI CORPORATION
1999 INCENTIVE STOCK OPTION PLAN
1. PURPOSE. The purpose of this Plan is to advance the interests of
ELXSI Corporation by providing an opportunity to selected directors, officers
and key employees of the Company and its Subsidiaries to purchase shares of
Common Stock through the exercise of options granted pursuant to this Plan,
which may be either Incentive Options or Nonqualified Options. By encouraging
such stock ownership, the Company seeks to establish as close an identity as
feasible between the interests of the Company and its Subsidiaries and those of
such directors, officers and key employees and also seeks to attract, retain,
motivate and reward persons of superior ability, training and experience.
2. DEFINITIONS.
(1) BOARD means the Board of Directors of the Company.
(2) CODE means the Internal Revenue Code of 1986 and
regulations thereunder, as amended from time to time.
(3) COMMITTEE means the committee appointed by the Board
responsible for administering the Plan or, in the absence
of the such an appointment, the Compensation Committee of
the Board.
(4) COMMON STOCK means the common stock of the Company, par
value $.001 per share.
(5) COMPANY means ELXSI Corporation, a Delaware corporation.
(6) DIRECTOR means each individual who is serving as a member
of the Board as of the time of reference.
(7) ELIGIBLE PERSON means an individual who is serving in any
one or more of the following capacities: Director,
director of a Subsidiary, officer of the Company, officer
of any Subsidiary, or Key Employee.
(8) EMPLOYEE means an employee of the Company or any
Subsidiary within the meaning of Code Section 3401(c).
(9) INCENTIVE OPTION means a stock option granted to an
Employee and intended to qualify as an "incentive stock
option" within the meaning of Code Section 422 and
designated as such.
(10) KEY EMPLOYEE means an executive, managerial or
administrative Employee.
(11) NONQUALIFIED OPTION means a stock option not intended to
be an Incentive Option and designated as nonqualified, the
federal income tax treatment of which is determined
generally under Code Section 83.
(12) OPTION means either an Incentive Option or a Nonqualified
Option granted pursuant to this Plan.
(13) PLAN means this ELXSI Corporation 1999 Incentive Stock
Option Plan as set forth herein, and as amended from time
to time.
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(14) SECURITIES ACT means the Securities Act of 1933, as
amended, and rules and regulations promulgated pursuant
thereto, as amended from time to time.
(15) SUBSIDIARY means a "subsidiary" of the Company within the
meaning of Code Section 424(f), which generally is defined
as any corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company if, at
the relevant time, each of the corporations other than the
last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power
of all classes of stock in one of the other corporations
in the chain.
3. EFFECTIVE DATE. This Plan was approved and adopted by the Board on
March 15, 1999. The effective date of this Plan shall be May __, 1999, the date
of the annual meeting of stockholders of the Company, so long as this Plan is
approved by the stockholders of the Company on said date.
4. STOCK SUBJECT TO PLAN. The maximum aggregate number of shares of
Common Stock that may be made subject to Options granted hereunder is 75,000
shares, which number shall be adjusted in accordance with Section 9 in the event
of any change in the Company's capital structure. Shares of Common Stock issued
pursuant to this Plan may consist, in whole or in part, of either authorized and
unissued shares or issued shares held in the Company's treasury. Any shares
subject to an Option that for any reason expires or is terminated unexercised as
to such shares may again be the subject of an Option under this Plan.
5. ADMINISTRATION. The Plan shall be administered by a Committee
appointed by the Board consisting of not fewer than two individuals who are
Directors. The Board shall have the discretion to remove and appoint members of
the Committee from time to time. The Committee shall have full power and
discretion, subject to the express provisions of this Plan, (i) to determine the
Eligible Persons to whom Options are to be granted, the time or times at which
Options are to be granted, the number of shares of Common Stock to be made
subject to each Option, whether each Option is to be an Incentive Option or a
Nonqualified Option, the exercise price per share under each Option, and the
maximum term of each Option; (ii) to interpret and construe the Plan and to
prescribe, amend and rescind rules and regulations for its administration; (iii)
to determine the terms and provisions of each option agreement evidencing an
Option; and (iv) to make all other determinations the Committee deems necessary
or advisable for administering this Plan. All decisions of the Committee shall
be made by a majority of its members, which shall constitute a quorum, and shall
be reflected in minutes of its meetings.
6. ELIGIBILITY. Options may be granted to such Eligible Persons as the
Committee selects.
7. TERMS AND CONDITIONS OF OPTIONS. Options granted pursuant to this
Plan shall be evidenced by stock option agreements in such form and containing
such terms and conditions as the Committee shall determine. If an Eligible
Person to whom an Option is granted does not execute an option agreement
evidencing that Option in the form prescribed by the Committee within the later
of (i) thirty days from the date of grant of the Option or (ii) ten days after
the Eligible Person's receipt of an option agreement from the Company, the
Option shall be void and of no further force or effect. Each option agreement
evidencing an Option shall contain among its terms and conditions the following:
(1) PRICE. Subject to the conditions on Incentive Options
contained in Section 8(2), if applicable, the purchase price
per share of Common Stock payable upon the exercise of each
Option granted hereunder shall be as determined by the
Committee in its discretion but shall not be less than the
fair market value (or, in the case of Nonqualified Options,
75% of the fair market value) of the Common Stock on the day
the Option is granted or, if greater, the book value of the
Common Stock on that date. The fair market value of Common
Stock shall be as determined by the Committee in its
discretion in accordance with any applicable laws or rules.
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(2) NUMBER OF SHARES AND KIND OF OPTION. Each option agreement
shall specify the number of shares to which it pertains and
shall specify whether the Option is a Nonqualified Option or
an Incentive Option.
(3) TERMS OF EXERCISE. Subject to the conditions on Incentive
Options contained in Section 8(2), if applicable, and to
Section 10, each Option shall be exercisable for the full
amount or for any part thereof and at such intervals or in
such installments as the Committee may determine at the time
it grants such Option; provided, however, that (i) no Option
shall be exercised as to fewer than 25 shares of Common
Stock or, if less, the total number of shares of Common
Stock remaining unexercised under the Option, and (ii) no
Option shall be exercisable with respect to any shares
earlier than six months from the date the Option is granted
or later than ten years after the date the Option is
granted, except to the extent permitted in the event of the
death of the holder of a Nonqualified Option under Section
7(7).
(4) NOTICE OF EXERCISE AND PAYMENT. An Option shall be
exercisable only by delivery of a written notice to the
Company's Treasurer, or any other officer of the Company
that the Committee designates to receive such notices,
specifying the number of shares of Common Stock for which
the Option is being exercised. If the shares of Common Stock
acquired upon exercise of an Option are not at the time of
exercise effectively registered under the Securities Act,
the optionee shall provide to the Company or Committee, as a
condition to the optionee's exercise of the Option, a
letter, in form and substance satisfactory to the Company,
to the effect that the shares are being purchased for the
optionee's own account for investment and not with a view to
distribution or resale, and to such other effects as the
Company deems necessary or appropriate to comply with
federal and applicable state securities laws. Payment shall
be made in full at the time the Option is exercised. Payment
shall be made by:
(i) cash;
(ii) delivery and assignment to the Company of
shares of Common Stock owned by the optionee;
(iii) delivery and assignment to the Company of
other securities of the Company owned by the
optionee;
(iv) delivery of a written exercise notice,
including irrevocable instructions to the
Company to deliver the stock certificates
issuable upon exercise of the Option directly
to a broker named in the notice that has
agreed to participate in a "cashless"
exercise on behalf of the optionee.
(v) a combination of (i), (ii) and (iii).
Upon the optionee's satisfaction of all conditions required
for the exercise of the Option and payment in full of the
purchase price for the shares being acquired as aforesaid,
the Company shall, within a reasonable period of time
following such exercise, deliver a certificate representing
the shares of Common Stock so acquired; provided, that the
Company may postpone issuance and delivery of shares upon
any exercise of an Option to the extent necessary or
advisable to comply with the applicable requirements of The
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Nasdaq Stock Market ("Nasdaq") or any exchange on which the
Common Stock is listed, or any federal or state securities
laws.
(5) WITHHOLDING TAXES. The Company's obligation to deliver
shares of Common Stock upon exercise of an Option, in whole
or in part, shall be subject to the optionee's satisfaction
of all applicable federal, state and local tax withholding
obligations, if any.
(6) NONTRANSFERABILITY OF OPTION. No Option shall be
transferable by the optionee otherwise than by will or the
laws of descent and distribution and shall be exercisable
during the optionee's lifetime only by the optionee (or the
optionee's guardian or legal representative).
(7) LEGENDS. Any restriction on transfer of shares of Common
Stock provided in this Plan or in the option agreement
evidencing any Option shall be noted or referred to
conspicuously on each certificate evidencing such shares.
8. RESTRICTIONS ON INCENTIVE OPTIONS. Incentive Options (but not
Nonqualified Options) granted under this Plan shall be subject to the following
restrictions:
(1) LIMITATION ON NUMBER OF SHARES. The aggregate fair market
value, determined as of the date an Incentive Option is
granted, of the shares with respect to which Incentive
Options are exercisable for the first time by an Employee
during any calendar year shall not exceed $100,000. If an
Incentive Option is granted pursuant to which the aggregate
fair market value of shares with respect to which it first
becomes exercisable in any calendar year by an Employee
exceeds the aforementioned $100,000 limitation, the portion
of such Option which is in excess of the $100,000 limitation
shall be treated as a Nonqualified Option pursuant to Code
Section 422(d)(1). In the event that an Employee is eligible
to participate in any other stock option plan of the Company
or a Subsidiary which is also intended to comply with the
provisions of Code Section 422, the $100,000 limitation
shall apply to the aggregate number of shares for which
Incentive Options may be granted under all such plans.
(2) 10% STOCKHOLDER. If any Employee to whom an Incentive Option
is granted pursuant to the provisions of this Plan is on the
date of grant the owner of stock (as determined under Code
Section 424(d)) possessing more than 10% of the total
combined voting power of all classes of stock of the Company
or a Subsidiary, then the following special provisions shall
be applicable to the Incentive Option granted to such
individual:
(i) The Option price per share subject to such
Incentive Option shall not be less than 110%
of the fair market value of one share on the
date of grant; and
(ii) The Incentive Option shall not have a term in
excess of five (5) years from its date of
grant.
9. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Appropriate and equitable
adjustment shall be made in the maximum number of shares of Common Stock subject
to this Plan under Section 4 and, subject to Section 10, in the number, kind and
option price of shares of Common Stock subject to then outstanding Options to
give effect to any changes in the outstanding Common Stock by reason of any
stock dividend, stock split, stock combination, merger, consolidation,
reorganization, recapitalization or any other change in the capital structure of
the Company affecting the Common Stock after the effective date of this Plan.
A-4
<PAGE>
10. CHANGE IN CONTROL, MERGER, ETC.
(1) CHANGE IN CONTROL. Upon the occurrence of any of the
events listed below, all outstanding Incentive Options and
Nonqualified Options held by all optionees pursuant to this
Plan which are not otherwise exercisable in whole or in part
shall become immediately exercisable in full, unless and to
the extent otherwise determined by the Committee. The events
are as follows:
(i) The sale by the Company of all or
substantially all of its assets;
(ii) Any of the following events if,
immediately following such event, a
majority of the Directors consists of
persons who were not Directors
immediately prior to the date of such
event:
(a) the sale of 50% or more of the
outstanding shares of Common
Stock of the Company in a
single transaction;
(b) the consummation of a tender
offer (by a party other than
the Company) for more than 50%
of the outstanding shares of
Common Stock of the Company;
or
(c) subject to Section 10(2)
below, the consummation of a
merger or consolidation
involving the Company; or
(iii) An election of new Directors if
immediately following such election a
majority of the Directors consists of
persons who were not nominated by
management to stand for election as
Directors in such election.
(2) WHERE COMPANY DOES NOT SURVIVE. In the event of a
merger or consolidation to which the Company is a
party but is not the surviving company, the Committee
in its discretion may vote to negate and give no
effect to the acceleration of Options pursuant to
Section 10(1)(ii)(c), but only if and to the extent
that an executed agreement of merger or consolidation
provides that the optionee holding such an Option
shall receive the same merger consideration as the
optionee would have received as a stockholder of the
Company had the exercisability of the Option been
accelerated in accordance with Section 10(1)(ii)(c)
and had the optionee, immediately prior to the merger
or consolidation, exercised the Option for the full
number of shares subject thereto, paid the exercise
price in full, and satisfied all other conditions for
the exercise of the Option.
(3) LIQUIDATION OR DISSOLUTION. The provisions of Section
9 and Subsections 10(1) and (2) shall not cause any
Option to terminate other than in accordance with
other applicable provisions of this Plan. However, in
the event of the liquidation or dissolution of the
Company, each outstanding Option shall terminate,
except to the extent otherwise specifically provided
in the option agreement evidencing the Option.
11. RIGHTS OF OPTIONEE. No Eligible Person shall have a right to be
granted an Option or, having received an Option, a right again to be granted an
Option. An optionee shall have no rights as a stockholder with respect to any
shares of Common Stock covered by his or her Option until the date the Option
has been exercised and the full purchase price for such shares has been received
by the Company. Nothing in this Plan or in any Option granted pursuant to the
Plan shall confer on any individual any right to continue in the employ of or to
continue as an officer or director of, this Company or any Subsidiary or to
interfere in any way with the right of the Company or any Subsidiary to
terminate or modify the terms or conditions of the Option holder's employment or
other relationship with the Company or any Subsidiary.
A-5
<PAGE>
12. AMENDMENT AND TERMINATION OF THE PLAN. Unless sooner terminated by
the Board, this Plan shall terminate, so that no Options may be granted pursuant
to it thereafter, on February 20, 2008. The Board may at any time amend, suspend
or terminate this Plan in its discretion without further action on the part of
the stockholders of the Company, except that:
(1) no such amendment, suspension or termination of the
Plan shall adversely affect or impair any then
outstanding Option without the consent of the
optionee holding the Option; and
(2) any such amendment, suspension or termination that
requires approval by the stockholders of the Company
in order to comply with applicable provisions of the
Code, applicable federal or state securities laws or
Nasdaq or exchange listing requirements shall be
subject to approval by the stockholders of the
Company within the applicable time period prescribed
thereunder, and shall be null and void if such
approval is not obtained.
A-6
<PAGE>
ANNEX B
TEXT OF CHARTER AMENDMENT TO IMPLEMENT THE STOCK SPLITS (PROPOSAL NO. 3)
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
ELXSI CORPORATION
Pursuant to Section 242 of the General Corporation Law of the State of Delaware
* * *
ELXSI Corporation, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the Corporation,
resolutions were duly adopted setting forth a proposed amendment to the Restated
Certificate of Incorporation of the Corporation (as previously amended and
corrected), declaring said amendment to be advisable and directing that said
proposed amendment be considered at the next annual meeting of the stockholders
of the Corporation; and that the resolution setting forth said proposed
amendment is as follows:
RESOLVED, that the Restated Certificate of
Incorporation of the Corporation (as previously amended and
corrected) be amended by adding to Article FOURTH thereof a
new Section E at the end thereof, which Article FOURTH,
Section E is to read in its entirety as follows:
"E. (1) Effective at 6:00 (New York City
time) on June __, 1999 (the "Reverse Split Effective
Time"), each whole share of the Common Stock, par
value $.001 per share, of the Corporation
outstanding at the Reverse Split Effective Time
shall automatically be reclassified and changed into
one hundredth (1/100th) of a share of Common Stock,
par value $.001 per share, of the Corporation;
PROVIDED, HOWEVER, that (i) if the foregoing reverse
stock split (the "Reverse Split") would result in
the record or beneficial ownership account of any
holder of Common Stock having a number of shares of
Common Stock that is, in the aggregate, less than
one (1) share ("Fractional Shares"), such Fractional
Shares will be canceled in the Reverse Split, and
(ii) in the Reverse Stock Split Fractional Shares
shall be converted into the right to receive the
Trading Value thereof. For purposes hereof, the term
"Trading Value" of any Fractional Shares shall mean
the product of: (A) the average of the closing sale
prices, as reported by The Nasdaq Stock Market
("Nasdaq"), per share of the Common Stock on each of
the 20 consecutive Nasdaq trading days that ends
with the Nasdaq trading day that immediately
precedes the date of the Reverse Split Effective
Time, and (B) the number of shares of Common Stock
which were converted into such Fractional Shares as
a result of the Reverse Stock Split.
"(2) Effective at 6:01 (New York City time)
on June __, 1999 (the "Forward Split Effective
Time"): (i) each whole share of the Common Stock,
par value $.001 per share, of the Corporation
outstanding at the Forward Split Effective Time
(after giving effect to the Reverse Split at the
Reverse Split Effective Time) shall automatically be
reclassified and changed into one hundred (100)
shares of Common Stock, par value $.001 per share,
of the
B-1
<PAGE>
Corporation; and (ii) fractions of a share
outstanding at the Forward Split Effective Time
(after giving effect to the Reverse Split at the
Reverse Split Effective Time) shall be
proportionately reclassified and changed."
SECOND: That thereafter, pursuant to resolutions of the Board of
Directors of the Corporation, an annual meeting of the stockholders of the
Corporation was duly called and held, upon notice in accordance with Section 222
of the General Corporation Law of the State of Delaware, at which meeting the
number of shares necessary to authorize such amendment were voted in favor of
such amendment.
THIRD: That such amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its officers thereunto duly authorized this ___ day of June, 1999.
By: ____________________________________
Alexander M. Milley
President
<PAGE>
ANNEX C
BACKGROUND QUESTIONS AND ANSWERS REGARDING THE STOCK SPLITS (PROPOSAL NO. 3)
SUMMARY
The Company is proposing that stockholders approve a reverse 1-for-100
stock split (the "Reverse Split") of the Company's outstanding Common Stock, to
be immediately followed by a forward 100-for-1 stock split (the "Forward Split;"
and collectively with the Reverse Split the "Stock Splits") of the Company's
outstanding Common Stock.
Q: Why is the Company proposing the Stock Splits?
A: To reduce the number of odd-lot positions (I.E., those with less than
100 shares) in order to provide significant savings and cost benefits
to the Company and its stockholders owning more than 100 shares. As of
April __., 1999, the Company's stockholders had over 8,000 record or
beneficial ownership accounts, of which approximately 7,100 held fewer
than 100 shares. The proposed Stock Splits will result in estimated
savings for the Company of approximately $______ per year.
Q: What is the benefit to odd-lot holders?
A: The Stock Splits will provide a way for odd-lot holders to "cash-out"
of their odd-lot positions without transaction costs, such as brokerage
commissions or fees. Because of the relative inconvenience and high
brokerage commissions charged to sell odd-lot positions, these
stockholders may want a low-cost way to receive cash for these
holdings. The Stock Splits will provide a cost-effective opportunity
for stockholders owning fewer than 100 shares to receive cash for their
holdings.
Q: How will I be treated if I own fewer than 100 shares in a record or
beneficial account, including in street name with my broker?
A: If the Stock Splits are approved and completed, you will be entitled to
receive a cash payment (without any interest) based upon the trading
value of your cashed-out shares.
Q: Will my stockholder account be affected if I own 100 or more shares?
A: The number of shares will not be affected. If you physically hold the
stock certificate(s) representing your shares, you will be requested to
exchange your certificate(s) with a properly executed Letter of
Transmittal (that will be provided by the Company) in order to receive
a certificate or certificates with a new CUSIP number. If you own 100
or more shares in a beneficial account through a nominee such as a
broker or bank, a Letter of Transmittal will be sent to your nominee
for completion.
Q: When will the Stock Splits occur?
A: If the Company's stockholders approve the Stock Splits and they are
completed, both the Reverse Split and the Forward Split will take place
after the market close on _________, June __,1999.
STRUCTURE OF THE TRANSACTION
Q: How does the Reverse Split part of Stock Splits work?
C-1
<PAGE>
A: If the Company's stockholders approve the Stock Splits and they are
completed, after the market close on _______, June __, 1999, all shares
held by stockholders will be subject to a reverse 1-for-100 stock
split. Any stockholder who holds fewer than 100 shares of the Company
stock in a record or beneficial account at 6:00 p.m. (NYC time) on that
day will have these shares automatically converted into the right to
receive a cash payment instead of any fractional shares.
Q: How does the Forward Split part of the Stock Splits work?
A: If the Company's stockholders approve the Stock Splits and they are
completed, one minute after the effective time of the Reverse Split, at
6:01 p.m. (NYC time) on ________, June __, 1999, all shares held by
stockholders who have not been cashed out will be subject to a
100-for-1 forward stock split. This will return those stockholders who
are not cashed out in the Reverse Split to their original share
position.
INSTRUCTIONS FOR CASHED-OUT STOCKHOLDERS
Q: What do I do with my stock certificate(s)?
A: If your Common Stock account balance is fewer than 100 shares, you will
be required to return your stock certificate(s) to the Company's
exchange agent, Continental Stock Transfer & Trust Company, in order to
receive your cash payment. You will be sent instructions as to where
and when to send your stock certificate(s) after the effective time of
the Stock Splits. DO NOT SEND YOUR CERTIFICATE(S) IN AT THIS TIME.
Q: What if I am a record or beneficial holder with fewer than 100 shares
in my account and do not want to be cashed out?
A: Stockholders in this situation, can either:
(1) Purchase additional shares on the open market to reach or
exceed 100 shares prior to June _, 1999. (Please note that
shares CANNOT be directly purchased through the Company or
Continental Stock Transfer & Trust Company); or
(2) Transfer, consolidate or combine two or more accounts to reach
or exceed 100 shares prior to June ___, 1999.
STOCKHOLDERS WHO CHOOSE EITHER OF THESE OPTIONS NEED TO ALLOW
SUFFICIENT TIME FOR THEIR ACTIONS TO BE COMPLETED BEFORE JUNE __, 1999.
PLEASE KEEP IN MIND, WHEN PURCHASING ADDITIONAL SHARES, THERE GENERALLY
IS A THREE BUSINESS DAY SETTLEMENT PERIOD.
INSTRUCTIONS FOR STOCKHOLDERS RETAINING THEIR SHARES
Q: What do I do with my stock certificate(s)?
A: If you physically hold the stock certificate(s) representing 100 or
more shares, you will be sent a Letter of Transmittal requesting your
stock certificates be surrendered. If the Stock Splits are completed,
the Company will obtain a new CUSIP number for the Common Stock. You
will receive a request to surrender your stock certificate(s) with a
properly executed Letter of Transmittal to the Company's transfer
agent, Continental Stock Transfer & Trust Company, in order to receive
a new certificate with the correct CUSIP number. If you own 100 or more
shares in a beneficial account through a nominee such as a broker or
bank, a Letter of Transmittal will be sent to your nominee for
completion.
C-2
<PAGE>
VALUATION OF CASHED-OUT SHARES
Q: How will the value of each cashed-out share be determined?
A: The value of the cashed-out shares will be determined based upon the
average closing sale price of the Company's Common Stock on The Nasdaq
Stock Market for the 20 trading days immediately preceding June __,
1999, without any interest.
Q: When will I receive a check for my cashed-out shares?
A: Checks will be available within after the June __, 1999 effective time
of the Stock Splits. However, no check will be mailed to you until you
surrender your stock certificate(s) to Continental Stock Transfer &
Trust Company, as exchange agent, with a properly executed Letter of
Transmittal. You will receive instructions about how to surrender your
shares at a later time. DO NOT SEND ANY CERTIFICATES AT THIS TIME.
NOTE: ONLY STOCKHOLDERS WITH A RECORD OR BENEFICIAL ACCOUNT BALANCE OF FEWER
THAN 100 SHARES AS OF JUNE __, 1999, WHO ALSO SURRENDER THEIR STOCK
CERTIFICATE(S) WITH A PROPERLY EXECUTED LETTER OF TRANSMITTAL WILL BE
RECEIVING A CHECK FROM THE COMPANY AS A RESULT OF THE STOCK SPLITS.
OTHER QUESTIONS:
Q: Is this a taxable event?
A: Yes; any cash you receive for the value of a fractional share is a
taxable transaction. A 1099-B tax form will be provided in January 2000
to all stockholders who are entitled to receive cash in lieu of
fractional shares. Please consult your tax advisor for further
assistance in preparing your tax return.
Q: Who should I contact if I have additional questions?
A: Continental Stock Transfer & Trust Company, at (212) 509-4000.
C-3
<PAGE>
(PRELIMINARY COPIES)
--------------------
ELXSI Corporation
3600 Rio Vista Avenue, Suite A
Orlando, Florida 32805
PROXY FOR ANNUAL MEETING OF STOCKHOLDERS
May ___, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitute(s) and appoint(s) Alexander M. Milley
and Robert C. Shaw, and each of them, as proxies of the undersigned, with full
power of the substitution, to vote all shares of Common Stock of ELXSI
Corporation (the "Company") which the undersigned is (are) entitled to vote at
the Annual Meeting of the Stockholders of the Company to be held at the
Company's headquarters, located at 3600 Rio Vista Avenue, Suite A, Orlando,
Florida 32805, on ________, May ____, 1999, at 9:00 a.m. (local time), and at
any adjournment(s) thereof (the "Meeting"), on all matters that may come before
such Meeting. Said proxies are instructed to vote on the following matters in
the manner herein specified.
The undersigned hereby revoke(s) all previous Proxies and
acknowledge(s) receipt of the Notice of the Meeting dated April_____, 1999, the
Proxy Statement attached thereto and the Annual Report on Form 10-K of the
Company for the fiscal year ended December 31, 1998 forwarded therewith.
(PLEASE DATE AND SIGN THIS PROXY ON THE REVERSE SIDE)
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<PAGE>
[X]
Please mark
your votes
like this
PROXY BY MAIL
IF THIS PROXY IS PROPERLY EXECUTED, THE SHARES OF COMMON STOCK COVERED HEREBY
WILL BE VOTED AS SPECIFIED HEREIN. IF NO SPECIFICATION IS MADE, SUCH SHARES WILL
BE VOTED "FOR" PROPOSALS 1, 2, 3 AND 4, AND AS THE PROXIES DEEM ADVISABLE ON
SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
WITHHELD
1. ELECTION OF DIRECTORS FOR FOR ALL
Nominees: [ ] [ ]
01 Farrokh K. Kavarana
02 Kevin P. Lynch
03 Alexander M. Milley
04 Denis M. O'Donnell
05 Robert C. Shaw
WITHHELD FOR: (Write that nominee's name in the space provided below).
FOR AGAINST ABSTAIN
2. Approval of the ELXSI Corporation [ ] [ ] [ ]
1999 Incentive Stock Option Plan
3. Approval of amendment to the Company's [ ] [ ] [ ]
charter to effect a 1- for-100 reverse
stock split followed by a 100-for-1
forward stock split
4. Ratification of appointment of [ ] [ ] [ ]
PricewaterhouseCoopers LLP as the Company's
independent accountants for the fiscal
year ending December 31, 1999
5. In their discretion, the proxies are authorized to vote upon such other
matters as may properly come before the Meeting.
- ---------------------------------------------------------------------
IF YOU WISH TO VOTE ELECTRONICALLY PLEASE READ THE INSTRUCTIONS BELOW
- ---------------------------------------------------------------------
=======================
COMPANY NUMBER:
PROXY NUMBER:
ACCOUNT NUMBER:
=======================
SIGNATURE _______________________ SIGNATURE____________________ DATE______, 1999
Please mark, sign and return this Proxy promptly using the enclosed envelope.
This Proxy should be signed exactly as the name appears hereon. If stock is held
in the names of joint owners, each should sign. Persons signing as an attorney,
executor, administrator, guardian, trustee, corporate officer or in any other
fiduciary or representative capacity should give full title.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE AND READ THE REVERSE SIDE
- --------------------------------------------------------------------------------
[GRAPHIC OF VOTE BY TELEPHONE OR INTERNET [GRAPHIC OF
TELEPHONE OMITTED] QUICK *** EASY *** IMMEDIATE COMPUTER OMITTED]
- --------------------------------------------------------------------------------
ELXSI CORPORATION
o You can now vote your shares electronically through the Internet or the
telephone.
o This eliminates the need to return the proxy card.
o Your electronic vote authorizes the named proxies to vote your shares in the
same manner as if you marked, signed, dated and returned the proxy card.
TO VOTE YOUR PROXY BY INTERNET
WWW.XXXXXXXXXXXX.COM
Have your proxy card in hand when you access the above website. You will be
prompted to enter the company number, proxy number and account number to create
an electronic ballot. Follow the prompts to vote your shares.
TO VOTE YOUR PROXY BY MAIL
Mark, sign and date your proxy card above, detach it and return it in the
postage-paid envelope provided.
TO VOTE YOUR PROXY BY PHONE
1-800-293-8533
Use any touch-tone telephone to vote your proxy. Have your proxy card in hand
when you call. You will be prompted to enter the company number, proxy number
and account number. Follow the voting instructions to vote your shares.
PLEASE DO NOT RETURN THE ABOVE CARD IF VOTED
