10.14 Selected Consequences of Public Company Status Memorandum To: From: Date:
Re: Consequences of Public Company Status
I. PERIODIC REPORTING REQUIREMENTSAs a result of the public offering of securities by ______________________
(the "Company"), the Company will be obligated to file various periodic reports
with the SEC. These reports, which are subject to many formal requirements,
update on a continuing basis the information contained in the Company's
registration statement under the Securities Act of 1933 (the "1933 Act"). Among
those reports are the following:
Form 10-K is an annual report to the SEC that covers substantially all of
the information in the 1933 Act Form S-1 registration statement, other than
information on the underwriting and use of proceeds. The report is due ninety
days after the Company's fiscal year end, together with a filing fee.
(Generally, if the due date of a report is not a business day, the report is due
on the next business day.) The Form 10-K includes the full audited financial
statements for the year under report as well as certain prior financial
information. The Form 10-K report will omit the data on management if, within
120 days after the fiscal year end (or by April 30), the Company will be
distributing proxy statements for the annual meeting to be held in the fiscal
year following the year covered by the report. There are also provisions for the
optional integration of the Form 10-K report with the annual report that must be
send directly to shareholders. To the extent that there are overlapping
information requirements, the disclosures included in the annual report to
shareholders need not be repeated in the Form 10-K. The Form 10-K must be signed by the Company, and also on behalf of the
Company by its principal executive officer, its principal financial officer, its
principal accounting officer and a majority of its directors. With respect to
the individual signatures, you will note that the Form 10-K must now be signed
by the same persons who are required to sign a 1933 Act registration statement. The Commission believes that this signature requirement will encourage
directors to devote the needed attention to reviewing the Form 10-K and to seek
the involvement of other professionals to the degree necessary to give
themselves sufficient comfort regarding the accuracy and completeness of the
document. According to the Commission, this added measure of discipline is vital
to the objectives of the Form 10-K as a central disclosure document, and
outweighs the potential impact, if any, of the signatures on legal liability. The precise level of personal liability that attaches to the directors and
signing officers is far from certain. It is, however, the clear intention of the
current signature requirements that persons whose signatures are required, as
well as those directors who are not in fact signatories, take seriously the
obligations to have accurate disclosures in the Form 10-K. Every effort should
be made to have this document reviewed in final or substantially final form, at
the earliest practicable date, by the officers whose signatures are required as
well as by all members of the Board. Comments should be solicited from all such
persons, and ample time should be available to have their comments acted on in
preparing the final filing. If scheduling permits, it would be appropriate to
have a draft of the Form 10-K discussed at a meeting of the Board of its Finance
Committee. Such a discussion would be in the interest of all Board members,
since it would help them establish their own due diligence with respect to the document.
There may be instances when it is extremely difficult to have either the
majority of the Board or the required officers available for manual signature at
the time that signatures are required. Normally, there may be only a very brief
period between the time that the information is available for completion of the
Form 10-K and the time that it is due to be filed. While we do not know what
practices will evolve among reporting companies generally, we anticipate that a
practice will emerge of using powers of attorney so that one or two designated
persons will be authorized to sign the form on behalf of others. A similar
procedure is often followed for the purpose of signing 1933 Act registration
statements. However, the use of power of attorney forms should not be viewed as
diminishing the personal responsibility of the officers whose signatures are
required, or of the directors with respect to the adequacy of the Form 10-K
disclosures. Each of these persons should be given some meaningful opportunity
to review the Form 10-K during the course of its preparation, even if he is not
available personally to affix his manual signature to the final copies that are filed.
Form 10-Q is a quarterly report containing unaudited financial data as
well as a Management's Discussion and Analysis section. If certain types of
nonrecurring events occur during the period, such as commencement of significant
litigation, these events must also be reported on Form 10-Q. This report is due
forty-five days after the end of each of the first three fiscal quarters.
Form 8-K is a report that is filed only when a reportable event occurs.
The form specifies particular items to be reported. Generally, they are events
or transactions of major significance. The reportable events include: changes in
control of the Company, material acquisitions or dispositions of assets,
commencement or other developments in connection with bankruptcy or receivership
proceedings, changes in the Company's certifying accountant, and resignations of
directors or refusal to stand for reelection as a result of disputes. There is a
catch-all item for other events, but this item is optional and need not be
answered if the Company does not wish to do so. (However, there are other
disclosure requirements, discussed below, that do apply to material events
generally.) Form 8-K reports are generally due within fifteen days after the
reportable event. There is no mandatory time for filing under the optional
catch-all item, although prompt filing is encouraged.
Form 10-C is a report required to be filed by issuers having a class of
securities quoted on the NASDAQ interdealer quotation system within ten days
after a corporate name change or any aggregate increase or decrease in the
amount of securities of any such class outstanding that exceeds 5% of the amount
of that class outstanding as last reported. This often overlooked filing may be
triggered by a stock split, dividend or other type of non-sale transaction as
well as by conventional sales and issuances in acquisitions.
Form SR. Information concerning expenses of and the use of proceeds from
the Company's initial public offering must be reported on Form SR. An initial
filing on Form SR must be made within ten days after the end of the first three-
month period following the effective date of the registration statement.
Subsequent filings on the same form must be made within ten days after the end
of each ensuing six-month period. A final report on Form SR must be filed within
ten days after termination of the offering or application of the proceeds,
whichever is later. If the initial report shows the full application of the
proceeds, no further reports will be required.
II. REGISTRATION UNDER THE SECURITIES EXCHANGE ACT OF 1934
The Company has registered its entire class of Common Stock under the
Securities Exchange Act of 1934 (the "1934 Act"). This is a different
registration process from the registration under the Securities Act of 1933.
1933 Act registration applies only to specific amounts of securities being
registered for a particular public distribution, and the Company may file many
additional 1933 Act registration statements covering particular blocks of the
same class of securities. By contrast, 1934 Act registration occurs just once
with respect to a given class of securities, regardless of the number of times
stock of that class is issued or distributed.
When the Company's 1934 Act registration became effective, additional sets
of requirements under the 1934 Act, as discussed below, became applicable: (1)
the Proxy Rules, (2) provisions of 1934 Act Section 16 relating to short-swing
profit recapture, reports of beneficial ownership and short sale prohibitions,
(3) the Williams Act, and (4) the Foreign Corrupt Practices Act.
A. THE PROXY RULESWhen stock is registered under the 1934 Act, all proxy solicitations
must be conducted under the SEC's very detailed Proxy Rules. Proxy disclosure
material must be pre-filed with the SEC a minimum of ten days before public
distribution, although a substantially longer period should be allowed whenever
a complex transaction is being submitted to shareholders. Preliminary proxy
materials need not be filed, however, in connection with meetings at which the
only matters to be acted upon are the election of directors, the selection of
auditors, the amendments of certain employee benefit plans and/or certain
shareholder proposals. The SEC regulations also dictate the form of proxy that
is sent to shareholders and require inquiries of street name holders regarding
the number of beneficial owners of securities held in street name and the number
of beneficial owners for whom shares are held, so that additional sets of
material can be supplied. For routine annual meetings, the information in the proxy material
corresponds very closely to the data under the caption "Management" in the
prospectus. The annual meeting proxy statement also must cover material
transactions between the Company and certain insiders since the beginning of the
preceding fiscal year. If any other matters are submitted to a shareholder vote,
the proxy statement must also make disclosures with respect to these additional items.
Even if management does not propose to solicit proxies in connection
with a shareholders' meeting, the Proxy Rules require the furnishing of
information substantially equivalent to a proxy statement. There are additional
rules that apply in the event of proxy contests.
B. SHORT-SWING PROFIT RECAPTUREThere are special provisions regarding so-called short-swing profits
that apply to every director and officer of the Company, as well as any
beneficial owner of more than 10% of the outstanding securities of any class of
equity security registered under the 1934 Act. In general, Section 16(b) of the
1934 Act provides that any paper profit realized on a purchase and a sale of
stock within a six-month period is recoverable by the Company. For this purpose,
it does not matter whether the purchase or the sale occurs first. It is not
necessary for the same shares to be involved in each of the matches
transactions. Losses cannot be offset against gains. Transactions are paired so
as to match the lowest purchase price and the highest sale price within a six-
month period, thus finding the maximum spread. The courts generally have applied
these provisions with mechanical rigidity to squeeze out the maximum amount of
profit. Good faith on the part of the insider is no defense. If the Company
itself does not press a claim, a claim for recovery of the profit may be
asserted by any shareholder for the benefit of the Company.There are many types of transaction that constitute a "purchase" or
a "sale" for this purpose other than normal open market transactions. Many
unusual corporate reorganizations may be "purchases" or "sales." Beneficial
ownership for this purpose may include indirect ownership of stock, for example,
through trusts or estates. In some circumstances, stock held by close relatives
of a person may be considered to be owned beneficially by such person, and a
purchase (or sale) by one individual may be matchable with a sale (or purchase)
by his close relative to produce a recoverable profit. The provisions also apply
to stock registered in a street name. Although the vesting and exercise of a
stock option is not an acquisition for purposes of Section 16(b), the grant of a
stock option is an acquisition, although it will be exempt for determining
Section 16(b) liability if the conditions of 1934 Act Rule 16(b)(3) are
satisfied. This rule also mitigates the impact of Section 16(b) with respect to
certain transactions in connection with employee bonus, stock appreciation,
profit sharing, retirement, thrift, savings and similar securities that a person
has a right to acquire through a newly defined category of "derivative
securities," which includes options and warrants to acquire an underlying equity
security as well as securities convertible into an underlying equity security. Obviously the short-swing profit recapture provisions, which are
personal obligations of the individuals subject to Section 16(b), require a
great deal of advance planning. If there are any doubts regarding the
applicability of Section 16(b), advice should be sought, based on the particular
facts, before any commitment is made to purchase or sell Company stock.
C. REPORTS OF BENEFICIAL OWNERSHIP
As a supplement to the profit recapture provisions of Section 16(b),
there are beneficial ownership reporting provisions. Each person subject to
these provisions (the directors, officers and 10% shareholders) must file his or
her own individual report on Form 4 with the SEC for each month during which
there is a change in his beneficial ownership of any class of the Company's
equity securities. A report for each calendar month during which a change of
beneficial ownership occurs is due at the SEC by the tenth day of the next
calendar month but no report is due for a month in which there is no change in
ownership.
All changes in beneficial ownership are reportable, not only
transactions that are purchases or sales. However, changes in beneficial
ownership resulting from certain small acquisitions and transactions of a type
not matchable for Section 16(b) purposes are reported on a year-end Form 5
report, or in certain instances on the next Form 4 otherwise required to be
filed. In addition to certain beneficial ownership changes for which reporting
properly may be deferred, any delinquencies in filing earlier due Section 16
reports must be reported in the year-end Form 5.
When these provisions first become applicable to an individual
(either because the Company's 1934 Act registration becomes effective or because
a person has become a director, officer or 10% shareholder), an initial report
on Form 3 is due. These reports have been distributed to the officers, directors
and 10% shareholders of the Company and will be filed as soon as they have been
returned. We can assist in the preparation of these initial reports, if you desire.
Thereafter, the obligation to file Form 4 reports is a personal
responsibility. For convenience, we suggest that one person within the Company
be designated to assist in the preparation of Form 4 reports and Form 5 reports,
and each director and officer should promptly report to the designated person
whenever a change in his beneficial ownership occurs.
Note that the Form 3, 4 and 5 reports that must be filed by 10%
holders are in addition to the reports discussed below which the same persons
will be required to file under the Williams Act. In May, 1991, the SEC implemented new enforcement initiatives
partially in response to the high delinquency rate that had been experienced
with respect to Section 16 filings. These initiatives require the Company to
disclose in its annual meeting proxy statement any person or entity who failed
to file timely any required report. In addition, the SEC may impose penalties
for the violation of any Federal securities law, including the failure to comply
with Section 16 reporting obligations, of up to $100,000 per violation for
individuals and up to $500,000 for violations by entities. While preparing proxy
statements, the Company should ensure that current Form 3, 4 and 5 filings are
consistent with the Company's stock ownership information and should, at this
point, ensure that any delinquent filings be made by the appropriate persons.
D. SHORT SALE PROHIBITIONIn addition to the foregoing, the 1934 Act prohibits the Company's
directors, officers and 10% holders of a 1934 Act registered class of security
from making "short sales" of any equity security of the Company (regardless of
whether that class is itself registered)-that is, sales of securities that the
seller does not own at the time or, if owned, securities that will not be
delivered for a period longer than twenty days after the sale.
E. THE WILLIAMS ACTThe so-called Williams Act provisions of the 1934 Act deal generally
with tender offers, which will not be discussed in this letter. They also apply
to persons owning beneficially more than 5% of the outstanding securities of a
1934 Act registered class of securities, whether or not the securities were
acquired in a tender offer. Persons making tender offers are required to file
certain disclosure documents and to comply with other substantive requirements. All 5% shareholders are required to file initial reports under these
provisions on Schedule 13D. Follow-up reports will be required promptly if any
material changes in their shareholdings occur. Those persons who are already 5%
shareholders must file a Schedule 13G forty-five days after the first calendar
year end when they become subject to this requirement. Additional filings on
Schedule 13G are due on each succeeding February 14 if there has been a change
in the reported information during the year. No filing is required where a
change in the percentage of shares owned by a reporting person is caused solely
by a change in the number of outstanding shares. Material changes in
shareholdings in the interim will trigger additional Schedule 13D filing
requirements.
III. FOREIGN CORRUPT PRACTICES ACT
The Foreign Corrupt Practices Act ("FCPA") is a major piece of legislation
regulating certain activities that may involve payments to foreign government
officials in the course of doing business abroad. The FCPA amended the
Securities Exchange Act of 1934 to impose two important requirements on the Company:
1. The Company must make and keep books, records and accounts that, in
reasonable detail, accurately and fairly reflect the Company's transactions and
dispositions of assets. In effect, this provision imposes a statutory
requirement that the Company maintain proper internal books and records, which
requirement is in addition to the Company's obligations relating to its filed or
otherwise publicly disclosed financial statements. 2. The Company must devise and maintain a system of internal accounting
controls sufficient to provide reasonable assurances that:
a. transactions are executed in accordance with management's general
or specific authorization; b. transactions are recorded as necessary (i) to permit preparation
of financial statements in conformity with generally accepted accounting
principles or any other criteria applicable to such statements, and (ii) to
maintain accountability for assets; c. access to assets is permitted only in accordance with
management's general or specific authorization; and
d. the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
Corporations generally consult with their auditors to be sure that their
systems for maintaining books and records and also their internal accounting
control systems are adequate to meet the FCPA standards. Two additional rules have been adopted by the SEC to supplemental the FCPA
statutory provisions. One rule prohibits any person from directly or indirectly
falsifying or causing to be falsified any book, record or account subject to the
FCPA provisions. This rule applies, as indicated, to any person and is not
limited to directors or officers. A second rule prohibits directors or officers
from making, directly or indirectly, any materially false, misleading or
incomplete statement to an accountant in connection with an audit or any filing
with the SEC.
IV. REPORTS TO SHAREHOLDERS
The annual report to shareholders ("ARS") is one of the most important
recurring items of communication to investors. Under the SEC Proxy Rules, the
ARS must be distributed with or before the solicitation of proxies for the
annual election of directors. The ARS is often characterized as a "free writing"
document, in the sense that it is not required to be pre-filed with or reviewed
by the SEC, although it must be submitted to the SEC after distribution. On the
other hand, the ARS, like all other financial communications, can be a source of
significant legal liability if it contains a material misstatement or omission.
Furthermore, there are detailed provisions in the Proxy Rules specifying
information that must appear in the ARS. Many companies also follow the practice of sending quarterly earnings
reports directly to the shareholders in addition to the customary press release
on earnings. These quarterly mailings can be used to report other developments
to shareholders, in addition to the earnings information as such. Companies may
also send important press releases directly to shareholders, although there is
no legal requirement to do so.
V. YEAR END TIMETABLE
As you can see from the above, there are a number of interrelated
processes that recur on an annual cycle. Between the Form 10-K and the proxy
statement for the annual meeting, the Company will be updating substantially all
of the information in the 1933 Act registration statement that just became
effective. During the same time that these filings are being prepared, the ARS
is being written and preparations for the annual meeting must be completed.
Questionnaires must be circulated to all directors and officers.
Generally, we recommend that the annual updating activity begin well in
advance of the fiscal year end. Ideally, most of the narrative disclosure
material should be in fairly definitive form by the time the final financial
statements are available, thereby enabling the Company to complete all of the
documentation shortly after the auditors complete their work.
VI. DISCLOSURES GENERALLYThe foregoing discussions have dealt principally with requirements for
filing disclosure documents with the SEC. Additionally, if a material event
occurs, it should be reported promptly to investors generally, although courts
have recognized that a variety of proper business purposes will justify a delay
in disclosure. Typically, such public disclosure is accomplished through a press
release. Occasionally, the releases are mailed directly to shareholders, in
addition to distribution through other financial information channels. Certain
developments are appropriate for public disclosure, but may not be so critical
as to make an immediate press release appropriate. These items can be
communicated as part of the quarterly earnings reports.
Press releases must avoid misstatements or material omissions. A high
degree of accuracy, completeness and balance between positive and negative
factors is required. There is no room for the degree of puffing in financial
disclosures that would be acceptable in general commercial advertising or other
areas of commercial communication.
The financial community will likely take an interest in the Company and
attempt to obtain information. To oversimplify somewhat, it is permissible for
the Company to have individual discussions with an analyst covering general or
background information. However, it is critically important not to release
information that might be considered "material" to one person who may purchase
or sell securities based upon that information, without simultaneously releasing
it to the general financial community. For example, if the Company has a
specific material internal projection of earnings that is disclosed to one
analyst (whether intentionally or inadvertently), it may become necessary to
disclose the information to the public at large.
While there is no standard that can be applied with mechanical certainty,
a fact will be considered "material" if a reasonable investor would consider it
important, as part of the total mix of available information, in reaching his
investment decision; that is, the investor would attach actual significance to
the information in making his deliberations. It is impossible to make a complete
catalog of all material information, but the following recurring types of events
are illustrative of what is considered material: significant mergers or
acquisitions, stock splits, adoption of a dividend policy or changes in
dividends, major increases or decreases in revenues or profits, important new
contracts or projects, and progress on major research and development programs.
In this connection, courts have treated the confirmation of a general
market expectation as being material information in some circumstances. To
illustrate, if the Company confirms to one analyst the accuracy of his
projection that it will achieve a specific level of earnings, this confirmation
may give the analyst "material information," and may trigger the obligation to
make a general public announcement, even if outside analysts are also arriving
at the same projection based upon their own analyses of published data.
It is generally recognized that good corporate practice calls for prompt
public disclosure of material events. There has been some debate, however,
concerning the extent to which the law requires such disclosure.
There is nothing in the federal securities laws that expressly mandates
immediate disclosure to the public generally of important events. The 1934 Act
filing requirements compel reports, generally on Form 8-K, only of specified
types of reportable events, not all material events. These filing requirements
commonly permit delays of at least fifteen days and require only filing with the
SEC, rather than direct public dissemination of the filed information. The
antifraud rules, such as 1934 Act Rule lOb-5, prohibit misstatements and half-
truths (i.e., material omissions of statements necessary to make the statements
made not misleading), but do not deal directly with total silence. Companies with securities listed on a stock exchange or with NASDAQ are
subject to the NASDAQ or exchange-imposed obligations to make timely public
disclosure. A duty by a company to make public disclosure of important
developments has also been recognized in the following factual circumstances;
where there has been a leak of the news, or selective disclosure or where
insider trading has occurred; where the company itself is acquiring its own
securities; in some but not all instances, where the company has made a previous
public announcement that is still reasonably current and on which traders could
reasonably rely, but which is no longer accurate because of subsequent
developments, or that was found to have been erroneous at the time of initial
issuance; or where there is a rumor or a market report circulating for which the
company had some responsibility. Arguably, a company that does not have exchange-listed securities does not
violate any binding legal requirement if it remains totally silent in the face
of important developments, absent special circumstances of the types listed
above. However, we recommend against a policy of withholding material
information, unless there is a bona fide corporate justification for doing so.
The trend of the law, as well as the SEC's enforcement position, favors full and
fair disclosure. In most circumstances, as a matter of caution and good business
practice, the Company should disclose material events on a timely basis. It is essential for the Company to adopt internal procedures regarding
disclosures to the financial community. There are both positive and negative
aspects. The Company should be certain that material information is disclosed on
a timely basis when appropriate, and also that there are no leaks or inadvertent
disclosures when release of information is inappropriate. There should be clear
lines of authority and responsibility within the Company, with a limited number
of persons authorized to deal with the financial community. All employees should
be alerted to these basic principles, including particularly the obligations
(more fully discussed below) to maintain the confidentiality of undisclosed
material information and to refrain from trading while privy to such
information.
A suggested form of notice to Company personnel dealing with the foregoing
matters and also the need for confidentiality accompanies this memorandum.
VII. CONFIDENTIALITY
As a corollary of the foregoing, it is essential that the confidentiality
of material information be strictly maintained within the Company by all persons
who may have access to that information, regardless of title or position. Your
recent rate of growth makes it likely that there will be genuinely material
information in existence within the Company on a fairly regular basis.
A public company normally has some degree of discretion in determining
when an event is ripe for public disclosure, assuming no leaks. A reasonable
standard, consistently applied for affirmative as well as negative information,
usually will avoid difficulties. However, there are certain circumstances where
a company's hand may be forced and good practice will require a disclosure-for
example, where there has been a leak of information or where rumors are
circulating in the financial community. Care should be taken to prevent these
circumstances.
VIII. RELATIONSHIP WITH THE BOARD OF DIRECTORS
Management should be sure that the directors are kept fully informed about
the affairs of the Company. With respect to director participation, the Proxy
Rules require disclosure if any director has attended fewer than 75% of the
combined number of meetings of the full Board plus any Board committees on which
that director serves.
IX. INDIVIDUAL SALES OF SHARESThere are restrictions on the right to sell securities publicly that apply
to two classes of persons:
1. Controlling persons of the issuer; and 2. Shareholders who have acquired their securities directly from the
Company or another shareholder in a private transaction or chain of private
transactions. For this purpose, such privately acquired shares are designated as
"restricted" shares.
Purchasers in private placements who are not also controlling persons are
restricted only with respect to their privately acquired, or restricted, shares.
If such persons should happen to own additional shares that were acquired in the
public securities market (including shares purchased in the initial registered
offering), the restrictions do not apply to such additional shares. Controlling
persons are limited in their right to sell any shares they own, even if the
shares were once registered under the 1933 Act and were acquired by the
controlling persons on the open market. There are certain "leakage" provisions under Rule 144 that will be
available to both controlling persons and holders of restricted shares
commencing on the ninety-first day after the effective date of the 1933 Act
registration statement (subject to any agreements between such persons and the
underwriters that provide for a longer time period prior to any sales). Holders
of restricted shares may not sell any such shares, however, unless the specific
shares have been held continuously by the seller for a period of at least two
years, although holding periods may be combined in certain circumstances
provided by the rule-for example, shares passing from one holder to another by
gift or bequest. Purchasers in private placements who were not controlling
persons during the three months prior to the proposed sale date can sell any
restricted shares that they have held for three years without regard to the
ninety-day period discussed above.
There are both qualitative and quantitative limitations on sales made
under Rule 144, although most of the limitations do not apply to holders of
restricted stock (other than controlling persons) after a continuous holding
period of three years. The qualitative limitations generally require that the sale be handled as
a routine open market brokerage transaction, although the seller also may deal
directly with an over-the-counter market maker who deals as a principal for his
own account rather than as a broker. If properly structured, an installment sale
of restricted shares, which may have tax advantages, can be accomplished under
Rule 144. The quantitative limitations are as follows: During each three month
period, the holder may sell an amount of securities equal to the greater of:
(1) 1% of the number of shares of the class outstanding, based upon
the Company's presently outstanding shares; or
(2) the average reported weekly trading volume during the four
calendar weeks preceding the filing of the notice of sale that is referred to below.
The sales of closely related persons such as spouses, a parent and minor
children, donor and donee, and pledgor and pledgee must be combined, as
specifically provided by the rule, in applying the numerical limitation. The person selling in reliance on Rule 144 (other than in reliance upon
Rule 144(k)) must file a notice on Form 144 with the SEC. The Form 144 must be
transmitted to the SEC concurrently with placing the order for sale-that is, the
Form 144 can be mailed to the SEC when the sell order is placed. There is an
exemption from the filing requirement for transactions that do not exceed either
500 shares or an aggregate sale price of $10,000 during any three-month period.
If the sales are not completed within ninety days, a new Form 144 must be filed
if additional sales are to be made.
The leakage provisions described above are available only if the Company
is current in its 1934 Act reporting requirements. The limitations of Rule 144
generally become inapplicable to noncontrolling persons who have held restricted
securities after a three-year holding period.
The foregoing is an extremely simplified summary of very complex and
detailed provisions that may vary in their impact on individual shareholders.
There are additional requirements that have not been summarized above, since
they do not appear relevant at the present time to the individual circumstances
of any controlling or restricted shareholder. However, a change in circumstances
may render these additional limitations relevant. Any controlling or restricted
shareholder should seek specific advice in advance, related to his individual
circumstances at the time, before committing to make any public sale of Company stock. The preceding discussion relates solely to an exemption from the 1933 Act
registration requirements. Whether or not registration is required with respect
to any proposed sale, the antifraud provisions remain applicable. Thus, even if
Rule 144 provides an exemption from 1933 Act registration, no controlling or
restricted shareholder should make any public sale of any stock if he is then
aware of material adverse information about the Company which has not yet been
publicly disclosed. It should be noted that controlling or restricted shareholders have
certain rights to sell their shares privately under circumstances where they
could not sell their shares publicly. We also note that an exemption from the registration requirements under
Rule 144 does not have any bearing on the exposure to short-swing profit
recapture under 1934 Act Section 16(b), as discussed above. Thus, an exempt sale
under Rule 144 may result in a short-swing profit recoverable by the Company
under Section 16(b) if the sale occurs within six months before or after the
seller's purchase of Company stock at a lower price.
X. INDIVIDUAL RESPONSIBILITIES
By way of summary, we would like to focus attention on the following areas
of individual responsibility for all Company personnel:
(a) Insider Trading-Inside Information
No individual, regardless of position within the Company, should
purchase or sell the Company's stock while in possession of material information
that is not yet publicly disseminated. We emphasize that this prohibition
applies to anyone in the Company at any level, and even to persons not employed
by the Company if they have access by any means (including but not limited to
tips from others) to material nonpublic information about the Company. Public dissemination usually contemplates some period of delay after
release of the information to the press in order for outside investors to
evaluate the news. A delay of two full days should suffice for a simple
announcement, such as a routine earnings announcement. A longer delay is
appropriate when a complex transaction is involved. In addition to other
possible serious sanctions, a person trading on material inside information may
be required to disgorge all of his profit and pay a civil penalty to the federal
government equal to up to three times the profit gained or loss avoided. As
discussed previously with regard to Section 16 reporting, the SEC may also
impose penalties for any violation of the Federal securities laws of up to
$100,000 for violations by individuals and up to $500,000 for violations by
entities. Under legislation adopted at the end of 1988, the Company may also be
subject to the treble damages penalty when an employee trades on material inside
information. Enactment, dissemination and documentation by the Company of the
policy stated in the suggested memorandum to Company personnel in Appendix A, as
well as specifically educating and monitoring those employees who are likely to
be exposed to confidential information, may reduce the Company's exposure to
such potential liability. It often develops that there is material information within the
Company that is not yet ripe for public disclosure by the Company itself. For
example, during the early stages of discussion regarding a significant
acquisition, the information about the discussion may be too tentative or
premature to require, or even permit, public announcement by the Company. On the
other hand, the information may be highly material in the sense that individuals
with access to that information are themselves precluded from trading in the
Company's stock. Whenever any doubt exists, the presumption should be against
trading in the Company's stock by any insider with access to the information
until approval has been sought through appropriate channels.
Incidentally, the foregoing principles also apply to inside
information Company employees may obtain about another public corporation with
respect to securities of the other corporation. Thus, if any Company employee
obtains material information about a customer or supplier that is not yet
public, he should refrain from trading in the stock of the other corporation
until a public announcement has been made.
(b) Confidentiality
Each individual who has access to material information must exercise
the utmost caution in preserving the confidentiality of that information within
the Company. If anyone becomes aware of a leak of material information, whether
inadvertent or otherwise, he should so report immediately to the person or
persons charged with responsibility for public disclosures. Any insider who
leaks inside information to a tippee may be equally liable with the tippee for
the profit of the tippee.
(c) Reporting
A director, officer or 10% shareholder of the Company is required to
report on a monthly Form 4 or a yearly Form 5 any change in his beneficial
ownership of stock, whether by purchase, sale or any other type of transaction.
For persons owning more than 5% of the outstanding shares, a material change in
shareholdings will require an additional filing under the Williams Act. For
controlling persons or persons desiring to sell restricted stock, compliance
with Rule 144 (including the filing of a Form 144) will be required in
connection with any sales above the minimum thresholds discussed above.
Unfortunately, each filing requirement is independent, and compliance with one
requirement will not satisfy any other.
XI. NEW YORK STOCK EXCHANGE ("NYSE")
The Company's listing on the NYSE subjects the Company to certain
requirements in addition to those mentioned above. The NYSE Bylaws require NYSE
companies to notify the NYSE of material news announcements prior to their
release to the public, recommending that notification occur at least ten minutes
in advance. When the NYSE contacts issuers for information, issuers are required
to provide full and prompt responses to all requests for information by the NYSE. In addition, each NYSE issuer is required to (i) maintain a minimum of two
independent directors on its Board of Directors; (ii) maintain an Audit
Committee, a majority of the members of which are independent directors and
(iii) conduct an appropriate review of all related party transactions on an
ongoing basis and utilize the company's Audit Committee or a comparable body for
the review of potential conflict of interest situations where appropriate.
XII. LIABILITY
The subject of liability is far too complex to discuss in detail in this
memorandum. It should be noted that any breach of the foregoing corporate or
individual requirements may expose the Company and also any insiders involved,
on an individual basis, to severe adverse consequences, including imposition of
an injunction and monetary damages (which may exceed three times any gain
realized), suspension of trading in the Company's stock and, in egregious cases,
possible criminal sanctions. Furthermore, any appearance of impropriety could
impair investor confidence in the Company. Considerable care should be taken to
avoid even inadvertent violations.
As will be noted, many of the requirements and prohibitions listed above
relate to the Company, although some of the requirements (principally those
relating to trading activities) are individual responsibilities of directors,
officers, large shareholders and, in some cases, others associated with, or
privy to, inside information about the Company. However, even with respect to
the corporate obligations, it is recognized that corporations act through their
officials. In many contexts, the courts and the SEC have used principles of
conspiracy as well as aiding and abetting in order to impose liability on
individual members of management for causing or permitting corporate misconduct.
The discussion above regarding the Form 10-K report points out the potential for
liability on the part of the directors and officers who must sign this
particular filing. There are also express statutory provisions that make a
person controlling an issuer jointly and severally liable for certain
liabilities of the issuer, with the further proviso that a controlling person
can avoid individual liability if he had no knowledge of or reasonable grounds
to believe the facts by reason of which the issuer's liability exists.
Therefore, there are many circumstances under which individual directors and
officers may have a personal responsibility to assure that the Company complies
with its obligations under the Federal securities laws.
XIII. CONCLUSION
This memorandum is a general and nontechnical summary of some extremely
complex legal requirements. In an effort to achieve relative simplicity, a
number of details, refinements and exceptions have been omitted, and this
memorandum should not be considered as a legal opinion on which you should place
reliance in taking specific actions. As a working guideline for action, we
suggest that, in any case where even the most remote doubt exists as to your
personal or the corporate responsibilities arising under the securities laws,
you should seek further information and guidance through proper corporate
channels before taking any action.
APPENDIX A
To: All Employees and StaffFrom: Date:
Re: Insider Trading and Confidentiality Policy
This memorandum confirms procedures that all personnel at every level must
follow, arising from our responsibilities as a public company. (a) Prohibition against trading on undisclosed material Information. If
you are aware of material information relating to the Company which has not yet
been (made?) available to the public for at least two full days, you are
prohibited from trading in our shares or directly or indirectly disclosing such
information to any other persons so that they may trade in our shares. It is
difficult to describe exhaustively what constitutes "material" information, but
you should assume that any information, positive or negative, which might be of
significance to an investor in determining whether to purchase, sell or hold our
stock would be material. Information may be significant for this purpose even if
it would not alone determine the investor's decision. Examples include a
potential business acquisition, internal financial information that departs in
any way from what the market would expect, important product developments, the
acquisition or loss of a major contract, or an important financing transaction.
We emphasize that this list is merely illustrative.
(b) Confidentiality. Serious problems could be caused for the Company by
unauthorized disclosure of internal information about the Company, whether or
not for the purpose of facilitating improper trading in the stock. Company
personnel should not discuss internal Company matters or developments with
anyone outside of the Company, except as required in the performance of regular
corporate duties. This prohibition applies specifically (but not exclusively) to inquiries
about the Company that may be made by the financial press, investment analysts
or others in the financial community. It is important that all such
communications on behalf of the Company be through an appropriately designated
officer under carefully controlled circumstances. Unless you are expressly
authorized to the contrary, if you receive any inquiries of this nature you
should decline to comment and refer the inquirer to our Senior Vice President- Finance.
If you have any doubt as to your responsibilities under these guidelines,
seek clarification and guidance from our Senior Vice President-Finance before
you act. Do not try to resolve uncertainties on your own.
We will expect the strictest compliance with these procedures by all
personnel at every level. Failure to observe them may result in serious legal
difficulties for you, as well as the Company. A failure to follow their letter
and spirit would be considered a matter of extreme seriousness.
