Fill and Sign the New Offering Memorandum Exemption Increases Access to Form

10.15 Limitation on Disposition of Securities Memorandum To: From: Date: Re: LIMITATION ON DISPOSITION OF SECURITIESThe purpose of this memorandum is to review certain reporting and disclosure requirements, and certain restrictions that may limit the disposition of securities of __________ _________ (the "Company") held by its officers, directors and principal shareholders, which are imposed by the Securities Act of 1933 (the "Securities Act"), the Securities and Exchange Act of 1934 (the "Exchange Act"), and the rules of the Securities and Exchange Commission thereunder. This memorandum was prepared for the management of the Company and should be treated as a confidential communication between the Company and its counsel. Introduction Public ownership of the Company's securities carries many legal obligations to be borne by both the Company and by its officers, directors and principal shareholders. Failure to satisfy these obligations, even inadvertently, may expose the Company and its directors, management, and, in some cases, principal shareholders to substantial liabilities. This memorandum describes, in general terms, certain obligations that will arise out of the Company's public status. It is not intended to provide answers to specific questions, and should not be relied upon as a "how-to" guide for complying with regulatory requirements. When questions arise, the Company or the individual concerned should contact counsel. This memorandum is divided into two general categories: certain trading considerations and limitations for officers, directors, principal shareholders and other insiders; and the Company's responsibilities for certain internal procedures that will effectuate its duties as a public company. I. Duties of Officers, Directors, Large Shareholders and Other "Insiders" Relating to their Company Stock A. Shareholder Reporting Requirements1. Forms 3, 4 and 5 Because the rules are quite complicated, particularly those under which shares held by family members, estates, and trusts may be deemed "beneficially owned" by an insider, all officers, directors, and major shareholders should consult with counsel regarding their filing obligations. Section 16(a) of the Exchange Act imposes reporting obligations on officers and directors of issuers that have a class of equity securities registered under Section 12 of the Exchange Act and on beneficial owners of more than 10% of such a class. Section 16(a) of the Exchange Act requires that the Form 3 reflecting the ownership of equity securities by insiders be filed at the time of registration of the securities on a national securities exchange, or pursuant to Section 12(g) of the Exchange Act for insiders who are such at the date of registration. For persons subsequently becoming insiders, Form 3 is to be filed within ten days after becoming a reporting insider. Section 16(a) requires the Form 4 reflecting changes in beneficial ownership to be filed within ten days after the close of each calendar month in which such changes occur. Rule 16a-3(f) requires the filing of the annual report on Form 5 within forty-five days after the issuer's fiscal year end. Rule 16a-3(e) requires insiders to forward duplicate copies of Forms 3, 4 and 5 to the person designated by the issuer to receive such statements, or, in the absence of such a designation, to the issuer's corporate secretary or other person performing the equivalent function not later than the time the statement is transmitted for filing with the Commission. As discussed below, the revised rules provide for deferred reporting of certain transactions.The annual reporting requirement on Form 5 is applicable to all persons who at any time during the issuer's fiscal year were subject to Section 16, except when all transactions otherwise required to be filed on a Form 5 have been reported before the due date of the Form 5. Form 5 is intended to serve a variety of purposes, not the least of which is to remind insiders that they are subject to the Section 16(a) reporting requirements and, if appropriate, to report any transactions during the most recent fiscal year that should have been but were not reported on a Form 3 or 4. In addition, with certain exceptions, transactions by an insider during the fiscal year that were exempt from Section 16(b) liability are to be reported on a Form 5. The purpose of this requirement is to allow the public to be aware of insider transactions, even though they may not be subject to Section 16(b) liability. A transaction involving derivative securities that is exempt from Section 16(b) liability under Rule 16b-6(b), however, must be reported on Form 4. Form 5 can also be used to report certain small acquisitions, the reporting of which can be on a Form 4 or deferred to year's end and reported on Form 5. No Reporting Required. The following transactions are no longer required to be reported under the revised rules: ¥ acquisitions pursuant to a dividend or interest reinvestment plan; ¥ transactions in tax-conditioned plans except for discretionary intra-plan transfers and cash withdrawals; ¥ transactions that only change the form of the beneficial ownership; ¥ post-termination transactions by a former officer or director that are either exempt from Section 16(b) or that do not occur within six months of an "opposite way" non-exempt transaction; and ¥ exempt cancellations or expirations of a long derivative security where no value is received. Reports on Form 4. The revised rules provide that the following transactions must be reported on Form 4: ¥ transactions not exempt from Section 16(b) except for small acquisitions (not exceeding $10,000) that are required to be filed on Form 5; and ¥ all exercises or conversions of derivative securities. The revised rules continue to permit insiders to voluntarily report exempt transactions on Form 4 rather than reporting annually on Form 5 but eliminate the category of transactions that had to be reported on the next required Form 4 or Form 5, whichever was due to be filed next. Reports on Form 5. Under the revised rules, the following transactions must be reported on Form 5: ¥ transactions exempt from Section 16(b) except for exempt exercises or conversions of derivative securities that are required to be filed on Form 4; and¥ small acquisitions not exceeding $10,000. The small acquisition reporting rule is also revised to exclude from the $10,000 threshold acquisitions occurring within the prior six months of the current acquisition that were exempted from Section 16(b) or previously reported on Form 4 or 5. Compliance with Reporting Requirements. Under the revised rules, issuers are required to set off any disclosure (required by Item 405 of Regulation S-K) of insider non-compliance with Section 16(a) reporting obligations under an appropriate and discrete caption. Trusts. The revised rules provide that a trust is only subject to Section 16 if the trust is the beneficial owner of more than 10% of a class of an issuer's equity securities. Joint Reporting for Beneficial Owners. When more than one person is deemed the beneficial owner of the same security, such persons will now be permitted to file their reports either jointly or separately. Equity Swaps. The revised rules confirm an insider's obligation to report equity swap transactions and the forms provide a new transaction code for reporting such transactions. 2. Schedules 13D and 13G Any person who acquires directly or indirectly 5% or more of the Company's common stock or other Exchange Act registered securities must file a Schedule 13D within ten days of such acquisition that discloses certain personal information and details about the shares beneficially owned. Please note that beneficial ownership is computed somewhat differently for purposes of Schedules 13D and 13G from the way it is for purposes of Forms 3 and 4. The Schedule must be filed with the SEC. Consequently, those who will be 5% shareholders of the Company following registration will need to file a Schedule 13D within ten days of the Effective Date. Schedule 13D must be amended if there are any subsequent acquisitions or dispositions of stock equal to 1% or more of the common stock or other 1934 Act registered securities outstanding, or if the acquisitions or dispositions are otherwise material, based on the facts and circumstances. If several persons, who, in the aggregate, own more than 5% (although no single one of them owns that amount) agree to act in concert, they will be deemed to have formed a "group" that owns the stock and either the "group" or each member must file a Schedule 13D. A Schedule 13G is filed by a 5% shareholder who is a registered broker or dealer or who otherwise fits within a specified category and is due forty-five days after the end of the calendar year in which such person became obligated to file. Consequently, the Company will have to file a Schedule 13G and will thereafter have to file a Schedule 13G annually if there are any changes in its beneficial holdings of the Company stock. B. Individual Shareholder Responsibilities-Limitations on the Sale of Registered Stock by Control Persons 1. Section 10b-5-Insider Trading-Inside Information Under the SEC's Section 10b-5, the general antifraud rule, it is unlawful for an "insider" to trade in the Company's securities using undisclosed material inside information. Generally, the term "insider" refers to an executive officer, a director, in some circumstances a principal shareholder, and anyone else who has access to inside information and who owes the Company some form of fiduciary duty. Under the Rule, an insider who trades unlawfully may be liable for damages incurred by the Company or a selling or buying individual and may be subject to an SEC enforcement action. Insiders may also be liable, under certain circumstances, if other persons, commonly called "tippees," trade on the basis of material inside information obtained from the insider. The SEC has designated insider trading a top enforcement target, and has developed very effective methods of detecting it. We cannot overemphasize the importance of avoiding trading by insiders, including the exercise of options, at any time material information has not been disclosed and allowed to "filter down" to the investing public. We reiterate 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 to material nonpublic information about the Company. The prohibition imposed by Section 10b-5 brings home the importance of timely public disclosure. One important consideration to bear in mind, however, is that the disclosure of information not generally known to the public may in some instances constitute the violation of a fiduciary duty owed to the Company by the person possessing such information, as when the information is not yet ripe for public disclosure (i.e., in the early stages of negotiation for an acquisition). In such cases, the insider may very well have to forego trading at that particular time. In the absence of further undisclosed insider information, an insider may trade company stock following the appropriate public disclosure. But there is usually some period of delay after the release of such information to the press or public in order for outside investors to evaluate the news. The following guidelines from the NYSE Stock Exchange Manual as to when trading is appropriate are instructive on the point: "Transactions may be appropriate under the following circumstances, provided that prior to making a purchase or sale a director or officer contacts the chief executive officer of the company to be sure there are no important developments pending which need to be made public before an insider could properly participate in the market: "Following a release of quarterly results, which includes adequate comment on new developments during the period. This timing of transactions might be even more appropriate where the report has been mailed to shareholders. "Following the wide dissemination of information on the status of the company and current results. For example, transactions may be appropriate after a proxy statement or prospectus which gives much information in connection with a merger or new financing. "At those times when there is relative stability in the company's operations and the market for its securities. Under these circumstances, timing of transactions may be relatively less important. Of course such periods of relative stability will vary greatly from time to time and will also depend to a large extent on the nature of the industry or the company. "It would also seem appropriate for officials to buy or sell stock in their companies for a 30-day period commencing one week after the annual report has been mailed to shareholders and otherwise broadly circulated (provided, of course, that the annual report has adequately covered important corporate developments and that no new major undisclosed developments occur within that period). "Where a development of major importance is expected to reach the appropriate time for announcement within the next few months, transactions by directors and officers should be avoided. "Corporate officials should wait until after the release of earnings, dividends, or other important developments have appeared in the press before making a purchase or sale. This permits the news to be widely disseminated and negates the inference that officials had an inside advantage. Similarly, transactions just prior to important press releases should be avoided." One appropriate means of avoiding Section 10b-5 liability might be a periodic investment program in which the directors or officers make regular purchases under an established program administered by a third party and when the timing of purchases is outside the control of the individual. Another important thing to keep in mind is that the foregoing principles also apply to inside information. Company employees may obtain material nonpublic information about another public corporation with respect to that corporation's securities. Thus, if a Company employee obtains material nonpublic information about another corporation, he must refrain from trading in that corporation's stock until a public announcement is made. 2. Section 16(b) Short Swing Profits. Section 16(b) requires that every officer, director and 10% shareholder who either purchases and sells or sells and purchases any of the Company's securities within a period of six months must turn over to the Company any profit realized (calculated by setting the highest sale against the lowest purchase, without offset for any losses), whether or not his trading was actually based on material inside information. Consequently, good faith is no defense and compliance with Section 10b-5 does not preclude the application of Section 16(b). An action may be brought by the Company or by any stockholder suing on its behalf and the courts apply Section 16(b) rigorously and mechanically with the intention of preventing short-swing trading by corporate insiders. The mechanics of Section 16(b) are as follows: A six-month period is evaluated for all purchases and sales of shares beneficially owned by an insider. Transactions are paired so that the lowest purchase price is matched against the highest sale price. It is not necessary for the same shares to be involved in each of the matched transactions. Moreover, beneficial ownership may include indirect ownership of stock, for example, through trusts or estates. In some circumstances, stock held by close relatives may be considered to be owned beneficially by an officer or director to produce a recoverable profit. Losses cannot be offset against gains. Thus, it is possible under this method, to compute a "profit" from trading during a six-month period when, in fact, the officer, director or 10% shareholder has sustained overall economic losses from trading in the Company's equity securities. You should bear in mind that sales or purchases made up to six months before the Company's Exchange Act registration of the stock may be matched with purchases or sales subsequent to such registration, and must be reported to the SEC if they occur within six months before any transaction that results in the filing of a Form 4. Example: X, a director of Y Corporation, engaged in the following transactions after a class of securities had been registered under the Exchange Act: 1. January 5, 1998: X purchases 100 shares of Y Corporation common stock for $5,000.00 ($50.00 per share). 2. February 2, 1998: X purchases 100 shares for $2,500.00 ($25.00 per share). 3. March 9, 1998: X sells 100 shares for $5,000.00 ($50.00 per share). 4. April 10, 1998: X sells 100 shares for $3,500.00 ($35.00 per share). 5. May 12, 1998: X purchases 100 shares for $3,500.00 ($35.00 per share). 6. June 15, 1998: X sells 100 shares for $1,000.00 ($10.00 per share). In summary, X paid $11,000 for securities that he subsequently sold for $9,500, thereby suffering an economic loss of $1,500. However, for purposes of Section 16(b), X would be regarded as realizing a $2,500 "short-swing" profit and incurring a liability of $2,500 to the Company. This liability results from matching the lowest purchase transaction (February 2) with the highest sale transaction (March 9) for a $2,500 liability, and the next lowest purchase transaction (May 12) with the next highest sale transaction (April 10) for no additional liability. X is not entitled to a deduction for the other two transactions that resulted in an overall economic loss. There are many types of transactions that constitute a "purchase" or a "sale" for 16(b) purposes in addition to normal open market transactions and Section 16(b) is not limited to the registered equity securities of the Company but includes any certificate of interest or participation in any profit sharing agreement, transferable shares, voting trust certificates or certificates of deposit for an equity security or any security convertible, with or without consideration, into such a security, or any such warrant or right. Some of the more difficult problems relating to the application of Section 16(b) arise in connection with stock options. The acquisition of shares through the exercise of a stock option is a purchase for purposes of Section 16(b), but Rule 16b-16 limits the amount of recoverable profit in certain circumstances and Rule 16b-3 creates a safe harbor for certain employee stock option, profit sharing, stock appreciation, bonus, retirement, thrift, savings and similar plans that meet specific criteria. 3. Section 16(c)-Short Sales Section 16(c) makes it unlawful for insiders to engage in short sales and sales against the box. A short sale is a sale in which the seller does not own the securities sold at the time of sale, but borrows shares to make delivery. A sale against the box occurs when a seller owns securities to cover his sale, but does not make delivery within twenty days after the sale or place the securities in the mail within five days after the sale. II. Internal Company Procedures to Effectuate Its Responsibilities as a Public Company Accounting ProceduresUnder the Foreign Corrupt Practices Act, the Company is required to make and keep books, records and accounts that accurately reflect the Company's transactions and dispositions of assets and to devise and maintain a system of internal accounting controls. Restricted and Control Stock The Company should place restrictive legends on the face of each stock certificate representing restricted or control shares and the transfer agent should be instructed to place "stop transfer notices" on its books with respect to such shares, so that if a transfer of such shares is attempted without registration, it will be stopped and the Company will be notified. These procedures are required under present SEC policy. Internal Information-Maintaining ConfidentialityIn order to preserve confidentiality, material, nonpublic information should be confined to as small a group as possible and those with access should be frequently reminded of the need to maintain its confidentiality. Not only must they refrain from disclosing such information to outsiders, but they must also avoid discussing it with other members of management. Any current practice of widely disseminating Company information among management personnel should be curtailed. Securities analysts and members of the financial press may from time to time approach the Company seeking information. For example, they may ask for confirmation of a rumor of unexpectedly high earnings. An improper response to such an inquiry may result in premature, incomplete, or otherwise misleading disclosure. To avoid such problems, and generally to maintain control over the flow of information to the public, the Company may wish to place one officer in charge of disseminating information for the Company and to direct all other personnel to refer all inquiries to him or her. There may be times when it is wise to anticipate questions, draft responses, and update them continuously as developments occur. If, during such a time, it appears that material information can no longer be kept confidential, the Company should be prepared to issue quickly a complete release. Placing a single officer in charge of all releases, as suggested above, will help prevent "leaks," reduce the potential for inadvertent disclosure, and prevent the embarrassment of conflicting statements from different sources. If anyone becomes aware of a leak of material information, whether inadvertent or otherwise, he or she should report it immediately to those responsible for public disclosures. We reiterate that any insider who leaks inside information to a "tippee" may be equally liable with the tippee for the profit of the tippee under Section 10b-5 discussed above. General Considerations - Transactions with the Company The relationship between officers and directors of the Company on the one hand and both the Company and its shareholders on the other is known in law as a fiduciary relationship. This relationship imposes on officers and directors a duty to ensure that all transactions they may enter into with the Company (e.g., loans from and contracts to supply goods to the Company) are undertaken in utmost good faith, on an arm's-length basis, and are fair and reasonable from the Company's standpoint. In addition, fiduciaries may neither use their strategic positions for their own advantage nor take for themselves opportunities that properly belong to the Company (e.g., an opportunity to buy an asset that is desirable for the Company's business). The fiduciary obligations of officers and directors must be carefully observed, for if they are breached, one or more minority shareholders may bring an action on behalf of the Company or the SEC may bring an enforcement action claiming there has been inadequate disclosure to shareholders or breach of fiduciary duty. No conscious wrongdoing is needed to establish a violation of fiduciary obligation: a fiduciary's conduct is judged by the strictest of standards. If an officer or director reaps a profit from such a breach, he or she may be required to account for it and pay it over to the Company. Under some circumstances, controlling shareholders, whether or not officers or directors, may also owe a fiduciary obligation to minority shareholders. Management should consider consulting with counsel before any transaction is undertaken between the Company and an officer, director, or major shareholder, or before any transaction involving any benefit to any such person in which all shareholders do not share is commenced (e.g., sale of a controlling block of stock or the taking of a business opportunity from which the Company could benefit). Sometimes steps may be taken (e.g., independent appraisals or bids, independent board approval or, possibly, shareholder approval) to ensure that the transaction does not in fact breach the fiduciary's duty. Transactions between the Company and its fiduciaries usually must be disclosed in the Company's annual report to shareholders, its Form 10-K, and its proxy or information statement (if one is prepared). LiabilityThe subject of liability is far too complex to discuss in detail in this memorandum. Suffice it to say that any breach of the foregoing corporate or individual requirements may expose the Company and also any insiders involved, on an individual basis, to adverse consequences, including imposition of an injunction and monetary damages (which may well exceed 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. 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 ensure that the Company complies with its obligations under the federal securities laws. ConclusionThis memorandum provides a general and nontechnical summary of some of the important reporting, filing and other legal requirements imposed upon the Company and its officers, directors, major shareholders, and other "insiders." It does not set forth in detail all of the legal and operational aspects of such 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 can place reliance in taking specific action. The Company should consult with counsel and its own accountants from time to time in order to understand more fully the actual operation of the various rules that now or may soon apply.