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Risk Factor Disclosure by pengxiang

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									Risk Factor Disclosure


        Mark Shuman
       Special Counsel
 SEC, Division of Corporation
           Finance
      Risk Factor Disclosure
 Item 503(c) of Regulation S-K generally
 requires disclosure of the most significant
 factors that make the offering risky:

• Concise and organized logically;

• Explain how the risk affects the issuer or
the securities;
      Risk Factor Disclosure (cont’d)

• Presented under a sub-caption that
adequately describes the risk;

• Immediately follow the summary section;

• Location referenced by page number on
the cover.
Risk Factors Should Avoid
 • Legalistic or overly complex
   presentations;

 • Vague "boilerplate" explanations that
   are imprecise;
Risk Factors Should Avoid (cont’d)


      • Complex information copied directly
        from legal documents;

      • Repetitive disclosure that does not
        inform.
    Risk Factors Fall into Three Categories

    Industry Risk

•     Will acquire properties with significant
     environmental issues;

•     Seasonal demand, uncertain supply of
    raw materials.
    Risk Factors --Three Categories (cont’d)

Company Risk

•     Specific owned properties require
     environmental clean-up;

•    Issuer has decided not to obtain insurance
    coverage.
    Risk Factors --Three Categories (cont’d)

Investment Risk

    • No prior market;

•     Debt being offered is subordinate to
     current and future debt.
    Example of Industry Risk
All of our key customers are
telecommunications companies. If the
telecommunications industry continues to
experience significant economic downturn,
our sales could be adversely impacted.
   Example of Industry Risk (cont’d)

A significant portion of our revenues is generated
from sales of our products and services to various
telecommunications companies. During the last
twelve to eighteen months, the
telecommunications industry has endured a
significant economic downturn.
Telecommunications service providers have
typically reduced planned capital spending, have
reduced staff, and sought bankruptcy proceedings
and/or ceased operations.
    Example of Industry Risk (cont’d)

Consequently, the spending cutback of these
organizations has affected the Company through
reduced product orders. The decline in product
orders negatively impacted our revenues,resulting
in significant operating losses and negative cash
flows. If the telecommunications industry
experiences further economic downturns, this
could negatively impact our sales and revenue
generation, and consequently have a material
adverse effect on our business, financial condition
and results of operations.
   Example of Company Risk
We may be unable to protect our proprietary
rights, permitting competitors to duplicate our
products and services, which could negatively
impact our business and operations.
   Example of Company Risk (cont’d)

We hold no patents on any of our technology. If
we are unable to license any technology or
products that we may need in the future, our
business and operations may be materially and
adversely impacted. However, we do not consider
any of these licenses to be critical to our
operations. We have made a consistent effort to
minimize the ability of competitors to duplicate
our software technology utilized in our products.
   Example of Company Risk (cont’d)

However, there remains the possibility of
duplication of our products, and competing
products have already been introduced. Any such
duplication by our competitors could negatively
impact on our business and operations.
We may be unable to protect our proprietary rights,
permitting competitors to duplicate our products
and services, which could negatively impact our
business and operations.
 Example of Securities Risk
Our common stock may be delisted from
Nasdaq and if this occurs you may have
difficulty converting your investment into
cash efficiently.
  Example of Securities Risk (cont’d)

The National Association of Securities
Dealers, Inc. has established certain
standards for the continued listing of a
security on the Nasdaq National Market and
the Nasdaq SmallCap Market. The
standards for continued listing on either
market require, among other things, that the
minimum bid price for the listed securities
be at least $1.00 per share.
  Example of Securities Risk (cont’d)

Our Common Stock has traded below $1.00 since
January 29, 2002, and on March 13, 2002, we
received notice from Nasdaq stating that our
Common Stock has not met the $1.00 continuing
listing standard for a period of 30 consecutive
trading days. There can be no assurance that we
will continue to satisfy the requirements for
maintaining a Nasdaq National Market or
SmallCap listing.
  Example of Securities Risk (cont’d)

If our common stock were to be excluded
from Nasdaq, the prices of our common
stock and the ability of holders to sell such
stock would be adversely affected, and we
would be required to comply with the initial
listing requirements to be relisted on
Nasdaq.
  Combination Risk – Issuer and Security

We do not anticipate the payment of dividends.

  We have never declared or paid cash dividends on
  our common stock. We currently anticipate that
  we will retain all available funds for use in the
  operation of our business. Thus, we do not
  anticipate paying any cash dividends on our
  common stock in the foreseeable future.
         Sample Comment
Currently, it appears you are including more than
one risk factor under one subheading. For
example, is the second paragraph under "Recent
Operating Results" a significant risk factor of this
offering that needs to stand alone under an
explanatory subheading? Other examples of
"bundled" risk factors include . . . In order to give
the proper prominence to each risk you present,
we suggest you assign each risk its own
descriptive subheading.
       Another Sample Comment

Provide the information investors need to assess
the magnitude of the risk. For example, in the
second risk factor on page 4, you state that
increases in short-term interest rates could have a
material adverse effect on XYZ Bank's
profitability. Explain why. Are a substantial
percentage of XYZ's interest-earning assets in
long-term investments that pay fixed rates while
the interest you pay to your depositors fluctuates?
If so, what percentage of your interest-earning
assets are in long-term investments?
  Risks Associated with Blank Check Offerings.
        What Is a Blank Check Offering?

A blank check company:

• Is a development stage company that has no
  specific business plan or purpose or has indicated
  that its business plan is to engage in a merger or
  acquisition with an unidentified company or
  companies, or other entity or person; and

• Is issuing penny stock
   What Risks Are Associated with Blank
                Check Offerings?
• Investors don’t have a business plan or history to
  evaluate;

• Investors don’t know the business to be entered;

• Investors don’t know the terms on which a
  business is acquired or entered;
  What Risks Are Associated with Blank
       Check Offerings? (cont’d)

• Investor reliance upon management is
  pronounced;

• Investors may be mislead about prospects.
     What is Required in a Blank Check
                     Offering?
• With limited exceptions, all securities issued in
  connection with an offering by a blank check
  company and the gross proceeds from the offering
  shall be deposited promptly into an escrow
  account;

• Securities held in the escrow or trust account are
  to be held for the sole benefit of the purchasers;
     What is Required in a Blank Check
             Offering? (cont’d)
• Upon acquisition of a business, amended
  disclosure is required and investors have a
  specified period to evaluate the proposed company
  and whether they wish to continue as investors;

• If an acquisition has not occurred by a date 18
  months after the effective date of the initial
  registration statement, funds held in the escrow or
  trust account shall be returned.
Liquidity and Going Concern Problems


In the past we have experienced significant
losses and negative cash flows from
operations. If these trends continue in the
future, it could adversely affect our
financial condition.
Liquidity and Going Concern Problems
               (cont’d)
We have incurred significant losses and
negative cash flows from operations in the
past. For the fiscal years ended March 31,
2001 and 2002, we experienced net losses
of $16,676,666 and $6,929,379,
respectively, and negative cash flows from
operations of $7,086,246 and $5,026,038,
respectively. These results have had a
negative impact on our financial condition.
Liquidity and Going Concern Problems
               (cont’d)

There can be no assurance that our business
will become profitable in the future and that
additional losses and negative cash flows
from operations will not be incurred.If these
trends continue in the future, it could have a
material adverse affect on our financial
condition.
     Final Paragraph from Report of
     Independent Public Accountant
The accompanying financial statements have been
prepared assuming that the Company will continue
as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring
losses from operations and its difficulty in
generating sufficient cash flow to meet its
obligations and sustain its operations raise
substantial doubt about its ability to continue as a
going concern.
      Final Paragraph from Report of
      Independent Public Accountant

Management's plans concerning these
matters are also described in Note 1. The
financial statements do not include any
adjustments that might result from the
outcome of this uncertainty.
MD&A Disclosure By Distressed Issuer
Our consolidated financial statements have been
prepared on the basis that we will continue as a
going concern, which contemplates the realization
and satisfaction of liabilities and commitments in
the normal course of business. At March 31, 2002,
we had an accumulated deficit of $37,094,424 and
working capital of $5,040,922. We also realized
net losses of $6,929,379 for the year ended March
31, 2002 and $16,676,666 for the year ended
March 31, 2001. Our existing working capital
might not be sufficient to sustain our operations.
MD&A Disclosure By Distressed Issuer
             (cont’d)

Our financial statements do not include any
adjustments relating to the recoverability
and classification of recorded asset amounts
or to amounts and classification of liabilities
that may be necessary should we be unable
to continue as a going concern.
More MD&A Disclosure By Distressed
                  Issuer
The decline in product orders negatively
impacted our revenues, resulting
insignificant operating losses and negative
cash flows. As a result, it is imperative for
us to be successful in increasing our
revenue, reducing costs,and/or securing
additional funding in fiscal 2003 in order to
continue operating as a going concern.
MD&A Disclosure By Distressed Issuer—
         The Problem Quantified
We believe that a minimum of $2,000,000 in
additional capital will be needed in order to fund
the Company's planned operations through June
2003. We plan to seek equity financing to provide
funding for operations but the current market for
equity financing is very weak. If we are not
successful in raising additional equity capital to
generate sufficient cash flows to meet our
obligations as they come due, we plan to continue
to reduce our overhead expenses by the reduction
of headcount and other available measures.
MD&A Disclosure By Distressed Issuer—
  The Problem Quantified (cont’d)

We may also explore the possibility of
mergers and acquisitions. If we are not
successful in increasing our revenue,
reducing our expenses or raising additional
equity capital to generate sufficient cash
flows to meet our obligations as they come
due, we may not be able to continue as a
going concern.
    The Plan to Address the Problem

Our plans to overcome this condition includes
refocusing our sales efforts to include penetrating
additional markets with our enterprise
infrastructure security products, reducing expenses
and raising additional equity capital. On February
14, 2002, we received $3,480,000 from the
issuance of new shares in a private placement of
4,000,000 shares of Common Stock.
The Plan to Address the Problem (cont’d)

We have restructured and reorganized to
reduce our operating expenses by the layoff
of 8 employees in July 2002 which reduced
the Company's overhead expenses by
approximately $575,000 in annual salaries
and employee benefits.
The Plan to Address the Problem (cont’d)
The Company has refocused its sales effort
to emphasize the selling of its software
products and reengineered its hardware
products in an effort to increase gross
margins. The Company has begun to
establish alternate channels that will open
opportunities in the future to sell our
products without the overhead expenses
associated with headcount.
The Plan to Address the Problem (cont’d)

We can not assure that our sales efforts or
expense reduction programs will be
successful, or that additional financing will
be available to us, or, if available, that the
terms will be satisfactory to us.
The Plan to Address the Problem (cont’d)

If we are not successful in increasing our
revenue, reducing our expenses or raising
additional equity capital, to generate
sufficient cash flows to meet our obligations
as they come due, we may not be able to
continue as a going concern.
 Dealing With Issuers Under Investigation

• Issuer may or may not know about the
  investigation;

• Inquiry-investigation process typically is
  not disclosed;
 Dealing With Issuers Under Investigation
                 (cont’d)

• Disclosure and Enforcement operations are
  by different persons;

• Disclosure concerns—issuer has the
  disclosure obligation.
When Issuer Is Aware of Enforcement
                    Interest
All persons who are responsible for the accuracy
and adequacy of the disclosure in the registration
statement are urged to be certain that all
information required for investors to make an
informed investment decision is provided. Since
ABC and its management are in possession of all
facts with respect to the matter under investigation
they are responsible for the accuracy and
adequacy of the disclosures made.
When Issuer is Aware of Enforcement
         Interest (cont’d)


In the event that ABC requests acceleration
of the effective date of the pending
registration statement, ABC should furnish
a letter at the time of such request which
acknowledges the following:
 When Issuer is Aware of Enforcement
          Interest (cont’d)
The disclosure in the filing is is the responsibility
of ABC. ABC represents to the Commission that
should the Commission or the staff acting
pursuant to delegated authority, declare the filing
effective, it does not foreclose the Commission
from taking any action with respect to the filing
and ABC represents that it will not assert this
action as a defense in any proceeding initiated by
the Commission or any person under the federal
securities laws of the United States.
When Issuer is Aware of Enforcement
         Interest (cont’d)

ABC further acknowledges, that the action
of the Commission or the staff, acting
pursuant to delegated authority, in declaring
the filing effective does not relieve ABC
from its full responsibility for the adequacy
and accuracy of the disclosures in the filing.

								
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