A. General Risk Factors.
1. The following list of Risk Factors is not exhaustive. Aztoré and its Operating Subsidiaries and its Portfolio Companies will face many risks not determinable at this time. A potential investor should consider reviewing the Risk Factors and other information contained in the VT Plan Disclosure Statement and Reorganization Plan with their professional investment and legal advisors.
2. All Portfolio Company and Operating Subsidiary Securities or Debt held by Aztoré are very likely to be highly speculative. All securities held by VCC are very likely to be highly speculative, and investment therein involve a high degree of risk.
B. Risks related to the operation of Aztoré and its Portfolio Companies. These risks will likely also apply to any Portfolio Companies.
1. Development stage companies. There may be no meaningful operating history to evaluate the prospects of any of our investments. The historical Visitalk business had a limited operating history and had only been a software developer for a little more than two years before filing bankruptcy. The technology concept related to its Operating Subsidiaries is new and unproven. We expect to commence our first larger scale marketing efforts of the VT Directory technology if we have adequate capital in the relevant Operating Subsidiaries. Our Predecessor, Visitalk, had incurred substantial operating losses (approximately $50,000,000 to $60,000,000) and had negative cash flow since its incorporation in late 1998. Future losses from our activities should be anticipated.
Each of our operations will be subject to all of the risks inherent in the establishment of a new business enterprise, particularly ones that are dependent on the ever-changing high technology industry. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with establishing a new business, including uncertainty as to service capabilities, market acceptance, marketing methods, expenses and competition. We may not be successful in our proposed new business activities.
2. Our business prospects are difficult to evaluate. We only commenced marketing any service for fees on February 1, 2001, after our predecessor was in bankruptcy. We have only had about $360,000 in revenues since 2001 but we have had very limited capital for development and marketing. Therefore, we have a very limited operating history upon which you can evaluate the prospects for our investments and any operating history is unlikely to be representative. Our prospects must be considered in light of the risks, difficulties and uncertainties frequently encountered by companies in an early stage of development, particularly companies in new and rapidly evolving markets such as the market for Internet Protocol communications directories. These risks include whether we are able to:
3. Lack of meaningful financial information. In addition to the risks inherent in developing a new business, we do not have significant historical financial information available for meaningful analysis. No financial information has been audited by an independent certified public accountant. Any financial statements presented may be subject to substantial adjustment upon such audit.
4. Difficulties attracting and retaining qualified personnel. VCC's, its Portfolio Companies' and its Operating Subsidiaries' ability to achieve profitable operations in any business that they may enter is dependent upon each company's ability to attract and retain qualified personnel. No assurances can be given that these companies will be able to attract or retain such qualified personnel.
5. Additional capital requirements. The current proposed plan of operations for VCC and its Operating Subsidiaries, even if successful, may not result in cash flow sufficient to finance the continued expansion of each of its new businesses. Each entity will, in all likelihood, require additional capital for operations and anticipated expansion. We will very likely require substantial additional capital for development and marketing activities. There can be no assurance we will be successful in obtaining any additional equity capital or other financing or, if obtained, that such capital will be obtained at a reasonable cost.
VCC's Predecessor was unable to fund its operations with internally generated funds. To expand our business we will very likely need to raise additional capital. We have required and continue to require substantial capital to fund our business operations. Our future capital requirements will depend upon many factors, including the expansion of the businesses of our Operating Subsidiaries, requirements to maintain adequate VT Directory capabilities, the progress of our research and development activities, expansion of our marketing and sales efforts and the status of competitive products and services. In the future, we expect to enter into additional financial transactions, which could result in significant dilution or substantial indebtedness.
We currently have no commitments, agreements or understandings regarding additional financing and we may be unable to obtain additional financing on satisfactory terms or at all. We expect to pursue additional financing through private placements of debt or equity or through the exercise of the warrants included in the Warrant Units issued by VCC and its Operating Subsidiaries. If additional funds are raised by issuing equity securities, dilution to existing or future stockholders may result. We may also incur or assume substantial indebtedness. If adequate funds are not available, we may be required to delay, scale back or eliminate our research and development, marketing or expansion efforts or obtain funds through arrangements with current investors or others. These arrangements may require us to relinquish rights to certain of our existing or potential products or other assets. The inability to obtain financing could have a material adverse effect on our business, financial condition and results of operations. VCC's history of bankruptcy may make it more difficult to attract additional capital.
6. Limited Intellectual Property Protection. All our Processor's patent filings have lapsed since they had no money to pursue them. In the future we will only be able to rely on trade secret, nondisclosure, confidentiality and non-competition rights to protect our intellectual property rights. Accordingly, we may not be able to bear the costs of any defense or prosecution of claims related to our intellectual property rights. Our actions to protect our trademarks and other proprietary rights may be inadequate. In addition, it is possible that we could become subject to infringement actions based upon content we may license from third parties. Any of these claims, with or without merit, could subject us to costly litigation and the diversion of our financial resources and technical and management personnel. Further, if such claims are successful, we may be required to alter the content and pay financial damages. Despite our efforts to protect our proprietary rights from unauthorized use or disclosure, parties may attempt to disclose, obtain or use our solutions or technologies. Any litigation regarding our proprietary rights could be costly and divert our attention, result in the loss of certain of our proprietary rights, require us to seek licenses from third parties and prevent us from selling its services, any one of which could adversely affect our business.
7. Potential control by Aztoré, its affiliates and officers. The Officers of Aztoré, the largest shareholder, along with its affiliates control a majority of the voting shares and, when acting in concert, could elect or designate all the members of VCC's Board of Directors and indirectly through this control the Boards of Directors of all its Operating Subsidiaries.
8. Significant Historical Losses. Our Predecessor incurred substantial losses and negative cash flow since its formation in 1998. For the 12 months ending December 31, 1999 and the 11 months ending November 30, 2000, Visitalk had nominal operating revenues. Visitalk's operating expenses for each of these periods were approximately $15,000,000 and $30,000,000, respectively. Visitalk also purchased millions of dollars in assets including more than $2,000,000 in leasehold improvements made to a building which we no longer occupy. We must be able to generate substantial sales of our services and increase the licensing of our software to increase revenues. There is no assurance that we can increase our revenue sources with limited investment capital and operating revenue. If VCC or its Operating Subsidiaries continue to lose money over a period of time, we may be forced to severely limit or discontinue most of our operations.
9. Dependence on Key Personnel. We will be dependent on the continued services of our new management team as set forth herein. While we have no assurance that our current management will produce successful operations, the loss of such personnel could have an adverse effect on meeting our production and financial performance objectives.
10. Risks associated with management of potential growth. We anticipate rapid growth which will place a significant strain on the very limited managerial, operational, financial and information systems resources of VCC and each of its Operating Subsidiaries. To manage growth, VCC and each of its Operating Subsidiaries must continue to implement and improve their operational, financial and information systems, and hire, train and manage an employee base. Additionally, expansion of their information and network systems is required to accommodate this growth. There can be no assurance that the management of VCC and each of its Operating Subsidiaries will be able to effectively manage the expansion of their operations, or that their facilities, systems, procedures or controls will be adequate to support their expanded operations. The inability to effectively manage future growth would have a material adverse effect on these entities. We believe that the ability of VCC and each of its Operating Subsidiaries to provide timely delivery for customers and adequate customer support largely will depend on their ability to attract, identify, train, integrate and retain qualified personnel. Failure to provide adequate customer support services would adversely affect their ability to maintain and increase our customer base, and could therefore have a material adverse effect on their operations.
11. Our Customer Base Must be Expanded. To date, our Predecessor had a limited number of customers that provide all of our revenues. There is no assurance that we will be able to obtain adequate distribution of our services to a large number of intended end users. Our ability to achieve revenues in the future will depend in significant part upon our ability to obtain additional gateway outlets, maintain relationships with, and provide support to, existing and new customers. As a result, any cancellation, reduction or delay may materially adversely affect our business, financial condition and results of operations. There can be no assurance that we will be able to support or attract additional customers.
12. Continual enhancements required and reliance on NavEdge. Our future success will depend significantly on our ability to enhance our current service capabilities or develop new technology that meets the changing market demands on a timely and cost-effective basis. We must maintain and improve the performance features and reliability of our services and continue to meet emerging industry standards and other technological changes. We may experience technical difficulties that could delay or prevent the successful development, introduction or marketing of new products and services. In addition, any new enhancements to our products and services must meet the requirements of our current and prospective users. We could incur substantial costs to modify our services to adapt to rapid technological change. We currently rely on NavEdge to supply us our core technology infrastructure.
We do not know if we will be successful in enhancing the existing services or developing new products on a timely basis or if such new or enhanced products will achieve market acceptance or sustain such acceptance for any significant period. Our failure to anticipate or respond adequately to changes in technology and customer requirements and preferences, or any significant delay in development of enhanced or new products, will have a material and adverse effect on our business, financial condition and results of operations.
Services based on sophisticated software and computer systems often encounter development delays and the underlying software may contain undetected errors that could cause system failures when introduced. Any system error or failure that causes interruption in availability of content or an increase in response time could result in a loss of potential or existing services customers, users or advertisers and, if sustained or repeated, could reduce the attractiveness of our Web site, VT Directory and other services to such entities or individuals. In addition, if we rely on Web advertising any such revenues are directly related to the number of advertisements delivered by us to users and system interruptions that result in the unavailability of our Web site or other services or slower response times for users would reduce the number of advertisements delivered and reduce revenues.
A sudden and significant increase in traffic on our Web site or other services could strain the capacity of the software, hardware and telecommunications systems deployed or utilized by us, which could lead to slower response times or system failures. In order to ensure that we are able to handle additional traffic in the future, we may have to enter into long-term agreements for leased capacity. To the extent that we over estimate our capacity needs, we may be obligated to pay for more transmission capacity than we actually use, resulting in costs without corresponding revenues. Conversely, if we underestimate our capacity needs, we may be required to obtain additional transmission capacity from more expensive sources. If we are unable to maintain sufficient capacity to meet the needs of our members, our reputation could be damaged and we could lose revenues.
13. Multinational Operations. We believe a portion of our success will be dependent upon usage in a number of countries throughout the world. In addition, we may receive revenue denominated in foreign currencies. Operations in several different countries will expose us to a number of risks, and any of these factors could have a material adverse effect on our business, financial condition and results of operations. These risks include:
14. Limitation of Officers' and Directors' Liabilities. The by-laws of VCC and its Operating Subsidiaries all eliminate directors' and officers' liabilities to the maximum permitted under applicable law. Thus, even if such an officer or director loses a lawsuit, unless such officer or director was guilty of gross negligence or willful misconduct in the performance of his/her duties, we or our insurance carrier, if any, will pay the amount of such judgment or settlement and reasonable legal fees.
C. External Factors that could impact the companies formed under the Plan.
1. Competition. The market we are targeting is expected to be highly competitive and dominated by competitors with substantial financial, operating, promotional and other resources far in excess of ours. We may not be able to compete successfully with current products or new technology that is introduced by others that may enter this market in the future. Competition from bigger, more established competitors who have greater financial and technical resources and from new entrants could cause us to lose current or future business opportunities and harm our business, results of operations, and ability to grow. The number of Web sites competing for the attention and spending of members, users and advertisers has increased and we expect it to continue to increase.
Most of our Operating Subsidiaries will likely compete for members, users and advertisers with audio and videoconferencing companies and Internet business services providers. The telecommunications market and, in particular the IP telephony market, is intensely and increasingly competitive. Many major Internet backbone companies and telephone carriers are involved in one or more aspects of the IP telephony market. These include AT&T, MCI WorldCom, Cisco and Qwest, among others, which offer a variety of products from switching platforms to least cost routing and long distance. We must compete with these larger enterprises in international, national, regional and local markets. In addition, we may encounter substantial competition from new market entrants. Most of our competitors or potential competitors have significantly greater name recognition and have greater marketing, financial and other resources than we do. They also have established distribution channels that give them an advantage in reaching prospective customers for IP telephony services. If we don't succeed in competing with these companies, we will lose customers and our revenue will be substantially reduced. Increased competition could also result in price reductions, reduced margins, loss of market share, and our inability to obtain new members, any of which could adversely affect our business.
2. Acceptance of Third Party Software. The potential for current success of most of our Operating Subsidiaries will likely depend on the market acceptance of H.323 standards for software addressing audio and video communications over the Internet. The interoperability and availability of such software, provided by companies such as White Pine and Microsoft, is critical to the success of their businesses. In order to receive and operate this software, including CU-SeeMee, Net Meeting and RealChat, adequately, users generally must have multimedia PCs with certain microprocessor requirements and at least 36.6 kbps Internet access. Users typically electronically download such software and install it on their PCs. Such installation may require technical expertise that some users do not possess. Furthermore, in order for users to receive software over corporate intranets, information systems managers may need to reconfigure such intranets. Because of bandwidth constraints on corporate intranets, some information systems managers may block reception of H.323 standardized software. Widespread adoption of such software depends on overcoming these obstacles, improving audio and video quality and educating customers and users in the use of the software and technology. If H.323 standardized software is not readily available at affordable prices or fails to achieve broad commercial acceptance or such acceptance is delayed, our business could be adversely affected. Further, we are currently experiencing problems with the operability of RealChat. The failure to resolve the problems with RealChat in a timely manner may have a material adverse effect on our business, financial condition and results of operations.
3. Systems Failure. The performance, reliability and availability of our Web site and other services and network infrastructure are critical to our reputation and ability to attract and retain users and advertisers. Our systems and operations are vulnerable to damage or interruption from fire, earthquake, flood, power loss, telecommunications failure, Internet breakdowns, break-ins and similar events. We have only limited redundant facilities and systems and have no formal disaster recovery plan and do not carry sufficient business interruption insurance to compensate for losses that may occur.
4. Dependence on Suppliers and Subcontractors. To supply our service we have to use third parties to supply "bandwidth" or Internet access. Although these are major companies, we have a limited basis upon which to judge the performance of subcontractors. Our inability to obtain timely delivery from our subcontractors or to locate alternate sources of supply could cause a loss of customer orders. Failure to satisfy market demand could result in failure to achieve our sales objectives. We are dependent upon Web browsers, Internet Service Providers ("ISPs") and Online Service Providers ("OSPs") to provide Internet users access to our Web site, VT Directory and other services. Many of these providers have experienced significant outages in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems.
5. Uncertainty concerning availability of net operating loss carry-forwards (NOLs). A significant potential asset of VCC is the availability and utilization of its tax NOL. Certain provisions of the Tax Code may affect or eliminate the availability or the utilization of the NOL. In addition, events occurring subsequent to confirmation of the plan may result in a reduction or loss of the NOL. Our Predecessor never prepared or filed tax returns and therefore this NOL's availability is still uncertain.
6. Acceptance of Services. Our success will be based upon acceptance of Internet videoconferencing, voice and video services. If our services do not receive the consumer or business acceptance as we anticipate, our revenues and operating results will likewise not reach the levels we anticipate. Our services have no brand name recognition. If we are unable to expand the demand for our services, whether because of competition, technology changes or other reasons, our ability to continue in business will be adversely affected. Although we continue to work on upgrades and enhancements, we cannot be certain that our technology will be well received in the broader marketplace. Actual performance of services may not match test results of our existing limited services. Acceptance of our technology by both individual and industrial users will be critical to the success of our business.
7. Development of Brand Name Recognition. We must develop and maintain the Visitalk™ brand to expand our member base and our revenues. We believe that the importance of brand recognition will increase as we expand our service offerings. We intend to increase our expenditures for creating and maintaining brand loyalty and raising awareness of our service offerings. However, if we fail to advertise and market our services effectively, we may not succeed in establishing our brand, we will lose members and our revenues will decline. Our success in promoting and enhancing the Visitalk™ brand will also depend on our success in providing our members high-quality services. If our members do not perceive our services to be of high quality, the value of the Visitalk™ brand would be diminished and we will lose members and revenues.
8. Rapidly Changing Industry. Telecommunications technology, and IP telephony in particular, are rapidly changing. Our market is also characterized by frequent new product and service introductions, short development cycles and evolving industry standards. The recent growth of the Internet and intense competition in our industry exacerbate these market characteristics. The development of new products involves considerable expenditures and can take from several months to several years. Accordingly, new product development requires a long-term forecast of market trends and customer needs and often a substantial commitment of capital resources with no assurance that such products or enhancements will be commercially viable.
9. Unproven Internet e-Commerce Market. Our success will depend in large part on the continued growth in the use of the Internet for our service. Our future operating results depend to a significant extent upon the continued development of IP telephony products and services deemed necessary, useful, convenient, affordable and competitive. We do not have control over the expansion of the Internet, and to the extent that the market for IP telephony does not increase, our potential customer base and revenues will not grow. If IP telephony gains in popularity, we can expect fierce competition from companies more established and better financed than we are. In addition, critical and unresolved issues concerning the commercial use of the Internet may affect the development of the market for our service and our other products and services, including:
If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth and its performance and reliability may decline. In addition, a number of Internet-based businesses have experienced interruptions in their services as a result of outages and other delays occurring throughout the Internet. If outages or delays frequently occur in the future, Internet usage, as well as electronic commerce and the usage of our products and services, could grow more slowly or decline. This could have an adverse effect on our business.
We may be required to expand and adapt our IP telephony infrastructure as the number of users and the amount of information they wish to transfer increases. The expansion and adaptation of our service will require substantial financial, operational and management resources. We cannot be certain that we will be able to expand or adapt our infrastructure to meet additional demand or subscribers' changing requirements on a timely basis, at a commercially reasonable cost, or at all. Nor do we know if we will be able to deploy successfully any necessary infrastructure expansion. Any failure to expand our infrastructure, as needed, on a timely basis or to adapt to changing subscriber requirements or evolving industry standards could have a material adverse effect on our overall business, financial condition and results of operations.
10. Acceptance of Internet as Advertising Medium. We expect to derive some of our revenues in the future from sponsorships and advertising for the foreseeable future, and demand and market acceptance for Internet advertising solutions is uncertain. There are currently no standards for the measurement of the effectiveness of Internet advertising, and the industry may need to develop standard measurements to support and promote Internet advertising as a significant advertising medium. If such standards do not develop, existing advertisers may not continue their levels of Internet advertising. Furthermore, advertisers that have traditionally relied upon other advertising media may be reluctant to advertise on the Internet. Our business would be adversely affected if the market for Internet advertising fails to develop or develops more slowly than expected. Different pricing models are used to sell advertising on the Internet. It is difficult to predict which, if any, will emerge as the industry standard. This makes it difficult to project our future advertising rates and revenues. Our advertising revenues could be adversely affected if we are unable to adapt to new forms of Internet advertising. Moreover, software programs that limit or prevent advertising from being delivered to an Internet user's computer are available. Widespread adoption of this software could adversely affect the commercial viability of Internet advertising.
11. Successful Expansions. If we are unable to manage our growth effectively, our business could suffer. This anticipated future growth will place, a significant strain on our resources. As part of this growth, we will have to implement new operational and financial systems, procedures and controls.
12. Network Security Risks. Our network may be vulnerable to unauthorized access, computer viruses and other disruptive problems. A party who is able to circumvent security measures could misappropriate proprietary information or cause interruptions in our Internet operations. ISPs and OSPs have in the past experienced, and may in the future experience, interruptions in service as a result of the accidental or intentional actions of Internet users, current and former employees or others. We may be required to expend significant capital or other resources to protect against the threat of security breaches or to alleviate problems caused by such breaches.
13. Credit Card Fraud. Under current credit card practices, merchants are liable for fraudulent credit card transactions where the merchant does not obtain a cardholder's signature. We may be liable for claims based on unauthorized purchases with credit card information, impersonation or other similar fraud claims. A failure to adequately control fraudulent credit card transactions would harm our business.
14. Service and Equipment Supplies. We have little ability to control the quality, reliability and availability of the equipment we purchase to operate our network. We are dependent upon other firms for the accurate manufacturing and timely delivery of necessary components. Because we are not presently a large customer of any of our suppliers, we are not likely to be able to negotiate favorable prices or limit future price increases. Frequently there is a substantial waiting period between the placing of an order and the receipt of finished products. This could have an adverse effect on our ability to respond to rapidly growing demand on short notice. If any supplier is unable to provide products on a timely basis because of labor disputes, shortages in raw materials or other reasons, such delays would significantly impair our ability to open new markets or to provide additional or upgraded equipment in existing markets. We may need to obtain licenses from others to refine, develop, market and deliver new services. We cannot assure you that we will be able to obtain any such licenses on commercially reasonable terms or at all or that rights granted pursuant to any licenses will be valid and enforceable.
15. Telecom suppliers. The ability of the our service to operate is dependent upon maintaining operating agreements and good relations with the companies offering multiple telecom services in each market. Presently, these companies are primarily vendors. Should any of the local or long distance carriers currently providing access to multiple services in a market terminate that relationship, we will be required to establish a new relationship for that market. We cannot predict whether a satisfactory new relationship can be established or that, if established, it can be done without an interruption in the availability of the service in that market. Entry into each additional market will require new contracts with carriers. We cannot be assured that such contracts can be attained upon terms which are acceptable to us in a particular market.
16. Regulations. Presently, the Federal Communication Commission does not regulate companies that provide IP telephony services in the United States because they are not considered to be common carriers or telecommunications service providers. Notwithstanding the current state of the rules, the FCC's potential jurisdiction over the Internet is broad because the Internet relies on wire and radio communications facilities and services over which the FCC has long-standing authority. Similarly, IP telephony services are not extensively regulated in most foreign countries. The regulatory environment in which we operate is subject to change. Federal and state regulatory agencies may conclude that our services should be regulated, which would subject us to numerous regulatory requirements, including:
Local governments may also require us to obtain a franchise and pay a portion of our gross revenues as a franchise fee. There can be no assurance that current or new government laws and regulations, or the application of existing laws and regulations, will not expose us to significant liabilities, significantly slow Internet growth or otherwise adversely affect our business.
Any such regulatory changes could have a material adverse effect on our business, financial condition and results of operations. We might deem it necessary or advisable to alter or modify our products to operate in compliance with such regulations. Such modifications could be very expensive and, especially if subject to regulatory review and approval, time-consuming.
17. Investment Company regulations. VCC expects to be exempt from the Investment Company Act of 1940. There can be no assurance that current or new government laws and regulations, or the application of existing laws and regulations, will not expose us to significant liabilities if this exemption is challenged or not available. Any such regulatory changes could have a material adverse effect on our business, financial condition and results of operations.
D. Impact of failing to develop a viable Visitalk technology based business.
In the event that VCC and its Operating Subsidiaries cannot develop or find a viable business, it is likely that such entities may seek other non-related mergers or acquisitions. Such transactions have significant risk factors associated with such an activity.
1. Such Company's majority stockholder will have the ability to effectively control substantially all actions taken by stockholders. Upon the confirmation, VCC will own more than 80% of each Operating Subsidiary. Accordingly, VCC can effectively control substantially all actions taken by such Company's stockholders, including the election of directors. Such concentration of ownership could also have the effect of delaying, deterring or preventing a change in control of such company that might otherwise be beneficial to stockholders and may also discourage acquisition bids for such company and limit the amount certain investors may be willing to pay for shares of the common stock.
2. Scarcity of and competition for business opportunities and combinations. If an Operating Subsidiary elects to seek mergers with, joint ventures with and/or acquisitions of small private and public entities, it will face intense competition. A large number of established and well-financed entities, including venture capital firms, are active in mergers and acquisitions of companies, which may be desirable target candidates for such Operating Subsidiary. Nearly all such entities will have significantly greater financial resources, technical expertise and managerial capabilities than such Operating Subsidiary and, consequently, such Operating Subsidiary will be at a competitive disadvantage in identifying possible business opportunities and successfully completing a business combination. Moreover, such Operating Subsidiary will also compete in seeking merger or acquisition candidates with numerous other small public companies. For the fiscal year ending in August 2005, most Operating Subsidiaries will likely have little or no revenues and a loss from operations. These conditions raise substantial doubt about any Operating Subsidiary's ability to continue as a going concern. Consistent with its business plan, management may seek to acquire an entity with experienced management and opportunities for growth in exchange for its securities and is dependent on a successful merger with a profitable company.
3. No Operating Subsidiary has executed any formal agreement for a business combination or other transaction and no specific standards have been established for business combinations. No Operating Subsidiary has executed any formal arrangement, agreement or understanding with respect to engaging in a merger with, joint venture with or acquisition of a private or public entity. There can be no assurance that any Operating Subsidiary will be successful in identifying and evaluating suitable business opportunities or in concluding a business combination. Management has not identified any particular industry or specific business within an industry for evaluation by any Operating Subsidiary. There is no assurance that any Operating Subsidiary will be able to negotiate a business combination on terms favorable to such Operating Subsidiary. Any such Operating Subsidiary has not established a specific length of operating history or specified level of earnings, assets, net worth or other criteria which it will require a target business opportunity to have achieved. Accordingly, the Operating Subsidiary may enter in to a business combination with a business opportunity having no significant operating history, losses, limited or no potential for earnings, limited assets, negative net worth or other negative characteristics.
4. Reduction of percentage share ownership following business combination and possible dilution. If in the future any Operating Subsidiary's primary plan of operation becomes seeking a business combination with a private concern it would, in all likelihood, result in the Operating Subsidiary issuing securities to shareholders of any such private company. The issuance of previously authorized and but unissued common shares of the Operating Subsidiary would result in reduction in percentage of shares owned by present and prospective shareholders of such Operating Subsidiary and may result in a change in control or management of such Operating Subsidiary. In addition, any merger or acquisition effected by the Operating Subsidiary can be expected to have a significant dilutive effect on the percentage of the shares held by the Operating Subsidiary's then shareholders and may cause significant reverse stock splits. In the event of significant additional share issuance, an Operating Subsidiary may choose to reverse split its shares which may negatively impact the value of an investor's shares.
E. Observations concerning the securities issued pursuant to the Plan.
1. Impediments to Transfer. The securities issued under the Plan will be issued without registration under the Securities Act or any state securities laws, in reliance, in case of shares issued to creditors, upon the exemption from federal and state registration provided by § 1145(a)(1) of the Bankruptcy Code. In addition, VCC securities may be restricted to avoid a "change of control" event related to VCC's NOL.
2. Penny Stock Regulation. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the SEC. Penny Stocks generally are defined as equity securities with a price of less than $5.00. Excluded from the Penny Stock designation are securities registered on certain national securities exchanges or quoted on NASDAQ, provided that current price and volume information with respect to transactions in such securities is provided by the exchange/system or are sold to established customers or accredited investors.
The Penny Stock rules require a broker-dealer, prior to a transaction in a Penny Stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about Penny Stocks and the risks in the Penny Stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the Penny Stock, the compensation of the broker-dealer and its salesperson in connection with the transaction, and the monthly account statements showing the market value of each Penny Stock held in the customer's account. In addition, the Penny Stock rules generally require that prior to a transaction in a Penny Stock, the broker-dealer must make a special written determination that such Penny Stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the Penny Stock rules. At this time, all the securities of VCC and its Operating Subsidiaries are subject to the Penny Stock rules and therefore holders of such securities may find it more difficult to sell their securities.
3. No Prior Public Market. Currently there is no market for any of the securities of VCC and its Operating Subsidiaries and there can be no assurance that an active public market will develop or be sustained for the common stock, Units or Warrants of VCC or any Operating Subsidiary. The existence of the Warrants may well also suppress the trading prices of the securities of such entities until such warrants have been "called" or exercised. It is expected that a public trading market for any of the securities to be issued under the Plan could, but may not, develop at all after distribution.
4. Requirements for a Public Market. A public trading market for the stock of an issuer, including VCC, having desirable characteristics of depth, liquidity and orderliness, also depends upon the presence in the marketplace of both willing buyers and willing sellers of the stock at any given time. The presence in the marketplace of a sufficient number of buyers and sellers at any given time is dependent upon the individual decisions of the stockholders, over which neither VCC nor any market maker has any control. Accordingly, there can be no assurance whatsoever that an established and liquid market for any securities to be issued pursuant to the Plan will develop or that recipients will be able to dispose of their securities. Furthermore, neither VCC nor any independent professional or professional associated with VCC makes any representation as to whether a market for the securities issued under the Plan will develop and, if it does, what market price for those securities may prevail. Initially a significant percentage of our securities are held in a Creditors' Trust formed under the Plan.
5. Arbitrary determination of the prices of securities issued under the Plan. The prices of the securities issued under the Plan were arbitrarily established by the Plan and does not necessarily bear any relationship to our potential assets, earnings or net worth or to any other generally recognized criteria of value and should not be regarded as an indication of any future market price of any of the Securities.
6. Discretion in Application of Proceeds of any warrants exercised or assets sold. VCC and all its Operating Subsidiaries will have warrants outstanding to purchase a significant number of additional shares. If exercised, the warrants will generate a significant amount of additional capital. No particular amounts are committed or assured. Holders of the warrants will not likely have any opportunity to evaluate and have limited economic, financial or other information which may be utilized by management in determining how and when to apply the proceeds. Holders must rely upon the ability of management to identify and make decisions as to the application of any proceeds consistent.
Dividends and Distributions. Neither VCC nor any of its Operating Subsidiaries anticipate paying cash dividends. We expect all such entities to retain income, if any, for working capital and investment needs. It is anticipated that any income received from operations will be devoted to future operations. The timing and payment of cash or other distributions, if any, will be left to the discretion of the Board of Directors of each individual entity