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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was organized in September 1998 as North American Software
Associates, Limited, a Delaware corporation. The Company was organized to
provide a variety of telecommunications services. On April 1, 1999, the Company
acquired all of the assets of Freedom 2000, a local internet service provider,
in exchange for 577,123 shares of restricted common stock of the Company. On
December 3, 1999, the Company acquired all of the common
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stock of Action Communications, Inc. ("Action"), a provider of digital and
alpha numeric paging services, in exchange for 1,731,339 shares of restricted
common stock of the Company. The Action transaction has been treated for
accounting purposes as a purchase of assets and liabilities, and revenues and
expenses of Action prior to December 3, 1999 have not been consolidated.
Effective December 21, 1999, North American Software Associates, Limited
("NAS") was acquired by Pierce International, Inc. in a share exchange
transaction and in March 2000 the Company changed its name to North American
DataCom, Inc. The transaction with Pierce International, Inc. has been
accounted for as a reverse acquisition since the former shareholders of NAS
owned controlling interest in the Company immediately following the transaction
and management of Pierce International, Inc. was replaced by management of NAS.
The Company intends to provide broad-based communications and
information technology services with an emphasis on wideband fiber optic and
wireless telecommunications services that support enterprise data storage
solutions. These services are intended to include Internet access services,
on-line critical data storage and retrieval, and data and voice networking.
Currently the Company only provides Internet access services and digital and
alpha numeric paging services. All of the Company's historical revenues have
been derived from these services.
Results of Operations:
Because the Company only acquired Freedom 2000, its Internet service
provider, in April 1999, only a partial year of revenues and expenses from this
activity is reflected in the Company's results of operations for fiscal 1999,
compared with a full year of operations for fiscal 2000. Because the Company
only acquired Action Communications, Inc., its digital and alpha numeric paging
provider, in December 1999, none of the revenues and expenses from this
activity is reflected in the Company's results of operations for fiscal 1999,
and only a partial year of operations is reflected for fiscal 2000. As a
result, management does not believe that the Company's results of operation for
fiscal 1999 are directly comparable to results of operation for fiscal 2000 and
are not indicative of possible results in the future.
The Company's historical net service revenues consist primarily of
monthly fees from customers subscribing to the Company's Internet service
provider services or the Company's digital and alphanumeric paging services. Net
service revenues increased to $269,649 in fiscal 2000 from $19,539 in fiscal
1999, an increase of approximately 1,280%. This growth in net service revenues
was primarily the result of having a full year of operations for the internet
service provider in fiscal 2000, as compared with only three month's of
operations in fiscal 1999 and having seven months of operations generating
approximately $93,000 of revenues for the paging services in fiscal 2000, as
compared with no operations in fiscal 1999. In addition, the Company provided
Internet access service to approximately 1,500 customers at June 30, 2000 as
compared with only about 250 customers at June 30, 1999.
The Company's cost of services consist primarily of paging airtime,
postage and delivery expenses and allocated overhead costs. Cost of services
increased to $117,924 in fiscal 2000 from
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$24,667 in fiscal 1999, an increase of approximately 378%. This increase in
cost of services was primarily related to the increase in net services
provided. Cost of service, as a percent of net service revenue, fell from 126%
in fiscal 1999 to 43% in fiscal 2000. As a result, gross profit in fiscal 2000
was $151,725, as compared with a gross loss of $5,128 in fiscal 1999.
The Company incurred selling, general and administrative expenses of
approximately $1,744,701 in fiscal 2000 compared with $477,612 in fiscal 1999,
an increase of approximately 265%. These expenses consisted primarily of
telephone expenses, insurance expenses, payroll expenses, legal and
professional services and rent expense, as well as non-cash stock compensation.
This increase in selling, general and administrative expenses was primarily the
result of having a full year of operations for the Internet service provider in
fiscal 2000, as compared with only three month's of operations in fiscal 1999
and having seven months of operations for the paging services in fiscal 2000,
as compared with no operations in fiscal 1999. The Company experienced an
increase of approximately 200% in the number of employees from fiscal 1999 to
fiscal 2000. Approximately $195,161 of general and administrative expense in
fiscal 2000 was incurred by the Company in order to pursue its broadband
telecommunications network and enterprise data center business plans. In
addition, approximately $211,000 of general and administrative expense was
attributed to the merger with Pierce International, Inc. during fiscal 2000.
The Company incurred approximately $214,710 in other expense in fiscal
2000 as compared with $184,650 of other income in fiscal 1999. Other income
(expense) was primarily associated with the sale of 500,000 shares of New York
Regional Rail Corporation stock, investment income, interest expense and
various miscellaneous expenses. Imputed interest of approximately $180,282 was
recorded in fiscal 2000 relating to a contract to acquire rights-of-way and
fiber conduit which provided for payments over a period of months without
stated interest.
Liquidity:
The Company's primary liquidity and capital needs consist of funding
cash flow losses from operations, constructing and equipping the Company's
enterprise data center and constructing the Company's fiber optic and broadband
wireless telecommunications network. In fiscal 2000 the Company used
approximately $1,183,421 of net cash in operations. In fiscal 2000
approximately $236,906 was provided by investing activities, of which $700,000
was attributed to the Company's collection of a $700,000 receivable in
connection with the sale of New York Regional Rail Corporation stock, and
$463,094 was used for the purchase of property and equipment. Approximately
$954,110 in funds were provided from financing activities in fiscal 2000,
principally consisting of proceeds from selling equity securities.
Management expects that the Company will require approximately
$150,000,000 in capital over the next twelve months to fund the following
anticipated needs. Estimated expenditures include, but are not limited to,
approximately $81,000,000 to acquire network rights-of-way, installation of
conduit and fiber optic cable, $28,000,000 for optical electronics and
software, $10,000,000 for operation support systems and network operation
center software, $9,500,000
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for Tier IV enterprise data center infrastructure upgrade and improvements,
$11,000,000 in working capital and approximately $10,500,000 for financing
costs. Actual costs may vary from management's current expectations.
In March 2000, the Company entered into an agreement with Qwest
Communications to purchase approximately 500 miles of fiber conduit from New
Orleans to Mobile, Alabama and from Pensacola, Florida to Jacksonville,
Florida. The total purchase price under this agreement is approximately
$15,120,000. Payments totaling approximately $9,000,000 are currently due or
past due under the agreement. Payments are due quarterly through March 31,
2001. The Company has not made any of the payments due under this agreement,
but no default has been declared.
In August 2000, the Company also entered into an agreement with a
third party to lay fiber conduit from Atlanta, Georgia to Chattanooga,
Tennessee and from Chattanooga to Memphis, Tennessee. The total cost of this
project under the agreements that the Company has already executed is
approximately $29,000,000. Approximately 10% of this cost is due October 15,
2000, with the remainder due as segments of the project are completed.
The Company plans to fund its liquidity and capital needs through
joint venture arrangements with strategic business partners, vendor financing
and the issuance of equity and debt securities. The Company is proceeding with
discussions with strategic partners, but has no commitments to provide
financing as of the date of this report.
In June 2000, the Company sold 300 shares of Series B cumulative
convertible preferred stock to the Company's president, director and principal
shareholder for a purchase price of $1,000 per share. Each share of the Series
B cumulative convertible preferred stock is convertible into 500 shares of
common stock commencing July 1, 2001, and is entitled to an annual dividend of
$60. An additional 500 shares of Series B cumulative convertible preferred
stock were issued to the Company's president, director and principal
shareholder in September 2000. Proceeds from these issuances were used to fund
working capital needs.
In order to pay certain accounts payable and for use for working
capital, in July 2000 the Company agreed to sell 317,500 shares of common stock
for a total purchase price of $635,000. In August 2000, the Company closed the
placement of these shares, and the Board of Directors authorized the issuance
of the 317,500 shares of common stock to satisfy the agreement. The Company
further agreed to use its best efforts to register the resale of such shares
with the SEC prior to February 2001.
In September 2000, the Company closed the private placement of 150,000
shares of common stock for a total purchase price of approximately $442,125.
The Company agreed to pay certain fees associated with the placement through
the issuance of an additional 3,000 shares of restricted common stock and the
payment of $13,700 in cash. The terms of the transaction provide that the
Company shall file a registration statement with SEC for the resale of the
150,000 shares by October 5, 2000. For each fifteen day period following
October 5, 2000 in which the
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registration statement is not filed with the SEC, the Company is required to
make a payment to the private investor equal to $8,842 payable in cash or
common stock based upon the closing OTC bid price of the shares of Company's
common stock as of the end of each fifteen day period. In addition, if the
registration statement is not declared effective by the SEC by February 2,
2001, the Company is required to make a payment to the private investor equal
to $44,212 payable in cash or common stock based upon the closing OTC bid price
of the shares of the Company's common stock as of such date.
The Company's liquidity and capital needs are substantial and the
Company has no present commitments to fund those needs. As reflected in the
accompanying financial statements for fiscal 2000, the accountant's opinion
includes a going concern qualification. As stated in note 15 to the financial
statements, as of June 30, 2000, the Company has negative working capital with
obligations totaling $15,451,759 due within one year of which approximately
$9,000,000 is past due. In addition, the Company has sustained losses totaling
$2,104,786 since inception. The inability of the Company to secure additional
capital and financing and the inability of the Company to attain and maintain
profitable operations would have a material adverse effect on whether the
Company would be successful in implementing its proposed business plan and
continue as a going concern.
Risks Affecting Future Results:
A number of risk factors exist that may impair or prevent the Company
from accomplishing its proposed business plan in some or all respects. Those
risk factors include the following matters among others:
The Company is a Start Up with Historical Losses. Substantially all of
the Company's historical revenues have been derived from its Internet access
provider services and its digital and alpha paging services. The Company has no
customers or revenues from its fiber optic and wireless broadband network that
it is developing or its enterprise data storage facility that it is
constructing. The Company has experienced operating losses in each fiscal
quarter since it was founded and will likely continue to experience such
losses. Because the Company's operating history is extremely limited, and the
Company has not actually commenced operations on its fiber optic and wireless
broadband network or its enterprise data storage facility, it is difficult to
evaluate the Company's business operations and prospects.
The Company Needs Substantial Additional Capital-Insolvency. The
Company's present operations do not provide sufficient cash flow to pay its
debts as they become due. The Company had negative working capital of
approximately $15,000,000 at June 30, 2000 and expects it will need to obtain
additional capital of approximately $150,000,000 to finance its operating and
capital needs over the next twelve months. See "Liquidity." The failure of the
Company to obtain additional capital will significantly restrict the Company's
proposed operations and may make it impossible for the Company to pursue its
proposed business plan.
Default on Certain Obligations. In March 2000, the Company entered
into an agreement
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with Qwest Communications to purchase 500 miles of fiber conduit from New
Orleans to Mobile, Alabama and from Pensacola, Florida to Jacksonville,
Florida. The total purchase price under this agreement is approximately
$15,000,000. Payments totaling approximately $9,000,000 are currently due or
past due under the agreement. The Company has not made any of the payments due
under this agreement, but no default has been declared. The Company's
obligations under this agreement are personally guaranteed by the Company's
president. See "Item 12 - Certain Relationships and Related Transactions." The
Company has also entered into a contract to lay fiber conduit between Atlanta
and Memphis, through Chattanooga, at a total cost of approximately $29,000,000,
of which 10% will be due on October 15, 2000.
The Company Leases its Facilities. The Company's primary facility in
Iuka, Mississippi is leased by the Company from the Mississippi Department of
Economic and Community Development. This facility is critical to the Company's
proposed business plan because it already contains many of the features
necessary to establish an enterprise data storage facility. Under the Company's
current lease agreement the lessor has the right to terminate the lease on
ninety days prior written notice, regardless of whether the Company has
defaulted under the lease. Termination of the lease by the lessor, especially
after the Company has invested considerable time and funds to developing the
facility as an enterprise data storage facility, would cause material damage to
the Company and its proposed business plans. See "Properties".
The Company Experiences General Risks Associated with Business. The
future success of the Company is heavily dependent on its ability to develop,
promote and sustain strong government relationships, reach agreements with
certain third parties necessary for the telecommunications needs of its
operations and attract and retain customers at suitable prices. The Company's
business involves competition with existing companies. There can be no
assurance that the business of the Company will ever be profitable.
The Company will Likely Experience Customer Concentration Until and
unless the Company secures multiple customer relationships, it is likely that
the Company will experience periods during which it will be highly dependent on
one or a limited number of customers. Dependence on a single or a few customers
will make it difficult to satisfactorily negotiate attractive prices for the
Company's services and will expose the Company to the risk of substantial
losses if a single dominant customer stops conducting business with the
Company.
The Company Must Comply with Telecommunications Regulations. Most of
the Company's proposed business services and products are subject to regulation
at the federal and state levels. These regulations are in some cases uncertain
and are often undergoing change. The failure of the Company to comply with
these regulations could have a materially adverse effect on the Company. See
"Description of Business - Government Regulation."
The Company Must Comply with Environmental Regulations. The Company's
intended operations, especially the construction and operation of a fiber optic
network, are subject to various federal, state and local laws and regulations
relating to the protection of the environment. These environmental laws and
regulations, which have become increasingly
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stringent, are implemented principally by the Environmental Protection Agency
and comparable state agencies, and govern the management of hazardous wastes,
the discharge of pollutants into the air and into surface and underground
waters, and the manufacture and disposal of certain substances. There are no
material environmental claims currently pending or, to the Company's knowledge,
threatened against the Company. In addition, the Company believes that its
operations are in material compliance with current laws and regulations. The
Company estimates that any expenses incurred in maintaining compliance with
current laws and regulations will not have a material effect on the Company's
earnings or capital expenditures. However, there can be no assurance that
current regulatory requirements will not change, that currently unforeseen
environmental incidents will not occur, or that past non-compliance with
environmental laws will not be discovered on the Company's properties.
The Company's Operating Results are Likely to Fluctuate Widely. The
Company expects that its operating results for the foreseeable future are
likely to fluctuate widely from quarter to quarter and from year to year. This
is especially true while the Company is building its fiber optic and wireless
broadband network. Fluctuation of results may occur due to a variety of factors
including, demand for and market acceptance of the Company's products and
services, reliability of service and network availability, the ability to
increase bandwidth as necessary, customer retention, capacity utilization of
the Company's enterprise data storage facility, the timing of customer needs,
the timing and magnitude of capital expenditures, changes in pricing policies
or practices of competitors, and changes in governmental regulations.
The Company will Face Significant Competition. The Company's market is
intensely competitive. There can be no assurance that the Company will have the
resources to compete successfully in the future. Current and potential
competitors include national, foreign and regional internet service providers,
global, regional and local telecommunications companies and the Regional Bell
Operating Companies, providers of server hosting and data storage services, and
other technology services and products companies. Most of these competitors
will have substantially greater resources than the Company. See "Description of
Business - Competition."
The Company is Entering a New Market. The market for Internet system
and network management solutions has only recently begun to develop, is
evolving rapidly and is characterized by an increasing number of market
entrants. This market may not prove to be viable or, if it becomes viable, may
not continue to grow. The Company currently incurs costs in excess of its
revenues. If the Company cannot attract and retain a customer base, it will not
be able to increase its sales and revenues nor create economies of scale to
offset its fixed and operating costs.
The Company Must be able to Manage Growth. In order for the Company to
accomplish its proposed business plan, it must experience rapid growth in
building its enterprise data storage facilities and network infrastructure,
expand its service offering, expand its geographical coverage, expand its
customer base and increase the number of employees. This growth is expected to
place a significant strain on the Company's financial, management, operational
and other resources, including its ability to ensure customer satisfaction.
This expansion will require significant time commitments from senior management
and involve the efficient management of multiple
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relationships with a growing number of third parties. The Company's ability to
manage its growth effectively will require the Company to continue to expand
operating and financial procedures and controls, to upgrade operational,
financial and management information systems and to attract, train, motivate
and retain key employees. The ability to attract, hire and retain qualified
employees in today's competitive employment market is another significant
challenge which the Company faces. If the Company's executives are unable to
manage growth effectively, the Company's business could be materially adversely
affected.
System Failures Could Lead to Significant Costs. The Company must
protect its network infrastructure and equipment against damage from human
error, physical or electronic security breaches, power loss and other facility
failures, fire, earthquake, flood, telecommunications failure, sabotage,
vandalism and similar events. Despite precautions the Company has taken, a
natural disaster or other unanticipated problems at the Company's facilities
could result in interruptions in services or significant damage to customer
equipment or data. Any damage to or failure of the Company's systems or service
providers could result in reductions in, or terminations of, services supplied
to the Company's customers, which could have a material adverse effect on the
Company's business.
The Company will Depend on Network Interconnections with Third
Parties. The Company will rely, in part, on a number of public and private
network interconnections to allow its customers to connect to other networks.
If the networks with which the Company interconnects were to discontinue their
interconnections, the Company's ability to exchange traffic would be
significantly constrained. Furthermore, the Company's business could be harmed
if these networks do not add more bandwidth to accommodate increased traffic.
Some of these networks will likely require the payment of fees for the right to
maintain interconnections. There usually is nothing to prevent any networks
from increasing fees or denying access. In such cases, the Company's ability to
pursue the proposed business plan could be materially adversely affected.
Some of the Company's Business may be Subject to International Risks.
The Company is pursuing international business opportunities, especially with
respect to the Country of Turkey. Risks inherent in international operations
include unexpected changes in regulatory requirements, export restrictions,
tariffs and other trade barriers; challenges in staffing and managing foreign
operations; differences in technology standards; employment laws and practices
in foreign countries; longer payment cycles and problems in collecting accounts
receivable; political instability; changes in currency exchange rates and
imposition of currency exchange controls and potentially adverse tax
consequences.
Safe Harbor Statement Under Private Securities Litigation Reform Act of 1995
This Annual Report on Form 10-K and other reports and statements
issued on behalf of the Company may include forward-looking statements in
reliance on the safe harbor provided by the Private Securities Litigation
Reform Act of 1995. Forward-looking statements include the use of
forward-looking words such as "plans," "estimates," "believes," "expects,"
"may," "will," "should," "anticipates" and "proposes" and the negative or other
variations of such terms or
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comparable terminology, or by discussion of strategy or business plans that
involve risks and uncertainties. These forward-looking statements are subject
to substantial risks and uncertainties, including those discussed above, and
actual results may differ materially from those contained in any such
forward-looking statement. The Company undertakes no obligation to update or
revise any such forward-looking statements to reflect subsequent events or
circumstances.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value.
If certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the changes
in the fair value of the hedged asset or liability that are attributable to the
hedged risk or (ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS 133 amends the guidance in
SFAS No. 52, Foreign Currency Translation, to permit special accounting for a
hedge currency forecasted transaction with a derivative. It also supersedes
SFAS No. 80, Accounting for Future Contracts, SFAS No. 105, Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, and SFAS No. 119,
Disclosure about Derivative Financial Instruments. In addition, it amends SFAS
No. 107, Disclosures about Fair Value of Financial Instruments, to include in
SFAS No. 107 the disclosure provisions about concentrations of credit risk from
SFAS No. 105.
SFAS 133 is effective for the financial statements for periods
beginning after June 15, 2000. Historically, the Company has not entered into
derivatives contracts either to hedge existing risk or for speculative
purposes. Accordingly, the Company does not expect adoption of the new standard
to materially effect its fiscal 2001 financial statements.
The Financial Accounting Standards Board issued Interpretation
("Interpretation") No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25" which is effective July
1, 2000. Interpretation No. 44 clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a
stock compensation plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. Adoption of the provisions of the
Interpretation are not expected to have a significant impact on our financial
statements.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
101, -- Revenue Recognition, which outlines the basic criteria that must be met
to recognize revenue and provides guidance for presentation of revenue and for
disclosure related to revenue recognition policies in financial statements filed
with the Securities and Exchange Commission. We believe that adopting SAB No.
101 will not have a material impact on our financial position or results of
operations.
In September 2000, the Financial Accounting Standards Board issued SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities ("SFAS 140"). SFAS 140 revises the standards for
accounting for Securitizations and other transfers of financial assets and
collateral and is effective for fiscal years ending December 15, 2000. We
believe that adopting SFAS 140 will not have a material impact on our financial
position or results of operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
The Company has not entered into any transaction using derivative
financial instruments and believes that its exposure to market risk associated
with other financial instruments is not material. The Company's cash
equivalents are maintained primarily in money market risks maturing in less
than three months. Accordingly, the Company does not believe that it has any
significant exposure to interest rate risk. The Company currently operates only
in the United States and all sales are made in U.S. dollars. Accordingly, the
Company does not have any material exposure to foreign currency rate
fluctuations.
Item 8. FINANCIAL STATEMENTS
The Company's financial statements are attached hereto as pages F-1
through F-17.
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective June 7, 2000, the Company retained BDO Seidman, LLP ("BDO")
to act as the Company's independent certified public accountant. In this regard,
BDO replaced Spicer Jeffries & Co. ("Spicer") which audited the Company's
financial statements for the fiscal years ended June 30, 1998 and 1999. The
reports of Spicer for these fiscal years did not contain an adverse opinion or
disclaimer of opinion and were not qualified or modified as to audit scope or
accounting principles. However, the report of Spicer for these fiscal years was
qualified with respect to uncertainty as to the Company's ability to continue as
a going concern. During the Company's two most recent fiscal years and
subsequent interim periods, there were no disagreements with Spicer on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedures, which disagreements, if not resolved to the
satisfaction of Spicer, would have caused it to make reference to such
disagreements in its reports.
The Company has authorized Spicer to discuss any matter relating to the
Company and its operations with BDO.
The change in the Company's auditors was recommended and approved by
the board of directors of the Company. The Company does not have an audit
committee.
During the two most recent fiscal years and subsequent interim periods,
the Company did not consult with BDO regarding the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's financial statements,
or any matter that was the subject of a disagreement or reportable event as
defined in the regulations of the Securities and Exchange Commission.
The Company filed a Current Report on Form 8-K dated June 15, 2000,
reporting the change in accountants. Spicer reviewed the disclosures in the Form
8-K. The Company advised Spicer that it had the opportunity to furnish the
Company with a letter addressed to the Securities and Exchange Commission
concerning any new information, clarifying the Company's disclosures in the Form
8-K or stating any reason why Spicer did not agree with any statements made by
the Company in the Form 8-K. Spicer advised the Company that nothing had come to
its attention which would cause it to believe that any such letter was
necessary.
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the Company's executive
officers and directors:
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