ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS OVERVIEW Introduction
FiberNet Telecom Group, Inc. ("FiberNet" or the "Company") is a development stage holding company dedicated to delivering integrated telecommunications products and services in tier-one major metropolitan service areas ("MSA's") throughout the United States. FiberNet conducts its business through its direct and indirect subsidiaries, including FiberNet Telecom, Inc.
FiberNet Telecom, Inc. is a management company organized to develop new ventures within the telecommunications industry arising from what management believes is the need for greater broadband capacity due to the growth of the Internet and data communications and the favorable regulatory environment created by the Telecommunications Act of 1996. FiberNet Telecom, Inc. manages two operating subsidiaries, FiberNet Equal Access, LLC and Local Fiber, LLC. Both subsidiaries are New York limited liability companies.
The subsidiary structure of the Company is set forth in the chart below:
[SUBSIDIARY STRUCTURE FLOW CHART]
FiberNet Equal Access, LLC ("Equal Access") specializes in designing, building, and operating intra-building fiber optic transmission networks and plans to lease digital bandwidth circuits to telecommunications providers.
Local Fiber, LLC ("Local Fiber") is a Competitive Local Exchange Carrier ("CLEC") which plans to provide competitive local telecommunications service as an alternative to the local exchange carriers.
FiberNet has 100% ownership of Equal Access (subject to a 10% warrant) and 90% ownership of Local Fiber, with the remaining 10% ownership held by MetroMedia Network, Inc. ("MetroMedia").
To date, FiberNet has not generated any revenues. Successful implementation of its business plan, as described herein, will depend upon many factors, including the ability to raise adequate financing.
The Company's founders have significant experience in the Competitive Access Provider industry and intend to draw upon their expertise in the telecommunications, electronics, and communications industries from their predecessor companies, FiberNet, Inc. and FiberNet USA, Inc., to expand the Company's business to be the premier provider of intra-building fiber optic networks and local telecommunications services in selected urban markets.
FiberNet, Inc. and FiberNet USA, Inc. were owned primarily by Petrocelli Industries Inc., an investment company controlled by the Company's Chairman, Santo Petrocelli. FiberNet, Inc. successfully designed, installed and operated competitive access networks in three upstate New York
markets (Albany, Buffalo, and Rochester). These networks, covering approximately 500 route miles, were sold to Metropolitan Fiber Systems (a predecessor entity to MCI WorldCom Inc.) in 1993. FiberNet USA, Inc. built additional networks in Cincinnati (OH), Raleigh-Durham (NC), Huntsville (AL), and St. Louis (MO) and merged with Intermedia Communications, Inc. in 1995.
FIBERNET EQUAL ACCESS, LLC
Equal Access' business strategy is to provide high-bandwidth carrier-class fiber and copper via transport intra-building networks in large Class-A commercial office buildings and to lease Synchronized Optical Network ("SONET") digital circuits to carriers. Management believes this strategy is unique in last mile telecommunications solutions.
Overview. Management believes Equal Access will become the "Premier Building Transmission Provider" by creating in-building high-speed, high-capacity fiber optic and copper networks, which it links to existing external fiber optic networks, thus delivering a high-speed, seamless link between users and the data and voice information they are sending and receiving. These services will be leased on a flat rate monthly fee basis, in addition to an installation charge, at a DS-0, DS-1, and DS-3 circuit level.
Management believes Equal Access' fiber intra-building network, called a Premise Distribution System ("PDS") efficiently supports the increased flow of information that has outgrown the transmission capabilities of copper-wire only systems. A PDS will connect various types of voice, data, and video communication devices, switching equipment and information management systems together, and to external fiber optic networks. Equal Access' PDS provides the critical links between tenants, the building and carrier networks necessary for 100% fiber optic connectivity and virtual throughput.
Equal Access intends to focus on delivering PDS technology to Class-A (generally with a minimum of 500,000 square feet) commercial office buildings. Management believes that Equal Access is currently the only company developing, implementing and managing intra-building networks consisting of 100% fully-redundant fiber optics.
Over the next five years, Equal Access expects to construct PDS systems in 10 MSA's in the United States. Management expects that this increased demand for PDS in the next few years will result from the increasing number of carriers competing with Regional Bell Operating Companies ("RBOC"), on a national level.
Business Strategy. Equal Access' business strategy will focus on securing multi-year license agreements from building owners/managers in their buildings. These license agreements provides Equal Access the exclusive right and ability to resell and/or lease intra-building transport capacity to third parties. In exchange for these agreements, each building owner receives a redundant state of the art fiber optic telecommunications network at no cost as well as a percentage share of the revenues generated by Equal Access in its building.
Network Interface Equipment Room. Equal Access generally will build a 1,000 to 1,500 square foot Network Interface Equipment Room in the basement of each building. This is the collocation facility within a building that interconnects the carriers' networks to Equal Access' intra-building network. Within this space, Equal Access will provide secure caged floor space with direct fiber connectivity to make carrier utilization easy and consistent.
Benefits. Equal Access' fiber optic voice and data network will benefit telecommunications service providers (carriers), building tenants and building owners.
Carrier Benefits. The PDS will allow carriers to share telecommunications equipment and fiber routes inside the building, providing significant economies of scale. Management expects the PDS to virtually eliminate the need for carriers to go through extensive provisioning and build-outs for each tenant. The PDS requires no capital investment and carriers pay on an "as-needed" basis for the services and network. Further, management anticipates carriers will realize savings from the cost-based, non-discriminatory pricing. In addition, carriers will not face building access problems. By dealing directly with Equal Access, management anticipates the carriers' need to negotiate directly with building owners to be significantly reduced. Lastly, management believes Equal Access will dramatically improve the carriers' time-to-market, reducing delays which can typically run up to 120 days. Management believes intra-building fiber optic connections are faster, better, and cheaper than current copper or hybrid systems, and offer virtually unlimited expandability.
Building Owner Benefits. Management expects building owners to benefit significantly from the PDS. First, the existing telecommunications systems (consisting of copper wires) in their buildings will be upgraded to a state-of-the-art redundant fiber system without any capital investment. Second, since Equal Access offers revenue sharing, it may become an additional profit center to the building. Third, management believes that buildings with PDS will represent a powerful incentive for attracting and maintaining tenants. Fourth, because the management of the system is outsourced, the property owner will not need to establish an in-house team of technicians. Fifth, since the PDS is efficient in the space it utilizes, the property owner will not have to sacrifice square footage. Sixth, the PDS is a complete system rather than multiple carrier systems which can clog up risers and telecommunications closets. Finally, rather than spending time and effort each time a tenant requests approval, the owner will only have to approve the construction plans once. Carriers needing access can then work directly with Equal Access.
Tenant Benefits. Management believes tenants will benefit from their connection to multiple carriers via a high capacity fiber optic network. As a result, tenants will have immediate and competitively priced access to enhanced high-speed, faultless transmission of voice, data, and fax communications. In addition, tenants may choose among a variety of different carriers.
Strategic Partners. Equal Access has established strategic alliances and credibility with major building owners and developers which have been leveraged to gain long-term building contracts. Equal Access has executed agreements with four building owners covering seven properties in New York City. These building owners also control an additional 29 properties in New York, which Equal Access expects to complete contracts with upon the successful completion of the initial buildings. Equal Access began construction on the initial buildings in 1998. The Company is negotiating with other building owners to enter into contracts relating to the leasing of space in a number of commercial office buildings.
Construction Costs. Management estimates the cost, subject to financing, of completing its initial targeted buildings and developing selected PDS systems to be in excess of $20 million. The capital will be used for the construction of the in-building riser system, the purchase of transmission equipment, fiber and copper cable, and the construction of a network interface equipment room in each building.
LOCAL FIBER, LLC
Overview. Management believes Local Fiber will be the first facilities-based carrier to offer an end-to-end, 100% fiber carrier-class network solution. This will be achieved through the interconnection of the Local Fiber network with its sister subsidiary, Equal Access' in-building network. In Manhattan, the Company plans to install a new digital switching and SONET transmission platform that interconnects with an existing, 384-mile dark fiber network. Local Fiber operates out of a 13,000 square foot switching facility at 60 Hudson Street, which will house its state-of-the-art 5ESS-2000 switch.
Local Fiber's advanced network and switching architecture will allow it to provide a broad array of services and products:
- Carrier Link Services to Business Customers: Dedicated products, hub collocation, inter-building transport and carrier access services, including special access, dedicated access, switched originating access and switched terminating access.
- Local Link Services: Switched products include Local voice line (POTS), Centrex, ISDN basic and primary, Direct inward and outward dialing.
- "Feature Group" Options: Voice mail, three-way calling, call-forwarding, call waiting, distinctive ringing and metered business calling.
- "Extended and long distance service" Services: IntraLATA toll, long distance toll, 800 and 888 service and calling card service.
Business Strategy. Local Fiber will initially focus on wholesale transport services in the New York City metropolitan area. The Company provides switched local telecommunications and long distance services, focusing on buildings already "on-net" with Equal Access. Management anticipates generating additional sales by selling to off-net customers. Local Fiber will expand its capabilities to include enhanced data and Internet Protocol services. Expansion markets for Local Fiber will include Los Angeles, Chicago, San Francisco, Philadelphia, Boston, Detroit, Dallas, Washington and Houston.
Benefits. Local Fiber's unique market niche, broad industry experience and expertise allow it to offer significant benefits to potential customers:
Capacity and Reliability. Management believes Local Fiber's 100% fiber optic SONET network delivers greater capacity, quality and reliability. The self-healing fiber architecture consists of diversely routed cables so that a cut or break will not affect service.
State-of-the-art switch. Local Fiber deploys a highly distributed switching architecture by using digital communication links connected to the host switch (Lucent 5ESS-2000). This sophisticated switch enables Local Fiber to provide a full range of services, including all types of calls (local exchange, long distance, Centrex services and ISDN) to multiple carriers and end-user customers. Local Fiber's bundling approach and distributive switching architecture represent a cost-effective alternative to current local exchange companies.
Comprehensive service offerings. Local Fiber will provide advanced fiber optic technology directly to each floor of the buildings it serves through its vertical marketing integration strategy with its subsidiary Equal Access, with comprehensive services such as on-site repairs and maintenance, and customized solutions.
Bundled local and long distance services: Customers will be provided with "One Simple Bill" that contains feature rich transport and switch-based products, as well as long distance services.
State-of-the-Art Network. Through a contractual arrangement with Metromedia, a 10% owner of Local Fiber, Local Fiber has the exclusive right to use up to eight strands (four of which are presently usable) of Metromedia's 48-mile dark fiber New York City network for an initial term of 12 years with a 15 year renewal option at Local Fiber's request, at no cost. Management expects that this significant cost
advantage over competitors will allow Local Fiber to provide lower costs for its customers. Combined with Equal Access' intra-building networks, FiberNet is able to provide 100% end-to-end fiber to customers.
Seamless Interconnection. Local Fiber has executed its first interconnection and co-carrier agreement with Bell Atlantic, and is currently in negotiations with other CLECs and long distance carriers in New York City. This arrangement will provide seamless interconnection between Local Fiber's network and other carriers. Local Fiber will negotiate similar agreements in other markets with the incumbent Regional Bell Operating Company and Local Exchange Carrier.
Network Operations Center. Both Equal Access and Local Fiber will utilize the Network Operations Center for remote provisioning and fault management.
The Network Operations Center ("NOC") will be a 24-hour, 365 days-per-year, technology center. The NOC will be responsible for real-time network surveillance, remote rearrangement of circuits and database maintenance for all wiring address and assignment records. In addition, all billing, provisioning and fault management routines will be performed here. The NOC will be strategically located in a 15,000 square foot facility in Rochester, New York which will enable Equal Access and Local Fiber to take advantage of Rochester's large technical labor force. In addition, the round the clock remote monitoring will ensure that all network components in up to 10 markets are working at top efficiency and security, at all times. The Company expects the NOC to be equipped and operational in 1999.
The NOC will be equipped with the following state-of-the-art technology:
* Lucent NOC1
- Allows for real-time network surveillance and alarming
* Lucent SNC Interface & Provisioning
- Provides provisioning of all SONET network elements
- Graphical user interface for alarm reporting and status display
* Metasolv
- electronic order processing
- trouble ticketing
- circuit inventory
* Macrologic Billing Control
- Financial reporting
- Payment/account information
- Billing parameters (rates/tax)
Market Opportunities. Management believes significant factors such as industry growth, regulatory changes and the obsolescence of current copper networks have combined to create excellent opportunity for FiberNet and its subsidiaries. Management expects the industry to growth substantially over the next decade.
Competition. Equal Access has a limited number of competitors, including RBOCs (which own most of the in-building copper networks), but have cables with limited broadband capabilities. Currently, however, the Company's customer base can choose from a selection of indirect competitive alternatives. Management believes Equal Access' redundant fiber optic network will be more technologically advanced compared to existing systems offered by competitors.
Local Fiber is in competition with incumbent LECs, CLECs and IXCs. However, Local Fiber believes it offers the following competitive advantages:
- FiberNet's end-to-end technology provides customers with fiber technology that originates at the Local Fiber fiber loop, and connects directly to the customer premise in buildings equipped with Equal Access' PDS infrastructure. The result is the unparalleled capacity, quality and reliability of a 100% fiber network.
- Local Fiber can reach customers at a lower cost than its competitors. This advantage is predicated on FiberNet's exclusive right of use agreement with Metromedia, which provides a dark fiber backbone to Local Fiber throughout Manhattan at no cost.
Expansion Costs. Local Fiber will require significant purchases of equipment essential for the growth and operation of its business. Management estimates Local Fiber will require significant additional capital over the next three years to purchase local switching equipment, electronics equipment, DACS equipment, a network control center and monitoring equipment, fiber and copper cable, construction, engineering and installation.
Federal Regulation. FiberNet intends to capitalize on the sweeping changes that have dramatically altered the the telecommunications industry. The new regulatory changes have opened new markets and created new opportunities for telecommunication companies.
The 1996 Telecommunications Act, which was enacted in February, 1996 (the "Telcom Act') effected plenary changes in regulation at both the federal and state levels that affect virtually every segment of the telecommunications industry. The stated purpose of the Telcom Act is to promote competition in all areas of telecommunications and to reduce unnecessary regulation in order to secure lower prices and higher quality services for telecommunication consumers.
The Telcom Act enables FiberNet to: a) connect directly to RBOCs; b) take advantage of lower, cost-based pricing; c) purchase individual network elements on an "as-needed" basis; and d) resell network capacity and services on a wholesale basis to carriers.
The Telcom Act also makes competitive entry into other services or geographic markets more attractive to RBOCs, other ILECs and other companies, and likely will increase the level of competition FiberNet faces. More and diverse kinds of telecom providers will be pursuing customers and selling their products and offerings to all market segments. However, telecommunications users, residential and business customers can expect increased choices and benefit from companies such as FiberNet.
Local Regulation. The Company is also subject to numerous local regulations, such as building code requirements. These regulations may vary greatly from state to state and city to city.
Employees. As of December 31, 1998, the Company employed 6 people, which were primarily engaged in administration and marketing. Management projects the number of employees to increase to 35 over the next twelve months. The Company's employees are not represented by any labor union. The Company considers its employee relations to be good.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTIES
The principal offices of FiberNet are located in its NOC facility in Rochester, New York, consisting of approximately 15,000 square feet of space. FiberNet leases this space under an agreement which expires in 2005, at a current annual base rental of approximately $90,750. FiberNet recently entered into a lease for 5,000 square feet at 570 Lexington Avenue in New York City for additional office space for an annual base rental of approximately $276,000.
Local Fiber has entered into an agreement to lease approximately 13,222 square feet of space to serve as the switch control site at 60 Hudson Street in New York City for a term of ten years and eight months, expiring in July 2008 for an annual base rental of approximately $330,000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
To the knowledge of management, there is no material litigation pending or threatened against the Company or FiberNet which would have a material adverse effect on the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the period covered in this report to a vote of shareholders.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER MATTERS
The Company's common stock is currently eligible for quotation on the NASD Electronic Bulletin Board under the symbol "FTGX". As of May 27, 1998, the Company currently had a minimum of 328 shareholders of record.
The following table sets forth the high and low sales prices for each quarter for the Company's Common Stock as reported on the NASD Electronic Bulletin Board during the fiscal year 1998:
PERIOD - 1998 Fiscal Year, quarter ended:
All of the above quotations were obtained from Bloomberg.
The Company has not paid any dividends with respect to its Common Stock and does not expect to pay dividends on the Common Stock in the foreseeable future. Any future dividends will be declared at the discretion of the Board of Directors and will depend, among other things, upon the financial condition, capital requirements, earnings and liquidity of the Company.
ITEM 6.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The Company has had no commercial operations to date. Since it inception, the Company has engaged principally in organizational activities, including developing strategic commitments to fund its plan. Accordingly, the Company has no relevant operating history upon which an evaluation of its performance and prospects can be made. The Company is subject to unforeseen capital requirements, failure of market acceptance, failure to establish business relationships, and competitive disadvantages against larger and more established companies.
The Company has generated no revenues to date, and will not generate any meaningful revenues until after the Company successfully completes the development and installation of Equal Access' PDS product as well as the installation of Local Fiber's local and long distance switch. Equal Access began construction on 3 buildings in 1998, which the Company expects to be operational in 1999. Local Fiber expects to have its switch and network operational by the third quarter, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has to date financed its development effort through direct equity investments from its shareholders. The Company has sustained losses in the amount of $3.57 million for the period from inception (August 10, 1994) to December 31, 1998. The Company had no revenues during this period, and substantially all of such losses are attributable to initial start-up costs.
The Company's planned operations will require significant capital to fund equipment purchases, engineering costs, and installation. During 1998, the Company spent approximately $5.4 million in capital expenditures, which was primarily used in the construction of PDS products for Equal Access. Additionally, Local Fiber has purchased a local and long distance switch, electronics equipment, DACS equipment, network control center and monitoring equipment, fiber and copper cable, construction, engineering, and installation which has been financed pursuant to a $5.1 million line of credit from Comdisco, a major leasing company. This line of credit replaced a former credit commitment which expired in December, 1998.
Equal Access projects that the completion of its initial plan including 36 buildings will require approximately $25 million in capital expenditures and associated working capital. The completion of these 36 buildings is subject to the execution of additional contracts with building owner/managers as well as securing additional financing commitments from a third party lender. The capital will be used for the construction of in-building risers, the purchase and installation of transmission equipment, fiber and copper cable, and the construction of network interface equipment rooms in the basements of each building and network engineering.
On November 24, 1997, the Company raised $5.075 million as a part of a one million share Preferred Stock Private Placement to satisfy financing requirements and to support working capital shortfalls. The Company has secured a commitment for an equipment lease line of credit totaling $5.1 million. This line will fund the Company's central office switch, SONET electronics for both the switch location and within the Equal Access buildings and DACS equipment. The Company is in the process of negotiating with other lenders regarding additional debt and equity financing, but as of to date a final commitment has not been secured.
The Company expects to accelerate its growth and expand to 10 tier-one MSA's over the next five years which includes the deployment of switching and transmission equipment as a CLEC through Local
Fiber and the construction of Premise Distribution Systems under Equal Access. The Company may require additional capital if the Company's expansion occurs more rapidly than currently anticipated or if operating results are below expectations. The Company intends to raise additional capital before such time. The Company may secure additional funding through the sale of public or private debt and/or equity securities. There can be no assurance, however, that the Company will be successful in raising sufficient additional capital.
YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs written using two digits rather than four to define the applicable year. Without corrective action, programs with time-sensitive software could potentially recognize a date ending in "00" as the year 1900 rather than the year 2000, causing many computer applications to fail or create erroneous results.
As a result of modifications or upgrades planned, the Company believes that the Year 2000 issue will not pose significant problems for the Company's business, operations, or operating systems. The Company expects that any additional modifications or upgrades of software or hardware required under the Year 2000 compatibility will be accomplished using existing resources and will not have a material impact on the Company's financial position or results of operations in future periods.
ITEM 7.
ITEM 7. FINANCIAL STATEMENTS
Audited balance sheets as of December 31, 1998 and the related statements of operations, cash flows and stockholders' equity for the period from inception (August 10, 1994) to December 31, 1998, together with related notes and the reports of Arthur Andersen LLP, independent auditor, appear on pages through of this report.
ITEM 8.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9.
ITEM 9. MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following tables set forth the directors and executive officers of the Company as of December 31, 1998. Directors are elected for a period of one year and thereafter serve until the next annual meeting at which their successors are duly elected by the stockholders. Officers and other employees serve at the will of the board of directors.
SANTO PETROCELLI, SR. served as Chairman and a Director of Fibernet Telecom Group, Inc., and its wholly-owned subsidiaries, FiberNet Equal Access, LLC and Local Fiber LLC., since their inception. Mr. Petrocelli is the President, Chief Executive Officer and a Director of Petrocelli Electric Company, and Petrocelli Communications Company. In addition, he controls Petrocelli Industries, Inc., and SMFS, Inc., investment companies which have held controlling interests in several communications ventures including FiberNet Telecom, Inc., FiberNet, Inc. and FiberNet USA, Inc. Mr. Petrocelli was the former Chairman and Chief Executive Officer of FiberNet Inc. and FiberNet USA, Inc. prior to their acquisition by MFS, now World Comm and InterMedia Communications Inc. He has over 40 years experience in the communications, electrical and telecommunications industry.
FRANK CHIAINO is President and Chief Executive Officer of FiberNet Telecom Group, Inc. and its subsidiaries. Mr. Chiaino joined the Company's management team after a 30 year career with Time Warner Communications, where he was most recently President and Chief Executive Officer and concurrently served as Vice President of Time Warner Cable. Mr. Chiaino also served as Vice President and Chief Operating Officer at Time Inc.'s Manhattan Cable subsidiary where he built and managed the nations first urban cable system. Mr. Chiaino has a Bachelor of Science degree from Queens College and received his Masters of Business Administration from Columbia University.
LAWRENCE S. POLAN is a Director of FiberNet Telecom Group, Inc. and its subsidiaries. Mr. Polan was a former director of FiberNet, Inc. and FiberNet USA, Inc. In addition, Mr. Polan is the Chief Financial Officer of Petrocelli Electric Company and Petrocelli Communications Company. Prior to joining Petrocelli Communications, he was the Chief Financial Officer and Controller of Visa Resources, Inc. a New York Stock Exchange Company with over $250 Million in annual revenue. Mr. Polan holds a bachelors degree from St. John's University.
JOHN J. MARCHAESI, CPA, is Vice President of Administration and a Director of FiberNet Telecom Group, Inc. and its subsidiaries. Mr. Marchaesi was the Controller of FiberNet USA, Inc. Prior to joining the Company, he was a Senior Manager-Internal Audit and Consulting with Associated Communications Corporation and also the controller of Cellular One/Albany Telephone Company. He has over ten years experience in financial management within the telecommunications industry. He holds a Masters of Business Administration from Rochester Institute of Technology and a Bachelor of Science in business administration from SUNY, Oswego.
KENNETH ELIAS is Vice President of Sales and Marketing. Mr. Elias has over 29 years in the telecommunications industry. Mr. Elias began his career at NYNEX in 1969 and during his tenure he has held a variety of executive level positions where he was responsible for product development, market growth and sales operations. Mr. Elias has a Bachelor of Science from the Citadel.
MARK F. LIPFORD is Vice President of Engineering and Operations of FiberNet Telecom Group, Inc. Prior to joining the Company, Mr. Lipford served as Regional Vice President of Time Warner Communications. Mr. Lipford has over 18 years of experience in the telecommunications industry which includes his direct participation in the development of the nation's first CLEC. Mr. Lipford holds a Masters of Arts from the University of Akron.
There are currently no arrangements or understandings regarding the length of time each director is to serve in such capacity except as otherwise described herein.
ITEM 10.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the executive officers of the Company for the fiscal year 1998:
(1) As of January 1, 1998, the Company entered into an employment agreement with Santo Petrocelli, Sr., the Company's Chairman. The Agreement has a term of three years and provides for an annual base salary of $150,000. In 1997, the disinterested members of the Board of Directors approved the issuance to Mr. Petrocelli of options to purchase 190,000 shares of the Company's Common Stock. In the event of a Change of Control, the Company shall pay to Mr. Petrocelli severance pay equal to 2.75 times the amount of Mr. Petrocelli's annual base salary and 2.75 times Mr. Petrocelli's bonus in respect of the calendar year preceding the date of termination. The Company deferred payment to Mr. Petrocelli in the amount of $50,000 until such time as the completion of the Company's financing.
(2) As of January 1, 1998, the Company entered into an employment agreement with Frank Chiaino, the Company's President and Chief Executive Officer. The agreement has a three year term and provides for an annual base salary of $125,000. Additionally, Mr. Chiaino may receive an annual bonus to be determined by the board of directors of the Company. Pursuant to the employment agreement, Mr. Chiaino shall have the right to purchase up to 150,000 shares of the Company's Common Stock at an exercise price of $1.95 per share. In the event of a Change of Control, the Company shall pay to Mr. Chiaino severance pay equal to 2.75 times the amount of Mr. Chiaino's annual base salary and 2.75 times
Mr. Chiaino's bonus in respect of the calendar year preceding the date of termination. The Company deferred payment to Mr. Chiaino in the amount of $31,250 until such time as the completion of the Company's financing.
(3) As of January 1, 1998, the Company entered into a consulting agreement with LPS Consultants, Inc. to provide financial and consulting services for a three year term at an annual rate of $75,000. Lawrence S. Polan is the majority shareholder of LPS Consultants, Inc.
(4) As of January 1, 1998, the Company entered into an employment agreement with John J. Marchaesi, the Company's Vice President of Administration and Finance. The agreement has a three year term and provides for an annual base salary of $85,000. Additionally, Mr. Marchaesi may receive an annual bonus to be determined by the board of directors of the Company. As consideration of past services, the disinterested members of the Board of Directors granted Mr. Marchaesi options to purchase 30,000 shares of the Company's Common Stock. In the event of a Change of Control, the Company shall pay to Mr. Marchaesi severance pay equal to 2.75 times the amount of Mr. Marchaesi's annual base salary and 2.75 times Mr. Marchaesi's bonus in respect of the calendar year preceding the date of termination.
(5) Mr. Lipford left the employ of the Company as of October, 1998. The Company paid Mr. Lipford $88,645 as compensation for services rendered through his last date of employment with the Company.
(6) Mr. Elias left the employ of the Company as of February, 1998. The Company paid Mr. Elias $33,750 as compensation for services rendered through his last date of employment with the Company.
The following table sets forth information concerning the grant of the following options to purchase shares of the Common Stock of the Company to the following executive officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR (INDIVIDUAL GRANTS)
THE STOCK PLAN
In November 1997, the Company adopted an employee equity participation program (the "Stock Plan") covering 1,500,000 shares of Common Stock of the Company to attract, retain and reward employees. The Board of Directors administers the Stock Plan. All employees are eligible to receive awards under the Stock Plan, at the Board's discretion.
Options granted pursuant to the Stock Plan may be either nonqualified options and/or incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
During the fiscal year ended as of December 31, 1998, the Company had granted an additional 203,000 options under its plan to certain employees covering approximately 203,000 shares, of which 175,000 options were granted at an average exercise price of $4.625, 20,000 options were granted at an exercise price of $5.375 per share and 8,000 options were granted at an exercise price of $1.875 per share.
ITEM 11.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1998 the beneficial ownership of the Company's Common Stock by each director, by each beneficial owner of more than five percent (5%) of the Company's outstanding Common Stock and all current directors of the Company as a group:
(1) In February 1998, the Company converted 1,000,000 shares of the Series A Preferred Convertible Stock to Common Stock. As a result, outstanding Common Stock of the Company increased to 16,000,000.
(2) The shares are held of record by Santo Petrocelli, Sr., Lawrence S. Polan and Joseph A. Tortoretti, respectively.
(3) Taking into account the 16,000,000 shares of Common Stock to be outstanding, and the 80,000 shares of Series B Preferred Stock, Messrs. Petrocelli, Polan and Tortoretti have the following voting rights: (a) Santo Petrocelli, Sr. 11,700,000 votes (48.75%); (b) Lawrence S. Polan 975,000 votes (4.1%); (c) Joseph A. Tortoretti 6,825,000 (28.4%). As a group these persons have 19,450,000 out of 25,000,000 votes of 81%.
(4) Michael Lauer is the investment manager of Lancer Offshore, Inc. and the largest shareholder of Lancer Partners LP. Mr. Lauer and his affiliates, Lancer Offshore, Inc. and Lancer Partners LP are the record owners of the 2.2 million shares of the Company's Common Stock.
ITEM 12.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Santo Petrocelli, Sr., as Chairman of FiberNet Telecom Group, Inc., is also President and Chief Executive Officer of Petrocelli Electric Company, Petrocelli Communications Company, SMFS, Inc. and Petrocelli Industries Incorporated. In addition, he is a director of National Abatement Corporation. Petrocelli Industries Incorporated has provided management, marketing and administrative services to the Company and its affiliates. As a result of an open bidding process through an independent third party, the Company in 1998 entered into three separate contracts with Petrocelli Electric totaling approximately $2.5 million to provide electrical contracting for the construction of a PDS in three commercial buildings. The Company is obligated for payment to Petrocelli Electric for services rendered in the amount of $1.4 million. Additionally, the company expensed $140,000 of consulting fees in 1998 from this related party.
Joseph Tortoretti, is the majority shareholder of Landtel Telecommunications Group, Inc. ("Landtel") which provides engineering services and network development and has been retained to provide consulting work to FiberNet Telecom Group, Inc. In connection with the provision of such services, the Company reimburses the travel expenses of Landtel which averages approximately $3,000 per month. In consideration for services rendered, the Company is obligated for payment to Landtel of $125,000 per year of which $83,334 has been paid and the remaining balance of $163,347, which includes amounts owed for services rendered in 1997, has been deferred until such time as the completion of the Company's financing. LTJ Group, Inc., a shareholder of the Company and Landtel Telecommunications Group, Inc. are owned by the same party.
The Company is obligated for payment of yearly management fees for services rendered by Landtel Telecommunications Group, Inc. in the amount of $125,000.
Mr. Lawrence Polan, is a Director of FiberNet Telecom Group, Inc. He is also Vice President and Chief Financial Officer for Petrocelli Electric Company, Petrocelli Communications Company and Petrocelli Industries Incorporated. In addition, he controls LPS Consultants, Inc. Pursuant to a three (3) year agreement with the Company, LPS Consultants, Inc. provides financial consulting services at a yearly rate of $75,000, of which $58, 330 has been paid and $16,670 has been deferred until such time as the completion of the Company's financing.
The Company may have continuing relationships with Petrocelli, Landtel and LPS Consultants, Inc. However, management believes that the terms and conditions of such dealings will be fair and reasonable to the Company and based upon terms that would be no less beneficial than could be negotiated with unrelated parties.
ITEM 13.
ITEM 13. EXHIBITS
10.1 Master Lease Agreement between ComDisco, Inc. and the Company dated as of July 27, 1998.
23.1 Consent of Mendelsohn Kary Bell and Natoli, P.C.
23.2 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
FIBERNET TELECOM GROUP, INC.
By: /s/ Frank Chiaino -------------------------------------------- Name: Frank Chiaino Title: President and Chief Executive Officer
Date: March 30, 1999
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Santo Petrocelli, Sr. -------------------------------------------- Name: Santo Petrocelli, Sr. Title: Chairman
Date: March 30, 1999
By: /s/ Lawrence S. Polan -------------------------------------------- Name: Lawrence S. Polan Title: Director
Date: March 30, 1999
FIBERNET TELECOM GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND 1997 TOGETHER WITH AUDITORS' REPORT FIBERNET TELECOM GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997
[MENDELSOHN KARY BELL & NATOLI LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors FiberNet Telecom Inc. and Affiliated Entities (A Development Stage Company)
We have audited the accompanying combined balance sheet of FiberNet Telecom Inc. and Affiliated Entities (A Development Stage Company) as of June 30, 1997, and the related combined statements of operations and accumulated deficit, stockholders' equity and cash flows for the year then ended and for the period from August 10, 1994 (inception), to June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FiberNet Telecom Inc. and Affiliated Entities as of June 30, 1997, and the results of its operations and its cash flows for the year then ended and from August 10, 1994 (inception), to June 30, 1997 in conformity with generally accepted accounting principles.
/s/ Mendelsohn Kary Bell & Natoli, P.C.
New York, New York November 29, 1997
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FiberNet Telecom Group, Inc.:
We have audited the accompanying consolidated balance sheets of FiberNet Telecom Group, Inc. (a corporation in the development stage - Note 1) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1998, the six months ended December 31, 1997 and for the period from inception (August 10, 1994) to December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FiberNet Telecom Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1998, the six months ended December 31, 1997 and for the period from inception (August 10, 1994) to December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP Arthur Andersen LLP
New York, New York March 8, 1999
FIBERNET TELECOM GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated statements.
FIBERNET TELECOM GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated statements.
FIBERNET TELECOM GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated statements.
FIBERNET TELECOM GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated statements.
FIBERNET TELECOM GROUP, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
FiberNet Telecom, Inc. ("FiberNet" or the "Company") was organized under the laws of the State of Delaware on August 10, 1994. On November 24, 1997, an existing public company, Desert Native Design ("DND") and its subsidiary ("DND Sub"), acquired FiberNet, pursuant to an Agreement and Plan of Merger dated that date (the "Merger"). To effect the Merger, DND effectuated a 3.5 for 1 forward stock split, which entitled DND shareholders to 3.5 shares of DND stock for every one share held by them and issued 11,500,000 shares and 80,000 Series B Preferred Stock in exchange for all of the outstanding shares of FiberNet. Upon consummation of the Merger, FiberNet became a wholly-owned subsidiary of DND, which subsequently changed its name to FiberNet Telecom Group, Inc. For accounting purposes, the acquisition has been treated as a recapitalization of DND with FiberNet as the acquirer (reverse acquisition).
The Company is a development stage company and has not realized revenues. It is an integrated provider of intra-building networks and competitive local telecommunications services. Through its subsidiary FiberNet Equal Access, LLC, the Company will build and own high-speed redundant digital fiber optic transmission networks within major high rise office buildings and lease bandwidth to carriers to provide connections to tenants. The Company will provide facilities-based local telecommunications carrier services through its subsidiary Local Fiber, LLC, a competitive local exchange carrier (CLEC). FiberNet will enter the New York City market in 1999 with plans to expand its operations throughout the top metropolitan markets in the United States. The developmental nature of the activities is such that inherent risks exist in the Company's operations. Expenses incurred have primarily been research and development, administrative and marketing costs. After services have been successfully introduced into the market, additional time may be necessary before significant revenues are realized. During this time, the Company may require additional funds that may not be available.
Certain of the Company's significant shareholders are committed to fund operations through December 31, 1999. The Company is actively searching additional financing for continued construction of its networks and its operating losses. The Company also believes proceeds from asset sales would be available to fund operations if required.
The Company has in force and is materially dependant on agreements with other entities to provide access to networks and other carriers facilities, access to buildings and experience to obtain permits and meet regulatory requirements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and its majority owned subsidiaries, FiberNet Telecom Inc., Local Fiber LLC, and FiberNet Equal Access, LLC. All significant intercompany accounts and transactions have been eliminated.
b) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumption that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
c) Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with an original maturity of three months or less. The carrying amount approximates fair value because of the short maturity of the instruments.
d) Deferred Charges and Other Assets
Deferred charges consist primarily of rental deposits and financing costs. Financing costs as of December 31, 1997 were amortized over the term of the related loan agreement. These costs were expensed during the year ended December 31, 1998. See Note 5.
e) Property Plant and Equipment
Plant and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are provided over the estimated useful lives of the assets using the straight-line method. The estimated lives are as follows:
Computer software 3 Years Leasehold improvements 3 Years Computer equipment 3 Years Office Equipment 7 Years
Maintenance and repairs are charged to expense as incurred. Long-term improvements are capitalized as additions to plant and equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
f) Fair Value of Financial Instrument
Due to short maturities, the Company estimates that the carrying value of its financial instruments approximates fair value.
g) Earnings per Share
In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share" which requires companies to present basic earnings per share and diluted earnings per share, instead of the primary and fully diluted EPS that was required. In 1997, the Company adopted SFAS No. 128, "Earnings per Share," effective December 15, 1997 for year ended December 31, 1998 and 1997.
On November 24, 1997, the Company's Board of Directors approved a three and a half for one stock split of its common stock. All references in the Financial Statement and notes thereto included in this Form 10-K report to the number of common shares and per share amounts reflects the stock split and the effect of SFAS 128.
FOR THE YEAR ENDED DECEMBER 1998
FOR THE SIX MONTHS ENDED DECEMBER 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Since the loss per share decreases, when convertible preferred shares and outstanding options are included in the computation, those convertible preferred shares and options are antidilutive and are ignored in the computation of diluted EPS.
The Company follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), which requires the use of the liability method of accounting for deferred income taxes. Under this method, deferred income taxes represent the net tax effect of temporary differences between tax carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Additionally, if it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is required to be recognized.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
4. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges consist of the following:
5. COMMITMENTS AND CONTINGENCIES
a) Credit Facilities - Local Fiber, LLC
On June 4, 1997, Local Fiber, LLC obtained a Credit Facility commitment for project financing associated with its CLEC operations in New York City.
As of December 31, 1998 this credit facility is no longer available. The cost associated to this line has been expensed.
b) Credit Facilities - FiberNet Equal Access, LLC
On July 28, 1997, FiberNet Equal Access, LLC obtained a Credit Facility commitment for project financing in connection with the purchase and installation of multiple high-speed redundant digital fiber optic transmission networks.
As of December 31, 1998 this credit facility is no longer available. The cost associated to this line has been expensed and is included in the statement of operations.
6. LEASES
The Company has entered into lease agreements for office space in Rochester, New York, a switching center in New York City and for collocation space in seven buildings. Lease expense for the years ended December 31, 1998 and 1997 is $331,288 and $8,334, respectively. Estimated future minimum lease payments are:
6. LEASES (CONTINUED)
7. STOCK OPTIONS
On November 24, 1997, the Company established an Employee Equity Participation Program. This plan provides that all employees are eligible to receive Incentive Stock Options or Nonstatutory Stock Options. In the case of an optionee who beneficially owns more than ten percent of the Company's outstanding shares as of the time the option is granted, the purchase price of the optioned stock must be fixed at not less than one-hundred and ten percent of the fair market value. Incentive Stock Options may not be exercised after ten years after the date they were granted or after five years in the case of an optionee who beneficially owns more than ten percent of the Company's outstanding shares of common stock. Options shall vest and become exercisable by the optionee at the rate of 20% per year for five years. The Company issued, related to this program, 673,000 and 600,000 stock options during 1998 and 1997, respectively.
The Company accounts for stock options under APB Opinion No. 25, under which during 1998 and 1997, $127,500 and $0 of compensation cost was recognized. Had compensation cost for this program been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
7. STOCK OPTIONS (CONTINUED)
Transactions during the year ended December 31, 1998 and the six months ended December 31, 1997, respectively, involving stock options are summarized as follows:
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in December 31, 1998 and 1997: risk-free interest rates of 5.62% and 5.92%; expected dividend yields of 0% and 0%; expected lives of 4 and 7 years and expected volatility of 88.0% and 86.1%, respectively.
8. SUBSIDIARY'S WARRANTS
The Company's subsidiary, FiberNet Equal Access, LLC has issued a warrant for the purchase of up to 10% of its membership interest. Tishman, Speyer Properties, L.P. is entitled to acquire a limited liability membership interest, at the exercise price of $25 per unit, subject to certain terms and conditions, and with an exercise period of three years from August 7, 1997.
9. PREFERRED SHARES
(a) Series A Convertible Cumulative Preferred Stock
As of November 24, 1997 the Company issued 1,000,000 shares out of 5,000,000 shares authorized, at $5.125 per share for gross proceeds of $5,075,000, net of issuance costs. The Company or the holders of the
9. PREFERRED SHARES (CONTINUED)
outstanding shares had the right to convert them into common stock, at any time up to November 24, 2000. Each share of preferred stock could be converted into one share of common stock.
Dividend
The holders were entitled to receive annual cumulative dividends at the rate of six percent based on a liquidation value of $5.125 per share.
As of February 24, 1998, the Company paid the dividend to the Series A convertible preferred cumulative stock for $75,000 and converted all of the Series A convertible preferred stock into common stock. As of December 31, 1997, $30,163 of this dividend had been accrued in the financial statements.
(b) Series B Voting Preferred Stock
As of November 24, 1997 the Company issued 80,000 shares out of 5,000,000 shares authorized. Each share shall be entitled to one-hundred votes to be voted at any meeting of shareholders.
In the event of any voluntary or involuntary liquidation, dissolution, or winding up of the corporation, the holders of shares of the Series B Voting Preferred Stock then outstanding, shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, whether from capital, surplus or earning, before any payment shall be made in respect of the Company 's Common Stock, but after payment to holders of Series A Preferred Stock, an amount equal to $1 per share.
10. RELATED PARTY TRANSACTIONS
The Company capitalized services from Petrocelli Electrical Services, a related party, of approximately $2,500,000 and $12,000 during 1998 and 1997, respectively. Additionally, the Company expensed approximately $140,000 and $20,000 of consultant fees from this related party during 1998 and 1997, respectively. As of December 31, 1998 and 1997, the Company had a payable of $1,208,048 and $152,595, respectively.
10. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company capitalized services approximately $57,000 and $6,000 of consulting services from Landtel Communications, a related party during 1998 and 1997, respectively. Additionally, the Company expensed approximately $57,000 and $100,000 of consultant fees from this related party during 1998 and 1997, respectively. As of December 31, 1998 and 1997, the Company had a payable of $163,347 and $87,405, respectively.
The Company purchased approximately $75,000 of consulting fees from LPS Consultants, a related party, during 1998. As of December 31, 1998, the Company had a payable of $16,670.
11. INCOME TAXES
The Company is subject to New York State and local taxes, as well as federal income taxes. The Company had cumulative expenses relating to new business development costs of approximately $3,500,000 and $750,000 for December 31, 1998 and 1997, respectively, that are not currently deductible for income taxes. Full valuation allowances have been recorded for the deferred tax assets related to this temporary difference.
12. EMPLOYMENT CONTRACTS
The Company has various employment contracts with key executive employees. The total compensation under these contracts for 1999 and the future years is as follows:
13. MINORITY INTEREST
The ownership of Local Fiber, LLC is divided into Class A Members (the Company) owning 90% and Class B Members owning 10%. The Class A Members have requested that Class B Members enter into a License Agreement with the Company, and as an inducement therefore, the Class A Members have made capital contributions on behalf of Class B Members in connection with each Class A Members' capital contribution.
14. RECENT ACCOUNTING PRONOUNCEMENTS:
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income," Statement of Financial Accounting Standard No. 131, "Disclosure about Segments of an Enterprise and Related Information" and Statement of Financial Accounting Standard No. 132, "Employer's Disclosure about Pension and Other Post Retirement Benefits" which are effective for the Company's fiscal 1998 financial statements. During the year ended December 31, 1998 and six months ended December 31, 1997, the Company had no items of comprehensive income. The Company is also only in one segment. Furthermore, the Company does not have any defined benefit plans, therefore, additional disclosure are not applicable to the notes of the financial statements.
In 1998, Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") and Statement of Position 98-5, "Reporting on the Costs of Start up Activities" ("SOP 98-5") were issued. SFAS 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company will adopt SFAS 133 in fiscal 1999 but since it does not have derivatives currently, there will be no impact on the financial statements or disclosures. SOP 98-5 provides guidance on accounting for the costs of start-up activities, which include preopening costs, preoperating costs, organization costs, and start-up costs. The Company will adopt SOP 98-5 in fiscal 1999. As of December 31, 1998, the Company does not have any start up costs capitalized on its balance sheet. Therefore, there will be no impact on the financial statements.