<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22859
CORSAIR COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0390406
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3408 Hillview Avenue Palo Alto, CA 94304
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (650) 842-3300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) [ X ] Yes [ ] No; (2) [ ] Yes [ X ] No
The number of shares of the Registrant's Common Stock outstanding as of
October 1, 1997 was 13,632,192.
<PAGE>
<TABLE>
INDEX
<CAPTION>
Page No.
Part I. Financial Information
Item 1. Financial Statements
<S> <C>
Balance Sheets as of September 30, 1997 and December 31, 1996........3
Statements of Operations for the three and nine months
ended September 30, 1997 and 1996 ..........................4
Statements of Cash Flows for the three and nine months
ended September 30, 1997 and 1996 ..........................5
Notes to Financial Statements .......................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................7
Part II. Other Information
Item 1. Legal Proceedings ..................................................20
Item 2. Changes in Securities ..............................................20
Item 3. Defaults Upon Senior Securities ....................................20
Item 4. Submission of Matters to a Vote of Security Holders ................20
Item 5. Other Information ..................................................20
Item 6. Exhibits and Reports on Form 8-K ...................................20
Signatures ..................................................................21
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
BALANCE SHEETS
(In thousands, except per share data)
<CAPTION>
September 30, December 31,
1997 1996
--------------------- ---------------------
Assets (unaudited) (audited)
<S> <C> <C>
Cash and cash equivalents $ 11,819 $ 17,052
Short-term investments 44,424 2,452
Trade accounts receivable, net 4,722 3,260
Inventories, net 6,036 3,970
Evaluation inventory 5,633 5,328
Prepaids and other 731 126
--------------------- ---------------------
Total current assets $ 73,365 $ 32,188
Property and equipment, net 3,260 2,424
Other assets 404 299
===================== =====================
Total assets $ 77,029 $ 34,911
===================== =====================
Liabilities and Stockholders' Equity
Accounts payable $ 1,513 $ 3,428
Accrued expenses 4,911 2,502
Short-term obligations 429 2,089
Deferred revenue 12,147 4,487
--------------------- ---------------------
Total current liabilities 19,000 12,506
Long-term obligations 551 4,394
--------------------- ---------------------
Total liabilities 19,551 16,900
Stockholders' equity 57,478 18,011
===================== =====================
Total liabilities and stockholders' equity $ 77,029 $ 34,911
===================== =====================
<FN>
The accompanying notes are an integral part of this financial information.
</FN>
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- --------------------------------
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
System revenue $ 11,351 $ 5,552 $ 29,653 $ 9,989
Service revenue 1,676 372 3,694 827
-------------- -------------- -------------- --------------
Total revenues 13,027 5,924 33,347 10,816
Cost of revenues:
Cost of system revenue 6,431 5,165 21,398 9,837
Cost of service revenue 938 548 2,474 1,319
-------------- -------------- -------------- --------------
Total cost of revenues 7,369 5,713 23,872 11,156
-------------- -------------- -------------- --------------
Gross profit (deficit) 5,658 211 9,475 (340)
Operating costs and expenses:
Research and development 1,892 1,259 4,886 3,401
Sales and marketing 1,934 1,374 5,265 3,405
General and administrative 859 581 2,827 1,787
-------------- -------------- -------------- --------------
Total operating costs and expenses 4,685 3,214 12,978 8,593
-------------- -------------- -------------- --------------
Operating income (loss) 973 (3,003) (3,503) (8,933)
Interest income (expense), net 516 (150) 559 (95)
-------------- -------------- -------------- --------------
Income (loss) before income taxes
And extraordinary item 1,489 (3,153) (2,944) (9,028)
Provision for income taxes 5 1 8 1
-------------- -------------- -------------- --------------
Income (loss) before debt extinguishment 1,484 (3,154) (2,952) (9,029)
Loss on debt extinguishment, net (428) -- (428) --
-------------- -------------- -------------- --------------
Net income (loss) $ 1,056 $ (3,154) $ (3,380) $ (9,029)
============== ============== ============== ==============
Net income (loss) per share before
extraordinary item $ 0.11 $ (0.37) $ (0.25) $ (1.06)
============== ============== ============== ==============
Extraordinary item $ (0.03) -- $ (0.04) --
============== ============== ============== ==============
Net income (loss) per share $ 0.08 $ (0.37) $ (0.29) $ (1.06)
============== ============== ============== ==============
Shares used in per share calculations 13,392 8,509 11,677 8,502
============== ============== ============== ==============
<FN>
The accompanying notes are an integral part of this financial information.
</FN>
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (3,380) $ (9,029)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,081 717
Amortization of deferred compensation 395 -
Loss on disposition of fixed assets 100 -
Loss on debt extinguishment 428 -
Changes in operating assets and liabilities:
Trade accounts receivable (1,462) (5,812)
Inventories and evaluation inventories (2,371) (6,021)
Prepaid expenses and other assets (730) (131)
Accounts payable and accrued expenses 494 3,659
Deferred revenue 7,660 2,076
------------- -------------
Net cash provided by (used in) operating activities 2,215 (14,541)
------------- -------------
Cash flows from investing activities:
Purchase of short-term investments (51,470) -
Proceeds from sales/maturities of short-term investments 9,498 1,957
Purchases of property and equipment (1,634) (202)
------------- -------------
Net cash provided by (used in) investing activities (43,606) 1,755
------------- -------------
Cash flows from financing activities:
Proceeds from sale of Preferred Stock, net of costs 2,997 -
Proceeds from exercise of Common Stock options 397 36
Proceeds from IPO, net of costs 39,059 -
Proceeds from notes payable and credit line - 6,925
Proceeds from issuance of warrants - 131
Payments on note payable (6,010) (169)
Principal payment on capital lease (285) (158)
------------- -------------
Net cash provided by financing activities 36,158 6,765
------------- -------------
Net decrease in cash and cash equivalents (5,233) (6,021)
Cash and cash equivalents, beginning of period 17,052 7,072
============= =============
Cash and cash equivalents, end of period $ 11,819 $ 1,051
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 552 $ 242
============= =============
Income taxes $ 8 $ 1
============= =============
Non-cash financing and investing activities:
Assets acquired through capital lease $ 365 $ 765
============= =============
Deferred compensation relating to stock option grants $ 1,129 $ 14
============= =============
<FN>
The accompanying notes are an integral part of this financial information.
</FN>
</TABLE>
<PAGE>
NOTES TO FINANCIAL INFORMATION
(Information as of September 30, 1997 is unaudited)
1. Basis of Presentation
The accompanying unaudited financial information has been prepared
by Corsair Communications, Inc. ("Corsair" or the "Company") in accordance
with generally accepted accounting principles for interim financial
statements and pursuant to the rules of the Securities and Exchange
Commission for Form 10-Q and article 10 of Regulation S-X. Accordingly,
certain information and footnotes required by generally accepted accounting
principles for complete financial statements have been omitted. It is the
opinion of management that all adjustments considered necessary for a fair
presentation have been included, and that all such adjustments are of a
normal and recurring nature. Operating results for the periods presented
are not necessarily indicative of the results that may be expected for any
future periods. For further information, refer to the financial statements
and information contained in the Company's registration statement on Form
S-1, dated July 29, 1997.
2. Net Income (Loss) Per Share
Net income (loss) per share is based upon the weighted average
number of common and dilutive common equivalent shares outstanding during
the period.
The Financial Accounting Standards Board recently issued SFAS No.
128, EARNINGS PER SHARE. SFAS No. 128 requires the presentation of basic
earnings per share (EPS) and, for companies with complex capital
structures, diluted EPS. SFAS No. 128 is effective for annual and interim
periods ending after December 15, 1997. The Company expects that for
profitable periods basic EPS will be higher than earnings per share as
presented in the accompanying financial statements and diluted EPS will not
differ materially from earnings per share as presented in the accompanying
financial statements. Computations for loss periods should not change
significantly.
3. Inventories
Inventories are stated at the lower of cost or market and are
summarized as follows:
<TABLE>
<CAPTION>
(In thousands) September 30, December 31,
1997 1996
--------------- ---------------
<S> <C> <C> <C>
Raw materials $ 2,971 $ 2,492
Work in progress 1,094 1,026
Finished goods 1,971 452
--------------- ---------------
$ 6,036 $ 3,970
=============== ===============
</TABLE>
4. Extraordinary Item
The Company incurred a loss on debt extinguishment of $428,000
associated with paying the principal and interest of $5.1 million of
short-term and long-term notes payable. The loss was comprised of
pre-payment penalties and amortization of the remaining discount on debt
associated with warrants issued along with the notes payable.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion may contain forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially from
the results discussed in such forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risks and Uncertainties" below. The Company undertakes no obligation to release
publicly the results of any revisions to these forward-looking statements to
reflect events or circumstances arising after the date hereof.
The following should be read in conjunction with the Company's condensed
financial statements and notes thereto.
Overview
Corsair was incorporated in December 1994 in connection with the
purchase of certain in-process research and development and certain assets from
a subsidiary of TRW Inc. The Company further developed this technology into the
PhonePrint cloning fraud prevention system and first recorded revenues from
commercial shipment of this system in June 1995. From inception, the Company's
operating activities have related primarily to the commercialization, continued
development and enhancement of PhonePrint, the sale and marketing of PhonePrint,
and the development of potential new products. In 1995, the Company generated
revenues of $7.6 million based upon sales of PhonePrint to two customers. In
1996, the Company generated revenues of $19.6 million based upon sales of
PhonePrint to nine customers. In the nine months ended September 30, 1997, the
Company generated revenues of $33.3 million based upon sales of PhonePrint to
twenty customers.
To date, all of the Company's revenues have been attributable to
PhonePrint, and the Company anticipates that the sale and license of the
hardware and software that constitute PhonePrint and the sale of associated
services will continue to account for substantially all of the Company's
revenues at least through the end of 1998. As a result, the Company's future
operating results will depend on the demand for and market acceptance of
PhonePrint.
There are two components of revenues attributable to PhonePrint: system
revenue and service revenue. System revenue is comprised of both the sale of
hardware and the licensing of software. Revenue from hardware sales is
recognized upon the commissioning of the product (the activation of the cell
site equipment) unless a sales contract contains specific acceptance criteria,
in which case, hardware revenue is recognized upon achievement of those
criteria. Software license revenue is recognized over the period of the software
license term. Service revenue is primarily derived from maintenance contracts
and subscriptions to the PhonePrint Roaming Network, which is recognized monthly
over the term of the contract. Service revenue also includes revenue resulting
from time and material billing, training courses, consulting, operations
support, and the provision of spare parts, each of which is recognized in the
month the service is provided to the customer.
Cost of system revenue consists of the cost of hardware and software,
as well as license and royalty fees. Cost of hardware revenue consists of
manufacturing overhead for the Company's test and assembly operation, materials
purchased from the Company's subcontractors and vendors, hardware purchased from
third party vendors, depreciation of rental units, and shipping costs. Cost of
software license revenue primarily includes fees paid to third party software
vendors, as well as costs associated with the installation and configuration of
the software. Cost of service revenue consists primarily of expenses for
personnel engaged in network support, customer support, installation, training
and consulting as well as communications charges and network equipment
depreciation.
The Company's gross margin has varied significantly in the past and may
vary significantly in the future, depending on the mix of services and systems.
The Company's software licenses have a higher gross margin than its service and
hardware revenue. In addition, the hardware gross margin varies from customer to
customer depending on the contract and from model to model depending upon the
customer's cell site and switch configuration. Therefore, the Company's
operating results will be affected by the mix of hardware units, software
licenses, and service fees recognized during the period.
<PAGE>
The Company sells PhonePrint primarily through its direct sales force,
but has also entered into distribution agreements with Motorola, Inc., Ericsson
Radio Systems A.B., and Aurora Wireless Technologies, Ltd. and seeks to enter
into additional distribution agreements for international markets. The Company
has entered into a sales referral agreement with Lucent Technologies, Inc. The
Company's gross margin will also vary depending on the mix of direct sales and
sales through distribution channels.
The Company continues to make efforts to achieve profitability by
increasing sales volume, decreasing costs of goods sold, and through certain
other measures. While the Company has certain programs in place intended to
reduce the costs of certain components of the system, the Company expects that
its operating expenses will continue to increase in the foreseeable future. As a
result, there can be no assurance that the Company will maintain or achieve
sustained profitability.
Results of Operations-Three Months Ended September 30, 1997
Revenues. For the three months ended September 30, 1997, total revenues
were $13.0 million, compared with $5.9 million for the comparable 1996 period.
This increase resulted primarily from an increase in sales of PhonePrint
systems. System revenue was $11.3 million for the three months ended September
30, 1997, compared with $5.5 million for the comparable 1996 period. Service
revenue was $1.7 million for the three months ended September 30, 1997, compared
with $372,000 for the comparable 1996 period. The increase in service revenue
was attributable to growth in the installed base of PhonePrint units covered by
service contracts ($657,000) and initial revenue attributable to the Company's
PhonePrint Roaming Network service ($647,000).
Gross Profit (Deficit). Gross profit increased to $5.7 million in the
three months ended September 30, 1997 from a gross profit of $211,000 in the
comparable 1996 period. The increase in gross profit was due primarily to system
revenue which contributed $4.9 million in gross profit for the three months
ended September 30, 1997 as compared to gross profit of $387,000 in the
comparable 1996 period. Service revenue gross profit for the three months ended
September 30, 1997 improved to $738,000 as compared to a gross deficit of
$176,000 in the comparable 1996 period. In the three months ended September 30,
1997, total gross margin was 43.4% consisting of 43.3% system gross margin and
44.0% service gross margin.
Research and Development. Research and development expenses were $1.9
million, or 14.5% of total revenues, for the three months ended September 30,
1997, compared with $1.3 million for the comparable 1996 period. This increase
in expenditures was due primarily to the hiring of additional engineering
personnel related to the continued development of PhonePrint and development
work on new products.
Sales and Marketing. Sales and marketing expenses were $1.9 million, or
14.8% of total revenues, during the three months ended September 30, 1997,
compared with $1.4 million for the comparable 1996 period. The increase in
expenses resulted from the hiring of additional sales and marketing personnel to
support the increased sales of PhonePrint and to support the increase in service
revenue. The Company expects its sales and marketing expenses to increase in
absolute dollars in the foreseeable future as it expands the scope of its sales
and marketing efforts.
General and Administrative. General and administrative expenses
increased to $859,000 million or 6.6% of total revenues, in the three months
ended September 30, 1997, compared with $581,000 million for the comparable 1996
period. This increase in expenditures was due primarily to higher personnel
expenses related to increased staffing.
Interest Income (Expense), Net. Net interest income was $516,000 in the
three months ended September 30, 1997 as compared to net interest expense of
$150,000 in the comparable 1996 period. Net interest income and expense consists
of interest income from the Company's cash and short-term investments, net of
interest expense on the Company's equipment loans, equipment lease lines and
other loans. The increase in net interest income was a result of larger average
cash investments attributable to the proceeds received from the Company's
initial public offering of Common Stock completed in July 1997.
Extraordinary Items. The Company incurred a loss on debt extinguishment
of $428,000 associated with paying the principal and interest of $5.1 million on
short-term and long-term notes payable.
Income Taxes. The income tax expense in the three months ended
September 30, 1997 and 1996 represents minimum state tax liabilities.
Results of Operations-Nine Months Ended September 30, 1997
Revenues. For the nine months ended September 30, 1997, total revenues
were $33.3 million, compared with $10.8 million for the comparable 1996 period.
This increase resulted primarily from an increase in sales of PhonePrint
systems. System revenue was $29.6 million for the nine months ended September
30, 1997, compared with $10.0 million for the comparable 1996 period. Service
revenue was $3.7 million for the nine months ended September 30, 1997, compared
with $827,000 for the comparable 1996 period. The increase in service revenue
was attributable to growth in the installed base of PhonePrint units covered by
service contracts ($1.5 million) and initial revenue attributable to the
Company's PhonePrint Roaming Network service ($1.4 million). For the nine month
periods ended September 30, 1997 and 1996, international revenues comprised
12.5% and 0.0% of total revenues respectively.
Gross Profit (Deficit). Gross profit increased to $9.5 million in the
nine months ended September 30, 1997 from a gross deficit of $340,000 in the
comparable 1996 period. The increase in gross profit was due primarily to system
revenue which contributed $8.2 million in gross profit for the nine months ended
September 30, 1997 as compared to gross profit of $152,000 in the comparable
1996 period. In the first nine months of 1997, total gross margin was 28.4%
consisting of 27.8% system gross margin and 33.0% service gross margin.
Research and Development. Research and development expenses were $4.9
million, or 14.6% of total revenues, for the nine months ended September 30,
1997, compared with $3.4 million for the comparable 1996 period. This increase
in expenditures was due primarily to the hiring of additional engineering
personnel related to the continued development of PhonePrint and development
work on new products. The Company believes that continued investment in research
and development is critical to attaining its strategic objectives, and as a
result, expects absolute dollars spent on product development to increase in the
foreseeable future.
Sales and Marketing. Sales and marketing expenses were $5.3 million, or
15.7% of total revenues, during the nine months ended September 30, 1997,
compared with $3.4 million for the comparable 1996 period. The increase in
expenses resulted from the hiring of additional sales and marketing personnel to
support the increased sales of PhonePrint and to support the increase in service
revenue. The Company expects its sales and marketing expenses to increase in
absolute dollars in the foreseeable future as it expands the scope of its sales
and marketing efforts.
General and Administrative. General and administrative expenses
increased to $2.8 million or 8.4% of total revenues, in the nine months ended
September 30, 1997, compared with $1.8 million for the comparable 1996 period.
This increase in expenditures was due primarily to higher personnel expenses
related to increased staffing.
Interest Income (Expense), Net. Net interest income was $559,000 in the
nine months ended September 30, 1997 as compared to net interest expense of
$95,000 in the comparable 1996 period. Net interest income and expense consists
of interest income from the Company's cash and short-term investments, net of
interest expense on the Company's equipment loans, equipment lease lines and
other loans. The increase in net interest income was a result of larger average
cash investments attributable to the proceeds received from the Company's
initial public offering of Common Stock completed in July 1997.
Extraordinary Items. The Company incurred a loss on debt extinguishment
of $428,000 associated with repaying the principal and interest on $5.1 million
in short-term and long-term notes payable.
Income Taxes. The income tax expense in the nine months ended
September 30, 1997 and 1996 represents minimum state tax liabilities.
Liquidity and Capital Resources
The Company has funded its operations from inception primarily through
a series of Preferred Stock, debt financings, and an initial public offering.
From its incorporation through September 30, 1997, the Company completed four
Preferred Stock financings providing aggregate net proceeds of approximately
$47.9 million, and debt financings provided aggregate net proceeds of
approximately $5.9 million. In July 1997, the Company completed its initial
public offering generating $39.1 million of net proceeds. At September 30, 1997,
the Company had cash and cash equivalents of approximately $11.8 million and
short-term investments of approximately $44.4 million.
In June 1997, the Company signed a loan and security agreement, which
made available a $3.0 million equipment term loan facility at prime plus 0.75%
(9.25% at September 30, 1997). The loan facility is available through July 1998
and is secured by any underlying equipment purchased. As of September 30, 1997,
the Company did not have any borrowings under the equipment term loan, and any
future borrowings will be repaid over three years.
The Company's operating activities generated cash of $2.2 million for
the nine months ended September 30, 1997. The improvement in 1997 of $16.8
million, as compared to 1996 was due primarily to improved operating results,
increased cash collections in accounts receivable, lower inventory requirements,
and an increase in deferred revenue.
The Company's investing activities used cash of $43.6 million for the
nine months ended September 30, 1997. Net cash of $42.0 million was used for
purchasing short-term investments, and cash of $1.6 million was used for the
purchase of property and equipment, primarily computer hardware and software,
and for leasehold improvements to the Company's facility.
The Company's financing activities generated cash of $36.2 million for
the nine months ended September 30, 1997. In the nine months ended September 30,
1997, cash provided by financing activities was primarily from the Company's
July 1997 initial public offering, generating net proceeds of $39.1 million.
The Company believes that existing sources of liquidity and internally
generated cash, if any, will be sufficient to meet the Company's projected cash
needs for at least the next 12 months. The Company intends to continue its
significant product development efforts in the future and expects to fund those
activities out of working capital. There can be no assurance, however, that the
Company will not require additional financing prior to such date to fund its
operations or possible acquisitions. In addition, the Company may require
additional financing after such date to fund its operations. There can be no
assurance that any additional financing will be available to the Company on
acceptable terms, or at all, if and when required by the Company.
<PAGE>
RISKS AND UNCERTAINTIES
This Quarterly Report may contain predictions, estimates and other
forward-looking statements that involve risks and uncertainties. Such risks and
uncertainties could cause actual results to differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Quarterly Report. The Company undertakes no
obligation to release publicly the results of any revisions to the
forward-looking statements to reflect events or circumstances arising after the
date hereof.
Limited Operating History; Lack of Profitability. The Company was
incorporated in December 1994 and first shipped its PhonePrint system in March
1995. Accordingly, the Company has only a limited operating history upon which
to base an evaluation of its business and prospects. Despite achieving
profitability in the most recent quarter, the Company has incurred net losses
since its incorporation resulting in an accumulated deficit of $30.6 million as
of September 30, 1997. There can be no assurance that the Company's existing
revenues levels can be sustained, and past and existing revenue levels should
not be considered indicative of future results or growth. Moreover, there can be
no assurance that the Company will achieve or sustain profitability on a
quarterly or annual basis. Operating results for future periods are subject to
numerous uncertainties specified elsewhere in this Quarterly Report. The
Company's prospects must be considered in light of the risks encountered by
companies with limited operating histories, particularly companies in new and
rapidly evolving markets such as the markets in which the Company now competes
and may in the future compete. The Company's future operating results will
depend upon, among other factors: the demand for PhonePrint; the Company's
ability to introduce successful new products and product enhancements, including
products that are sold to both analog network carriers and emerging digital
network carriers such as Personal Communications Services ("PCS") and Enhanced
Specialized Mobile Radio ("ESMR") carriers; the level of product and price
competition; the ability of the Company to expand its international sales; the
Company's success in expanding distribution channels; the Company's success in
attracting and retaining motivated and qualified personnel; and the ability of
the Company to avoid patent and intellectual property litigation. If the Company
is not successful in addressing such risks, as well as the others set forth in
this Quarterly Report, the Company's business, operating results and financial
condition will be materially adversely affected.
Dependence on Phoneprint; Dependence on Analog Networks. To date, all
of the Company's revenues have been attributable to PhonePrint, the Company's
cloning fraud prevention system, and the Company anticipates that PhonePrint
will continue to account for substantially all of the Company's revenues at
least through the end of 1998. As a result, the Company's future operating
results will depend on the demand for and market acceptance of PhonePrint. A
relatively small number of analog network carriers are potential customers for
PhonePrint. A majority of the analog carriers in the largest U.S. markets have
already begun to implement cloning fraud solutions, and the Company anticipates
that the growth rate of demand for cloning fraud solutions in the U.S. will slow
and demand may potentially decline over the next few years. If not offset by
growth in international markets, this trend would have a material adverse effect
on PhonePrint sales. Over time, this trend could also occur in international
markets. As analog network carriers adopt cloning fraud solutions for their
existing networks, the future commercial success of PhonePrint will depend in
part on the further expansion of analog networks by those carriers. If analog
networks do not continue to expand, expand slowly or expand in a manner that
does not create significant new demand for cloning fraud solutions, then the
future demand for PhonePrint would be materially adversely affected. There can
be no assurance that the market for cloning fraud solutions will grow as analog
network carriers adopt solutions to their cloning fraud problems, or that
current or future levels of revenues attributable to PhonePrint will be
maintained or will not decline. Any reduction in the demand for PhonePrint would
have a material adverse effect on the Company's business, operating results and
financial condition.
All of the Company's customers to date have been carriers that operate
analog networks. Wireless services operating in digital mode, including PCS and
ESMR in the U.S. and Global System for Mobile Communications ("GSM") in many
foreign countries (including many European countries), use or may use
authentication processes that automatically establish the validity of a phone
each time it attempts to access the wireless telecommunications network. The
Company is not aware of any information that suggests that cloners have been
able to break the authentication encryption technologies. Unless the encryption
technologies that form the basis for authentication are broken by cloners, the
Company does not believe that operators of digital networks will purchase third
party radio frequency ("RF") fingerprinting solutions for cloning fraud such as
PhonePrint. In addition, authentication processes for analog networks are also
currently available. The Company is also very dependent on the continued
widespread use of analog networks. While there are currently over 40 million
analog phones in existence in the U.S., industry experts project that the number
of analog phones will decline in the future. Any reduction in demand by analog
network carriers for cloning fraud solutions would, or any reduction in the use
of analog phones could, have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on New Product Introductions and Product Enhancements. The
Company's future success depends on the timely introduction and acceptance of
new products and product enhancements that the Company is developing. However,
there can be no assurance that any new products or product enhancements the
Company attempts to develop will be developed successfully or on schedule, or if
developed, that they will achieve market acceptance. In the case of products
that can locate wireless phones, the U.S. Federal Communications Commission
("FCC") has mandated that wireless telecommunications carriers be able to
identify the location of emergency 911 callers by October 2001. The Company has
a significant product development effort underway addressing the need of U.S.
wireless telecommunications carriers resulting from the FCC mandate. There can
be no assurance that the FCC mandate will not be abolished or altered in a
fashion that reduces or eliminates any potential demand for products addressing
phone location. There can be no assurance that any wireless telecommunications
carriers will purchase any phone location products before the effective date of
the FCC mandate, October 2001. Any failure by the Company to introduce
commercially successful new products or product enhancements or any significant
delay in the introduction of such new products or product enhancements would
have a material adverse effect on the Company's business, operating results and
financial condition.
The process of developing new products and product enhancements for use
in the wireless telecommunications industry is extremely complex and is expected
to become more complex and expensive in the future as new platforms and
technologies emerge. In particular, the Company is aware of significant
technical challenges with respect to the phone location product it is currently
attempting to develop. In the past, the Company has experienced delays in the
introduction of certain product enhancements, and there can be no assurance that
new products or product enhancements will be introduced on schedule or at all.
Any new products or product enhancements may also contain defects when first
introduced or when new versions are released. There can be no assurance that,
despite testing by the Company, defects will not be found in new products or
product enhancements after commencement of commercial shipments, resulting in
loss of or delay in market acceptance. Any loss of or delay in market acceptance
would have a material adverse effect on the Company's business, operating
results and financial condition.
Fluctuations in Quarterly Financial Results; Lengthy Sales Cycle. The
Company has experienced significant fluctuations in revenues and operating
results from quarter to quarter due to a combination of factors and expects
significant fluctuations to continue in future periods. Factors that are likely
to cause the Company's revenues and operating results to vary significantly from
quarter to quarter include, among others: the level and timing of revenues
associated with PhonePrint; the timing of the introduction or acceptance of new
products and services and product enhancements offered by the Company and its
competitors; changes in governmental regulations or mandates affecting the
wireless telecommunications industry; technological changes or developments in
the wireless telecommunications industry; dependence on a single product; the
size, product mix and timing of significant orders; the timing of system
revenue; competition and pricing in the markets in which the Company competes;
possible recalls; lengthy sales cycles; production or quality problems; the
timing of development expenditures; further expansion of sales and marketing
operations; changes in material costs; disruptions in sources of supply; capital
spending; the timing of payments by customers; and changes in general economic
conditions. These and other factors could cause the Company to recognize
relatively large amounts of revenue over a very short period of time, followed
by a period during which relatively little revenue is recognized. Because of the
relatively fixed nature of most of the Company's costs, including personnel and
facilities costs, any unanticipated shortfall in revenues in any quarter would
have a material adverse impact on the Company's operating results in that
quarter and would likely result in substantial adverse fluctuations in the price
of the Company's Common Stock. Accordingly, the Company expects that from time
to time its future operating results will be below the expectations of market
analysts and investors, which would likely have a material adverse effect on the
prevailing market price of the Common Stock.
A carrier's decision to deploy PhonePrint typically involves a
significant commitment of capital by the carrier and approval by its senior
management. Consequently, the timing of purchases are subject to uncertainties
and delays frequently associated with significant capital expenditures, and the
Company is not able to accurately forecast future sales of PhonePrint. In
addition, purchases of PhonePrint involve testing, integration, implementation
and support requirements. For these and other reasons, the sales cycle
associated with the purchase of PhonePrint typically ranges from three to 18
months and is subject to a number of risks over which the Company has little
control, including the carrier's budgetary and capital spending constraints and
internal decision-making processes. In addition, a carrier's purchase decision
may be delayed as a result of announcements by the Company or competitors of new
products or product enhancements or by regulatory developments. The Company
expects that there will be a lengthy sales cycle with respect to new products,
if any, that the Company may offer in the future. Because of this lengthy sales
cycle and the relatively large size of a typical order and because the Company
does not recognize revenue until cell site equipment is activated or other
contractual acceptance criteria are met, if revenues forecasted from a specific
customer for a particular quarter are not realized in that quarter, the
Company's operating results for that quarter could be materially and adversely
affected.
Highly Competitive Industry. The market for PhonePrint is new and
intensely and increasingly competitive. The Company believes that the primary
competitive factors in the cloning fraud prevention market in which it currently
competes include product effectiveness and quality, price, service and support
capability and compatibility with cloning fraud prevention systems used by the
carrier in other geographic markets and by the carrier's roaming partners. There
has been a tendency for carriers that purchase cloning fraud prevention systems
to purchase products from the company that supplies cloning fraud prevention
systems to other carriers with whom the purchasing carrier has a roaming
arrangement. As a result, the Company expects it will be significantly more
difficult to sell PhonePrint to a carrier if the carrier's roaming partners use
cloning fraud prevention systems supplied by a competitor. Furthermore, once a
competitor has made a sale of RF-based cloning fraud prevention systems to a
carrier, the Company expects that it is unlikely that the Company would be able
to sell PhonePrint to that carrier.
The Company's principal competitor for RF-based cloning fraud
prevention systems is Cellular Technical Services Company, Inc. ("CTS"). CTS has
agreements pursuant to which it has installed or will install its RF-based
cloning fraud prevention system in many major U.S. markets. PhonePrint also
competes with a number of alternative technologies, including profilers,
personal identification numbers and authentication. The Company is aware of
numerous companies, including GTE Telecommunications Services, Inc., Authentix
Network, Inc., Signal Science, Inc. (a subsidiary of The Allen Group) and Coral
Systems, Inc., that currently are or are expected to offer products in the
cloning fraud prevention area. In addition, carriers may themselves develop
technologies that limit the demand for PhonePrint. There can be no assurance
that any such company or any other competitor will not introduce a new product
at a lower price or with greater functionality than PhonePrint. Furthermore, the
demand for PhonePrint would be materially adversely affected if wireless
telecommunications carriers implement authentication technology applicable to
analog phones as their sole cloning fraud solution in major markets, if U.S.
wireless telecommunications carriers adopt a uniform digital standard that
reduces the need for digital phones to operate in analog mode while roaming, or
if analog phone makers change product designs and/or improve manufacturing
standards to a point where the difference from phone to phone in the radio
waveform becomes so small that it is difficult for PhonePrint to identify a
clone. There can be no assurance that any currently available alternative
technology or any new technology will not render the Company's products obsolete
or significantly reduce the market share afforded to RF-based cloning fraud
prevention systems like PhonePrint. The Cellular Telephone Industry Association
is currently supervising a study conducted by a third party to determine whether
PhonePrint and the cloning fraud prevention system marketed by CTS are able to
operate with each other. The Company is not able to predict the effect of this
study on competition. An increase in competition could result in price
reductions or the loss of market share by the Company and could have a material
adverse effect on the Company's business, operating results and financial
condition.
The market for other products and services provided to wireless
telecommunications carriers is highly competitive and subject to rapid
technological change, regulatory developments and emerging industry standards.
In addition, many wireless telecommunications carriers and vendors of switches
and other telecommunications equipment may be capable of developing and offering
products and services competitive with new products, if any, that the Company
may offer in the future. Trends in the wireless telecommunications industry,
including greater consolidation and technological or other developments that
make it simpler or more cost-effective for wireless telecommunications carriers
to provide certain services themselves could affect demand for new products, if
any, offered by the Company, and could make it more difficult for the Company to
offer a cost-effective alternative to a wireless telecommunications carrier's
own capabilities. The Company is aware of a number of companies that have either
announced an intention to develop or are capable of developing products that
would compete with the products the Company is developing, and the Company
anticipates the entrance of new competitors in the wireless telecommunications
carrier service industry in the future. The Company's ability to sell new
products, if any, may be hampered by relationships that competitors have with
carriers based upon the prior sale of other products to carriers.
The Company believes that its ability to compete in the future depends
in part on a number of competitive factors outside its control, including the
ability to hire and retain employees, the development by others of products and
services that are competitive with the Company's products and services, the
price at which others offer comparable products and services and the extent of
its competitors' responsiveness to customer needs. Many of the Company's
competitors and potential competitors have significantly greater financial,
marketing, technical and other competitive resources than the Company. As a
result, the Company's competitors may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or may be able to
devote greater resources to the promotion and sale of their products and
services. To remain competitive in the market for products and services sold to
wireless telecommunications carriers, the Company will need to continue to
invest substantial resources in engineering, research and development and sales
and marketing. There can be no assurance that the Company will have sufficient
resources to make such investments or that the Company will be able to make the
technological advances necessary to remain competitive. Accordingly, there can
be no assurance that the Company will be able to compete successfully with
respect to new products, if any, it offers in the future.
Risks Associated with International Expansion. To date, the Company has
conducted a limited number of deployments of PhonePrint systems internationally.
The Company intends to devote significant marketing and sales efforts over the
next several years to increase its sales to international customers. This
expansion of sales efforts outside of the U.S. will require significant
management attention and financial resources. There can be no assurance that the
Company will be successful in achieving significant sales of PhonePrint in
international markets. The Company does not expect to sell PhonePrint in the
many international markets that rely primarily on digital wireless networks,
including many European countries. There may not be demand in foreign countries
with respect to new products, if any, that the Company may offer in the future.
For example, the Company is currently developing a product addressing the U.S.
FCC mandate that wireless telecommunications carriers be able to identify the
location of emergency 911 callers by October 2001. The Company is not aware of
any corresponding regulatory requirement in any foreign country.
The Company's international sales may be denominated in foreign or U.S.
currencies. The Company does not currently engage in foreign currency hedging
transactions. As a result, a decrease in the value of foreign currencies
relative to the U.S. dollar could result in losses from transactions denominated
in foreign currencies. With respect to the Company's international sales that
are U.S. dollar-denominated, such a decrease could make the Company's systems
less price-competitive. Additional risks inherent in the Company's international
business activities include changes in regulatory requirements, the costs and
risks of localizing systems in foreign countries, tariffs and other trade
barriers, political and economic instability, reduced protection for
intellectual property rights in certain countries, difficulties in staffing and
managing foreign operations, difficulties in managing distributors, potentially
adverse tax consequences, foreign currency exchange fluctuations, the burden of
complying with a wide variety of complex foreign laws and treaties and the
possibility of difficulty in accounts receivable collections. The Company
anticipates that product service and support will be more complicated and
expensive with respect to products sold in international markets. The Company
may need to adapt its products to conform to different technical standards that
may exist in foreign countries. Future customer purchase agreements may be
governed by foreign laws, which may differ significantly from U.S. laws.
Therefore, the Company may be limited in its ability to enforce its rights under
such agreements and to collect damages, if awarded. There can be no assurance
that any of these factors will not have a material adverse effect on the
Company's business, operating results and financial condition.
Customer Concentration. To date, a very significant portion of the
Company's revenues in any particular period has been attributable to a limited
number of customers, comprised entirely of wireless telecommunications carriers
that operate analog networks. AT&T Wireless Services, Comcast Cellular
Communications, Inc., Los Angeles Cellular Telephone Company and Southwestern
Bell Mobile Systems, Inc., each accounted for greater than 10% of the Company's
total revenues in 1996, and collectively accounted for over 70% of the Company's
total revenues in 1996. AirTouch Communications, Inc. and AT&T Wireless Services
accounted for virtually all of the Company's total revenues in 1995. A
relatively small number of analog network carriers are potential customers for
PhonePrint. The Company believes that the number of potential customers for
future products, if any, will be relatively small. Any failure by the Company to
capture a significant share of those customers could have a material adverse
effect on the Company's business, operating results and financial condition. The
Company expects a relatively small number of customers will continue to
represent a significant percentage of its total revenues for each quarter for
the foreseeable future, although the companies that comprise the largest
customers in any given quarter may change from quarter to quarter. The terms of
the Company's agreements with its customers are generally for periods of between
two and five years. Although these agreements typically contain annual software
license fees and various service and support fees, there are no minimum payment
obligations or obligations to make future purchases of hardware or to license
additional software. Therefore, there can be no assurance that any of the
Company's current customers will generate significant revenues in future
periods.
Uncertainty Regarding Patents and Protection of Proprietary Technology;
Risks of Future Litigation. The Company relies on a combination of patent, trade
secret, copyright and trademark protection and nondisclosure agreements to
protect its proprietary rights. As of September 30, 1997, the Company had one
issued U.S. patent, six pending U.S. patent applications, one issued foreign
patent and ten pending foreign patent applications. The Company's success will
depend in large part on the ability of the Company to obtain patent protection,
defend patents once obtained, license third party proprietary rights, maintain
trade secrets and operate without infringing upon the patents and proprietary
rights of others. The patent positions of companies in the wireless
telecommunications industry, including the Company, are generally uncertain and
involve complex legal and factual questions. There can be no assurance that
patents will issue from any patent applications owned or licensed to the Company
or that, if patents do issue, the claims allowed would be sufficiently broad to
protect the Company's technology. In addition, there can be no assurance that
any issued patents owned by or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company.
Patents issued and patent applications filed relating to products used
in the wireless telecommunications industry are numerous and there can be no
assurance that current and potential competitors and other third parties have
not filed or in the future will not file applications for, or have not received
or in the future will not receive, patents or obtain additional proprietary
rights relating to products used or proposed to be used by the Company. The
Company is aware of patents granted to third parties that relate to the
potential products the Company is currently developing. The Company will need to
either design those potential products in a manner that does not infringe the
third-party patents or obtain licenses from the third parties, and there can be
no assurance that the Company will be able to do so. There can be no assurance
that the Company is aware of all patents or patent applications that may
materially affect the Company's ability to make, use or sell any current or
future products. U.S. patent applications are confidential while pending in the
U.S. Patent and Trademark Office, and patent applications filed in foreign
countries are often first published six months or more after filing. There can
also be no assurance that third parties will not assert infringement claims
against the Company in the future or that any such assertions will not result in
costly litigation or require the Company to obtain a license to intellectual
property rights of such parties. There can be no assurance that any such
licenses would be available on terms acceptable to the Company, if at all.
Furthermore, parties making such claims may be able to obtain injunctive or
other equitable relief that could effectively block the Company's ability to
make, use, sell or otherwise practice its intellectual property (whether or not
patented or described in pending patent applications), or to further develop or
commercialize its products in the U.S. and abroad and could result in the award
of substantial damages. Defense of any lawsuit or failure to obtain any such
license could have a material adverse effect on the Company's business,
operating results or financial condition.
The Company also relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire the same or substantially equivalent
technologies or otherwise gain access to the Company's proprietary technology or
disclose such technology or that the Company can ultimately protect its rights
to such unpatented proprietary technology. No assurance can be given that third
parties will not obtain patent rights to such unpatented trade secrets, which
patent rights could be used to assert infringement claims against the Company.
The Company also relies on confidentiality agreements with its employees,
vendors, consultants and customers to protect its proprietary technology. There
can be no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade secrets
will not otherwise become known to or be independently developed by competitors.
Failure to obtain or maintain patent and trade secret protection, for any
reason, could have a material adverse effect on the Company's business,
operating results and financial condition.
Dependence on Third-Party Products and Services; Sole or Limited
Sources of Supply. The Company relies to a substantial extent on outside vendors
to manufacture many of the components and subassemblies used in PhonePrint, some
of which are obtained from a single supplier or a limited group of suppliers.
The Company's reliance on outside vendors generally, and a sole or a limited
group of suppliers in particular, involves several risks, including a potential
inability to obtain an adequate supply of required components and reduced
control over quality, pricing and timing of delivery of components. In the past,
the Company has experienced delays in receiving materials from vendors,
sometimes resulting in delays in the assembly of products by the Company. Such
delays, or other significant vendor or supply quality issues, may occur in the
future, which could result in a material adverse effect on the Company's
business, operating results or financial condition. The manufacture of certain
of these components and subassemblies is specialized and requires long lead
times, and there can be no assurance that delays or shortages caused by vendors
will not reoccur. Any inability to obtain adequate deliveries, or any other
circumstance that would require the Company to seek alternative sources of
supply or to manufacture such components internally could delay shipment of the
Company's products, increase its cost of goods sold and have a material adverse
effect on the Company's business, operating results and financial condition. In
addition, from time to time, the Company must also rely upon third parties to
develop and introduce components and products to enable the Company, in turn, to
develop new products and product enhancements on a timely and cost-effective
basis. There can be no assurance that the Company will be able to obtain access
in a timely manner to third-party products and development services necessary to
enable the Company to develop and introduce new and enhanced products, that the
Company will obtain third-party products and development services on
commercially reasonable terms or that the Company will be able to replace
third-party products in the event such products become unavailable, obsolete or
incompatible with future versions of the Company's products. The absence of, or
any significant delay in, the replacement of third-party products could have a
material adverse effect on the Company's business, operating results and
financial condition.
Dependence on Personnel. The success of the Company is dependent, in
part, on its ability to attract and retain highly qualified personnel. The
Company's future business and operating results depend upon the continued
contributions of its senior management and other employees, many of whom would
be difficult to replace and certain of whom perform important functions for the
Company beyond those functions suggested by their respective job titles or
descriptions. Competition for such personnel is intense and the inability to
attract and retain additional senior management and other employees or the loss
of one or more members of the Company's senior management team or current
employees, particularly to competitors, could materially adversely affect the
Company's business, operating results or financial condition. There can be no
assurance that the Company will be successful in hiring or retaining requisite
personnel. None of the Company's employees has entered into employment
agreements with the Company, and the Company does not have any key-person life
insurance covering the lives of any members of its senior management team.
Management of Growth. The Company is at an early stage of development
and has rapidly and significantly expanded its operations. The number of
employees grew from 36 on January 1, 1995 to 136 on September 30, 1997. Such
growth has placed, and, if sustained, will continue to place, significant
demands on the Company's management, information systems, operations and
resources. The strain experienced to date has chiefly been in hiring,
integrating and effectively managing sufficient numbers of qualified personnel
to support the expansion of the Company's business. The Company's ability to
manage any future growth, should it occur, will continue to depend upon the
successful expansion of its sales, marketing, research and development, customer
support and administrative infrastructure and the ongoing implementation and
improvement of a variety of internal management systems, procedures and
controls. There can be no assurance that the Company will be able to attract,
manage and retain additional personnel to support any future growth, if any, or
will not experience significant problems with respect to any infrastructure
expansion or the attempted implementation of systems, procedures and controls.
Any failure in one or more of these areas could have a material adverse effect
on the Company's business, results of operations and financial condition.
Government Regulation and Legal Uncertainties. While most of the
Company's operations are not directly regulated, the Company's existing and
potential customers are subject to a variety of U.S. and foreign governmental
regulations. Such regulations may adversely affect the wireless
telecommunications industry, limit the number of potential customers for the
Company's products or impede the Company's ability to offer competitive products
and services to the wireless telecommunications industry or otherwise have a
material adverse effect on the Company's business, financial condition and
results of operations. Recently enacted legislation, including the
Telecommunications Act of 1996, deregulating the telecommunications industry may
cause changes in the wireless telecommunications industry, including the
entrance of new competitors and industry consolidation, which could in turn
increase pricing pressures on the Company, decrease demand for the Company's
products, increase the Company's cost of doing business or otherwise have a
material adverse effect on the Company's business, operating results and
financial condition. The Telecommunications Act of 1996 contains several
provisions that may bear directly on the Company's existing and potential
customers in the U.S., including provisions that require wireless carriers to
interconnect with local exchange carriers and contribute to a universal service
fund, that limit the ability of state and local governments to discriminate
against or prohibit certain wireless services and that may allow certain
companies to bundle local and long distance services with wireless offerings.
These provisions may cause an increase in the number of wireless
telecommunications carriers which could in turn increase the number of potential
customers of the Company. This could require the Company to expand its marketing
efforts with no assurance that revenues would increase proportionately or at
all. Alternatively, these provisions could encourage industry consolidation,
which would reduce the Company's potential customer base. Currently the FCC and
state authorities are implementing the provisions of the Telecommunications Act
of 1996 and several of the decisions by the FCC and state authorities are
already being challenged in court. Therefore, the Company cannot at this time
predict the extent to which the Telecommunications Act of 1996 will affect the
Company's current and potential customers or ultimately affect the Company's
business, financial condition or results of operations. If the recent trend
toward privatization and deregulation of the wireless telecommunications
industry outside of the U.S. were to discontinue, or if currently deregulated
international markets were to reinstate comprehensive government regulation of
wireless telecommunications services, the Company's business, operating results
and financial condition could be materially and adversely affected. In addition,
the problem of cloning fraud has received heightened attention from Congress and
the FCC, which are exploring legislative and regulatory initiatives that would
impose stricter penalties for, and increase enforcement against, cloning fraud.
The Company cannot predict the effect of such initiatives on the Company's
business, operating results or financial condition, including demand for the
Company's products.
Dependence on Growth of Wireless Telecommunications Industry. The
Company's future financial performance will depend in part on the number of
carriers seeking third-party solutions to the problem of cloning fraud and other
problems that the Company's new products, if any, will attempt to address,
including phone location and churn reduction. Although the wireless
telecommunications industry has experienced significant growth in recent years,
there can be no assurance that such growth will continue at similar rates, or
that, if the industry does grow, there will be continued demand for the
Company's cloning fraud prevention or other products. Any decline in demand for
wireless telecommunications products and services in general would have a
material adverse effect on the Company's business, operating results and
financial condition.
Risk of System Failure. The continued, uninterrupted operation of the
PhonePrint system depends on protecting it from damage from fire, earthquake,
power loss, communications failure, unauthorized entry or other events. Any
damage to or failure of a component or combination of components that causes a
significant reduction in the performance of a PhonePrint system could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company currently does not have liability insurance to
protect against these risks and there can be no assurance that such insurance
will be available to the Company on commercially reasonable terms, or at all. In
addition, if any carrier using PhonePrint encounters material performance
problems, the Company's reputation and its business, operating results and
financial condition could be materially adversely affected.
Dependence on Distributors. PhonePrint is currently marketed primarily
through the Company's direct sales efforts. The Company has entered into
distribution agreements with respect to PhonePrint with Motorola, Inc., Aurora
Wireless Technologies, Ltd. ("Aurora") and a sales referral agreement with
Lucent Technologies, Inc. To date, the Company has not recognized any revenues
under the agreement with Motorola, Inc. Aurora has placed a PhonePrint system
with a carrier in the Philippines, but consistent with the Company's accounting
practices, the Company will not recognize any revenue from this installation
until the Company has completed a field test demonstrating that this PhonePrint
System meets performance specifications with respect to the disconnection of
fraudulent calls and the lack of impact on legitimate subscriber calls which is
required to gain acceptance. The Company seeks to pursue distribution agreements
with other companies. While the Company had not generated any revenues from
distributors through September 30, 1997, the Company believes that its
dependence on distributors will increase in the future, both with respect to
PhonePrint and to new products, if any, that the Company may offer in the
future. There are no minimum purchase obligations applicable to any existing
distributor and the Company does not expect to have any guarantees of continuing
orders from any distributor. There can be no assurance that any existing or
future distributors will not become competitors of the Company with respect to
PhonePrint or any future product. Any failure by the Company's existing and
future distributors to generate significant revenues could have a material
adverse effect on the Company's business, operating results and financial
condition.
Future Capital Requirements. The Company's future capital requirements
will depend upon many factors, including the commercial success of PhonePrint,
the timing and success of new product introductions, if any, the progress of the
Company's research and development efforts, the Company's results of operations,
the status of competitive products and the potential acquisition of businesses,
technologies or assets. The Company believes that combination of existing
sources of liquidity and internally generated cash will be sufficient to meet
the Company's projected cash needs for at least the next 12 months. There can be
no assurance, however, that the Company will not require additional financing
prior to such date to fund its operations. In addition, the Company may require
additional financing after such date to fund its operations. There can be no
assurance that any additional financing will be available to the Company on
acceptable terms, or at all, when required by the Company. If additional funds
are raised by issuing equity securities, further dilution to the existing
stockholders will result. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate one or more of its development or
manufacturing programs or obtain funds through arrangements with third parties
that may require the Company to relinquish rights to certain of its technologies
or potential products or other assets that the Company would not otherwise
relinquish. Accordingly, the inability to obtain such financing could have a
material adverse effect on the Company's business, operating results and
financial condition.
Potential Acquisitions. The Company expects in the future to pursue
acquisitions of businesses, products or technologies that complement the
Company's business. Future acquisitions may result in the potentially dilutive
issuance of equity securities, the use of cash resources, the incurrence of
additional debt, the write-off of in-process research and development or
software acquisition and development costs and the amortization of expenses
related to goodwill and other intangible assets, any of which could have a
material adverse effect on the Company's business, operating results and
financial condition. Future acquisitions would involve numerous additional
risks, including difficulties in the assimilation of the operations, services,
products and personnel of an acquired business, the diversion of management's
attention from other business concerns, entering markets in which the Company
has little or no direct prior experience and the potential loss of key employees
of an acquired business. In addition, there can be no assurance that the Company
would be successful in completing any acquisition. The Company currently has no
agreements or understandings with regard to any acquisition.
Volatility of Stock Price. The market price of the Common Stock is
likely to be highly volatile and could be subject to wide fluctuations in
response to numerous factors, including, but not limited to, revenues
attributable to PhonePrint, new products or new contracts by the Company or its
competitors, actual or anticipated variations in the Company's operating
results, the level of operating expenses, changes in financial estimates by
securities analysts, potential acquisitions, regulatory announcements,
developments with respect to patents or proprietary rights, conditions and
trends in the wireless telecommunications and other industries, adoption of new
accounting standards affecting the industry and general market conditions. As a
result, the Company expects that from time to time its future operating results
will be below the expectations of market analysts and investors, which would
likely have a material adverse effect on the prevailing market price of the
Common Stock. The realization of any of the risks described in these "Risk and
Uncertainties" could have a dramatic and adverse impact on the market price of
the Common Stock.
Further, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of equity
securities of many companies in the telecommunications industry and that often
have been unrelated or disproportionate to the operating performance of such
companies. These market fluctuations, as well as general economic, political and
market conditions such as recessions or international currency fluctuations may
adversely affect the market price of the Common Stock. In the past, following
periods of volatility in the market price of the securities of companies in the
telecommunications industry, securities class action litigation has often been
instituted against those companies. Such litigation, if instituted against the
Company, could result in substantial costs and a diversion of management
attention and resources, which would have a material adverse effect on the
Company.
Antitakeover Effects of Charter, Bylaws and Delaware Law. The Company's
Restated Certificate of Incorporation authorizes the Company's Board of
Directors (the "Board") to issue shares of undesignated Preferred Stock without
stockholder approval on such terms as the Board may determine. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any such Preferred Stock that may be issued in the
future. Moreover, the issuance of Preferred Stock may make it more difficult for
a third party to acquire, or may discourage a third party from acquiring, a
majority of the voting stock of the Company. The Company's Restated Bylaws
provide that the Company's Board will be classified into three classes of
directors beginning at the 1998 annual meeting of stockholders. With a
classified Board, one class of directors is elected each year with each class
serving a three-year term. These and other provisions of the Restated
Certificate of Incorporation and the Restated Bylaws, as well as certain
provisions of Delaware law, could delay or impede the removal of incumbent
directors and could make more difficult a merger, tender offer or proxy contest
involving the Company, even if such events could be beneficial to the interest
of the stockholders. Such provisions could limit the price that certain
investors might be willing to pay in the future for the Common Stock.
<PAGE>
PART II - OTHER INFORMATION
Item 1 Legal Proceedings. None
Item 2 Change in Securities. None
Item 3 Defaults Upon Senior Securities. None
Item 4 Submission of Matters to a Vote of Securities Holders. None
Item 5 Other Information. None
Item 6 Exhibits and Reports on Form 8-K.
a. Exhibits
11.1 Computation of Shares Used In Per Share Calculations
27.1 Financial Data Schedule
b. Reports on form 8-K. None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Corsair Communications, Inc.
Date: November 13, 1997 By: /s/ Martin J. Silver
--------------------------- --------------------
Martin J. Silver
Chief Financial Officer and
Secretary (Duly Authorized
Officer and Principal Financial
and Accounting Officer)
<PAGE>
<TABLE>
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
COMPUTATION OF SHARES USED IN PER SHARE CALCULATIONS
<CAPTION>
Three Months Ended Nine Months Ended,
September 30, September 30,
------------------------- -------------------------
(In thousands, except per share data) 1997 1996 1997 1996
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Weighted average number of common stock outstanding 12,729 63 4,298 56
Preferred stock (as if converted basis) -- 6,741 4,868 6,741
Preferred stock and common stock issued and stock options
granted in accordance with Staff Accounting Bulletin
No. 83 -- 1,705 2,511 1,705
Common stock equivalents 663 -- -- --
---------- ---------- ---------- ----------
Shares used in calculation of earnings (loss) per share 13,392 8,509 11,677 8,502
========== ========== ========== ==========
Income (loss) before extraordinary items 1,484 (3,154) (2,952) (9,029)
Extraordinary item - loss on debt extinguishment (428) -- (428) --
---------- ---------- ---------- ----------
Net income (loss) 1,056 (3,154) (3,380) (9,029)
Earnings per common share (1)
Income before extraordinary item $ 0.11 $ (0.37) $ (0.25) $ (1.06)
Extraordinary item (0.03) -- (0.04) --
---------- ---------- ---------- ----------
Earnings (loss) per share $ 0.08 $ (0.37) $ (0.29) $ (1.06)
========== ========== ========== ==========
<FN>
(1) Fully diluted earnings per share have been excluded from the presentation
since the calculation would not be materially different from primary
earnings per share.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Corsair Communications, Inc. Form 10-Q for the period ended September 30, 1997
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 11,819
<SECURITIES> 44,424
<RECEIVABLES> 4,722
<ALLOWANCES> 0
<INVENTORY> 6,036
<CURRENT-ASSETS> 73,365
<PP&E> 3,260
<DEPRECIATION> 0
<TOTAL-ASSETS> 77,029
<CURRENT-LIABILITIES> 19,000
<BONDS> 551
0
0
<COMMON> 88,078
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 77,029
<SALES> 33,347
<TOTAL-REVENUES> 33,347
<CGS> 23,872
<TOTAL-COSTS> 23,872
<OTHER-EXPENSES> 12,978
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (559)
<INCOME-PRETAX> (2,944)
<INCOME-TAX> 8
<INCOME-CONTINUING> (3,380)
<DISCONTINUED> 0
<EXTRAORDINARY> (428)
<CHANGES> 0
<NET-INCOME> (3,380)
<EPS-PRIMARY> (0.29)
<EPS-DILUTED> 0
</TABLE>
