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 June 30, 1998.
[ ] 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)
<TABLE>
<S> <C>
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)
</TABLE>
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;
The number of shares of the Registrant's Common Stock outstanding as of
July 31, 1998 was 17,770,018.
<PAGE>
INDEX
Page No.
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998 and
December 31, 1997................................................3
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1998 and 1997 .....................4
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1997 .............................5
Notes to Condensed Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................9
Part II. Other Information
Item 2. Change in Securities and Use of Proceeds........................21
Item 4. Submission of Matters to a Vote of Security Holders.............21
Item 5. Other Information...............................................22
Item 6. Exhibits and Reports on Form 8-K ...............................22
Signatures ..............................................................23
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
CORSAIR COMUNICATIONS, INC.
Unaudited Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 6,616 $ 16,915
Short-term investments 49,435 46,038
Trade accounts receivable, net 8,695 6,780
Inventories, net 4,047 3,618
Evaluation inventory 1,207 4,590
Prepaids and other 2,264 1,415
----------------- -----------------
Total current assets 72,264 79,356
Property and equipment, net 7,731 7,110
Other assets 1,659 2,393
================= =================
Total assets $ 81,654 $ 88,859
================= =================
Liabilities and Stockholders' Equity
Accounts payable $ 1,383 $ 1,419
Accrued benefits 4,515 3,009
Accrued expenses 4,138 4,946
Accrued merger related expenses 4,108 --
Current portion of notes payable 3,095 2,245
Current portion of capital lease 730 723
obligations
Deferred revenue 6,627 13,522
----------------- -----------------
Total current liabilities 24,596 25,864
Notes payable, net of current portion 1,738 4,694
Capital lease obligations, net of current 447 850
portion
Other liabilities 138 139
----------------- -----------------
Total liabilities $ 26,919 $ 31,547
----------------- -----------------
Common stock 18 18
Notes receivable from stockholders (375) (511)
Additional paid-in capital 104,325 103,923
Deferred compensation (450) (648)
Accumulated deficit (48,783) (45,470)
----------------- -----------------
Total stockholders' equity 54,735 57,312
----------------- -----------------
Total liabilities and stockholders' $ 81,654 $ 88,859
equity
================= =================
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
<PAGE>
CORSAIR COMUNICATIONS, INC.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Hardware revenue $9,925 $8,996 $22,047 $16,594
Software revenue 4,462 2,222 7,216 4,743
Service revenue 4,662 2,151 8,298 4,189
--------- --------- ---------- ----------
Total revenues 19,049 13,369 37,561 25,526
Cost of revenues:
Hardware revenue costs 4,643 7,352 11,292 14,711
Software revenue costs 356 436 708 663
Service revenue costs 2,349 1,548 4,494 3,233
--------- --------- ---------- ----------
Total cost of revenues 7,348 9,336 16,494 18,607
--------- --------- ----------
----------
Gross profit 11,701 4,033 21,067 6,919
--------- --------- ---------- ----------
Operating costs and expenses:
Research and development 4,340 3,165 8,965 5,371
Sales and marketing 4,136 2,914 7,591 4,884
General and administrative 2,430 2,260 4,424 4,249
Merger related expenses 4,481 - 4,481 -
---------- -------- ---------- ----------
Total operating costs and 15,387 8,339 25,461 14,504
expenses
--------- --------- ---------- ----------
Operating loss (3,686) (4,306) (4,394) (7,585)
Interest income (expense), net 402 31 1,671 (97)
--------- --------- ---------- ----------
Loss before income (3,284) (4,275) (2,723) (7,682)
taxes
Income taxes 110 - 364 3
--------- --------- ---------- ----------
Extraordinary loss on debt (3,394) (4,275) (3,087) (7,685)
extinquishment
Loss on debt extinguishment, (226) - (226) -
net
--------- --------- ---------- ----------
Net loss $(3,620) $(4,275) $(3,313) $(7,685)
========= ========= ========== ==========
Basic and diluted net loss per share data:
Basic net loss before
extraordinary item $(0.19) $(0.29) $(0.18) $(2.47)
Extraordinary loss on debt (0.01) - (0.01) -
extinguishment
========= ========= ========== ==========
Basic and diluted net
loss per share $(0.20) $(1.29) $(0.19) $(2.47)
========= ========= ========== ==========
Shares used in per share 17,660 3,320 17,632 3,112
calculations
========= ========= ========== ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
<PAGE>
CORSAIR COMMUNICATIONS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(3,313) $(7,685)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization 1,935 1,081
Amortization of deferred compensation and 298 238
compensation expense
Loss on disposition of fixed assets -- 100
Extraordinary loss on debt extinguishment 226 --
Merger-related costs 4,108 --
Changes in operating assets and liabilities:
Trade accounts receivable (1,915) 251
Inventories 2,954 (2,141)
Prepaid expenses and other assets (630) (1,878)
Accounts payable and accrued expenses 661 (1,364)
Deferred revenue (6,895) 6,432
---------- ----------
Net cash used in operating activities (2,571) (4,966)
---------- ----------
Cash flows from investing activities:
Purchase of short-term investments (14,413) (28,066)
Proceeds from sales and maturities of short-term
investments 11,016 19,932
Purchases of property and equipment (2,041) (1,856)
---------- ----------
Net cash used in investing activities (5,438) (9,990)
---------- ----------
Cash flows from financing activities:
Proceeds from sale of preferred stock, net -- 17,091
of offering costs
Proceeds from stock options and purchase plans 402 220
Proceeds from debt 4,128 660
Principal and prepayment penalty payments on (6,460) (2,398)
debt obligations
Proceeds from note receivable from 36 --
stockholder
Principal payment on capital lease (396) (356)
---------- ----------
Net cash provided by (used in) financing (2,290) 15,217
activities
---------- ----------
Net increase (decrease) in cash and cash (10,299) 261
equivalents
Cash and cash equivalents, beginning of period 16,915 19,629
========== ==========
Cash and cash equivalents, end of period $ 6,616 $ 19,890
========== ==========
Cash paid:
Interest $ 624 $ 520
========== ==========
Income taxes $ 332 $ 4
========== ==========
Noncash financing and investing activities:
Assets acquired through capital lease $ -- $ 481
========== ==========
Common stock issued in exchange for $ -- $ 377
stockholder note
========== ==========
Deferred compensation relating to stock option $ -- $ 1,129
grants
========== ==========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
<PAGE>
CORSAIR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial information has been
prepared by Corsair Communications, Inc. ("Corsair") 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.
On June 23, 1998, Corsair acquired Subscriber Computing, Inc. ("SCI") in a
combination to be accounted for under the pooling of interests method of
accounting. Corsair's condensed consolidated financial statements have been
restated to include the financial position and results of SCI for all periods
presented. Due to the fiscal year end conversion of SCI to that of Corsair,
SCI's net revenues of $2.9 million and net loss of $5.0 million for the three
months ended December 31, 1997 are not included in the unaudited condensed
consolidated statements of operations. Operating results for the periods
presented are not necessarily indicative of the results that may be expected
for any future periods. These condensed consolidated financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 and Registration Statement on Form S-4,
dated May 27, 1998.
The condensed consolidated financial statements include Corsair
Communications, Inc., and its subsidiary. Significant intercompany
transactions and accounts have been eliminated.
2. Revenue Recognition
Revenue from hardware sales is recognized upon shipment, unless a sales
agreement contemplates that Corsair provide testing, integration or
implementation services, in which case hardware revenue is recognized upon
commissioning and acceptance of the product (the activation of the cell site
equipment following testing integration and implementation). Revenue from the
licensing of software products generally is recognized upon delivery of the
products, unless the sales includes post-contract customer support, in which
case the revenue is recognized ratably over the term of the license period.
Revenue from services is recognized ratably over the term of the maintenance
support, on a percentage of completion basis over the term of the consulting
effort, or during the month the training or operations support is provided.
During the first quarter of fiscal 1998, Corsair adopted Statement of
Position (SOP) No. 97-2, "Software Revenue Recognition". The provisions of
SOP No. 97-2 have been applied to transactions entered into beginning January
1, 1998. SOP No. 97-2 generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element
based on the relative fair values of the elements. In connection with the
adoption of SOP 97-2, the Company analyzed all of the elements included in
its multiple-element arrangements and believes that it currently complies
with the SOP.
3. Net Income (Loss) Per Share
Basic net income (loss) per share is based on the weighted average
number of shares of common stock outstanding during the period. Diluted net
income (loss) per share is based on the weighted average number of shares of
common stock outstanding during the period and dilutive common equivalent
shares from options and warrants outstanding during the period. No common
equivalent shares are included for loss periods as they would be
anti-dilutive. Dilutive common equivalent shares consist of stock options and
stock warrants.
<PAGE>
The following tables set forth the computations of shares and net loss
used in the calculation of basic and diluted net loss per share for the three
and six months ended June 30, 1998, and 1997 (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------------------------
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic and diluted net loss per share data:
Net loss $ $ $ $
(3,620) (4,275) (3,313) (7,685)
========== ========= ========= =========
Actual weighted average common
shares outstanding for the 17,660 3,320 17,632 3,112
period
========== ========= ========== =========
Basic and diluted net loss per $ (0.20) $(1.29) $(0.19) $(2.47)
share
========== ========= ========= =========
</TABLE>
The Company has excluded the impact of approximately 1,581,827, and 1,015,753
outstanding options to purchase common stock as of June 30, 1998 and 1997 and
warrants to purchase 85,915 shares of common stock as of June 30, 1998 and
1997, since their inclusion in diluted per share results would have been
antidilutive.
4. Inventories
Inventories are stated at the lower of cost or market and are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, December
1998 31, 1997
---------- ----------
<S> <C> <C>
Raw materials $1,174 $1,479
Work in progress 895 189
Finished goods 1,978 1,950
========== ==========
$ 4,047 $3,618
========== ==========
</TABLE>
5. Merger with Subscriber Computing, Inc.
On June 23, 1998, Corsair issued approximately 3.9 million shares of its
common stock in exchange for all the outstanding shares of common stock of
Subscriber Computing, Inc, ("SCI"), a provider of scalable billing, customer
care, fraud detection, prepaid billing and mediation solutions for paging,
cellular and Personal Communications Services service providers. As a result
of the merger, each outstanding share of SCI Preferred Stock was converted
into shares of SCI Common Stock based on their respective liquidation
preference. Concurrently, each share of SCI Common Stock was converted into
0.238 shares of Corsair's Common Stock, and SCI became a wholly owned
subsidiary of Corsair. In addition, Corsair has reserved approximately
464,500 shares of its Common Stock for issuance upon the exercise of assumed
SCI stock options and warrants. The merger was accounted for as a pooling of
interests, and accordingly, the Company's condensed consolidated financial
statements have been restated to include the financial position and results
of SCI for all periods presented.
The results of operations reported by the separate enterprises and the
combined amounts presented in the accompanying consolidated financial
statements are summarized below (in thousands):
<TABLE>
<CAPTION>
Corsair SCI Combined
-------------- ------------- --------------
<S> <C> <C> <C>
Six Months Ended June 30,
1998
Total revenue $ 29,682 $ 7,879 $ 37,561
Extraordinary loss 226 - 226
Net income (loss) 3,861 (7,174) (3,313)
Six Months Ended June 30,
1997
Total revenue $ 20,319 $ 5,207 $ 25,526
Net loss (4,437) (3,248) (7,685)
</TABLE>
In the second quarter, Corsair incurred merger-related and other charges
of $4.5 million. The following table presents the components of the
charges (in thousands):
<TABLE>
<CAPTION>
Non-cash June 30,
Total Amounts Writedown 1998
Charge Paid of Assets Reserve
Balance
<S> <C> <C> <C> <C>
Transaction costs 2,741 239 -- 2,502
Termination benefits (20 1,338 -- -- 1,338
employees)
Redundant facility and other 402 -- 134 268
equipment costs
========================================
Total $4,481 $ 239 $ 134 $ 4,108
========================================
</TABLE>
6. Extraordinary Item
Corsair incurred a loss on debt extinguishment of $226,000
associated with paying the principal and interest of $4.8 million of
short-term and long-term notes payable. The loss was comprised of the
amortization of the remaining loan fees associated with the debt issuance.
7. Recent Pronouncements
On January 1, 1998, Corsair adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements.
In Corsair's circumstances, total comprehensive income (loss) for all
periods presented herein would not have differed from reported net income
(loss).
In June 1998, the Financial Accounting Standards Board issues SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
This statement establishes accounting and reporting standards for
derivative instruments and hedging activities. Currently, the Company does
not use either of these financial tools and therefore will not be impacted
by the issuance of this standard.
<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. Corsair'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. Corsair 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 Corsair's condensed
consolidated financial statements and notes thereto.
Recent Events
Corsair is a leading provider of software and system solutions for the
wireless industry. The Company's products include systems for fraud prevention
and churn reduction, customer care and billing, and location service.
On June 23, 1998, Corsair acquired Subscriber Computing, Inc. ("SCI"), a
Delaware corporation, which provides software systems to the paging, cellular,
and PCS industries. The merger was accomplished pursuant to an Agreement and
Plan of Reorganization, dated April 2, 1998. As a result of the merger, each
outstanding share of SCI Preferred Stock was converted into shares of SCI Common
Stock based on the respective liquidation preference. Concurrently, each SCI
Common Stock was converted into 0.238 shares of Corsair's Common Stock, and SCI
became a wholly owned subsidiary of Corsair. The acquisition of SCI was treated
as a pooling of interests for accounting purposes.
A total of approximately 3.9 million shares of Corsair's Common Stock was
issued in connection with the merger. In addition, all outstanding options and
warrants to purchase SCI common stock were assumed by Corsair and converted into
the respective rights to purchase shares of Corsair's Common Stock. Corsair has
reserved approximately 464,500 shares of its Common Stock for issuance upon the
exercise of the assumed SCI stock options and warrants.
With the acquisition of SCI, Corsair acquired two billing products:
Customer Resource Manager(TM) ("CRM") and PrePay(TM). CRM is a full featured,
integrated customer service and real-time billing system for wireless and paging
carriers, available on a scalable desktop platform. CRM is currently one of the
most widely used billing and customer care systems in the U.S. paging industry.
PrePay is a system for prepaid billing, based on wireless intelligent network
technology, to allow carriers to provide cellular and PCS services to new
consumer and business market segments. Corsair also acquired SCI's FraudWatch(R)
Pro, a profiling system designed to detect fraud on all types of wireless
telephony networks.
Results of Operations
Revenues: For the three months ended June 30, 1998, total revenues were
$19.0 million, compared with $13.4 million for the same period in 1997. For the
six months ended June 30, 1998, total revenues were $37.6 million, up $12.1
million from $25.5 million for the comparable 1997 period. The improvement in
revenues for the three and six months ended June 30, 1998, having increased 42%
and 47% from the respective periods in 1997, was primarily due to higher
software and services revenues resulting from a larger installed customer base
and recognition of the corresponding consulting and maintenance contracts. In
addition, hardware revenues for the same three and six month periods increased
due to continuing growth in the number of PhonePrint systems sold.
Gross Profit: Gross profit increased to 61% of total revenues in the three
months ended June 30, 1998 from 30% of revenues in the comparable three month
period of 1997. For the six months ended June 30, 1998, gross profit was 56%, up
from 27% in the same period of 1997. The increasing margins were due primarily
to the improved manufacturing yields and lower material costs for hardware
<PAGE>
sales, which contributed $5.3 million and $10.8 million to gross margins for the
three and six month periods ended June 30, 1998, respectively. Software margins
contributed $4.1 million and $6.5 million from improved product mix while
Service margins of $2.3 million and $3.8 million were the result of improved
pricing on consulting projects undertaken to support the new license sales.
Research and Development: For the three months ended June 30, 1998,
research and development expenses were $4.3 million compared with $3.2 million
for the same period of 1997, an increase of $1.2 million or 37%. For the first
six months of 1998, research and development expenses were $9.0 million compared
with $5.4 million for the same period of 1997, an increase of $3.6 million or
67%. Research and development expenses were 24% and 21% of revenues for the six
months ended June 30, 1998 and 1997, respectively. The increase in research and
development expenses for the three and six month periods from 1997 to 1998 was
primarily due to the increase in headcount hired to assist in the development of
new and continuing products.
Sales and Marketing: For the three months ended June 30, 1998, sales and
marketing expenses were $4.1 million compared with $2.9 million for the same
period of 1997, an increase of $1.2 million or 42%. For the first six months of
1998, sales and marketing expenses were $7.6 million compared with $4.9 million
for the same period of 1997, an increase of $2.7 million or 55%. Sales and
marketing expenses were 20% and 19% of revenues for the six months ended June
30, 1998 and 1997, respectively. Additional sales personnel and the incremental
costs relating to additional travel and commissions costs associated with the
increased headcount caused the increase in sales and marketing expenses from
1997 to 1998. The Company expects its sales and marketing expenses to increase
in absolute dollars in the foreseeable future as it continues to expand the
scope of its sales and marketing efforts.
General and Administrative: For the three months ended June 30, 1998,
general and administrative expenses were $2.4 million compared with $2.3 million
for the same period of 1997, an increase of $170,000 or 8%. For the first six
months of 1998, general and administrative expenses were $4.4 million compared
with $4.2 million for the comparable period of 1997, an increase of $175,000 or
4%. General and administrative expenses were 12% and 17% of revenues for the six
months ended June 30, 1998 and 1997, respectively. The increase in absolute
dollars for the three and six month periods are due to increased headcount to
support the operational needs of the Company.
Merger Related Costs: As discussed in Note 4 of Notes to Condensed
Consolidated Financial Information, Corsair incurred $4.5 million in merger
related costs resulting from the acquisition of Subscriber Computing, Inc. The
one-time charges included transaction costs, termination benefits for
approximately 20 employees, and redundant facility and other equipment costs
associated with the merger.
Interest Income (Expense), Net: 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 for the three and six months
ended June 30, 1998 was a result of larger average cash investment balances
attributable to the proceeds received from Corsair's initial public offering of
Common Stock completed in July 1997.
Income Taxes: The income tax expense in the three and six months ended
June 30, 1998 represents a provision for estimated income taxes (after
considering all available loss carryforwards for fiscal 1998), while the
comparable periods in 1997 represents minimum state tax liabilities.
Extraordinary Item: The Company incurred a loss on debt extinguishment of
$226,000 associated with paying the principal and interest of $4.8 million of
short-term and long-term notes payable.
<PAGE>
Liquidity and Capital Resources
Corsair has funded its operations through a series of Preferred Stock
private placements, debt financing, and an initial public offering in July 1997.
As of June 30, 1998, Corsair's cash and short-term investments were $56.1
million compared with $63.0 million at December 31, 1997.
Net cash of $2.6 million was used by operations for the first six months
of 1998. This was primarily due to increased levels of accounts receivables from
higher sales volume and lower deferred revenue balances given the timing of
revenue recognition, offset by a decrease in inventory following improved
customer acceptance of hardware products. Net cash of $5.4 million was used in
investing activities, including the net purchase and sale of short-term
investments, and the purchase of property and equipment. Corsair continues to
invest in capital equipment to support its employee and facility growth, its
implementation of new management and accounting systems, and its research and
development activities.
Net cash of $2.3 million was used by financing activities primarily for
the repayment of various debt instruments. Corsair maintained a $3.0 million
equipment term loan facility at prime plus 0.75% (8.5% at June 30, 1998). The
loan facility is available through July 1998 and is secured by any underlying
equipment purchased. As of June 30, 1998, Corsair did not have any borrowings
under the equipment term loan, and any future borrowings would have been repaid
over three years. Corsair did not renew the line following its expiration in
July 1998.
Management has initiated an enterprise-wide program to prepare Corsair's
computer systems and applications for the year 2000. Corsair expects to incur
internal staff costs as well as consulting and other expenses related to
infrastructure and facilities enhancements necessary to prepare the systems for
the year 2000. Corsair expects its year 2000 date conversion project to be
completed on a timely basis. However, there can be no assurance that the systems
of other companies on which Corsair's systems rely also will be timely converted
or that any such failure to convert by another company would not have an adverse
effect on Corsair's systems. Testing and conversion of system applications is
expected to cost approximately $600,000 over the next year. A significant
portion of these costs is not likely to be incremental costs to Corsair, but
rather will represent the redeployment of existing information technology
resources. Accordingly, Corsair does not expect the amounts required to be
expensed over the next three years to have a material effect on its financial
position or results of operations.
Corsair believes that existing sources of liquidity and internally
generated cash, if any, will be sufficient to meet Corsair's projected cash
needs for at least the next 12 months. Corsair 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
Corsair will not require additional financing prior to such date to fund its
operations or possible acquisitions. In addition, Corsair may require additional
financing after such date to fund its operations. There can be no assurance that
any additional financing will be available to Corsair on acceptable terms, or at
all, if and when required by Corsair.
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. Corsair Communications, Inc. and
its subsidiaries ("Corsair") undertake 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.
Corsair Limited Operating History and Lack of Sustained Profitability.
Corsair has only a limited history of significant operations upon which to base
an evaluation of its business and prospects commencing with the first shipment
of its PhonePrint systems in March 1995. Since its incorporation Corsair has
incurred net losses $48.8 million as of June 30, 1998, approximately $39.9
million of which was recorded since January 1995. There can be no assurance that
Corsair's existing revenue levels can be sustained, and past and existing
revenue levels should not be considered indicative of future results or growth.
<PAGE>
Moreover, there can be no assurance that Corsair will be profitable on a
quarterly or annual basis. Operating results for future periods are subject to
numerous uncertainties specified elsewhere herein. Corsair'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 Corsair now competes and may in the future compete.
Corsair's future operating results will depend upon, among other factors: the
demand for PhonePrint; Corsair's ability to introduce successful new products
and product enhancements, including products that are sold to both analog
network carriers and digital network carriers such as PCS and Enhanced
Specialized Mobile Radio ("ESMR") carriers; the level of product and price
competition; the ability of Corsair to expand its international sales; Corsair's
success in expanding distribution channels; the degree to which Corsair
successfully integrates Subscriber Computing, Inc. and the time period during
which integration efforts occur; Corsair's ability to cause the business
conducted by Subscriber Computing, Inc. ("Subscriber") to achieve and sustain
profitability; Corsair's success in attracting and retaining motivated and
qualified personnel; and the ability of Corsair to avoid patent and intellectual
property litigation. If Corsair is not successful in addressing such risks, as
well as the others set forth herein, Corsair's business, operating results and
financial condition will be materially adversely affected.
Dependence on PhonePrint; Dependence on Analog Networks. Prior to the
acquisition of Subscriber, Corsair's revenues were primarily attributable to
PhonePrint, Corsair's cloning fraud prevention system, and Corsair anticipates
that PhonePrint will continue to account for a significant portion of Corsair's
revenues. As a result, Corsair's future operating results will depend on the
demand for and market acceptance of PhonePrint. A relatively small number of
analog network carriers constitute the potential customers for PhonePrint. A
large majority of the analog carriers in the largest U.S. markets have to
varying degrees already implemented cloning fraud solutions, and there can be no
assurance that Corsair will be able to achieve material revenues from the sale
of PhonePrint to remaining potential customers in the U.S. Corsair anticipates
that the demand for cloning fraud solutions in the U.S. will decline in the
future. If not offset by growth in international markets, this trend will have a
material adverse effect on Corsair's business, operating results and financial
condition. 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 international market for cloning fraud solutions will grow as the U.S.
market declines as a result of U.S. analog network carriers having adopted
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
Corsair's business, operating results and financial condition.
All of Corsair's customers for PhonePrint 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. Corsair
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,
Corsair 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. Corsair 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 Corsair's business,
operating results and financial condition.
Dependence on Product Introductions and Product Enhancements. Corsair's
future success depends on the timely introduction and acceptance of new
products, new versions of existing products and product enhancements. However,
there can be no assurance that any new products, new versions of existing
products or product enhancements Corsair attempts to develop will be developed
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successfully or on schedule, or if developed, that they will achieve market
acceptance. In addition, there can be no assurance that Corsair will
successfully execute its strategy of acquiring additional businesses, products
and technologies from third parties. 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. Corsair 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. Furthermore, Corsair has significant product
development efforts underway aimed at developing next versions of CRM,
FraudWatch Pro and PrePay. Any failure to introduce commercially successful new
products, new versions of existing products or product enhancements or any
significant delay in the introduction of such new products, new versions of
existing products or product enhancements would have a material adverse effect
on Corsair's business, operating results and financial condition.
The process of developing new products, new versions of existing 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, Corsair is aware
of significant technical challenges with respect to the phone location product
it is currently attempting to develop. In the past, Corsair has experienced
delays in the introduction of certain product enhancements, and there can be no
assurance that new products, new versions of existing products or product
enhancements will be introduced on schedule or at all. Any new products, new
versions of existing 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, defects will not be found in new products, new
versions of existing 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
Corsair's business, operating results and financial condition.
Fluctuations in Quarterly Financial Results; Lengthy Sales Cycle. Corsair
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
Corsair'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 Corsair and its competitors;
changes in governmental regulations or mandates affecting the wireless
telecommunications industry; technological changes or developments in the
wireless telecommunications industry; the size, product mix and timing of
significant orders; the timing of system revenue; competition and pricing in the
markets in which Corsair competes; the degree to which Corsair successfully
integrates Subscriber and the time period during which integration efforts
occur; Corsair's ability to cause the business conducted by Subscriber to
achieve and sustain profitability; 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; potential reduction in demand in the international markets because of
economic or political conditions in those countries and changes in general
economic conditions. These and other factors could cause Corsair 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 Corsair's costs, including personnel and
facilities costs, any unanticipated shortfall in revenues in any quarter would
have a material adverse impact on Corsair's operating results in that quarter
and would likely result in substantial adverse fluctuations in the price of
Corsair's Common Stock. Accordingly, Corsair 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 Corsair Common Stock.
A carrier's decision to deploy PhonePrint and other products offered by
Corsair 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 Corsair is not able to accurately forecast future
sales of PhonePrint or any of its other products. In addition, purchases of
PhonePrint and certain of Corsair's other products involve testing, integration,
implementation and support requirements. For these and other reasons, the sales
cycle associated with the purchase of PhonePrint and Corsair's other products
typically ranges from three to 18 months and are subject to a number of risks
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over which Corsair 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 Corsair or competitors of new products or product enhancements
or by regulatory developments. Corsair expects that there will be a lengthy
sales cycle with respect to new products, if any, that it may offer in the
future. Because of this lengthy sales cycle and the relatively large size of a
typical order and because Corsair does not recognize revenue on PhonePrint sales
upon shipment if a sales agreement contemplates that Corsair provide testing,
integration or implementation services or contains other contractual acceptance
criteria, if revenues forecasted from a specific customer for a particular
quarter are not realized in that quarter, Corsair's operating results for that
quarter could be materially and adversely affected.
Risks Associated with International Markets. In an effort to offset what
Corsair expects will be declining demand in the U.S. for cloning fraud
solutions, Corsair intends to devote significant marketing and sales efforts
over the next several years to increase its sales of PhonePrint, CRM, FraudWatch
Pro, PrePay and IMR to international customers. This expansion of sales efforts
outside of the U.S. will require significant management attention and financial
resources. Corsair expects that sales outside of the U.S. will account for a
significant portion of the revenues Corsair derives from CRM, FraudWatch Pro,
PrePay and IMR. There can be no assurance that Corsair will be successful in
achieving significant sales of PhonePrint and other products in international
markets. Corsair 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 Corsair may offer. For example, Corsair 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. Corsair is not aware of any corresponding regulatory
requirement in any foreign country.
Corsair's international sales may be denominated in foreign or U.S.
currencies. Corsair 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 Corsair's international sales that are
U.S. dollar-denominated, such a decrease could make Corsair's products less
price-competitive. Also, there can be no assurance that the current state of the
Asian economy will not cause Corsair's sales revenue to decline. Additional
risks inherent in Corsair's international business activities include changes in
regulatory requirements, the costs and risks of localizing and supporting
systems and software 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. Product service and support is
generally more complicated and expensive with respect to products sold in
international markets. Corsair 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, Corsair 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 Corsair's business, operating results and financial condition.
Integration of Recent Acquisition. Corsair Communications, Inc. recently
acquired Subscriber by merging a subsidiary with Subscriber. As a result,
Corsair will now be significantly more complex and diverse than it was prior to
the acquisition.. Following this acquisition, to achieve optimal synergies,
Corsair will need to successfully integrate and streamline overlapping functions
and control expenditures resulting from its respective business operations
located in Palo Alto and Irvine, California. In addition, Corsair must now
integrate different systems and procedures in certain areas of operations. The
effort to reconcile systems and procedures required and the impact of success or
failure may be material. There can be no assurance that the process of
integrating the two companies can be effectively managed to achieve desired
results. Any delay or failure in integrating the two companies could have a
material adverse effect on Corsair's business, operating results and financial
condition.
Potential Acquisitions. Corsair has in the past evaluated and expects in
the future to pursue acquisitions of businesses, products or technologies that
complement Corsair'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 Corsair's business, operating results and
<PAGE>
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 Corsair 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 Corsair would
be successful in completing any acquisition. Corsair does not currently have any
agreement or understanding with regard to any acquisition.
Highly Competitive Industry. The market for 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
may be capable of developing and offering products and services competitive with
new products, if any, that Corsair 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 Corsair, and could make
it more difficult for Corsair to offer a cost-effective alternative to a
wireless telecommunications carrier's own capabilities. Corsair 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 Corsair is
developing, and Corsair anticipates the entrance of new competitors in the
wireless telecommunications carrier service industry in the future. Corsair'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 market for PhonePrint is intensely competitive. Corsair 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, Corsair 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, Corsair expects that it is unlikely that it would be able to sell
PhonePrint to that carrier in the same markets in which the competitor's
products have been deployed.
Corsair'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. Corsair is aware of numerous companies, including
GTE Telecommunications Services, Inc. ("GTE"), Authentix Network, Inc.,
Lightbridge, Inc. ("Lightbridge"), Systems/Link Corporation ("Systems/Link"),
International Business Machines Corporation ("IBM") and Digital Equipment Corp.
("DEC") 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
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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 radiowave form becomes so
small that it is difficult for PhonePrint to identify a clone. Any currently
available alternative technology or any new technology may render Corsair's
products obsolete or significantly reduce the market share afforded to RF-based
cloning fraud prevention systems like PhonePrint.
The markets for CRM, FraudWatch Pro, PrePay and IMR are intensely and
increasingly competitive, subject to rapid change and significantly affected by
new product introductions and other market activities of industry participants.
A large number of companies currently offer one or more products that compete
directly with CRM, FraudWatch Pro, PrePay and IMR. For example, Corsair competes
directly with In-Touch Management Systems, Inc. and Keenan Systems Corporation
in paging billing systems; with AG Communications Systems, National
Telemanagement Corporation, Systems/Link, GTE, Glenayre Technologies, Inc.,
Brite Voice Systems, Inc. and Boston Communications Group, Inc. for prepaid
billing; with GTE, Lightbridge, Systems/Link, IBM, DEC and Hewlett-Packard in
real time fraud profiler systems; with Metapath Software Corp. and ACE*Comm
Corporation for mediation systems; and with Daleen Technologies, Inc., Keenan
Systems Corporation, Sema Group Telecoms, Inc., LHS Group, Inc. and AMDOCS, Inc.
for its suite billing products. Corsair also competes with companies offering a
breadth of software knowledge applicable to a variety of industries, including
communications businesses. Such companies include Andersen Consulting and
Electronic Data Systems Corporation. Several of these competitors have
significantly greater financial, technical, marketing and other resources,
significantly greater name recognition and a larger installed base of customers
than Corsair. As a result, Corsair's competitors may be able to adapt more
quickly to new or emerging technologies and changes in subscriber requirements
or may be able to devote greater resources to the promotion and sale of their
products and services.
Corsair 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 Corsair'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 Corsair's competitors and potential
competitors have significantly greater financial, marketing, technical and other
competitive resources than Corsair's. As a result, Corsair'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,
Corsair will need to continue to invest substantial resources in engineering,
research and development and sales and marketing. There can be no assurance that
Corsair will have sufficient resources to make such investments or that it will
be able to make the technological advances necessary to remain competitive.
Accordingly, there can be no assurance that Corsair will be able to compete
successfully with respect to new products, if any, it offers in the future.
Customer Concentration. To date, a very significant portion of Corsair's
revenues in any particular period has been attributable to a limited number of
customers. Any failure to capture a significant share of those customers could
have a material adverse effect on Corsair's business, operating results and
financial condition. Corsair 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 Corsair's agreements with its PhonePrint 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. The terms of Corsair's agreements
for its other products do not contain obligations for the customer to purchase
additional products. Therefore, there can be no assurance that any of Corsair's
current customers will generate significant revenues in future periods.
Uncertainty Regarding Patents and Protection of Proprietary Technology;
Risks of Future Litigation. Corsair relies on a combination of patent, trade
secret, copyright and trademark protection and nondisclosure agreements to
protect its proprietary rights. Corsair's success will depend in large part on
its ability 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 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
or that, if patents do issue, the claims allowed would be sufficiently broad to
<PAGE>
protect the applicable technology. In addition, there can be no assurance that
any issued patents owned or licensed will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages. Furthermore, the laws of certain countries in which Corsair sells
its respective products do not protect software and intellectual property rights
to the same extent as do the laws of the U.S.
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 Corsair. Corsair is
aware of patents granted to third parties that relate to potential products
currently being developed. Corsair 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 Corsair will
be able to do so. There can be no assurance that Corsair is aware of all patents
or patent applications that may materially affect its 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 in the future or that any such assertions will not result in
costly litigation or require Corsair 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 Corsair, if at all.
Furthermore, parties making such claims may be able to obtain injunctive or
other equitable relief that could effectively block Corsair'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 Corsair's business, operating
results or financial condition.
Corsair 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 Corsair's proprietary technology or disclose such
technology or that Corsair 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 Corsair. Corsair also relies on
confidentiality agreements with its employees, vendors, consultants and
customers to protect proprietary technology. There can be no assurance that
these agreements will not be breached, that there would be adequate remedies for
any breach or that 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
Corsair's business, operating results and financial condition. Moreover, the
laws of certain countries in which Corsair sells its respective products do not
protect software and intellectual property rights to the same extent as do the
laws of the U.S. Unauthorized copying or misuse of products could have a
material adverse effect on Corsair's business, operating results and financial
condition.
Dependence on Third-Party Products and Services; Sole or Limited Sources
of Supply. Corsair relies to a substantial extent on outside vendors to
manufacture many of the components and subassemblies used in many of its
products, including PhonePrint, some of which are obtained from a single
supplier or a limited group of suppliers. Corsair'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, Corsair has experienced delays in receiving
materials from vendors, sometimes resulting in delays in the assembly of
products by Corsair. Such delays, or other significant vendor or supply quality
issues, may occur in the future, which could result in a material adverse effect
on Corsair'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 Corsair to seek alternative sources of
supply or to manufacture such components internally could delay the shipment of
products, increase cost of goods sold and have a material adverse effect on
Corsair's business, operating results and financial condition. In addition, from
time to time, Corsair must also rely upon third parties to develop and introduce
components and products to enable Corsair, in turn, to develop new products and
<PAGE>
product enhancements on a timely and cost-effective basis. There can be no
assurance that Corsair will be able to obtain access in a timely manner to
third-party products and development services necessary to enable Corsair to
develop and introduce new and enhanced products, that Corsair will obtain
third-party products and development services on commercially reasonable terms
or that Corsair will be able to replace third-party products in the event such
products become unavailable, obsolete or incompatible with future versions of
Corsair's products. The absence of, or any significant delay in, the replacement
of third-party products could have a material adverse effect on Corsair's
business, operating results and financial condition.
Dependence on Personnel. The success of Corsair is dependent, in part, on
its ability to attract and retain highly qualified personnel. Corsair'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 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 Corsair's
senior management team or current employees, particularly to competitors, could
materially adversely affect Corsair's business, operating results or financial
condition. There can be no assurance that Corsair will be successful in hiring
or retaining requisite personnel. None of Corsair's employees has entered into
employment agreements with Corsair, and Corsair does not have any key-person
life insurance covering the lives of any members of its senior management team.
Management of Growth. Corsair has rapidly and significantly expanded its
operations over the past few years. The number of Corsair employees has grown
from 193 on December 31, 1995 to 289 on June 30, 1998. Such growth has placed,
and, if sustained, will continue to place, significant demands on 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 Corsair's business.
Corsair'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 Corsair 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 Corsair's business, results of operations and financial
condition.
Government Regulation and Legal Uncertainties. While most of Corsair's
operations are not directly regulated, 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 Corsair's products or impede Corsair's
ability to offer competitive products and services to the wireless
telecommunications industry or otherwise have a material adverse effect on
Corsair's business, financial condition and results of operations. Recently
enacted legislation, including the Telecommunications Act of 1996, that
deregulates 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
Corsair, decrease demand for Corsair's products, increase Corsair's cost of
doing business or otherwise have a material adverse effect on Corsair's
business, operating results and financial condition. The Telecommunications Act
of 1996 contains several provisions that may bear directly on Corsair'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 Corsair. This could require Corsair 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 Corsair'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, Corsair cannot at this time predict the
extent to which the Telecommunications Act of 1996 will affect its current and
potential customers or ultimately affect Corsair'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, Corsair's business, operating results and financial condition could be
materially and adversely affected.
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Dependence on Growth of Wireless Telecommunications Industry. Corsair's
future financial performance will depend in part on the number of carriers
seeking third-party solutions. 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 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 Corsair'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 Corsair's business, operating results and financial
condition. Corsair currently does not have liability insurance to protect
against these risks and there can be no assurance that such insurance will be
available to Corsair on commercially reasonable terms, or at all. In addition,
if any carrier using PhonePrint encounters material performance problems,
Corsair's reputation and its business, operating results and financial condition
could be materially adversely affected.
Risk of Product Defects. Software products such as CRM, FraudWatchPro and
PrePay frequently contain errors or failures, especially when first introduced
or when new versions are released. Corsair could, in the future, lose revenues
as a result of software errors or defects. Corsair's products are intended for
use in sales applications that may be critical to a customer's business. As a
result, Corsair expects that its customers and potential customers have a
greater sensitivity to product defects than the market for software products
generally. There can be no assurance that, despite testing by Corsair and by
current and potential customers, errors will not be found in new products or
releases after commencement of commercial shipments, resulting in loss of
revenue or delay in market acceptance, diversion of development resources,
damage to Corsair's reputation, or increased service and warranty costs, any of
which could have a material adverse effect on Corsair's business, operating
results and financial condition.
Year 2000 Compliance. Corsair's products use and are dependent upon
certain internally developed and third party software programs. Corsair has
initiated a review and assessment of all hardware and software used in their
respective products to confirm that they will function properly in the year
2000. With respect to software developed internally, the results of that
evaluation to date have revealed certain source codes that are unable to
appropriately interpret the upcoming calendar year 2000, and Corsair is working
diligently to upgrade programs to make them capable of processing data
incorporating year 2000 dates without material errors or interruptions. With
respect to third party software incorporated in products, all vendors whose
software is incorporated in PhonePrint have indicated that their software is or
will be year 2000 compliant. Evaluation of year 2000 issues is continuing, and
there can be no assurance that additional issues, not presently known to
Corsair, will not be discovered which could present a material risk to the
function of Corsair's products and have a material adverse effect on Corsair's
business, operating results and financial condition.
Dependence on Distributors. PhonePrint is currently marketed primarily
through Corsair's direct sales efforts. Corsair has entered into distribution
and similar agreements with respect to PhonePrint with Motorola, Inc., Ericsson
Radio Systems AB ("Ericsson") and Aurora Wireless Technologies, Ltd. ("Aurora")
and sales referral agreements with Lucent Technologies, Inc. ("Lucent") and
Sumitomo Corporation of America. Corsair has entered into distribution
agreements with a number of distributors with respect to certain of its other
products, including Ericsson, Daewoo Information Systems Company, Groupe
Bull-Integris and Aurora. In addition, Corsair has relationships with a number
of third party integrators and may rely on these integrators to a greater extent
in the future. Corsair seeks to pursue distribution agreements and other forms
of sales and marketing arrangements with other companies and Corsair believes
that its dependence on distributors and these other sales and marketing
relationships will increase in the future, both with respect to PhonePrint and
to other products. Generally, there are no minimum purchase obligations
<PAGE>
applicable to any existing distributor or other sales and marketing partners and
Corsair does not expect to have any guarantees of continuing orders. There can
be no assurance that any existing or future distributors or other sales and
marketing partners will not become competitors of Corsair with respect to
current products or any future product. Any failure by Corsair's existing and
future distributors or other sales and marketing partners to generate
significant revenues could have a material adverse effect on Corsair's business,
operating results and financial condition.
Future Capital Requirements. Corsair's future capital requirements will
depend upon many factors, including the commercial success of PhonePrint and
Corsair's other products, the timing and success of new product introductions,
if any, the progress of Corsair's research and development efforts, its results
of operations, the status of competitive products, the degree to which Corsair
successfully integrates Subscriber and the time period during which integration
efforts occur, Corsair's ability to cause the business conducted by Subscriber
to achieve and sustain profitability, and the potential acquisition of
businesses, technologies or assets. Corsair believes that combination of
existing sources of liquidity and internally generated cash will be sufficient
to meet Corsair's projected cash needs for at least the next 12 months. There
can be no assurance, however, that Corsair will not require additional financing
prior to such date to fund its operations. In addition, Corsair may require
additional financing after such date to fund its operations. There can be no
assurance that any additional financing will be available to Corsair on
acceptable terms, or at all, when required. If additional funds are raised by
issuing equity securities, further dilution to the existing stockholders will
result. If adequate funds are not available, Corsair 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 Corsair
to relinquish rights to certain of its technologies or potential products or
other assets that Corsair would not otherwise relinquish. Accordingly, the
inability to obtain such financing could have a material adverse effect on
Corsair's business, operating results and financial condition.
Volatility of Stock Price. The market price of Corsair's 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 and Corsair's other products, new products or new
contracts by Corsair or its competitors, actual or anticipated variations in
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, economic or
political conditions in foreign countries and general market conditions. As a
result, Corsair expects that from time to time 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 Corsair Common
Stock. The realization of any of the risks described in these "Risks and
Uncertainties" could have a dramatic and adverse impact on the market price of
Corsair 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 Corsair 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 Corsair, could result in substantial costs and a diversion of
management attention and resources, which would have a material adverse effect
on Corsair's business, operating results and financial conditions.
Antitakeover Effects of Charter, Bylaws and Delaware Law. Corsair's
Restated Certificate of Incorporation authorizes the Corsair 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 Corsair 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 such 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 Corsair. Corsair's Restated Bylaws provide that Corsair'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 Corsair, 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 Corsair Common Stock.
<PAGE>
PART II - OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
From the effective date of Corsair's initial registration statement on
Form S-1 on July 29, 1997 (Registration No. 333-28519) to June 30, 1998, the
approximate use of the net offering proceeds were $10.5 million for the
repayment of indebtedness, $4.6 million for capital expenditures, and $250,000
for acquisition costs paid through June 30, 1998. The remaining balance from the
net proceeds of $39.1 million have been invested in short-term investments,
pending future use. All payments were direct or indirect payments to
third-parties.
Item 4. Submission of Matters to a Vote of Security Holders
I. 1998 Annual Meeting of Stockholders held on June 4, 1998
a. The 1998 Annual Meeting of Stockholders of Corsair, Inc. (the "Annual
Meeting") was held on June 4, 1998. The holders of 8,749,911 of the
13,715,538 shares of the Company's Common Stock outstanding on April 6,
1998, the record date for the Annual Meeting (approximately 63%), were
present at the Annual Meeting in person or by proxy.
b. At the Annual Meeting, the seven individuals listed below were duly
nominated and properly elected as Directors of the Company. Stephen M.
Dow and Roland L. Robertson were elected to serve until the 1999 annual
meeting of stockholders or until their successors are elected and have
qualified. Peter L.S. Currie David H. Ring were elected to serve
until the 2000 annual meeting of stockholders or until their successors
are elected and have qualified. Kevin R. Compton and Mary Ann Byrnes
were elected to serve until the 2001 annual meeting of stockholders or
until their successors are elected and have qualified. The number of
votes cast for and withheld with respect to each nominee for office,
as well as broker non-votes are indicated below:
<TABLE>
<CAPTION>
For Against/Withheld Broker Non-Votes
--------------- -------------- -----------------
<S> <C> <C> <C>
Mary Ann Byrnes 8,740,793 9,118 0
Kevin R. Compton 8,740,793 9,118 0
Peter L.S. Currie 8,740,793 9,118 0
Stephen M. Dow 8,748,495 1,416 0
David H. Ring 8,740,693 9,218 0
Roland L. Robertson 8,748,395 1,516 0
</TABLE>
At the Annual Meeting, a proposal to ratify the appointment of KPMG Peat
Marwick LLP as the Company's independent auditors for fiscal 1998 was
approved. The number of votes cast for, against and to abstain on the
proposal, as well as broker non-votes, are indicated below:
<TABLE>
<CAPTION>
For Against Abstentions Broker
Non-Votes
------------------- --------------- ------------------- ---------------
<S><C> <C> <C> <C>
8,745,756 3,190 965 0
</TABLE>
II. Special Meeting of Stockholders held on June 22, 1998
a. A Special Meeting of Stockholders of Corsair Communications, Inc. (the
"Special Meeting") was held on June 4, 1998. The holders of 10,909,136 of
the 13,743,423 shares of the Company's Common Stock outstanding on May 15,
1998, the record date for the Special Meeting (approximately 79%), were
present at the Special Meeting in person or by proxy.
b. At the Special Meeting, a proposal to approve and adopt the Agreement
and Plan or Reorganization dated April 2, 1998, by and among the
Company, Anteater Acquisition Corp. ("Merger Sub"), and Subscriber
Computing, Inc. ("Subscriber"), to approve the Company's acquisition of
Subscriber through a merger of Merger Sub with and into Subscriber,
with Subscriber being the surviving corporation and becoming a
wholly-owned subsidiary of the Company and to authorize the issuance of
the Company's Common Stock, as consideration for its acquisition of
Subscriber was approved. The number of votes cast for, against and to
abstain on the proposal, as well as broker non-votes, are indicated
below
<TABLE>
<CAPTION>
For Against Abstentions Broker Non-Votes
------------------ --------------- ------------------- -------------------
<S><C> <C> <C> <C>
10,901,317 3,693 4,126 0
</TABLE>
At the Special Meeting, a proposal to approve and adopt an amendment to
the Company's 1997 Stock Incentive Plan to increase the authorized number
of shares of the Company's Common Stock available for issuance under such
plan from 1,337,633 to 2,587,633 was approved. The number of votes cast
for, against and to abstain on the proposal, as well as broker non-votes,
are indicated below:
<TABLE>
<CAPTION>
For Against Abstentions Broker Non-Votes
------------------ --------------- ------------------- -------------------
<S><C> <C> <C> <C>
9,442,393 1,460,047 6,696 0
</TABLE>
At the Special Meeting, a proposal to approve and adopt an amendment to
the Company's 1997 Employee Stock Purchase Plan to increase the authorized
number of shares of the Company's Common Stock available for issuance
under such plan from 167,667 to 266,667 was approved. The number of votes
cast for, against and to abstain on the proposal, as well as broker
non-votes, are indicated below:
<TABLE>
<CAPTION>
For Against Abstentions Broker Non-Votes
------------------ --------------- ------------------- -------------------
<S><C> <C> <C> <C>
10,888,690 13,850 6,596 0
</TABLE>
Item 5. Other Information.
On August 4, 1998, Roland L. Robertson resigned as a member of the
registrant's board of directors. Mr. Robertson's resignation was not a
result of any dispute or disagreement with the registrant.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
3.1 Amended and Restated Certificate of Incorporation of the Company
previously filed as Exhibit 3.2 on Form S-1, File No. 333-28519,
and incorporated herein by reference.
3.2 Restated Bylaws of the Company previously filed as Exhibit 3.4
on Form S-1, File No. 333-28519, and incorporated herein by
reference.
4.1 Form of Certificate for Common Stock previously filed asExhibit 4.1on
Form S-1, File No. 333-28519, and incorporated herein by reference.
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: August 14 , 1998 By: /s/ Martin J. Silver
------------------ --------------------
Martin J. Silver
Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,616
<SECURITIES> 49,435
<RECEIVABLES> 10,589
<ALLOWANCES> 1,894
<INVENTORY> 5,254
<CURRENT-ASSETS> 72,264
<PP&E> 9,151
<DEPRECIATION> 1,420
<TOTAL-ASSETS> 81,654
<CURRENT-LIABILITIES> 24,596
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 54,717
<TOTAL-LIABILITY-AND-EQUITY> 81,654
<SALES> 29,263
<TOTAL-REVENUES> 37,561
<CGS> 12,000
<TOTAL-COSTS> 16,494
<OTHER-EXPENSES> 25,461
<LOSS-PROVISION> 750
<INTEREST-EXPENSE> (1,671)
<INCOME-PRETAX> (2,723)
<INCOME-TAX> 364
<INCOME-CONTINUING> (3,087)
<DISCONTINUED> 0
<EXTRAORDINARY> (226)
<CHANGES> 0
<NET-INCOME> (3,313)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
