24
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 March 31, 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; (2) [ ] Yes [ X ] No
The number of shares of the Registrant's Common Stock outstanding as
of April 30, 1998 was 13,733,073.
<PAGE>
INDEX
Page No.
Part I. Financial Information
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of March 31, 1998
and December 31, 1997..............................................3
Condensed Statements of Operations for the three months
ended March 31, 1998 and 1997 .....................................4
Condensed Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 .....................................5
Notes to Condensed Financial Statements ............................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..............................7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ..................................20
Signatures .................................................................21
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
CORSAIR COMUNICATIONS, INC.
Unaudited Condensed Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ----------
<S> <C> <C>
Assets
Cash and cash equivalents .............................................................. $ 11,433 $ 15,426
Short-term investments ................................................................. 49,121 43,734
Trade accounts receivable, net ......................................................... 7,616 3,836
Inventories, net ....................................................................... 3,861 3,618
Evaluation inventory ................................................................... 2,873 4,590
Prepaids and other ..................................................................... 1,281 923
-------- --------
Total current assets ................................................................ $ 76,185 $ 72,127
Property and equipment, net ............................................................ 3,820 3,511
Other assets ........................................................................... 1,717 2,039
======== ========
Total assets ........................................................................ $ 81,722 $ 77,677
======== ========
Liabilities and Stockholders' Equity
Accounts payable ....................................................................... $ 992 $ 696
Accrued expenses ....................................................................... 6,250 5,790
Short-term obligations ................................................................. 440 437
Deferred revenue ....................................................................... 10,481 10,369
-------- --------
Total current liabilities ........................................................... 18,163 17,292
Long-term obligations .................................................................. 328 438
-------- --------
Total liabilities ................................................................... 18,491 17,730
-------- --------
Common stock,$.001 par value; 20,000,000 shares authorized;
13,714,475 and 13,635,440 shares issued and outstanding
at March 31, 1998 and December 31, 1997, respectively ............................... 14 14
Note receivable from stockholder ....................................................... (100) (136)
Additional paid-in capital ............................................................. 89,382 89,005
Deferred compensation .................................................................. (533) (648)
Accumulated deficit .................................................................... (25,532) (28,288)
-------- --------
Total stockholders' equity ......................................................... 63,231 59,947
-------- --------
Total liabilities and stockholders' equity ......................................... $ 81,722 $ 77,677
======== ========
</TABLE>
See accompanying notes to Condensed Financial Statements
<PAGE>
CORSAIR COMUNICATIONS, INC.
Unaudited Condensed Statements of Operations
(In thousands, except share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1998 1997
--------- ----------
<S> <C> <C>
Revenues:
System revenue ............................................................... $12,965 $ 8,167
Service revenue .............................................................. 2,270 929
------- -------
Total revenues ........................................................... 15,235 9,096
Cost of revenues:
System revenue costs ......................................................... 6,038 7,480
Service revenue costs ........................................................ 1,188 829
------- -------
Total cost of revenues ................................................... 7,226 8,309
------- -------
Gross profit ...................................................................... 8,009 787
Operating costs and expenses:
Research and development ..................................................... 2,194 1,382
Sales and marketing .......................................................... 2,363 1,548
General and administrative ................................................... 1,293 991
------- -------
Total operating costs and expenses ................................................ 5,850 3,921
------- -------
Operating income (loss) ...................................................... 2,159 (3,134)
Interest income (expense), net .................................................... 851 (3)
------- -------
Income (loss) before income taxes ......................................... 3,010 (3,137)
Income Taxes ...................................................................... 254 3
------- -------
Net income (loss) ................................................................. $ 2,756 $(3,140)
======= =======
Basic net income (loss) per share data:
Basic net income (loss) per share ......................................... $ 0.20 $ (3.08)
======= =======
Shares used in per share calculation ...................................... 13,672 1,019
======= =======
Diluted net income (loss) per share data:
Diluted income (loss) per share ........................................... $ 0.19 $ (3.08)
======= =======
Shares used in per share calculations ..................................... 14,354 1,019
======= =======
</TABLE>
See accompanying notes to Condensed Financial Statements
<PAGE>
CORSAIR COMMUNICATIONS, INC.
Unaudited Condensed Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................................................... $ 2,756 $ (3,140)
Adjustments to reconcile net loss to net cash provided by
(used in)operating activities:
Depreciation and amortization ......................................................... 706 316
Amortization of deferred compensation ................................................. 115 85
Loss on disposition of fixed assets ................................................... -- 100
Changes in operating assets and liabilities:
Trade accounts receivable ............................................................. (3,780) (4,341)
Inventories ........................................................................... 1,474 (2,147)
Prepaid expenses and other assets ..................................................... (380) (512)
Accounts payable and accrued expenses ................................................. 756 (1,443)
Deferred revenue ...................................................................... 112 5,126
-------- --------
Net cash provided by (used in) operating activities .............................. 1,759 (5,956)
-------- --------
Cash flows from investing activities:
Purchase of short-term investments ........................................................ (8,967) (6,474)
Proceeds from sales and maturities of short-term investments .............................. 3,580 1,973
Purchases of property and equipment ....................................................... (743) (70)
-------- --------
Net cash used in investing activities ................................................. (6,130) (4,571)
-------- --------
Cash flows from financing activities:
Proceeds from sale of preferred stock, net of costs ....................................... -- 2,997
Proceeds from stock options and purchase plans ............................................ 377 296
Payments on note payable .................................................................. -- (330)
Proceeds from note receivable from stockholder ......................................... 108 --
Principal payment on capital lease ........................................................ (107) (75)
-------- --------
Net cash provided by financing activities ............................................. 378 2,888
-------- --------
Net decrease in cash and cash equivalents ................................................. (3,993) (7,639)
Cash and cash equivalents, beginning of period ............................................ 15,426 17,052
======== ========
Cash and cash equivalents, end of period .................................................. $(11,433) $ (9,413)
======== ========
Supplemental disclosures of cash flow information: Cash paid during the period:
Interest .............................................................................. $ 16 $ 218
======== ========
Income taxes .......................................................................... $ 13 $ 3
======== ========
Non-cash financing and investing activities:
Assets acquired through capital lease ..................................................... $ -- $ 168
======== ========
Deferred compensation relating to stock option grants ..................................... $ -- $ 1,093
======== ========
</TABLE>
See accompanying notes to Condensed Financial Statements
<PAGE>
CORSAIR COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL INFORMATION
(Information as of and for the three months
ended March 31, 1998and 1997 is unaudited)
1. Basis of Presentation
The accompanying unaudited 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. Operating results for the periods presented are not necessarily
indicative of the results that may be expected for any future periods.
These condensed financial statements should be read in conjunction with the
audited financial statements as of December 31, 1996 and 1997, and for each
of the years in the three-year period ended December 31, 1997, including
notes thereto, incorporated by reference into Corsair's Annual Report on
Form 10-K for the year ended December 31, 1997.
2. 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.
The following tables set forth the computations of shares and net
income (loss) used in the calculation of basic and diluted net income
(loss) per share for the quarters ended March 31, 1998, and 1997 (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Basic net income (loss) per share data:
Net income (loss) ............................................................. $ 2,756 $(3,140)
=========== =======
Actual weighted average common shares outstanding for the period ................... 13,672 1,019
=========== =======
Basic net income (loss) per share .................................................. $ 0.20 $ (3.08)
=========== =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Diluted net income (loss) per share data:
Net income (loss) ................................................................. $ 2,756 $(3,140)
======= =======
Actual weighted average common shares outstanding for the period ....................... 13,672 1,019
Weighted average number of common shares issuable upon exercise of
dilutive options and warrants .......................................................... 682 --
======= =======
Shares used in per share calculations .................................................. 14,354 1,019
======= =======
Diluted net income (loss) per share .................................................... $ 0.19 $ (3.08)
======= =======
</TABLE>
<PAGE>
3. Inventories
Inventories are stated at the lower of cost or market and are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- ----------
<S> <C> <C>
Raw materials ..................................................... $2,007 $1,479
Work in progress .................................................. 505 189
Finished goods .................................................... 1,349 1,950
====== ======
$3,861 $3,618
====== ======
</TABLE>
4. Comprehensive Income
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).
5. Subsequent Event
On April 2, 1998, Corsair announced that it had entered into an
agreement to acquire Subscriber Computing, Inc. ("Subscriber"), a privately
held supplier of software systems to the wireless telecommunications
industry, through a merger (the "Merger") in which Subscriber would be
merged into a wholly-owned subsidiary of Corsair. Corsair has agreed to
issue to shareholders of Subscriber shares of Corsair common stock valued
at approximately $70 million and the combined entity will pay approximately
$2.3 million for expenses incurred in connection with the acquisition. The
transaction is expected to be accounted for as a pooling of interests upon
Corsair's expected completion of the acquisition in the second quarter of
1998, subject to shareholder approval.
<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 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. Corsair 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, Corsair'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, Corsair generated
revenues of $7.6 million based upon sales of PhonePrint to two customers. In
1996, Corsair generated revenues of $19.6 million based upon sales of PhonePrint
to nine customers. In 1997, Corsair generated revenues of $47.8 million based
upon sales of PhonePrint to twenty-three customers.
To date, all of Corsair's revenues have been attributable to
PhonePrint, and Corsair 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 Corsair's revenues at least through
the end of 1998. 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 Corsair
anticipates that the demand for cloning fraud solutions in the U.S. has begun to
decline and will continue to decline in the future. If not offset by growth in
international markets, this trend could also occur in international markets. To
date, Corsair has conducted a limited number of deployments of PhonePrint
systems internationally. 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 to international customers and intends to
pursue acquisitions of business, products or technologies that complement
Corsair's business.
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 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). 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 Corsair's test and assembly operation, materials
purchased from Corsair'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.
<PAGE>
Corsair's gross margin has varied significantly in the past and may
vary significantly in the future, depending on the mix of services and systems.
Corsair'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, Corsair's operating
results will be affected by the mix of hardware units, software licenses, and
service fees recognized during the period.
Corsair 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. Corsair has
entered into sales referral agreements with Lucent Technologies, Inc. and
Sumitomo Corp. of America. Corsair's gross margin will also vary depending on
the mix of direct sales and sales through distribution channels and sales
referral arrangements.
Corsair continues to make efforts to achieve profitability by
increasing sales volume, decreasing costs of goods sold, and through certain
other measures. While Corsair has certain programs in place intended to reduce
the costs of certain components of the PhonePrint system, Corsair expects that
its operating expenses will continue to increase in the foreseeable future. As a
result, there can be no assurance that Corsair will maintain or achieve
sustained profitability.
Results of Operations-Three Months Ended March 31, 1998
Revenues. For the three months ended March 31, 1998, total revenues
were $15.2 million, compared with $9.1 million for the comparable 1997 period.
This increase resulted primarily from an increase in sales of PhonePrint
systems. System revenue was $13.0 million for the three months ended March 31,
1998, compared with $8.2 million for the comparable 1997 period. Service revenue
was $2.3 million for the three months ended March 31, 1998, compared with
$929,000 for the comparable 1997 period. The increase in service revenue was
attributable to growth in the installed base of PhonePrint units covered by
service contracts and additional revenue attributable to Corsair's PhonePrint
Roaming Network service.
Gross Profit. Gross profit increased to $8.0 million in the three
months ended March 31, 1998 from a gross profit of $787,000 in the comparable
1997 period. The increase in gross profit was due primarily to system revenue
which contributed $6.9 million in gross profit for the three months ended March
31, 1998 as compared to gross profit of $687,000 in the comparable 1997 period.
Service revenue gross profit for the three months ended March 31, 1998 improved
to $1.1 million as compared to a gross profit of $100,000 in the comparable 1997
period. In the three months ended March 31, 1998 , total gross margin was 52.6%
consisting of 53.4% system gross margin and 47.7% service gross margin.
Research and Development. Research and development expenses were $2.2
million, or 14.4% of total revenues, for the three months ended March 31, 1998,
compared with $1.4 million for the comparable 1997 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 $2.4 million, or
15.5% of total revenues, during the three months ended March 31, 1998, compared
with $1.5 million for the comparable 1997 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. Corsair 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 $1.3 million or 8.5% of total revenues, in the three months ended
March 31, 1998, compared with $991,000 for the comparable 1997 period. This
increase in expenditures was due primarily to higher personnel expenses related
to increased staffing.
<PAGE>
Interest Income (Expense), Net. Net interest income was $851,000 in the
three months ended March 31, 1998 as compared to net interest expense of $3,000
in the comparable 1997 period. Net interest income and expense consists of
interest income from Corsair's cash and short-term investments, net of interest
expense on Corsair'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 Corsair's initial public offering of
Common Stock completed in July 1997.
Income Taxes. The income tax expense in the three months ended March
31, 1998 represents a provision of 8% of the income before income taxes, while
the comparable period in 1997 represents minimum state tax liabilities.
Liquidity and Capital Resources
Corsair has funded its operations from inception primarily through a
series of Preferred Stock private placement, debt financings, and an initial
public offering. From its incorporation through March 31, 1998, Corsair
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, Corsair completed its initial
public offering generating $39.1 million of net proceeds. At March 31, 1998,
Corsair had cash and cash equivalents of approximately $11.4 million and
short-term investments of approximately $49.1 million.
In June 1997, Corsair signed a loan and security agreement, which made
available a $3.0 million equipment term loan facility at prime plus 0.75% (9.5%
at March 31, 1998). The loan facility is available through July 1998 and is
secured by any underlying equipment purchased. As of March 31, 1998, Corsair did
not have any borrowings under the equipment term loan, and any future borrowings
will be repaid over three years.
Corsair's operating activities generated cash of $1.8 million for the
three months ended March 31, 1998. The improvement in 1998 as compared to 1997
was due primarily to improved operating results and lower inventory
requirements.
Corsair's investing activities used cash of $6.1 million for the three
months ended March 31, 1998. Net cash of $5.4 million was used for purchasing
short-term investments, and cash of $743,000 was used for the purchase of
property and equipment, primarily computer hardware and software.
Corsair's financing activities generated cash of $378,000 for the three
months ended March 31, 1998. In the three months ended March 31, 1998, cash
provided by financing activities was primarily from the purchase of Corsair's
stock by participants of the Employee Stock Purchase Plan.
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
proportion of these costs are 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.
On April 2, 1998, Corsair announced that it had entered into an
agreement to acquire Subscriber Computing, Inc. ("Subscriber"), a privately held
supplier of software systems to the wireless telecommunications industry,
through a merger (the "Merger") in which Subscriber would be merged into a
wholly-owned subsidiary of Corsair. Corsair has agreed to issue to shareholders
<PAGE>
of Subscriber shares of Corsair common stock valued at approximately $70 million
and the combined entity will pay approximately $2.3 million for expenses
incurred in connection with the acquisition. The transaction is expected to be
accounted for as a pooling of interests upon Corsair's expected completion of
the acquisition in the second quarter of 1998, subject to shareholder approval.
Upon completion of the Merger, Subscriber would be a wholly-owned subsidiary of
Corsair, and the combination of Corsair and Subscriber that will exist following
the Merger is referred to herein as the "combined company."
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 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.
If the Merger with Subscriber is not completed, the risks and
uncertainties relating to Subscriber set forth herein will not be applicable to
Corsair. See "No Assurance that the Merger will be Completed".
Risks Relating to the Merger
No Assurance that Businesses Can Be Successfully Combined. The combined
company will be significantly more complex and diverse than either Subscriber or
Corsair prior to the combination. Following the Merger, to achieve optimal
synergies, the combined company 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. Some
Subscriber employees, including officers of Subscriber, will leave and others
may leave if they find new assignments unattractive or unacceptable. These
departures may create operating difficulties and could adversely affect morale
and operations at Subscriber for some period of time following the Merger.
Although specific areas of reduction have not been defined, it is likely that
reductions in force will occur in areas for which Corsair and Subscriber have
overlapping functions. In addition, the two companies have different systems and
procedures in many areas which must be reconciled. 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. There can be no
assurance that any of the objectives or reasons for the Merger, including
reducing the combined company's dependence on any one product, creating an
opportunity to cross-sell products to Corsair's and Subscriber's respective
customer bases, enhancing distribution and marketing relationships, leveraging
customer support infrastructure to reduce costs and improve efficiency,
broadening product development capabilities or achieving other financial
synergies, can be achieved.
No Assurance that the Merger will be Completed. There can be no
assurance that the Company's proposed Merger with Subscriber will be completed
on the same terms as currently contemplated by the Merger Agreement between the
parties, or will be completed at all. The Merger is subject to the approval of
each of the stockholders of Corsair and Subscriber, and there can be no
assurance that the requisite stockholder approvals will be obtained. The failure
of Corsair to complete the Merger in a timely manner upon substantially the same
terms as set forth in the Merger Agreement, including the failure of Corsair to
complete the Merger as a result of the inability to obtain the requisite
stockholder approvals, would have a material adverse effect on Corsair's
business, operations and financial condition.
<PAGE>
Risks Relating to the Combined Company
Uncertainty Relating to the Number of Shares of Corsair Common Stock to
be Issued in the Merger. Stockholders should note that the aggregate number of
shares of Corsair Common Stock that Corsair will issue in the Merger depends on
several factors that cannot be determined conclusively until the Effective Time,
including the average of the closing price per share of Corsair Common Stock as
reported in the Wall Street Journal for the ten (10) consecutive trading days
immediately preceding the closing date of the Merger.
Corsair Limited Operating History and Lack of Sustained Profitability.
Corsair was incorporated in December 1994 and first shipped its PhonePrint
system in March 1995. Accordingly, Corsair has only a limited operating history
upon which to base an evaluation of its business and prospects. Despite
achieving profitability in the latter half of fiscal 1997, Corsair has incurred
net losses since its incorporation resulting in an accumulated deficit of $25.5
million as of March 31, 1998. 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. Moreover, there can be no
assurance that Corsair will sustain profitability 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 emerging 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 and the time period during which integration efforts
occur; 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, the combined company's business, operating results
and financial condition will be materially adversely affected.
Dependence on PhonePrint; Dependence on Analog Networks. To date, all
of Corsair's revenues have primarily been attributable to PhonePrint, Corsair's
cloning fraud prevention system, and Corsair anticipates that PhonePrint will
continue to account for substantially all of Corsair's revenues at least through
the end of 1998. 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 adopting 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
combined company's business, operating results and financial condition.
All of Corsair'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
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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 the combined company's
business, operating results and financial condition.
Dependence on Product Introductions and Product Enhancements. The
combined company'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 the combined company
attempts to develop will be developed 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, Subscriber has significant product
development efforts underway aimed at developing next versions of CRM,
FraudWatch Pro, PrePay and IMR. 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 the combined company'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 and
Subscriber have 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 combined company's business, operating results and
financial condition.
Fluctuations in Quarterly Financial Results; Lengthy Sales Cycle.
Corsair and Subscriber have each experienced significant fluctuations in
revenues and operating results from quarter to quarter due to a combination of
factors and expect significant fluctuations to continue in future periods.
Factors that are likely to cause the combined 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 combined company 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 the combined
company competes; the degree to which Corsair successfully integrates Subscriber
and the time period during which integration efforts occur; possible recalls;
<PAGE>
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 combined 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 combined company's costs, including personnel and
facilities costs, any unanticipated shortfall in revenues in any quarter would
have a material adverse impact on the combined company'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 of the combined company 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 Corsair Common
Stock.
A carrier's decision to deploy PhonePrint and other products offered by
the combined company 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 combined company is not able to
accurately forecast future sales of PhonePrint or any of its other products. In
addition, purchases of PhonePrint and certain of the combined company'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 the combined company's other products typically ranges from three
to 18 months and is subject to a number of risks over which the combined 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 combined
company 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 the combined company 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, the combined company's operating
results for that quarter could be materially and adversely affected.
Risks Associated with International Markets. To date, Corsair has
conducted a limited number of deployments of PhonePrint systems internationally.
In an effort to offset what Corsair expects will be declining demand in the U.S.
for cloning fraud solutions, the combined company intends to devote significant
marketing and sales efforts over the next several years to increase its sales of
PhonePrint and sales of Subscriber's 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.
Subscriber's sales outside of the U.S. accounted for a significant portion of
its total revenues in 1996 and 1997, and Corsair expects that sales outside of
the U.S. will continue to account for a significant portion of the revenues the
combined company derives from CRM, FraudWatch Pro, PrePay and IMR. There can be
no assurance that the combined company 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 the combined company 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.
The combined company's international sales may be denominated in
foreign or U.S. currencies. Neither Corsair nor Subscriber currently engages 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 combined
company's international sales that are U.S. dollar-denominated, such a decrease
could make the combined company's products less price-competitive. Additional
risks inherent in the combined company'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
<PAGE>
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. The combined 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 combined 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 combined company'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 the combined 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 combined 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 combined company would be successful in completing any
acquisition. Neither Corsair nor Subscriber currently has any agreement or
understanding with regard to any acquisition other than the Merger.
Highly Competitive Industry. The market for PhonePrint is new and
intensely and increasingly 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"), Digital Equipment Corp.
("DEC") and Hewlett-Packard Corporation ("Hewlett Packard") 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 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.
<PAGE>
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 combined
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 combined company, and could make
it more difficult for the combined company 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 and
Subscriber are developing, and Corsair anticipates the entrance of new
competitors in the wireless telecommunications carrier service industry in the
future. The combined 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.
Corsair believes that the ability of the combined company 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 combined 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 combined company's competitors and potential competitors have
significantly greater financial, marketing, technical and other competitive
resources than the combined company's. As a result, the combined 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 combined company 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 the combined company will be able to make the
technological advances necessary to remain competitive. Accordingly, there can
be no assurance that the combined company 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 the
Corsair'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. BellSouth Cellular Corporation, GTE Wireless Inc.
("GTE Wireless"), Southwestern Bell Mobile Systems, Inc. and Radiomovil DIPSA
S.A. de C.V. each accounted for greater than 10% of Corsair's total revenues in
1997, and collectively accounted for over 52% of Corsair's total revenues in
1997. For the same period in 1996, 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 Corsair's
total revenues, and collectively accounted for over 70% of Corsair's total
revenues in 1996. Air Touch Communications, Inc. and AT&T Wireless Services,
Inc. accounted for virtually all of Corsair's total revenues in 1995. A
relatively small number of analog network carriers are potential customers for
PhonePrint. Corsair believes that the number of potential customers for future
products, if any, will be relatively small. 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. Therefore, there can be no assurance that any of the Corsair's current
customers will generate significant revenues in future periods.
To date, a significant portion of Subscriber's revenue in any
particular period has been attributable to a limited number of customers. Two
customers each accounted for more than 10% of Subscriber's total revenues in
fiscal 1996 and 1997. Subscriber expects that a relatively small number of
customers will continue to represent a significant percentage of its total
revenues for each fiscal year for the foreseeable future, although the companies
<PAGE>
that comprise the largest customers in any given fiscal year are expected to
change from year to year and there can be no assurance that any of Subscriber's
existing customers will generate significant revenues in future periods. The
concentration of customers can cause Subscriber's revenues and earnings to
fluctuate from quarter to quarter, based on such customers' requirements and the
timing of their respective orders. A loss of or significant decrease in business
from any of Subscriber's major customers would have a material adverse effect on
Subscriber's business, results of operations and financial condition.
Additionally, the acquisition by a third party of one of Subscriber's major
customers could result in the loss of that customer and have a material adverse
effect on Subscriber's business, operating results and financial condition.
Uncertainty Regarding Patents and Protection of Proprietary Technology;
Risks of Future Litigation. The combined company relies on a combination of
patent, trade secret, copyright and trademark protection and nondisclosure
agreements to protect its proprietary rights. As of March 31, 1998, Corsair had
two issued U.S. patents, seven pending U.S. patent applications; one issued
foreign patent and thirteen pending foreign patent applications, and Subscriber
had two issued U.S. patents. The combined company'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
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 and
Subscriber sell their 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 the combined company.
Corsair is aware of patents granted to third parties that relate to the
potential products currently being developed. The combined 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 combined company will be able to do so. There can be no
assurance that either Corsair or Subscriber is aware of all patents or patent
applications that may materially affect the combined 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 in the future or that any such assertions will not
result in costly litigation or require Corsair or Subscriber 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 or
Subscriber, if at all. Furthermore, parties making such claims may be able to
obtain injunctive or other equitable relief that could effectively block the
combined 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 combined company's business, operating results or financial
condition.
The combined 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 combined company's proprietary
technology or disclose such technology or that the combined 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 Corsair or Subscriber. Corsair and Subscriber also
rely on confidentiality agreements with their respective 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
<PAGE>
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 the combined company's business, operating results
and financial condition. Moreover, the laws of certain countries in which
Corsair and Subscriber sell their 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 the combined company'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 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 the combined 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 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 the combined
company'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
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 the combined
company's business, operating results and financial condition.
Dependence on Personnel. The success of the combined company 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 the combined
company's business, operating results or financial condition. There can be no
assurance that Corsair or Subscriber 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 is at an early stage of development and
Corsair and Subscriber have each rapidly and significantly expanded their
operations. The number of Corsair employees has grown from 36 on January 1, 1995
to 158 on March 31, 1998, while the number of employees of Subscriber expanded
from 75 to 132 over the same period. 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 the combined company's business. The
combined 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 combined
company will be able to attract, manage and retain additional personnel to
<PAGE>
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 combined company's business, results
of operations and financial condition.
Government Regulation and Legal Uncertainties. While most of the
combined company'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 the combined company's products or
impede the combined company's ability to offer competitive products and services
to the wireless telecommunications industry or otherwise have a material adverse
effect on the combined 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 combined company, decrease demand for the combined company's products,
increase the combined company's cost of doing business or otherwise have a
material adverse effect on the combined company's business, operating results
and financial condition. The Telecommunications Act of 1996 contains several
provisions that may bear directly on the combined 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 combined company. This could require the combined 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 combined 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,
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
the combined 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 combined
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. Corsair cannot predict the
effect of such initiatives on the combined company's business, operating results
or financial condition, including demand for the combined company's products.
Dependence on Growth of Wireless Telecommunications Industry. The
combined company'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 the combined 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 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, the
combined company's reputation and its business, operating results and financial
condition could be materially adversely affected.
<PAGE>
Year 2000 Compliance. Corsair's and Subscriber's products use and are
dependent upon certain internally developed and third party software programs.
Corsair and Subscriber each have 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 the parties are 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 by Corsair or Subscriber, will not be discovered which could
present a material risk to the function of their respective products and have a
material adverse effect on the 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
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. Subscriber has entered into distribution agreements with
a number of distributors, including Ericsson, Daewoo Information Systems
Company, Groupe Bull-Integris and Aurora and a sales referral agreement with
Lucent. In addition, Subscriber has relationships with a number of third party
integrators and may rely on these integrators to a greater extent in the future.
Corsair and Subscriber each seek to pursue distribution agreements and other
forms of sales and marketing arrangements with other companies and Corsair
believes that the combined company's 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 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 the combined
company with respect to current products or any future product. Any failure by
the combined company's existing and future distributors or other sales and
marketing partners to generate significant revenues could have a material
adverse effect on the combined company's business, operating results and
financial condition.
Future Capital Requirements. The combined 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 combined company's research and development efforts, the
combined company's 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, 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 the combined company's projected cash needs for at least the next 12
months. There can be no assurance, however, that the combined company will not
require additional financing prior to such date to fund its operations. In
addition, the combined 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 combined company 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, the combined 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 combined
company to relinquish rights to certain of its technologies or potential
products or other assets that the combined company would not otherwise
relinquish. Accordingly, the inability to obtain such financing could have a
material adverse effect on the combined company'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, new products or new contracts by the combined
company or its competitors, actual or anticipated variations in operating
results, the level of operating expenses, changes in financial estimates by
<PAGE>
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, 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 the Corsair Common
Stock. The realization of any of the risks described in these "Risks and
Uncertainities" 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 the combined company.
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.
Risks Relating to Subscriber
History of Losses; No Assurance of Profitability. Subscriber has
incurred net losses in each of its past three fiscal years. As of March 31,
1998, Subscriber had incurred approximately $19.9 million in cumulative net
losses since inception, only a portion of which had resulted in any loss
carryforwards for federal tax purposes due to Subscriber's former status as an
"S corporation" under the Internal Revenue Code of 1986, as amended. There can
be no assurance that Subscriber will achieve or sustain profitability on a
quarterly basis or annual basis in the future. Enhanced versions of CRM,
FraudWatch Pro, PrePay and IMR were introduced as recently as 1997. Therefore,
Subscriber's prospects must be considered in light of the risks encountered by
developing companies attempting to compete in new and rapidly evolving markets.
Subscriber's operating results will depend upon, among other factors, the demand
for Subscriber's products, the level of product and price competition, the
degree to which Corsair successfully integrates Subscriber and the time period
during which integration efforts occur. Subscriber's ability to manage its
direct and indirect distribution channels, the ability of Subscriber to develop
and market new products, new versions of existing products and product upgrades
and manage product transitions and implementations, the ability of Subscriber to
control costs and avoid complications and delays, and general economic
conditions. Many of these factors are beyond Subscriber's control. A failure to
successfully address these risks would have a material adverse effect on
Subscriber's and the combined company's business, operating results and
financial condition. Subscriber will be materially adversely affected.
Competition. The markets for Subscriber's products 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 those offered by Subscriber. For example, Subscriber competes
directly with In-Touch Management Systems, Inc. in paging billing systems; with
<PAGE>
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.
Subscriber 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 Subscriber. As a result, Subscriber'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.
In addition, many wireless service providers are providing, or can
provide, products and services developed in-house that compete directly with
those that Subscriber offers. If technological or other developments make it
simpler or more cost-effective for wireless service providers to provide certain
services themselves, such development could affect demand for Subscriber's
services and could make it more difficult for Subscriber to offer a
cost-effective alternative to a wireless service provider's own capabilities.
There can be no assurance that Subscriber will be able to compete successfully
with its existing competitors or with new competitors. An increase in
competition through entry of new competitors or additional product offerings by
existing competitors could result in price reductions or the loss of market
share by Subscriber which would have a material adverse effect on Subscriber's
and the combined company's business, operating results and financial condition.
Contractual Relationships with Customers. Substantially all of
Subscriber's revenues are derived from the sale of products and services under
contracts with its customers. Most of Subscriber's existing customers have no
obligation to purchase additional products or services. Therefore, there can be
no assurance that any of Subscriber's existing customers will continue to
purchase new systems, systems enhancements and services in amounts similar to
previous years. The failure of existing customers to purchase additional
products and services from Subscriber could have a material adverse effect on
Subscriber's and the combined company's business, operating results and
financial condition.
Risk of Product Defects. Software products such as those offered by
Subscriber frequently contain errors or failures, especially when first
introduced or when new versions are released. Subscriber could, in the future,
lose revenues as a result of software errors or defects. Subscriber's products
are intended for use in sales applications that may be critical to a customer's
business. As a result, Subscriber 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
Subscriber 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 Subscriber's and the combined company's reputation, or
increased service and warranty costs, any of which could have a material adverse
effect on Subscriber's and the combined company's business, operating results
and financial condition.
<PAGE>
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.
a. Exhibits
27.1 * Financial Data Schedule
b. Reports on Form 8-K. None
*Incorporated by reference to the same numbered exhibit to the
Company's Registration Statement on Form S-4 (No. 333-51989)
filed on May 6, 1998.
<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: May 14, 1998 By: /s/ Martin J. Silver
------------------------
Martin J. Silver
Chief Financial Officer and Secretary (Duly Authorized
Officer and Principal Financial and Accounting Officer)
