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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For fiscal year ended December 31, 1998
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 000-22859
CORSAIR COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
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Delaware 77-0390406
(State of incorporation) (IRS Employer
Identification No.)
3408 Hillview Avenue, Palo Alto, California 94304
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 842-3300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based on the closing price of the Common Stock as reported on The
Nasdaq Stock Market (National Market System) on February 28, 1999 was
approximately $39,847,146. For the purposes of this calculation, shares owned by
officers, directors and 10% stockholders known to the registrant have been
excluded. Such exclusion is not intended, nor shall it be deemed, to be an
admission that such persons are affiliates of the registrant.
As of February 28, 1999 there were 18,037,141 shares of the registrant's
Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be held on June 16, 1999 (the "Proxy Statement"), are
incorporated by reference into Part III of this Annual Report on Form 10-K.
<PAGE>
51
PART I
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ITEM 1. Business
The discussion in this Annual Report contains forward-looking statements
that involve risks and uncertainties. The statements contained in this Annual
Report that are not purely historical are forward-looking statements within the
meaning of section 27A of the securities Act of 1933, as amended including
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statement. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and elsewhere
in this Annual Report, and the risks discussed in the Company's Securities and
Exchange Commission ("SEC") filings.
GENERAL
Corsair Communications, Inc. is a leading provider of software and system
solutions for the wireless industry. Corsair's PhonePrint(R) system has proven
highly effective in reducing cloning fraud. The PhonePrint system has prevented
hundreds of millions of fraudulent call attempts; some of Corsair's customers
have reported up to a 95% reduction in cloning fraud losses after deploying
PhonePrint. The Company's PrePay(TM) billing system provides wireless
telecommunications carriers with a prepaid system designed to fully integrate
with the upcoming wireless intelligent network standards ("WIN"). The Company
believes that its products can provide a number of benefits to wireless
telecommunications carriers, including reduced costs, improved cash flow,
increased market penetration and improved customer service.
The Company sells and markets its products to wireless
telecommunications carriers domestically and internationally. The Company's
customers include Alltel Communications, Inc., AT&T Wireless Services, Aurora
Wireless Technology, Baja Cellular Mexicana, S.A. de C.V., Bell Atlantic
Mobile, BellSouth Cellular Corp., Celular de Telefonia, S.A. de C.V., CCPR
Services, Inc., Centennial Cellular Corp., Comcast Cellular Communications,
Communicacion Cellular, S.A., Compania Dominicana de Telefonos c. por a.
(Codetel), Dobson Cellular Systems, Inc., GTE Wireless, Grupo Iusacell, S.A.
de C.V., Los Angeles Cellular Telephone Company, Motorola, Inc., Pilipino
Telephone Corporation (Piltel), PriCellular Wireless Corp., Puerto Rico
Telephone Company, RadioMovil DIPSA, S.A. de C.V. (Telcel), Radiofone, Inc.,
Southwestern Bell Mobile Systems Inc., Southwestern Bell Wireless, Telcel
Celular, S.A., United States Cellular Corp. and Vanguard Cellular Financial
Corp.
The worldwide demand for wireless telecommunications services has grown
significantly in recent years as those services have become widely available and
increasingly affordable. The growth in the worldwide subscriber base, together
with changes in telecommunications regulations and allocations of additional
radio spectrum frequencies, has resulted in the build-out of a significant
number of new networks and plans for additional networks. The Yankee Group
estimates that the number of wireless telecommunications subscribers worldwide
increased from approximately 85 million in 1995 to approximately 270 million in
1998, and the number of subscribers is expected to exceed 530 million by the end
of 2002.
There are two types of wireless telecommunications networks: analog and
digital. Analog networks broadcast the actual voice waveform; digital networks
digitize the voice waveform using various coding techniques before the signal is
broadcast. In the 1980s, carriers around the world installed primarily analog
networks. In North America, all analog networks use a single transmission
standard, called Advanced Mobile Phone Services ("AMPS"), that enables carriers
to provide nearly seamless roaming coverage by partnering with other carriers.
The Company believes that analog networks will continue to play a significant
role in wireless telecommunications for the foreseeable future. However, because
digital standards are gaining substantial market share, the Company has plans to
develop products to serve markets using digital standards.
Issues Facing Wireless Telecommunications Carriers
As the wireless telecommunications industry evolves, it faces severe
competitive, pricing and cost pressures and additional regulatory hurdles. In
the U.S., existing carriers are seeing increased competition as new Personal
Communications Services ("PCS") and Enhanced Specialized Mobile Radio ("ESMR")
carriers enter their markets. Also, as the industry shifts from a predominantly
high usage business subscriber base to the mass market, carriers are being
impacted by a decline in the average revenue per subscriber. As a result,
carriers must retain subscribers for a longer period of time to recover their
marketing investment per subscriber and the high costs of spectrum acquisition
and network build-out. In order to retain or acquire market share, carriers are
faced with a growing need to differentiate service offerings from their
competitors, using enhanced features, alternative billing plans and options,
security, voice quality, coverage, pricing and other factors as differentiators.
These market forces have hastened the need for carriers to improve their
service offerings and to address a number of issues that have been facing the
industry for some time. Two of these issues are objects of the Company's
products: fraud and prepaid wireless services.
Fraud
Fraud is one of the most pervasive problems facing the wireless
telecommunications industry in both the U.S. and abroad. The most common types
of fraud are cloning fraud, subscription fraud and phone theft. The Company
believes that cloning fraud accounts for most fraud losses in analog networks.
Cloning occurs when a thief uses a scanning device to steal the mobile
identification number ("MIN") and electronic serial number ("ESN") transmitted
over the air during a wireless call, and then reprograms other phones with the
stolen numbers. The reprogrammed phones, or "clones," are then used to make
fraudulent calls on the wireless carriers' networks.
To address cloning fraud, a number of prevention techniques, including
fraud profilers, personal identification numbers ("PINs") and voice recognition,
have been developed. None of these techniques has proven to be a practical and
effective solution to preventing cloning fraud on analog networks. A fraud
profiler is a software tool that tracks anomalies in a subscriber's behavior and
notifies a carrier of unusual calling patterns. Profilers detect suspicious
activity only after it has occurred and do not identify fraud conclusively, but
instead only assist carriers in identifying fraud and require manual
intervention. PINs involve the use of a numeric code that must be dialed by the
subscriber before a call is connected. PINs are considered inconvenient, and
because they are transmitted over the air during a call, they have been
compromised in the same manner as MIN/ESN numbers. Voice recognition requires
the use of a spoken password before a call is connected. The technological
feasibility of voice recognition systems for the prevention of cloning fraud is
still being evaluated and voice recognition systems are not generally viewed as
a cost-effective or convenient solution.
Another cloning fraud prevention technique, known as authentication, uses
encryption technologies and requires a phone to prove its validity before a call
is connected. While authentication has been adopted by many carriers and is
expected to be used in a large number of networks in the future, the Company
believes that it will not be cost effective to replace the large number of
existing analog phones that do not allow authentication. Because authentication
is generally considered expensive and difficult to implement, a number of
carriers, especially in international and smaller U.S. markets, have not yet
deployed it. In addition, announcements relating to breaches of other wireless
encryption algorithms have heightened concerns about the vulnerability of
authentication processes in preventing fraud.
Prepaid Metered Billing
Wireless carriers have identified potential subscribers who prefer the use
of cash over credit, as well as potential subscribers who do not qualify for
credit, as an attractive segment for which to target their service offerings.
Additionally, the monthly billing arrangements commonly used in the U.S. are
often much less appealing in international markets, where neither the
information infrastructure nor the business culture favor credit-based business
models, particularly when targeting mass consumer markets in developing
economies. Prepaid service enables carriers to gain substantial penetration into
mass markets that would otherwise be unavailable. In developed markets such as
the U.S., monthly billing is often not practical for individuals who want
wireless service only temporarily or for businesses that want to control
employee usage. Prepaid service provides carriers with the opportunity to offer
an alternative payment approach to these potential subscribers. Accordingly,
wireless carriers are seeking cost-effective ways to solve the technological and
marketing challenges in providing prepaid service, including monitoring usage,
inbound and outbound calling and roaming.
To address the market for prepaid services, several approaches have been
developed, including "post-call" systems, handset-based systems and trunk-based
or "adjunct switch" systems. Post-call systems were designed to review call
detail records released by wireless switches after calls were completed.
Post-call systems need only a data link from the carriers' network which makes
them inexpensive to deploy; however, these systems cannot operate in real-time
and are thus prone to fraud, which has resulted in limited market reception.
Handset-based technology has proven popular in European markets employing Global
System for Mobile Telecommunications ("GSM") networks through applications that
run on the Subscriber Identification Module ("SIM") card. Handset-based systems
have met with limited success outside of markets operating SIM card systems in
part due to concerns over potential fraud exposure, inventory requirements and
lack of flexibility. Adjunct switch systems provide real-time prepaid service
and can avoid fraud associated with post-call systems. This is accomplished by
implementing an adjunct switching platform in the voice network connected by
T1/E1 trunk lines to control all prepaid calls. Limitations to adjunct switch
systems include high costs for additional switching platforms and additional
trunk lines, prohibitive costs of scaling the system and substantial increases
in call setup times. Voice trunks in particular represent a substantial and
often prohibitive recurring cost as the customer base for prepaid service
expands to a significant percentage of the market's total users. Carriers are
concerned about relying upon an adjunct switch to support a large and growing
customer group.
CORSAIR'S SOLUTIONS
Fraud
Corsair's PhonePrint system provides highly effective cloning fraud
prevention to wireless telecommunications carriers by using proprietary radio
frequency ("RF") signal analysis technology to identify attempted fraudulent
calls and prevent cloners from gaining access to a carrier's analog network. The
system measures specific characteristics of each phone's unique RF waveform to
develop an "RF fingerprint" that is a reliable tool to distinguish between a
clone and a legitimate phone. Just as no two human fingerprints are the same,
differences in phone designs and components as well as subtle manufacturing
differences mean that no two wireless phones generate the same waveform. The RF
fingerprint of one wireless phone cannot be emulated by another wireless phone,
and is therefore not subject to being compromised like MIN/ESN numbers, PINs or
potentially authentication codes. The scalable design of the PhonePrint system
allows carriers to deploy the system initially in areas where fraud is most
prevalent and to further deploy the system over time in other parts of their
networks. In addition, by purchasing subscriptions to the Company's PhonePrint
Roaming Network(TM), carriers can share RF fingerprints in real-time between
PhonePrint systems in different markets to protect against losses associated
with roaming fraud.
Prepaid Metered Billing
PrePay expands the carriers' potential customer base by allowing carriers
to market services to customers who prefer the use of cash over credit or who do
not qualify for credit and who otherwise would be required to pay high deposits.
PrePay is differentiated from most other competitive offerings by its wireless
intelligent network ("WIN") based architecture, which enables carriers to use
existing switch infrastructure equipment rather than requiring costly additional
adjunct switches and voice trunk resources. PrePay software scales with growth
in the number of prepaid subscribers by adding processors to its server. Since
prepaid calls are controlled by the existing switch, there is no impact on call
setup times and carriers can convert prepaid customers to traditional post-paid
customers without changing their mobile phone number. All calls by prepaid
subscribers are rated in real time, and an integrated interactive voice response
("IVR") system automatically informs the customer when account funds are low. If
prepaid funds are depleted during a call, the call is automatically terminated
and service is suspended to avoid fraud until additional funds are deposited.
The deposit of additional funds can be made over the air with a prepaid phone
card or in cash at a replenishment center, ensuring continuity of cellular
service.
STRATEGY
The Company's objective is to be the leading provider of value-added
solutions to wireless telecommunications carriers. Key elements of the Company's
strategy include:
Maintain Leadership in WIN-based Prepaid Metered Billing Solutions. The
Company believes that it deployed the first prepaid system designed to fully
integrate with the upcoming wireless intelligent network standards, and that
PrePay systems currently serve more prepaid subscribers worldwide than any other
WIN-based prepaid system. The Company intends to leverage its reputation and
experience in operating PrePay in international markets to increase its share of
the global market for wireless prepaid billing solutions.
Further Penetrate Market for Cloning Fraud Prevention Solutions. The
Company intends to leverage its reputation and experience as a leading provider
of RF fingerprinting solutions to increase its share of the market for cloning
fraud prevention solutions. The Company believes that carriers in international
markets are experiencing substantial cloning fraud on their analog networks and
present a greater future opportunity for PhonePrint sales than domestic markets.
The Company intends to expand PhonePrint sales internationally by increasing its
direct sales force and marketing through distribution partners. The Company
believes that the reputation, customer relationships and global field support
capabilities of distribution partners may accelerate the penetration of its
products in international markets.
Provide Superior Customer Support. The Company believes that providing
superior customer support is critical to maintaining long-term relationships and
to capitalizing upon future sales opportunities. The Company has invested in
building a customer support organization with the range of technical skills and
depth of expertise necessary to serve various wireless customers. The Company
has developed proprietary software tools that permit extensive monitoring and
diagnosis of system performance and provide for the flexibility of remote
operation.
Leverage Core Expertise to Develop and Acquire New Products. The Company
intends to use its core expertise in RF signal analysis, digital signal
processing and real-time networking in distributed systems environments, billing
and customer care to develop and introduce other products. The Company also
seeks to strategically acquire complementary businesses, products and
technologies from third parties. The Company has in the past evaluated and
expects in the future to pursue acquisitions with third parties.
Maintain Leadership in RF Fingerprinting Solutions. The Company believes
that its proprietary approach to developing RF fingerprints, based upon
technology originally developed for the military, is a key differentiator of the
Company's solution that results in highly effective cloning fraud prevention.
The Company also believes that it deployed the first real-time network for the
exchange of fingerprints between carriers, and that it was also the first to
expand real-time roaming protection internationally. The Company intends to
focus on enhancing and improving PhonePrint in order to optimize its
performance.
THE PHONEPRINT SYSTEM
PhonePrint is an open architecture hardware and software system that
reduces cloning fraud by detecting and promptly disconnecting fraudulent call
attempts. A key element of the architecture is its distributed processing
capability, which provides high performance and efficiency and reduces network
bandwidth requirements. The system supports real-time network connectivity,
allowing PhonePrint markets to interoperate both domestically and abroad. The
scalable design of the PhonePrint system has allowed both large and small
carriers to deploy the system initially in areas where cloning fraud is most
prevalent and to further deploy the system over time in other parts of their
networks.
PhonePrint's cloning fraud prevention capability is based upon proprietary
RF signal analysis technology. Every wireless phone's signal creates a unique
waveform due to differences in phone designs and components, as well as subtle
manufacturing variances. PhonePrint creates an RF fingerprint by using complex
proprietary algorithms to measure physical features of these waveforms. RF
fingerprints of legitimate subscribers' phones are stored in a database.
PhonePrint compares the observed RF fingerprint of the caller with the RF
fingerprint of the subscriber in the database. If the two fingerprints do not
match, the call is promptly disconnected. In addition, PhonePrint reduces
roaming fraud by exchanging RF fingerprints between markets connected to the
PhonePrint Roaming Network in real-time, allowing the immediate disconnection of
fraudulent roaming call attempts.
The PhonePrint system is comprised of three components for each market:
radio frequency units located in multiple cell sites, a single system control
center and a single real-time application server. All of these components are
connected by a real-time open internet protocol ("IP") network.
Radio Frequency Units ("RFUs"). Each RFU is an intelligent, self-contained
unit that detects fraudulent calls. Key elements of the RFU include
sophisticated receivers, a PC-based processor and a database of subscriber RF
fingerprints. An RFU constantly monitors the RF waveforms generated by phones,
analyzes them via proprietary algorithms and initiates disconnections when fraud
is detected. The RF collection, signal analysis and fraud detection process
requires less than 0.5 seconds. RFUs have been designed so that they can be
installed, exchanged or taken off-line without interrupting the carrier's
wireless network.
System Control Center ("SCC"). An SCC administers and maintains the master
database of RF fingerprints and activates RF fingerprint validation processes
for a market. An SCC also communicates with the market's RFUs to receive new RF
fingerprint observations and update RF fingerprint databases. The SCC also
supports remote system diagnostics and configuration administration.
Real-Time Application Server ("RTAS"). The RTAS hosts a graphical user
interface that allows different carrier personnel, including customer care
representatives and fraud analysts, to generate a variety of system activity
reports based on real-time and historical data.
Real-Time Network. The RFUs, SCC and RTAS for each market are connected
together, and the PhonePrint system is connected to the carrier's network
infrastructure, using an open IP network. Carriers can subscribe to the
PhonePrint Roaming Network service to exchange RF fingerprints with other
markets in real-time to reduce roaming fraud.
The hardware and software components of the PhonePrint system have been
designed to be compatible with various vendors' infrastructure equipment to
maximize the testability, reliability and performance of the system and to
reduce software release cycle times.
THE PREPAY SYSTEM
PrePay allows carriers to support prepaid service offerings using their
existing Mobile Switching Center/Home Location Registry ("MSC/HLR")
infrastructure equipment. The PrePay server communicates with the MSC/HLR and
other network elements via IS41 messages in a standard SS7/C7 network, and via
TCP/IP with the PrePay IVR server and customer service clients. Because PrePay
is designed to operate in IS41 networks, it supports several air interfaces,
including: Code Division Multiple Access ("CDMA"), Time Division Multiple Access
("TDMA"), AMPS, Total Access Communications System ("TACS") and Extended Total
Access Communications System ("ETACS").
When a subscriber initiates a call and the MSC/HLR validates that it is a
prepaid subscriber, an IS41 message is sent to the PrePay system to pre-rate the
call and determine the allowed call duration. The result of pre-call rating is
determined by a number of factors, but is primarily based on the current account
balance, the calling location, the called location and the subscriber's plan
offering. The MSC/HLR then processes the call in the same manner as in the
post-paid environment, but times the call against the allowed call duration. If
prepaids funds are depleted during a call, the call is automatically ended and
service is suspended until additional funds are deposited. When the call is
released, the MSC/HLR passes a message to the PrePay server for a post-call
rating, and then PrePay adjusts the subscriber's account balance to reflect the
costs associated with the call.
All communications and processes occur in real time.
The PrePay IVR server provides subscribers with automated telephone access
to the PrePay system. The mobile inquiry function allows subscribers to obtain
automated information regarding their mobile balance and balance expiration
date. The mobile payment function allows subscribers to replenish their mobile
balance by using a prepaid phone card. The PrePay system will update the mobile
balances, record payment transactions, update the "used" phone card inventories
and provide the subscribers with their new mobile balances and new mobile
balance expiration dates. The low balance/funds expiration warning announcement
function provides an automated warning message to subscribers warning them that
their mobile balance is getting low or mobile balance expiration date is getting
near. If either the balance or expiration threshold are met, then PrePay will
instruct the network to route a new call to the IVR for a warning prior to
completing the call. In the PrePay system, only the IVR need connect to the
MSC/HLR with voice trunks.
PrePay provides carriers with feature-rich customer care and
administration functions including: activations and provisioning, phone number
and phone card inventory control, and real-time account review and adjustment
capabilities for customer service representatives. PrePay uses existing number
blocks and provides airtime rating, true point-to-point toll rating, special
number rating, special discounting, multiple rate calendars, holiday rates, and
taxes. The system also supports one-time only fees as well as daily or monthly
recurring access fees. Rate plans and threshold processing plans are
user-definable in accordance with carriers' unique marketing strategies.
PrePay operates in UNIX to provide for better multitasking, more fault
tolerance and more effective call resource utilization. UNIX allows PrePay's key
software processes to operate in parallel and with multithreading for efficiency
and optimal scalability. Consequently, the cost to scale with PrePay is
minimized, generally only requiring additional processors to be added to the
PrePay server.
Corsair developed proprietary WIN-based interfaces in conjunction with
Ericsson Radio Systems AB ("Ericsson") to accelerate the market development of
PrePay in markets which have deployed Ericsson switching equipment in advance of
the final WIN standards. Prior to PrePay's launch, the use of existing MSC/HLR
equipment was impractical or impossible due to the proprietary nature of
Ericsson equipment. PrePay's development reflects two important considerations.
First, the Company believes that its present system architecture and design will
support a smooth transition to WIN standards once the standards are released and
implemented commercially. Second, in the absence of standards, the Company
believes that the system can support proprietary interfaces to other
infrastructure vendors' networks with modest additional research and
development.
PRODUCT DEVELOPMENT
The Company's product development enhancements to the PhonePrint and
PrePay systems and development of new products will address perceived market
opportunities. Future releases of PhonePrint and PrePay are being developed to
support additional signal transmission standards and may include developing
interfaces for PrePay with additional switch manufacturers.
The process of developing new products and product enhancements for use in
the wireless telecommunications industry is extremely complex and is expected to
become more complex and expensive in the future as new platforms and
technologies emerge. In the past, the Company has experienced delays in the
introduction of certain product enhancements, and there can be no assurance that
new products or product enhancements will be introduced on schedule or at all.
Any new products or product enhancements may also contain defects when first
introduced or when new versions are released. There can be no assurance that,
despite testing by the Company, defects will not be found in new products or
product enhancements after commencement of commercial shipments, resulting in
loss of or delay in market acceptance. Any loss of or delay in market acceptance
would have a material adverse effect on the Company's business, operating
results and financial condition.
Total research and development expenditures were $8.6 million, $12.5
million, and $18.3 million in fiscal years 1996, 1997, and 1998, respectively.
The Company anticipates that it will continue to commit substantial resources to
product development in the future. Since the Company wrote-off nonrecoverable
capitalized software costs of $3.8 million in 1996, all research and development
expenditures have been expensed as incurred. For the past three years, product
development activities have significantly improved the PhonePrint system by
identifying new algorithms and refining existing algorithms to bolster
PhonePrint's fraud detection capabilities and by improving reliability and
manufacturability. During this same period of time, end-to-end real-time network
connectivity capabilities and a graphical user interface were also developed,
and significant size and cost reductions were achieved. Also during this period,
PrePay has been enhanced to increase peak throughput capability and improve
reliability.
As of December 31, 1998 102 employees were engaged in research and
development programs, including hardware and software development, test and
engineering support. The Company believes that recruiting and retaining
engineering personnel is essential to its success. Competition for such
personnel is intense. See "Risks and Uncertainties - Dependence on Personnel."
CUSTOMERS
The end users of the Company's products are both domestic and
international wireless telecommunications carriers. BellSouth Cellular
Corporation and GTE Mobilnet Service Corporation, each accounted for greater
than 10% of the Company's total revenues in 1998, and collectively accounted for
over 23% of the Company's total revenues in 1998. In 1997, BellSouth Cellular
Corporation, GTE Mobilnet Service Corporation, and Southwestern Bell Mobile
Systems, Inc. each accounted for greater than 10% of the Company's total
revenues, and collectively accounted for over 33% of the Company's total
revenues for the year. In 1996, AT&T Wireless Services and Los Angeles Cellular
Telephone Company each accounted for greater than 10% of the Company's total
revenues, and collectively accounted for over 22% of the Company's total
revenues for the year. See "Risks and Uncertainties Customer Concentration."
The following is a partial list of wireless telecommunications carriers
that have deployed either the Company's PhonePrint or PrePay systems:
American CellularCommunications Corp. Houston Cellular Telephone Company
AT&T Wireless Services Los Angeles Cellular Telephone Company
Bell Atlantic NYNEX Mobil Pilipino Telephone Corporation (PILTEL)
BellSouth Cellular Corporation Puerto Rico Cellular Telephone Company
Centennial Cellular Corporation RadioMovil DIPSA, S.A. de C.V. (Telcel)
Comcast Cellular Communications, Inc. Southwestern Bell Mobile Systems, Inc.
CCPR Services, Inc.(Cellular One Vanguard Cellular Financial Corp.
Puerto Rico) United States Cellular Corporation
GTE Mobilnet Services Corp.
SALES, MARKETING, DISTRIBUTION AND CUSTOMER SUPPORT
The Company markets PhonePrint to wireless telecommunications carriers
domestically and internationally through its direct sales force. The Company has
also entered into several distribution agreements with respect to PhonePrint.
The Company sells and licenses PhonePrint pursuant to agreements that typically
provide for hardware purchases and software licenses, customer service and
support and roaming service fees. The Company sells and licenses PrePay
primarily pursuant to a non-exclusive OEM agreement with Ericsson. A carrier's
decision to deploy PhonePrint or PrePay typically involves a significant
commitment of capital by the carrier, with the attendant delays frequently
associated with significant capital expenditures. In addition, purchases of
PhonePrint or PrePay involve testing, integration, implementation and support
requirements. For these and other reasons, the sales cycle associated with the
purchase of PhonePrint or PrePay typically ranges from three to 18 months and is
subject to a number of risks over which the Company has little control,
including the carrier's budgetary and capital spending constraints and the
internal decision making processes. See "Risks and Uncertainties - Fluctuations
in Quarterly Financial Results; Lengthy Sales Cycle and Customer Concentration."
For the year ended December 31, 1998, international revenues accounted for
approximately 42% of the Company's total revenues. For the year ended December
31, 1997, international revenues accounted for approximately 24% of the
Company's total revenues. Revenue from international customers accounted for
approximately 12% of the Company's total revenues in 1996. The Company expects
that revenue from international customers will continue to grow and account for
a larger portion of the Company's total revenues in the foreseeable future than
it did in 1998. The Company is expanding its sales efforts outside of the United
States, both directly and through distributors and switch vendors. Any such
expansion will require significant management attention and financial resources.
See "Risks and Uncertainties - Risks Associated with International Markets."
The Company is actively seeking to enter into distribution agreements and
other marketing arrangements as it believes it will depend more on distributors
in the future, both with respect to PhonePrint, PrePay and new products, if any,
that the Company may offer. During 1998, the Company entered into a distribution
agreement with Telesis Sistemas em Telecomunicacoes Ltda., with respect to
PhonePrint for the territory covering the countries of Argentina, Brazil, Chile,
Paraguay, and Uruguay. As a result of its acquisition of Subscriber Computing,
Inc. in 1998, the Company is party to a non-exclusive agreement with Ericsson
dated June 3, 1997 which provides Ericsson the right to sub-license PrePay
worldwide. During 1997, the Company entered into distribution agreements with
Motorola, Inc. ("Motorola") and Ericsson, which provides these companies the
ability to distribute PhonePrint worldwide on a non-exclusive basis. The Company
has also entered into sales referral agreements with Lucent Technologies, Inc.
("Lucent") and Sumitomo Corporation of America ("Sumitomo") allowing Lucent and
Sumitomo to work with the Company to generate sales leads in certain situations.
In 1996, the Company entered into a distribution agreement with Aurora Wireless
Technologies, Ltd. ("Aurora"), which provides Aurora with the ability to
distribute PhonePrint throughout the Asia/Pacific region, as defined in the
agreement. Pursuant to these arrangements, PhonePrint systems have been placed
with carriers in the Philippines, and Europe. See "Risks and Uncertainties -
Dependence on Distributors."
The Company provides service and technical support for its products
through both its direct field service and support personnel and its
distributors. A high level of continuing service and support is critical to the
Company's objective of developing long-term relationships with its customers.
The Company also provides on-site installations and technical assistance as part
of the standard support and service package that its customers typically
purchase for the length of their respective agreements with the Company. The
Company also offers various training courses for its distributors and customers.
COMPETITION
The market for PhonePrint is intensely and increasingly competitive. The
Company believes that the primary competitive factors in the cloning fraud
prevention market in which it currently competes include carriers' timelines for
phasing out analog standards, 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. The expansion of digital networks and the reluctance of carriers to
make further investments in their existing analog infrastructure has limited the
demand for PhonePrint.
The Company's principal competitor for RF-based cloning fraud prevention
systems is Cellular Technical Services Company, Inc. ("CTS"). CTS has agreements
pursuant to which it has installed or will install its RF-based cloning fraud
prevention system in many major U.S. markets. PhonePrint also competes with a
number of alternative technologies, including profilers, personal identification
numbers and authentication. The Company is aware of numerous companies,
including GTE Telecommunications Services, Inc., Authentix Network, Inc.,
Systems/Link, and Lightbridge, Inc., that currently are or are expected to offer
products in the cloning fraud prevention area. In addition, carriers may
themselves develop technologies that limit the demand for PhonePrint. There can
be no assurance that any such company or any other competitor will not introduce
a new product at a lower price or with greater functionality than PhonePrint.
Furthermore, the demand for PhonePrint would be materially adversely affected if
wireless telecommunications carriers implement authentication technology
applicable to analog phones as their sole cloning fraud solution in major
markets, if U.S. wireless telecommunications carriers adopt a uniform digital
standard that reduces the need for digital phones to operate in analog mode
while roaming, or if analog phone makers change product designs and/or improve
manufacturing standards to a point where the difference from phone to phone in
the radio waveform becomes so small that it is difficult for PhonePrint to
identify a clone. There can be no assurance that any currently available
alternative technology or any new technology will not render the Company's
products obsolete or significantly reduce the market share afforded to RF-based
cloning fraud prevention systems like PhonePrint. See "Risks and Uncertainties
Dependence on PhonePrint, Dependence on Analog Networks."
The market for PrePay is new and intensely and increasingly competitive.
PrePay competes with a number of alternative prepaid billing products, including
post-call systems, handset-based systems and adjunct switch systems. The Company
is aware of numerous companies, including GTE Telecommunications Services, Inc.,
Boston Communications Group, Inc., Brite Voice Systems, Inc., Comverse
Technology, Inc., Glenayre Technologies, Inc., National Telemanagement
Corporation, Telemac Cellular Corporation, Systems/Link Corporation, Prairie
Systems, Inc., ORGA Kartensysteme GmbH, SEMA Group, Logica plc, Alcatel USA,
Priority Call Management, Lucent Technologies, Inc., TeleCommunication Systems,
Inc. and Northern Telecom Limited that currently are or are expected to offer
prepaid wireless billing products. 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 PrePay. Furthermore, the demand for
PrePay would be materially adversely affected if wireless carriers implement WIN
standards and prepaid systems other than PrePay as their sole prepaid solution
in major markets. There can be no assurance that any currently available
alternative technology or any new technology will not render the Company's
PrePay system obsolete or significantly reduce the market share afforded to
prepaid wireless billing systems like PrePay.
The market for other products and services provided to wireless
telecommunications carriers is highly competitive and subject to rapid
technological change, regulatory developments and emerging industry standards.
In addition, many wireless telecommunications carriers and vendors of switches
and other telecommunications equipment may be capable of developing and offering
products and services competitive with new products, if any, that the Company
may offer in the future. Trends in the wireless telecommunications industry,
including greater consolidation and technological or other developments that
make it simpler or more cost-effective for wireless telecommunications carriers
to provide certain services themselves could affect demand for new products, if
any, offered by the Company, and could make it more difficult for the Company to
offer a cost-effective alternative to a wireless telecommunications carrier's
own capabilities. The Company is aware of a number of companies that have either
announced an intention to develop or are capable of developing products that
would compete with the products the Company may develop, and the Company
anticipates the entrance of new competitors in the wireless telecommunications
carrier service industry in the future. The Company's ability to sell new
products, if any, may be hampered by relationships that competitors have with
carriers based upon the prior sale of other products to carriers.
The Company believes that its ability to compete in the future depends in
part on a number of competitive factors outside its control, including the
ability to hire and retain employees, the development by others of products and
services that are competitive with the Company's products and services, the
price at which others offer comparable products and services and the extent of
its competitors' responsiveness to customer needs. Many of the Company's
competitors and potential competitors have significantly greater financial,
marketing, technical and other competitive resources than the Company. As a
result, the Company's competitors may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or may be able to
devote greater resources to the promotion and sale of their products and
services. To remain competitive in the market for products and services sold to
wireless telecommunications carriers, the Company will need to continue to
invest substantial resources in engineering, research and development and sales
and marketing. There can be no assurance that the Company will have sufficient
resources to make such investments or that the Company will be able to make the
technological advances necessary to remain competitive. Accordingly, there can
be no assurance that the Company will be able to compete successfully with
respect to new products, if any, it offers in the future.
MANUFACTURING
The Company's manufacturing objective is to produce products that conform
to Corsair's specifications at the lowest possible manufacturing cost.
Manufacturing, system integration and certain testing operations are performed
at the Company's headquarters in Palo Alto, California. The Company's
manufacturing operations consist primarily of assembling finished goods from
components and subassemblies purchased from third parties. The Company monitors
quality at each stage of the production process, including the selection of
component suppliers, the assembly of finished goods and final testing, packaging
and shipping.
The Company relies to a substantial extent on outside vendors to
manufacture many of the components and subassemblies used in PhonePrint and the
hardware and third party software used in PrePay, some of which are obtained
from a single supplier or a limited group of suppliers. The Company's reliance
on outside vendors generally, and a sole or a limited group of suppliers in
particular, involves several risks, including a potential inability to obtain an
adequate supply of required components and reduced control over quality, pricing
and timing of delivery of components. In the past the Company has experienced
delays in receiving materials from vendors, sometimes resulting in delays in the
assembly of products by the Company. See "Risks and Uncertainties - Dependence
on Third-Party Products and Services; Sole or Limited Sources of Supply."
<PAGE>
PATENTS AND PROPRIETARY RIGHTS
The Company relies on a combination of patent, trade secret, copyright and
trademark protection and nondisclosure agreements to protect its proprietary
rights. As of December 31, 1998, the Company had four issued U.S. patents, five
pending U.S. patent applications; one issued foreign patent and two pending
foreign patent applications. The Company's success will depend in large part on
the ability of the Company to obtain patent protection, defend patents once
obtained, license third-party proprietary rights, maintain trade secrets and
operate without infringing upon the patents and proprietary rights of others.
The patent positions of companies in the wireless telecommunications industry,
including the Company, are generally uncertain and involve complex legal and
factual questions. There can be no assurance that patents will issue from any
patent applications owned or licensed to the Company or that, if patents do
issue, the claims allowed would be sufficiently broad to protect the Company's
technology. In addition, there can be no assurance that any issued patents owned
by or licensed to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company.
Patents issued and patent applications filed relating to products used in
the wireless telecommunications industry are numerous and there can be no
assurance that current and potential competitors and other third parties have
not filed or in the future will not file applications for, or have not received
or in the future will not receive, patents or obtain additional proprietary
rights relating to products used or proposed to be used by the Company. There
can be no assurance that the Company is aware of all patents or patent
applications that may materially affect the Company's ability to make, use or
sell any current or future products. U.S. patent applications are confidential
while pending in the U.S. Patent and Trademark Office, and patent applications
filed in foreign countries are often first published six months or more after
filing. There can also be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such
assertions will not result in costly litigation or require the Company to obtain
a license to intellectual property rights of such parties. There can be no
assurance that any such licenses would be available on terms acceptable to the
Company, if at all. Furthermore, parties making such claims may be able to
obtain injunctive or other equitable relief that could effectively block the
Company's ability to make, use, sell or otherwise practice its intellectual
property (whether or not patented or described in pending patent applications),
or to further develop or commercialize its products in the U.S. and abroad and
could result in the award of substantial damages. Defense of any lawsuit or
failure to obtain any such license could have a material adverse effect on the
Company's business, operating results or financial condition.
The Company also relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire the same or substantially equivalent
technologies or otherwise gain access to the Company's proprietary technology or
disclose such technology or that the Company can ultimately protect its rights
to such unpatented proprietary technology. No assurance can be given that third
parties will not obtain patent rights to such unpatented trade secrets, which
patent rights could be used to assert infringement claims against the Company.
The Company also relies on confidentiality agreements with its employees,
vendors, consultants and customers to protect its proprietary technology. There
can be no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade secrets
will not otherwise become known to or be independently developed by competitors.
Failure to obtain or maintain patent and trade secret protection, for any
reason, could have a material adverse effect on the Company's business,
operating results and financial condition.
EMPLOYEES
As of December 31, 1998, the Company had 258 employees, including 81 in
sales and marketing, 47 in manufacturing, 102 in research and development, and
28 in finance and administration. None of the Company's employees are
represented by a collective bargaining agreement, nor has the Company
experienced any work stoppages. The Company believes that its relations with its
employees are good.
<PAGE>
RISKS AND UNCERTAINTIES
The Company operates in a rapidly changing environment that involves a
number of risks, many of which are beyond the Company's control. The following
discussion highlights some of these risks. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in this section and elsewhere in this Annual Report, and the risks discussed in
the Company's other SEC filings.
Lack of Sustained Profitability. The Company has incurred net losses since
its incorporation resulting in an accumulated deficit of $52.6 million as of
December 31, 1998. There can be no assurance that the Company'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 the Company will reach profitability on a quarterly or annual
basis. Operating results for future periods are subject to numerous
uncertainties specified elsewhere in this Annual Report. The Company's future
operating results will depend upon, among other factors: the demand for
PhonePrint; the demand for PrePay, the Company's ability to introduce successful
new products and product enhancements, including products that are sold to both
analog network carriers and digital network carriers such as Personal
Communications Services ("PCS") and Enhanced Specialized Mobile Radio ("ESMR")
carriers; the level of product and price competition; the ability of the Company
to expand its international sales; the Company's success in expanding
distribution channels; the Company's success in attracting and retaining
motivated and qualified personnel; and the ability of the Company to avoid
patent and intellectual property litigation. If the Company is not successful in
addressing such risks, as well as the others set forth in this Annual Report,
the Company's business, operating results and financial condition will be
materially adversely affected.
Dependence on PhonePrint; Dependence on Analog Networks. To date, the
Company's revenues have primarily been attributable to PhonePrint, the Company's
cloning fraud prevention system, and the Company anticipates that PhonePrint
will continue to account for a majority of the Company's revenues at least
through the end of 1999. As a result, the Company's future operating results
will depend on the demand for and market acceptance of PhonePrint. A relatively
small number of carriers that operate analog networks constitute the potential
customers for PhonePrint. A large majority of the carriers that operate analog
networks in the largest U.S. markets have to varying degrees already implemented
cloning fraud solutions, and the Company believes 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 will have a
material adverse effect on PhonePrint sales. Over time, this trend could also
occur in international markets. As carriers that operate analog networks 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. The rate of implementation of new analog networks
has slowed significantly and some carriers have determined not to make
additional investments in their existing analog networks. As analog networks
expand slowly or cease to expand, the future demand for PhonePrint will 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, or
that current or future levels of revenues attributable to PhonePrint will be
maintained or will not decline. Any reduction in the demand for PhonePrint would
have a material adverse effect on the Company's business, operating results and
financial condition.
All of the Company's customers for PhonePrint to date have been carriers
that operate analog networks. Wireless services operating in digital mode,
including PCS and ESMR in the U.S. and Global System for Mobile Communications
("GSM") in many foreign countries (including many European countries), use or
may use authentication processes that automatically establish the validity of a
phone each time it attempts to access the wireless telecommunications network.
The Company is not aware of any information that suggests that cloners have been
able to break the authentication encryption technologies. Unless the encryption
technologies that form the basis for authentication are broken by cloners, the
Company does not believe that operators of digital networks will purchase third
party radio frequency ("RF") fingerprinting solutions for cloning fraud such as
PhonePrint. In addition, authentication processes for analog networks are also
currently available and are being employed by a significant number of carriers.
The Company is also very dependent on the continued widespread use of analog
networks. Industry experts project that the number of analog phones and analog
networks will ultimately decline. Any reduction in demand by carriers that
operate analog networks for cloning fraud solutions would, or any reduction in
the use of analog phones could, have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on PrePay; Dependence on Ericsson Radio Systems AB Switching
Equipment . The Company anticipates that PrePay, the Company's prepaid metered
billing solution, will account for a growing percentage of the Company's
revenues in 1999. As a result, the Company's future operating results will
depend on the demand for and market acceptance of PrePay. To date, only a small
number of wireless carriers have deployed PrePay, and the rate of adoption of
the PrePay system will need to increase dramatically in order to achieve the
Company's revenue targets. The Company's PrePay solution currently only works in
conjunction with Ericsson switching equipment. Therefore, only carriers that
have deployed Ericsson's infrastructure equipment are potential customers for
PrePay. In order to expand the Company's potential customer base by making
PrePay compatible with other infrastructure equipment, each of the Company and
the infrastructure provider would have to complete significant development
projects. There can be no assurance that Corsair will be able to cause PrePay to
work with any other infrastructure provider's equipment, or that Corsair will be
capable of causing PrePay to work on future versions of Ericsson equipment. Any
reduction in the demand for prepaid billing services or any failure to gain
market acceptance for Corsair's PrePay solution would have a material adverse
effect on the Company's business, operating results and financial condition.
Fluctuations in Quarterly Financial Results; Lengthy Sales Cycle. The
Company has experienced significant fluctuations in revenues and operating
results from quarter to quarter due to a combination of factors and expects
significant fluctuations to continue in future periods. Factors that are likely
to cause the Company's revenues and operating results to vary significantly from
quarter to quarter include, among others: the level and timing of revenues
associated with PhonePrint and PrePay; the timing of the introduction or
acceptance of new products and services and product enhancements offered by the
Company and its competitors; technological changes or developments in the
wireless telecommunications industry; dependence on a limited number of
products; the size, product mix and timing of significant orders; the timing of
system revenue; competition and pricing in the markets in which the Company
competes; possible recalls; lengthy sales cycles; production or quality
problems; the timing of development expenditures; further expansion of sales and
marketing operations; changes in material costs; disruptions in sources of
supply; capital spending; the timing of payments by customers; and changes in
general economic conditions. These and other factors could cause the Company to
recognize relatively large amounts of revenue over a very short period of time,
followed by a period during which relatively little revenue is recognized.
Because of the relatively fixed nature of most of the Company's costs, including
personnel and facilities costs, any unanticipated shortfall in revenues in any
quarter would have a material adverse impact on the Company's operating results
in that quarter and would likely result in substantial adverse fluctuations in
the price of the Company's Common Stock. Accordingly, the Company expects that
from time to time its future operating results will be below the expectations of
market analysts and investors, which would likely have a material adverse effect
on the prevailing market price of the Common Stock.
A carrier's decision to deploy PhonePrint or PrePay 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 expenditures, and the Company
is not able to accurately forecast future sales of PhonePrint or PrePay. In
addition, purchases of PhonePrint and PrePay involve testing, integration,
implementation and support requirements. For these and other reasons, the sales
cycle associated with the purchase of PhonePrint and PrePay typically ranges
from three to 18 months and is subject to a number of risks over which the
Company has little control, including the carrier's budgetary and spending
constraints and internal decision-making processes. In addition, a carrier's
purchase decision may be delayed as a result of announcements by the Company or
competitors of new products or product enhancements or by regulatory
developments. The Company expects that there will be a lengthy sales cycle with
respect to new products, if any, that the Company may offer in the future.
Because of this lengthy sales cycle and the relatively large size of a typical
order and because the Company does not recognize revenue until contractual
acceptance criteria are met, if revenues forecasted from a specific customer for
a particular quarter are not realized in that quarter, the Company's operating
results for that quarter could be materially and adversely affected.
Dependence on Distributors. PhonePrint is currently marketed primarily
through the Company's direct sales efforts. The Company has entered into
distribution agreements with respect to PhonePrint with, amongst others,
Motorola, Inc., Ericsson and Aurora Wireless Technologies, Ltd. and a sales
referral agreement with Lucent Technologies, Inc. and Sumitomo Corporation of
America. PrePay is currently marketed primarily through the Company's
distribution agreement with Ericsson, and to a limited extent, through the
Company's direct sales efforts. The Company seeks to pursue distribution
agreements and other forms of sales and marketing arrangements with other
companies and the Company believes that its dependence on distributors and these
other sales and marketing relationships will increase in the future, both with
respect to PhonePrint, PrePay and new products, if any, that the Company may
offer in the future. There are no minimum purchase obligations applicable to any
existing distributor or other sales and marketing partners and the Company 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 Company with respect to PhonePrint,
PrePay or any future product either by developing a competitive product
themselves or by distributing a competitive offering. In fact, the Company
believes that with respect to PrePay, Ericsson from time to time may evaluate
and seek to distribute or acquire alternative vendor's prepaid product
offerings. Any failure by the Company's existing and future distributors or
other sales and marketing partners to generate significant revenues could have a
material adverse effect on the Company's business, operating results and
financial condition.
Risks Associated with International Markets. In an effort to offset
declining demand in the U.S. for cloning fraud solutions, the Company intends to
devote significant marketing and sales efforts over the next several years to
increase its sales of PhonePrint and PrePay to international customers. This
expansion of sales efforts outside of the U.S. will require significant
management attention and financial resources. There can be no assurance that the
Company will be successful in achieving significant growth of sales of
PhonePrint and PrePay in international markets. The Company does not expect to
sell PhonePrint in the many international markets that rely primarily on digital
wireless networks, including many European countries. In addition, the Company
does not anticipate selling PrePay to any wireless carriers that do not employ
Ericsson switching equipment.
The Company's international sales may be denominated in foreign or U.S.
currencies. The Company does not currently engage in foreign currency hedging
transactions. As a result, a decrease in the value of foreign currencies
relative to the U.S. dollar could result in losses from transactions denominated
in foreign currencies. With respect to the Company's international sales that
are U.S. dollar-denominated, such a decrease could make the Company's systems
less price-competitive. Additional risks inherent in the Company's international
business activities include changes in regulatory requirements, the costs and
risks of localizing systems in foreign countries, tariffs and other trade
barriers, political and economic instability, reduced protection for
intellectual property rights in certain countries, difficulties in staffing and
managing foreign operations, difficulties in managing distributors, potentially
adverse tax consequences, foreign currency exchange fluctuations, the burden of
complying with a wide variety of complex foreign laws and treaties and the
possibility of difficulty in accounts receivable collections. The Company
anticipates that product service and support will be more complicated and
expensive with respect to products sold in international markets. The Company
may need to adapt its products to conform to different technical standards that
may exist in foreign countries. Future customer purchase agreements may be
governed by foreign laws, which may differ significantly from U.S. laws.
Therefore, the Company may be limited in its ability to enforce its rights under
such agreements and to collect damages, if awarded. There can be no assurance
that any of these factors will not have a material adverse effect on the
Company's business, operating results and financial condition.
Potential Acquisitions. The Company has in the past evaluated and expects
in the future to pursue acquisitions of businesses, products or technologies
that complement the Company's business. Future acquisitions may result in the
potentially dilutive issuance of equity securities, the use of cash resources,
the incurrence of additional debt, the write-off of in-process research and
development or software acquisition and development costs and the amortization
of expenses related to goodwill and other intangible assets, any of which could
have a material adverse effect on the Company's business, operating results and
financial condition. Future acquisitions would involve numerous additional
risks, including difficulties in the assimilation of the operations, services,
products and personnel of an acquired business, the diversion of management's
attention from other business concerns, entering markets in which the Company
has little or no direct prior experience and the potential loss of key employees
of an acquired business. In addition, there can be no assurance that the Company
would be successful in completing any acquisition. The Company currently has no
agreements or understandings with regard to any acquisition.
Highly Competitive Industry. The market for PhonePrint is new and
intensely and increasingly competitive. The Company believes that the primary
competitive factors in the cloning fraud prevention market in which it currently
competes include product effectiveness and quality, price, service and support
capability and compatibility with cloning fraud prevention systems used by the
carrier in other geographic markets and by the carrier's roaming partners. There
has been a tendency for carriers that purchase cloning fraud prevention systems
to purchase products from the company that supplies cloning fraud prevention
systems to other carriers with whom the purchasing carrier has a roaming
arrangement. As a result, the Company expects it will be significantly more
difficult to sell PhonePrint to a carrier if the carrier's roaming partners use
cloning fraud prevention systems supplied by a competitor. Furthermore, once a
competitor has made a sale of RF-based cloning fraud prevention systems to a
carrier, the Company expects that it is unlikely that the Company would be able
to sell PhonePrint to that carrier.
The Company's principal competitor for RF-based cloning fraud prevention
systems is Cellular Technical Services Company, Inc. ("CTS"). CTS has agreements
pursuant to which it has installed or will install its RF-based cloning fraud
prevention system in many major U.S. markets. PhonePrint also competes with a
number of alternative technologies, including profilers, personal identification
numbers and authentication. The Company is aware of numerous companies,
including GTE Telecommunications Services, Inc., Authentix Network, Inc.,
Systems/Link and Lightbridge, Inc., that currently are or are expected to offer
products in the cloning fraud prevention area. The expansion of digital networks
and the reluctance of carriers to make further investments in their existing
analog infrastructure has limited the demand for PhonePrint. In addition,
carriers may themselves develop technologies that limit the demand for
PhonePrint. There can be no assurance that any such company or any other
competitor will not introduce a new product at a lower price or with greater
functionality than PhonePrint. Furthermore, the demand for PhonePrint would be
materially adversely affected if wireless telecommunications carriers implement
authentication technology applicable to analog phones as their sole cloning
fraud solution in major markets, if U.S. wireless telecommunications carriers
adopt a uniform digital standard that reduces the need for digital phones to
operate in analog mode while roaming, or if analog phone makers change product
designs and/or improve manufacturing standards to a point where the difference
from phone to phone in the radio waveform becomes so small that it is difficult
for PhonePrint to identify a clone. There can be no assurance that any currently
available alternative technology or any new technology will not render the
Company's products obsolete or significantly reduce the market share afforded to
RF-based cloning fraud prevention systems like PhonePrint.
The market for PrePay is new and increasingly competitive. PrePay competes
with a number of alternative prepaid billing products, including post-call
systems, handset-based systems and adjunct switch systems. The Company is aware
of numerous companies, including GTE Telecommunications Services, Inc., Boston
Communications Group, Inc., Brite Voice Systems, Inc., Comverse Technology,
Inc., Glenayre Technologies, Inc., National Telemanagement Corporation, Telemac
Cellular Corporation, Systems/Link Corporation, Prairie Systems, Inc., ORGA
Kartensysteme GmbH, SEMA Group, Logica plc, Alcatel USA, Priority Call
Management, Lucent Technologies, Inc., TeleCommunication Systems, Inc. and
Northern Telecom Limited that currently are or are expected to offer prepaid
wireless billing products. There can be no assurance that any such company or
other competitor will not introduce a new product at a lower price or with
greater functionality than PrePay. Furthermore, the demand for PrePay would be
materially adversely affected if wireless carriers implement wireless
intelligent network standards and a prepaid offering other than PrePay as their
sole prepaid solution in major markets. There can be no assurance that any
currently available alternative technology or any new technology will not render
the Company's PrePay system obsolete or significantly reduce the market share
afforded to prepaid wireless billing systems like PrePay.
The market for other products and services provided to wireless
telecommunications carriers is highly competitive and subject to rapid
technological change, regulatory developments and emerging industry standards.
In addition, many wireless telecommunications carriers and vendors of switches
and other telecommunications equipment may be capable of developing and offering
products and services competitive with new products, if any, that the Company
may offer in the future. Trends in the wireless telecommunications industry,
including greater consolidation and technological or other developments that
make it simpler or more cost-effective for wireless telecommunications carriers
to provide certain services themselves could affect demand for new products, if
any, offered by the Company, and could make it more difficult for the Company to
offer a cost-effective alternative to a wireless telecommunications carrier's
own capabilities.
The Company believes that its ability to compete in the future depends in
part on a number of competitive factors outside its control, including the
ability to hire and retain employees, the development by others of products and
services that are competitive with the Company's products and services, the
price at which others offer comparable products and services and the extent of
its competitors' responsiveness to customer needs. Many of the Company's
competitors and potential competitors have significantly greater financial,
marketing, technical and other competitive resources than the Company. As a
result, the Company's competitors may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or may be able to
devote greater resources to the promotion and sale of their products and
services. To remain competitive in the market for products and services sold to
wireless telecommunications carriers, the Company will need to continue to
invest substantial resources in engineering, research and development and sales
and marketing. There can be no assurance that the Company will have sufficient
resources to make such investments or that the Company will be able to make the
technological advances necessary to remain competitive. Accordingly, there can
be no assurance that the Company will be able to compete successfully with
respect to new products, if any, it offers in the future.
Customer Concentration. To date, a significant portion of the Company's
revenues in any particular period has been attributable to a limited number of
customers, comprised entirely of wireless telecommunications carriers. BellSouth
Cellular Corporation and GTE Mobilnet Service Corporation each accounted for
greater than 10% of the Company's total revenues in 1998 and collectively
accounted for over 23% of the Company's total revenues in 1998. In 1997,
BellSouth Cellular Corporation, GTE Mobilnet Service Corporation and
Southwestern Bell Mobile Systems, Inc. each accounted for greater than 10% of
the Company's total revenues in 1997, and collectively accounted for over 33% of
the Company's total revenues for the year. In 1996, AT&T Wireless Services, and
Los Angeles Cellular Telephone Company each accounted for greater than 10% of
the Company's total revenues, and collectively accounted for over 22% of the
Company's total revenues for the year. A relatively small number of carriers
that operate analog networks are potential customers for PhonePrint and a
relatively small number of carriers that use Ericsson infrastructure equipment
are potential customers for PrePay. The Company believes that the number of
potential customers for future products, if any, will be relatively small. Any
failure by the Company to capture a significant share of those customers could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company expects a relatively small number of customers
will continue to represent a significant percentage of its total revenues for
each quarter for the foreseeable future, although the companies that comprise
the largest customers in any given quarter may change from quarter to quarter.
The terms of the Company's agreements with its customers are generally for
periods of between two and five years. Although these agreements typically
contain annual software license fees and various service and support fees, there
are no minimum payment obligations or obligations to make future purchases of
hardware or to license additional software. Therefore, there can be no assurance
that any of the Company's current customers will generate significant revenues
in future periods.
Uncertainty Regarding Patents and Protection of Proprietary Technology;
Risks of Future Litigation. The Company relies on a combination of patent, trade
secret, copyright and trademark protection and nondisclosure agreements to
protect its proprietary rights. As of December 31, 1998, the Company had four
issued U.S. patent, five pending U.S. patent applications, one issued foreign
patent and two pending foreign patent applications. The Company's success will
depend in large part on the ability of the Company to obtain patent protection,
defend patents once obtained, license third party proprietary rights, maintain
trade secrets and operate without infringing upon the patents and proprietary
rights of others. The patent positions of companies in the wireless
telecommunications industry, including the Company, are generally uncertain and
involve complex legal and factual questions. There can be no assurance that
patents will issue from any patent applications owned or licensed to the Company
or that, if patents do issue, the claims allowed would be sufficiently broad to
protect the Company's technology. In addition, there can be no assurance that
any issued patents owned by or licensed to the Company will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company.
Patents issued and patent applications filed relating to products used in
the wireless telecommunications industry are numerous and there can be no
assurance that current and potential competitors and other third parties have
not filed or in the future will not file applications for, or have not received
or in the future will not receive, patents or obtain additional proprietary
rights relating to products used or proposed to be used by the Company. There
can be no assurance that the Company is aware of all patents or patent
applications that may materially affect the Company's ability to make, use or
sell any current or future products. U.S. patent applications are confidential
while pending in the U.S. Patent and Trademark Office, and patent applications
filed in foreign countries are often first published six months or more after
filing. There can also be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such
assertions will not result in costly litigation or require the Company to obtain
a license to intellectual property rights of such parties. There can be no
assurance that any such licenses would be available on terms acceptable to the
Company, if at all. Furthermore, parties making such claims may be able to
obtain injunctive or other equitable relief that could effectively block the
Company's ability to make, use, sell or otherwise practice its intellectual
property (whether or not patented or described in pending patent applications),
or to further develop or commercialize its products in the U.S. and abroad and
could result in the award of substantial damages. Defense of any lawsuit or
failure to obtain any such license could have a material adverse effect on the
Company's business, operating results or financial condition.
The Company also relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire the same or substantially equivalent
technologies or otherwise gain access to the Company's proprietary technology or
disclose such technology or that the Company can ultimately protect its rights
to such unpatented proprietary technology. No assurance can be given that third
parties will not obtain patent rights to such unpatented trade secrets, which
patent rights could be used to assert infringement claims against the Company.
The Company also relies on confidentiality agreements with its employees,
vendors, consultants and customers to protect its proprietary technology. There
can be no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade secrets
will not otherwise become known to or be independently developed by competitors.
Failure to obtain or maintain patent and trade secret protection, for any
reason, could have a material adverse effect on the Company's business,
operating results and financial condition.
Dependence on New Product Introductions and Product Enhancements. The
Company's future success depends on the timely introduction and acceptance of
new products and product enhancements. However, there can be no assurance that
any new products or product enhancements the Company attempts to develop will be
developed successfully or on schedule, or if developed, that they will achieve
market acceptance. In addition, there can be no assurance that the Company will
successfully execute its strategy of acquiring businesses, products and
technologies from third parties. Any failure by the Company to introduce
commercially successful new products or product enhancements or any significant
delay in the introduction of such new products or product enhancements would
have a material adverse effect on the Company's business, operating results and
financial condition.
The process of developing new products and product enhancements for use in
the wireless telecommunications industry is extremely complex and is expected to
become more complex and expensive in the future as new platforms and
technologies emerge. In the past, the Company has experienced delays in the
introduction of certain product enhancements, and there can be no assurance that
new products or product enhancements will be introduced on schedule or at all.
Any new products or product enhancements may also contain defects when first
introduced or when new versions are released. There can be no assurance that,
despite testing by the Company, defects will not be found in new products or
product enhancements after commencement of commercial shipments, resulting in
loss of or delay in market acceptance. Any loss of or delay in market acceptance
would have a material adverse effect on the Company's business, operating
results and financial condition.
Dependence on Third-Party Products and Services; Sole or Limited Sources
of Supply. The Company relies to a substantial extent on outside vendors to
manufacture many of the components and subassemblies used in PhonePrint and the
hardware and third party software used in PrePay, some of which are obtained
from a single supplier or a limited group of suppliers. The Company's reliance
on outside vendors generally, and a sole or a limited group of suppliers in
particular, involves several risks, including a potential inability to obtain an
adequate supply of required components and reduced control over quality, pricing
and timing of delivery of components. In the past, the Company has experienced
delays in receiving materials from vendors, sometimes resulting in delays in the
assembly of products by the Company. Such delays, or other significant vendor or
supply quality issues, may occur in the future, which could result in a material
adverse effect on the Company's business, operating results or financial
condition. The manufacture of certain of these components and subassemblies is
specialized and requires long lead times, and there can be no assurance that
delays or shortages caused by vendors will not reoccur. Any inability to obtain
adequate deliveries, or any other circumstance that would require the Company to
seek alternative sources of supply or to manufacture internally could delay
shipment of the Company's products, increase its cost of goods sold and have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, from time to time, the Company must also rely
upon third parties to develop and introduce components and products to enable
the Company, in turn, to develop new products and product enhancements on a
timely and cost-effective basis. In particular, the Company must rely on the
development efforts of third party wireless infrastructure providers in order to
allow its PrePay product to integrate with both existing and future generations
of the infrastructure equipment. There can be no assurance that the Company will
be able to obtain access in a timely manner to third-party products and
development services necessary to enable the Company to develop and introduce
new and enhanced products, that the Company will obtain third-party products and
development services on commercially reasonable terms or that the Company will
be able to replace third-party products in the event such products become
unavailable, obsolete or incompatible with future versions of the Company's
products. The absence of, or any significant delay in, the replacement of
third-party products could have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on Personnel. The success of the Company is dependent, in part,
on its ability to attract and retain highly qualified personnel. The Company's
future business and operating results depend upon the continued contributions of
its senior management and other employees, many of whom would be difficult to
replace and certain of whom perform important functions for the Company beyond
those functions suggested by their respective job titles or descriptions.
Competition for such personnel is intense and the inability to attract and
retain additional senior management and other employees or the loss of one or
more members of the Company's senior management team or current employees,
particularly to competitors, could materially adversely affect the Company's
business, operating results or financial condition. There can be no assurance
that the Company will be successful in hiring or retaining requisite personnel.
None of the Company's employees has entered into employment agreements with the
Company, and the Company does not have any key-person life insurance covering
the lives of any members of its senior management team.
Management of Growth. The Company has rapidly and significantly expanded
its operations. Such growth has placed, and, if sustained, will continue to
place, significant demands on the Company's management, information systems,
operations and resources. The strain experienced to date has chiefly been in
hiring, integrating and effectively managing sufficient numbers of qualified
personnel to support the expansion of the Company's business. The Company's
ability to manage any future growth, should it occur, will continue to depend
upon the successful expansion of its sales, marketing, research and development,
customer support and administrative infrastructure and the ongoing
implementation and improvement of a variety of internal management systems,
procedures and controls. There can be no assurance that the Company will be able
to attract, manage and retain additional personnel to support any future growth,
if any, or will not experience significant problems with respect to any
infrastructure expansion or the attempted implementation of systems, procedures
and controls. Any failure in one or more of these areas could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Government Regulation and Legal Uncertainties. While most of the
Company's operations are not directly regulated, the Company's existing and
potential customers are subject to a variety of U.S. and foreign governmental
regulations. Such regulations may adversely affect the wireless
telecommunications industry, limit the number of potential customers for the
Company's products or impede the Company's ability to offer competitive products
and services to the wireless telecommunications industry or otherwise have a
material adverse effect on the Company's business, financial condition and
results of operations. Recently enacted legislation, including the
Telecommunications Act of 1996, deregulating the telecommunications industry may
cause changes in the wireless telecommunications industry, including the
entrance of new competitors and industry consolidation, which could in turn
increase pricing pressures on the Company, decrease demand for the Company's
products, increase the Company's cost of doing business or otherwise have a
material adverse effect on the Company's business, operating results and
financial condition. The Telecommunications Act of 1996 contains several
provisions that may bear directly on the Company's existing and potential
customers in the U.S., including provisions that require wireless carriers to
interconnect with local exchange carriers and contribute to a universal service
fund, that limit the ability of state and local governments to discriminate
against or prohibit certain wireless services and that may allow certain
companies to bundle local and long distance services with wireless offerings.
These provisions may cause an increase in the number of wireless
telecommunications carriers which could in turn increase the number of potential
customers of the Company. This could require the Company to expand its marketing
efforts with no assurance that revenues would increase proportionately or at
all. Alternatively, these provisions could encourage industry consolidation,
which would reduce the Company's potential customer base. Currently the FCC and
state authorities are implementing the provisions of the Telecommunications Act
of 1996 and several of the decisions by the FCC and state authorities are
already being challenged in court. Therefore, the Company cannot at this time
predict the extent to which the Telecommunications Act of 1996 will affect the
Company's current and potential customers or ultimately affect the Company's
business, financial condition or results of operations. If the recent trend
toward privatization and deregulation of the wireless telecommunications
industry outside of the U.S. were to discontinue, or if currently deregulated
international markets were to reinstate comprehensive government regulation of
wireless telecommunications services, the Company's business, operating results
and financial condition could be materially and adversely affected. In addition,
the problem of cloning fraud has received heightened attention from Congress and
the FCC, which are exploring legislative and regulatory initiatives that would
impose stricter penalties for, and increase enforcement against, cloning fraud.
The Company cannot predict the effect of such initiatives on the Company's
business, operating results or financial condition, including demand for the
Company's products.
Dependence on Growth of Wireless Telecommunications Industry. The
Company's future financial performance will depend in part on the number of
carriers seeking third-party solutions to the problem of cloning fraud and the
number of carriers seeking to implement prepaid billing services. Although the
wireless telecommunications industry has experienced significant growth in
recent years, there can be no assurance that such growth will continue at
similar rates, or that, if the industry does grow, there will be continued
demand for the Company's cloning fraud prevention, prepaid metered billing or
other products. Any decline in demand for wireless telecommunications products
and services in general would have a material adverse effect on the Company's
business, operating results and financial condition.
Risk of System Failure. The continued, uninterrupted operation of the
PhonePrint system depends on protecting it from damage from fire, earthquake,
power loss, communications failure, unauthorized entry or other events. Any
damage to or failure of a component or combination of components that causes a
significant reduction in the performance of a PhonePrint system could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company currently does not have liability insurance to
protect against these risks and there can be no assurance that such insurance
will be available to the Company on commercially reasonable terms, or at all. In
addition, if any carrier using PhonePrint encounters material performance
problems, the Company's reputation and its business, operating results and
financial condition could be materially adversely affected.
Year 2000 Compliance. The Company's products use and are dependent upon
certain internally developed and third party software programs The Company has
initiated a review and assessment of all hardware and software used in its
products to confirm that they will function properly in the year 2000. With
respect to software developed internally by the Company, the results of that
evaluation to date initially revealed certain source codes that were unable to
appropriately interpret the upcoming calendar year 2000. The Company has
completed its work to upgrade these 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 the Company's products, all
vendors whose software is used by the Company 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 the
Company, will not be discovered which could present a material risk to the
function of the Company's products and have a material adverse effect on the
Company's business, operation results and financial condition.
Future Capital Requirements. The Company's future capital requirements
will depend upon many factors, including the commercial success of PhonePrint
and PrePay, the timing and success of new product introductions, if any, the
progress of the Company's research and development efforts, the Company's
results of operations, the status of competitive products and the potential
acquisition of businesses, technologies or assets. The Company believes that
combination of existing sources of liquidity and internally generated cash will
be sufficient to meet the Company's projected cash needs for at least the next
12 months. There can be no assurance, however, that the Company will not require
additional financing prior to such date to fund its operations. In addition, the
Company may require additional financing after such date to fund its operations.
There can be no assurance that any additional financing will be available to the
Company on acceptable terms, or at all, when required by the Company. If
additional funds are raised by issuing equity securities, further dilution to
the existing stockholders will result. If adequate funds are not available, the
Company may be required to delay, scale back or eliminate one or more of its
development or manufacturing programs or obtain funds through arrangements with
third parties that may require the Company to relinquish rights to certain of
its technologies or potential products or other assets that the Company would
not otherwise relinquish. Accordingly, the inability to obtain such financing
could have a material adverse effect on the Company's business, operating
results and financial condition.
Volatility of Stock Price. The market price of the Common Stock is likely
to be highly volatile and could be subject to wide fluctuations in response to
numerous factors, including, but not limited to, revenues attributable to
PhonePrint and PrePay, new products or new contracts by the Company or its
competitors, actual or anticipated variations in the Company's operating
results, the level of operating expenses, changes in financial estimates by
securities analysts, potential acquisitions, regulatory announcements,
developments with respect to patents or proprietary rights, conditions and
trends in the wireless telecommunications and other industries, adoption of new
accounting standards affecting the industry and general market conditions. As a
result, the Company expects that from time to time its future operating results
will be below the expectations of market analysts and investors, which would
likely have a material adverse effect on the prevailing market price of the
Common Stock. The realization of any of the risks described in these "Risk and
Uncertainties" could have a dramatic and adverse impact on the market price of
the Common Stock.
Further, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of equity
securities of many companies in the telecommunications industry and that often
have been unrelated or disproportionate to the operating performance of such
companies. These market fluctuations, as well as general economic, political and
market conditions such as recessions or international currency fluctuations may
adversely affect the market price of the Common Stock. In the past, following
periods of volatility in the market price of the securities of companies in the
telecommunications industry, securities class action litigation has often been
instituted against those companies. Such litigation, if instituted against the
Company, could result in substantial costs and a diversion of management
attention and resources, which would have a material adverse effect on the
Company.
Antitakeover Effects of Charter, Bylaws and Delaware Law. The Company's
Restated Certificate of Incorporation authorizes the Company's Board of
Directors (the "Board") to issue shares of undesignated Preferred Stock without
stockholder approval on such terms as the Board may determine. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any such Preferred Stock that may be issued in the
future. Moreover, the issuance of Preferred Stock may make it more difficult for
a third party to acquire, or may discourage a third party from acquiring, a
majority of the voting stock of the Company. The Company's Restated Bylaws
divide the Company's Board into three classes of directors. One class of
directors is elected each year with each class serving a three-year term. These
and other provisions of the Restated Certificate of Incorporation and the
Restated Bylaws, as well as certain provisions of Delaware law, could delay or
impede the removal of incumbent directors and could make more difficult a
merger, tender offer or proxy contest involving the Company, even if such events
could be beneficial to the interest of the stockholders. Such provisions could
limit the price that certain investors might be willing to pay in the future for
the Common Stock.
ITEM 2. Properties.
The Company maintains its corporate headquarters in Palo Alto, California.
This leased facility, totaling 34,555 square feet, contains the principal
administrative, assembly, manufacturing, marketing and sales facilities. The
lease on this facility expires on June 1, 2002, and includes the right to expand
into the remaining 20,455 feet of space in the building beginning in April 1998.
To date, the Company has not exercised this option. The Company also maintains a
facility in Irvine, California. This lease, for 32,000 square feet, expires on
April 30, 2001.
ITEM 3. Legal Proceedings.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of the
date of this Report, the Company is not engaged in any legal proceedings that
are expected, individually or in the aggregate, to have a material adverse
effect on the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1998.
<PAGE>
PART II
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ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Price of and Dividends on the Registrants Common Equity.
The Company's Common Stock trades on The Nasdaq Stock Market under the
symbol "CAIR." The table below sets forth the high and low closing sales prices
per share as reported on The Nasdaq Stock Market since the Company's initial
public offering on July 29, 1997.
High Low
Year Ended December 31, 1997
Third quarter ended September 30, 1997 (1) $21.625 $15.000
Fourth quarter ended December 31, 1997 $26.000 $15.000
Year Ended December 31, 1998
First quarter ended March 31, 1998 $22.250 $14.000
Second quarter ended June 30, 1998 $21.188 $ 6.500
Third quarter ended September 30, 1998 $11.000 $ 2.625
Fourth quarter ended December 31, 1998 $ 6.250 $ 2.625
(1) From July 29, 1997 through end of the third quarter.
On February 28, 1999, the last reported sale price of the Registrant's
Common Stock was $4.375 per share. As of February 28, 1999, the number of record
holders of the Company's Common Stock was 251 and the number of beneficial
holders was approximately 1,900. The Company has declared no cash dividends on
its Common Stock. The Company currently intends to retain any earnings for use
in its business and does not anticipate paying any cash dividends in the
foreseeable future.
<PAGE>
ITEM 6. Selected Financial Data
The following selected financial data should be read in conjunction with
the Company's consolidated financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.
On June 23, 1998, Corsair acquired Subscriber Computing, Inc. ("SCI") in a
merger accounted for under the pooling-of-interests method of accounting. The
Company's consolidated financial statements have been restated to include the
financial position and results of SCI for all periods presented. Due to the
fiscal year end conversion of SCI to that of Corsair, SCI's net revenues of $2.9
million and net loss of $4.9 million for the three month period ended December
31, 1997 are not included in the Statement of Operations data.
The selected financial data presented below under the captions "Statement
of Operations Data" for each of the years ended December 31, 1994, 1995, 1996,
1997 and 1998 combines Corsair's statements of operations for each of the years
in the five-year period ended December 31, 1998 with SCI's statements of
operations for each of the years in the four-year period ended September 30,
1997, and the year ended December 31, 1998, respectively, giving effect to the
fiscal year end conversion and the merger as if it had occurred at the beginning
of the earliest period presented on a pooling-of-interest basis. The financial
information of Corsair has been derived from Corsair's audited financial
statements for each of the years in the five-year period ended December 31,
1998. Historical information is not necessarily indicative of the operating
results or financial position that would have occurred had the merger been
consummated at the beginning of the periods presented, nor is it indicative of
future operation results or financial position.
Year Ended December 31,
1994 1995 1996 1997 1998
-------- --------- -------- --------- --------
Statement of Operations Data:
Total revenues $ 4,918 $ 15,139 31,216 $ 60,856 $65,218
Total cost of revenues 3,063 12,716 24,935 36,867 26,562
-------- --------- -------- --------- --------
Gross profit 1,855 2,423 6,281 23,989 38,656
Operating costs and expenses:
Research and development 595 3,421 8,583 12,525 18,289
Sales and marketing 837 4,274 7,764 11,411 16,775
General and adminstrative 1,271 3,547 5,282 9,432 8,501
Write-off of in process
research and development 4,894 -- -- -- --
Write-off of capitalized -- -- 3,760 -- --
software costs
Merger related expenses -- -- -- -- 4,191
-------- --------- -------- --------- --------
Total operating costs 7,597 11,242 25,389 33,368 47,756
and expenses -------- --------- -------- --------- --------
Operating loss (5,742) (8,819) (19,108) (9,379) (9,100)
Interest income (expense), (31) 181 (494) 1,191 2,460
net
-------- --------- -------- --------- --------
Loss before income taxes (5,773) (8,638) (19,602) (8,188) (6,640)
Income taxes expense 2 2 3 8 --
-------- --------- -------- --------- --------
Loss before extraordinary (5,775) (8,640) (19,605) (8,196) (6,640)
item
Loss on debt -- -- -- (428) (226)
extinguishment, net -------- --------- -------- --------- --------
Net loss $(5,775) $(8,640) $(19,605) $ 8,624) $(6,866)
======== ========= ======== ========= ========
Basic and diluted net loss
per share
Loss per share before -- $ (5.49) $(11.57) $ (0.82) $ (0.38)
extraordinary item
Extraordinary item -- $ -- $ -- $ (0.04) $ (0.01)
-------- --------- -------- -------- ---------
Basic and diluted net loss -- $ (5.49) $(11.57) $ (0.86) $ (0.39)
per share ======== ========= ======== ======== =========
Shares used in per share -- 1,573 1,694 10,017 17,749
calculation ======== ========= ======== ======== =========
<PAGE>
December 31,
1994 1995 1996 1997 1998
---------- ---------- ---------- --------- ---------
Balance Sheet Data:
Cash, cash equivalents
& short term investments $ 7,145 $ 15,569 $ 22,081 $ 62,953 $ 38,573
Working capital 9,336 15,145 17,670 51,321 45,424
Total assets 15,985 26,707 41,726 87,539 71,560
Long-term obligations 3,018 8,030 8,295 3,164 1,624
Total stockholders' 9,881 13,077 13,651 57,375 52,114
equity
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis may contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in such forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Item 1. Business - Risks and Uncertainties." The
Company undertakes no obligation to release publicly the results of any
revisions to these forward-looking statements to reflect events or circumstances
arising after the date hereof.
As noted above, Corsair acquired Subscriber Computing, Inc. ("SCI") in a
combination accounted for under the pooling-of-interests method of accounting.
As such, the Company's consolidated financial statements have been restated to
include the financial position and results of SCI for all periods presented. The
following should be read in conjunction with the Company's consolidated
financial statements and notes thereto, and discussion of the Company's business
and risks and uncertainties affecting it results of operations, included
elsewhere in this Annual Report on Form 10-K.
Overview
Corsair Communications, Inc. is a leading provider of software and system
solutions for the wireless industry. Corsair's PhonePrint(R) system has proven
highly effective in reducing cloning fraud. The PhonePrint system has prevented
hundreds of millions of fraudulent call attempts; some of Corsair's customers
have reported up to a 95% reduction in cloning fraud losses after deploying
PhonePrint. The Company's PrePay(TM) billing system provides wireless
telecommunications carriers with a prepaid system designed to fully integrate
with the upcoming wireless intelligent network standards. The Company believes
that its products can provide a number of benefits to wireless
telecommunications carriers, including reduced costs, improved cash flow,
increased market penetration and improved customer service.
The worldwide demand for wireless telecommunications services has grown
significantly in recent years as those services have become widely available and
increasingly affordable. The Yankee Group estimates that the number of wireless
telecommunications subscribers worldwide increased from approximately 85 million
in 1995 to approximately 270 million in 1998, and the number of subscribers is
expected to approximate 530 million by the end of 2002.
The Company's revenue is comprised of three categories: hardware, software
and service revenue. Revenue from hardware sales is recognized upon shipment,
unless a sales agreement contemplates that Corsair provide testing, integration
or implementation services, in which case hardware revenue is recognized upon
commissioning and acceptance of the product (the activation of the cell site
equipment following testing integration and implementation). Revenue from the
licensing of software products generally is recognized upon delivery of the
products, unless the sales includes post-contract customer support for which
vendor specific objective evidence does not exist, in which case the revenue is
recognized ratably over the term of the license period. Revenue from services is
recognized ratably over the term of the maintenance support, on a percentage of
completion basis over the term of the consulting effort, or during the month the
training or operations support is provided.
Cost of hardware revenue consists of manufacturing overhead for the
Company's test and assembly operation, materials purchased from the Company's
subcontractors and vendors, hardware purchased from third party vendors,
depreciation of rental units, and shipping costs. Cost of software license
revenue primarily includes fees paid to third party software vendors, as well as
costs associated with the installation and configuration of the software. Cost
of service revenue consists primarily of expenses for personnel engaged in
network support, customer support, installation, training and consulting as well
as communications charges and network equipment depreciation.
The Company's gross margin has grown significantly in the past and may
vary significantly in the future, depending on the mix of hardware, software and
services. The Company's software licenses have a higher gross margin than its
service and hardware revenue. In addition, the hardware gross margin can vary
from customer to customer depending on the contract and from model to model
depending upon the customer's cell site and switch configuration. Therefore, the
Company's operating results will be affected by the mix of hardware units,
software licenses, and service fees recognized during each period.
The Company sells PhonePrint primarily through its direct sales force, but
has also entered into distribution agreements with Motorola, Ericsson, Aurora
and Telesis, and seeks to enter into additional distribution agreements for
international markets. The Company has entered into a sales referral agreement
with Lucent and Sumitomo. The Company sells PrePay primarily through a
distribution arrangement with Ericsson and to a limited extent through its
direct sales force. The Company's gross margin will also vary depending on the
mix of direct sales and sales through distribution channels and sales referral
arrangements.
The Company continues to make efforts to generate profits by increasing
sales volume, decreasing costs of goods sold, and through certain other
measures. While the Company has certain programs in place intended to reduce
operating costs, the Company's expenses could increase in the foreseeable
future. As a result, there can be no assurance that the Company will reach or
sustain profitability. See "Risks and Uncertainties - Lack of Sustained
Profitability".
Results of Operations-Years Ended December 31, 1996, 1997 and 1998
Revenues. For the years ended December 31, 1996, 1997 and 1998, total
revenues were $31.2, $60.9 and $65.2 million, respectively. Hardware revenue
increased 108.5% from $18.2 million in 1996 to $37.9 million in 1997, and
decreased 10% to $34.1 million in 1998. The hardware revenue increase from 1996
to 1997 was due primarily to the growth in the installed base of PhonePrint
units. The growth in the installed base slowed in 1998 following the saturation
of the domestic markets in addition to delayed sales in international markets as
a result of economic difficulties in such markets. Software revenue increased
66.5% from $7.4 million in 1996 to $12.3 million in 1997, and increased 11.5% to
$13.7 million in 1998. The growth in software revenues was due to an increase in
the number of licenses and upgrades sold following the introduction of new
products and software versions. Service revenue increased 88.6% from $5.7
million in 1996 to $10.7 million in 1997, and increased 63.2% to $17.4 million
in 1998. The increase in service revenue was attributable to growth in the
installed base for both hardware and software sales which included maintenance
and other service contracts over the years.
Gross Profit. Gross profit increased from $6.3 million for 1996 to $24.0
million for 1997 and $38.7 million for 1998, or 20.1%, 39.4%, 59.3% of total
revenues, respectively. The increase in gross profit was due primarily to
improved margins from hardware revenues, which contributed $455,000 in 1996,
$9.9 million in 1997, and $16.9 million in 1998. Increased contributions from
software revenues of $5.4, $10.4, and $12.4 million for 1996, 1997, and 1998,
respectively also increased the Company's gross profit. Service revenue gross
profit for the year ended December 31, 1996 improved from $402,000, to a gross
profit of $3.6 million and $9.3 million in the following two years. The
increasing margins resulted from improved pricing models and manufacturing
yields.
Research and Development. Research and development expenses were $8.6,
$12.5 and $18.3 million for the years ended December 31, 1996, 1997, and 1998,
or 27.5%, 20.6% and 28.0% of total revenues, respectively. The increase in
absolute dollars was due primarily to the hiring of additional engineering and
consulting personnel related to the continued development of PhonePrint and
development work on new software products. The decrease as a percentage of total
revenues from 1996 to 1997, was due to a higher growth in sales than engineering
headcount during the period. In 1998, increased hiring of technical personnel
and consultants increased research and development costs as a percentage of
revenues to assist in the development of new products.
Sales and Marketing. Sales and marketing expenses were $7.8, $11.4 and
$16.8, million for the years ended December 31, 1996, 1997, and 1998, or 24.9%,
18.8% and 25.7% of total revenues, respectively. The increase in absolute
dollars resulted from the hiring of additional sales and marketing personnel to
support the increased sales of PhonePrint and to support the increase in service
revenue. The decrease in percentage of total revenues in 1997 was due to a
larger increase in the Company's revenues, in comparison to the growth in sales
and marketing headcount.
General and Administrative. General and Administrative expenses were
$5.3, $9.4 and $8.5, million for the years ended December 31, 1996, 1997, and
1998, or 16.9%, 15.5% and 13.0% of total revenues, respectively. The increase in
absolute dollars in 1997 was due primarily to increased staffing needed to
support growing operations, while the decrease in 1998 was due to the
consolidation of operations. The decrease in percentage of total revenues was
due to the overall increase in the Company's revenues from year to year, in
addition to the reduced headcount in 1998.
Write-off of Capitalized Software Costs. During 1996, the Company wrote
off $3.8 million of previously capitalized software costs after evaluating the
recoverability of capitalized costs and determining that such costs were not
recoverable based on changes in product mix.
Merger Related Expenses. As discussed in the Notes to the Consolidated
Financial Statements, Corsair incurred $4.2 million in merger related costs
resulting from the acquisition of SCI in 1998. The one-time charges included
transaction costs, termination benefits for approximately 20 employees, and
redundant facility and other equipment costs associated with the merger.
Interest Income (Expense), Net. Net interest expense was $494,000 for the
year ended December 31, 1996 as compared to net interest income of $1.2 million
in 1997 and $2.5 million in 1998. Net interest income and expense consists of
interest income from the Company's cash and short-term investments, net of
interest expense on the Company's equipment loans, equipment lease lines and
other loans obtained primarily in 1996 and 1997. The increase in net interest
income in 1997 and 1998 was a result of larger average cash investments
attributable to the proceeds received from the Company's initial public offering
of Common Stock completed in July 1997.
Extraordinary Item. During the years ended December 31, 1997 and 1998, the
Company incurred losses on debt extinguishment of $428,000 and $226,000
associated with paying the principal and interest of $5.1 million and $4.8
million, respectively, on short-term and long-term notes payable.
Income Taxes. The income tax expense for the years ended December 31,
1996, 1997 and 1998 represent minimum state tax liabilities.
Liquidity and Capital Resources
The Company's operating activities used cash of $16.5 million for the year
ended December 31, 1998. The increased use of cash was due to decreased accounts
payable (net of the merger related expenses) and deferred revenue, and increased
accounts receivable related to higher sales volume late in the year.
The Company's investing activities provided cash of $6.9 million for the
year ended December 31, 1998. Net cash of $10.3 million was received for the
sale and maturities of short-term investments, and cash of $3.4 million was used
for the purchase of property and equipment, primarily computer hardware and
software, and for leasehold improvements to the Company's facility.
The Company's financing activities used cash of $4.4 million for the year
ended December 31, 1998, that was primarily attributable to the debt
extinguishment discussed above.
The Company has funded its operations from inception primarily through a
series of Preferred Stock, debt financing, and an initial public offering. In
July 1997, the Company completed its initial public offering generating $39.1
million of net proceeds. At December 31, 1998, the Company had cash and cash
equivalents of approximately $4.2 million and short-term investments of
approximately $34.4 million. The Company believes that existing sources of
liquidity and internally generated cash, if any, will be sufficient to meet the
Company's projected cash needs for at least the next 12 months. The Company
intends to continue its significant product development efforts in the future
and expects to fund those activities out of working capital. There can be no
assurance, however, that the Company will not require additional financing prior
to such date to fund its operations or possible acquisitions. In addition, the
Company may require additional financing after such date to fund its operations.
There can be no assurance that any additional financing will be available to the
Company on acceptable terms, or at all, if and when required by the Company.
Year 2000 Issue
The year 2000 issue refers to the inability of certain date-sensitive
computer chips, software and systems to recognize a two-digit date field as
belonging to the 21st Century. Mistaking "00" for 1900 or any other incorrect
year could result in a system failure or miscalculations, causing disruptions to
Corsair's products or operations (including manufacturing, or a temporary
inability to process transactions or send invoices, or engage in other normal
business activities). The year 2000 issue may create unforeseen risks to Corsair
from product or internal computer system failures, as well as from the failure
of third party computer systems with which it deals. Failures of Corsair's
products or computer systems and or third party computer systems could have a
material adverse impact on Corsair's ability to conduct its business.
Management has initiated an enterprise-wide program to prepare Corsair's
computer systems and applications for the year 2000 with respect to: (1) the
portion of products developed internally by Corsair, (2) systems and
applications developed by third parties and incorporated in Corsair's products,
and (3) systems relied upon to conduct operations (including payroll, accounting
and cash management). With respect to software developed internally by the
Company, the results of that evaluation to date initially revealed certain
source codes that were unable to appropriately interpret the upcoming calendar
year 2000. The Company has completed its work to upgrade these 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
the Company's products, all vendors whose software is used by the Company have
indicated that their software is or will be year 2000 compliant. This includes
all systems relied upon to conduct operations. Currently, the Company is
establishing contingency plans to address the impact to the Company in the event
its suppliers, products and internal systems are not year 2000 compliant.
Evaluation of year 2000 issues is continuing, and there can be no assurance that
additional issues, not presently known by the Company, will not be discovered
which could present a material risk to the function of the Company's products
and have a material adverse effect on the Company's business, operating results
and financial condition. The total cost of the testing and conversion of
internally developed hardware and software is expected to be approximately
$600,000 and should be substantially incurred by June 30, 1999. A significant
portion of these costs has not been incremental costs to Corsair, rather
redeployment of existing information technology resources. Corsair expects to
continue 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.
ITEM 7. Quantitative and Qualitative Disclosures about Market Risk
We invest our excess cash and short-term investment in corporate debt
securities with high quality credit ratings and maturities of less than one
year. These investments are not held for trading or other speculative purposes.
Changes in interest rates affect the investment income we earn on our
investments and, therefore, impact our cash flows and results in operations. At
December 31, 1998, we had outstanding a note payable for $2.0 million which
matures in 2001. The note has a fixed interest rate of 15.8%. Accordingly, while
changes in interest rates may affect the fair market value of the notes, they do
not impact our cash flows or results of operations. We are not exposed to risks
for changes in foreign currency exchange rates, commodity prices, or any other
market rates.
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
Annual Report on Form 10-K
For the Year Ended December 31, 1998
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
------
Independent Auditors' Report, KPMG LLP 28
Independent Auditors' Report, Deloitte & Touche LLP 29
Consolidated Balance Sheets as of December 31, 1997 and 1998 30
Consolidated Statements of Operations for the years ended December 31, 31
1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity for the years ended 32
December 31, 1996, 1997 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 33
1996, 1997 and 1998
Notes to Consolidated Financial Statements 34
<PAGE>
Independent Auditors' Report
The Board of Directors
Corsair Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Corsair
Communications, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of Corsair's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We did not audit the statements of
operations, stockholders' equity and cash flows of Subscriber Computing Inc., a
company acquired by Corsair Communications, Inc. in a business combination
accounted for as a pooling of interests as described in Note 4 to the
consolidated financial statements, which reflect total revenues constituting
37.2% and 21.4% in fiscal 1996 and 1997 respectively, of the related
consolidated totals. Those financial statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Subscriber Computing Inc., is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Corsair Communications, Inc. and
its subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
San Francisco, California
February 2, 1999
<PAGE>
Independent Auditors' Report
The Board of Directors
Subscriber Computing, Inc.:
We have audited the balance sheets of Subscriber Computing, Inc. ("SCI")
as of September 30, 1997 and 1996, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended September 30, 1997 (not presented separately herein). These
financial statements are the responsibility of SCI's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Subscriber Computing, Inc.
as of September 30, 1997 and 1996, and the results of its operations and its
cash flow for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
January 7, 1998
<PAGE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
1997 1998
ASSETS
Current assets:
Cash and cash equivalents $ 18,228 $ 4,196
Short-term investments 44,725 34,377
Trade accounts receivable, less allowance
for doubtful accounts of $1,428
for 1997 and $2,896 for 1998 5,610 14,134
Evaluation inventory 4,745 2,597
Inventories, net 3,618 5,676
Prepaid expenses 1,395 2,266
---------- ---------
Total current assets 78,321 63,246
Property and equipment, net 7,110 7,422
Other assets 2,108 892
---------- ---------
$ 87,539 $ 71,560
========== =========
LIABILITIES AND STOCKHOLDERS'EQUITY
Current liabilities:
Accounts payable $ 1,419 $ 1,706
Accrued expenses 7,881 7,731
Current portion of notes payable 4,559 639
Current portion of capital lease 789 609
obligations
Deferred revenue 12,352 7,137
---------- ---------
Total current liabilities 27,000 17,822
Notes payable, net of current portion 2,380 1,407
Capital lease obligations, net of current 784 217
portion ---------- ---------
Total liabilities 30,164 19,446
---------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value; 20,000,000
shares authorized; 17,548,562, and
17,976,492 shares issued and outstanding
at December 31, 1997 and 1998,
respectively 17 18
Notes receivable from stockholders (511) (468)
Additional paid-in capital 104,142 105,433
Deferred compensation (648) (288)
Accumulated deficit (45,625) (52,581)
---------- ---------
Total stockholders' equity 57,375 52,114
---------- ---------
$ 87,539 $ 71,560
========== =========
See accompanying notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
1996 1997 1998
----------- ----------- -----------
Revenues:
Hardware 18,168 37,882 34,089
Software 7,390 12,303 13,717
Service 5,658 10,671 17,412
----------- ----------- -----------
Total revenues 31,216 60,856 65,218
----------- ----------- -----------
Cost of revenues:
Hardware 17,713 27,938 17,151
Software 1,966 1,903 1,317
Service 5,256 7,026 8,094
----------- ----------- -----------
Total cost of revenues 24,935 36,867 26,562
----------- ----------- -----------
Gross profit 6,281 23,989 38,656
----------- ----------- -----------
Operating costs and expenses:
Research and development 8,583 12,525 18,289
Sales and marketing 7,764 11,411 16,775
General and 5,282 9,432 8,501
administrative
Write-off of 3,760 - -
capitalized software costs
Merger related expenses - - 4,191
----------- ----------- -----------
Total operating costs and 25,389 33,368 47,756
expenses ----------- ----------- -----------
Operating loss (19,108) (9,379) (9,100)
Interest income (expense), net (494) 1,191 2,460
----------- ----------- -----------
Loss before income taxes (19,602) (8,188) (6,640)
Income tax expense 3 8 -
----------- ----------- -----------
Loss before extraordinary (19,605) (8,196) (6,640)
item
Loss on debt extinguishment, - (428) (226)
net =========== =========== ===========
Net loss $ (19,605) $ (8,624) $ (6,866)
=========== =========== ===========
Basic and diluted net loss per share data:
Loss before extraordinary
item $ (11.57) $ (0.82) $ (0.38)
Extraordinary item - (0.04) (0.01)
=========== =========== ===========
Basic and diluted net loss $ (11.57) $ (0.86) $ (0.39)
per share =========== =========== ===========
Shares used in per share 1,694 10,017 17,749
calculation =========== =========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
CONVERTIBLE NOTE
PREFERRED COMMON RECEIVABLE ADDITIONAL TOTAL
STOCK STOCK FROM PAID-IN DEFERRED ACCUM. STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCKHOLDER CAPITAL COMPENSATION DEFICIT EQUITY
Balance as
of December 6,741,424 7 1,814,863 2 -- 25,392 -- (12,324) 13,077
31, 1995
Exercise of
common -- -- 553,344 -- (136) 230 -- -- 94
stock
options
Issuance of
convertible -- -- -- -- -- 131 -- -- 131
preferred
stock
warrants
in
conjunction
with debt
financing
Issuance of
Series C 2,424,864 2 -- -- -- 19,948 -- -- 19,950
convertible
preferred
stock,
net of
issuance
costs
Deferred
compensation -- -- -- -- -- 73 (73) -- --
related
to grant of
stock
options
Amortization
of deferred -- -- -- -- -- -- 4 -- 4
compensation
Net loss -- -- -- -- -- -- -- (19,605) (19,605)
----------------------------------------------------------------------------------------------
Balance as
of December 9,166,288 9 2,368,207 2 (136) 5,774 (69) (31,929) 13,651
31, 1996
Exercise of
common -- -- 730,417 1 -- 402 -- -- 403
stock
options
Issuance of
common -- -- 58,828 -- -- 142 -- -- 142
stock
for an
acquisition
Issuance of
common -- -- 178,229 -- (375) 375 -- -- --
stock for
notes
receivable
Issuance of
Series B 1,911,951 2 -- -- -- 14,092 -- -- 14,094
convertible
preferred
stock,
net of
issuance
costs
Issuance of
Series D 266,668 -- -- -- -- 2,996 -- -- 2,996
convertible
preferred
stock,
net of
issuance
costs
Deferred
compensation -- -- -- -- -- 1,129 (1,129) -- --
related
to grant of
stock
options
Amortization
of deferred -- -- -- -- -- -- 550 -- 550
compensation
Conversion
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
of preferred (11,344,907) (11) 11,344,907 11 -- -- -- -- --
stock to
common stock
Issuance of
common -- -- 2,875,000 3 -- 39,055 -- -- 39,058
stock
net of
issuance
costs
Repurchase
of common -- -- (7,026) -- -- (3) -- -- (3)
stock
Accretion
attributable -- -- -- -- -- 180 -- (180) --
to
subsidiary's
preferred
stock
Net loss -- -- -- -- -- -- -- (8,624) (8,624)
Change in
subsidiary's -- -- -- -- -- -- -- (4,892) (4,892)
year end
---------------------------------------------------------------------------------------------
Balances as
of December -- -- 17,548,562 17 (511) 104,142 (648) (45,625) 57,375
31, 1997
Stock
issued under -- -- 384,932 1 -- 1,209 -- -- 1,210
stock
option
and stock
purchase
plans
Stock
issued -- -- 40,409 -- -- -- -- -- --
pursuant to
exercise
of warrants
Notes
receivable -- -- -- -- 43 -- -- -- 43
repayments
Issuance of
common -- -- 13,575 -- -- -- -- -- --
stock
for an
acquisition
Accretion
attributable -- -- -- -- -- 90 -- (90) --
to
subsidiary's
preferred
stock
Repurchase
of common -- -- (10,986) -- -- (8) -- -- (8)
stock
Amortization
of deferred -- -- -- -- -- -- 360 -- 360
compensation
Net loss -- -- -- -- -- -- -- (6,866) (6,866)
----------------------------------------------------------------------------------------------
Balances as
of December
31, 1998 -- -- 17,976,492 $ 18 $(468) $ 105,433 $ (288) $(52,581) $52,114
==============================================================================================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
---------- --------- ----------
Cash flows from operating activities:
Net loss $(19,605) $ (8,624) $ (6,866)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,389 2,934 4,243
Amortization of deferred compsensation 4 550 360
Extraordinary loss on extinguishment - 428 226
of debt
Loss on disposition of fixed assets 3 100 -
Write-off of capitalized software 3,761 - -
development costs
Merger-related costs - - 4,191
Changes in operating assets and
liabilities:
Trade accounts receivables (3,373) (886) (8,524)
Inventories (6,965) 969 90
Prepaid expenses and other assets (277) (2,341) (990)
Accounts payable and accrued expenses 5,904 153 (4,054)
Deferred revenue 1,692 4,487 (5,215)
---------- --------- ---------
Net cash used in operating activities (17,467) (2,230) (16,539)
---------- --------- ---------
Cash flow from investing activities:
Purchase of short-term investments (2,472) (66,601) (29,514)
Proceeds from sales and maturities of 1,957 23,969 39,862
short-term investments
Purchases of property and equipment (1,504) (4,822) (3,446)
Proceeds from sale of property and 19 - -
equipment ---------- --------- ---------
Net cash (used in) provided by (2,000) (47,454) 6,902
investment activities ---------- --------- ---------
Cash flow from financing activities:
Proceeds from sale of preferred stock, net 19,950 17,090 -
of offering costs
Proceeds from issuance of common stock, 95 39,458 1,202
net of offering costs
Proceeds from notes payable 6,022 660 4,128
Proceeds from issuance of warrants 131 - -
Payments on note payable (322) (8,269) (9,021)
Payments on capital lease (348) (733) (747)
Loan to stockholder (64) - -
Proceeds from note receivable from - - 43
stockholder ---------- --------- ---------
Net cash (used in) provided 25,464 48,206 (4,395)
by financing activities ---------- --------- ---------
Net increase (decrease) in cash and cash 5,997 (1,478) (14,032)
equivalents
Change in subsidiary's year end - 77 -
Cash and cash equivalents, beginning of year 13,632 19,629 18,228
---------- --------- ---------
Cash and cash equivalents, end of year $ 19,629 $ 18,228 $ 4,196
========== ========= =========
Cash paid during the year:
Interest $ 834 $ 1,128 $ 1,188
========== ========= =========
Income taxes $ 2 $ 807 $ 364
========== ========= =========
Noncash financing and investing activities:
Assets recorded under capital leases $ 1,496 $ 864 $ -
========== ========= =========
Common stock issued upon exercise of stock
option in exchange for stockholders'
note $ 136 $ 375 $ -
========== ========= =========
Deferred compensation relating to stock
option grants $ 73 $ 1,129 $ -
========== ========= =========
Conversion of preferred stock to common
stock $ - $ 31,737 $ -
========== ========= =========
Accretion of subsidiary's preferred stock
liquidation preference $ - $ 180 $ 90
========== ========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
1. BUSINESS
Corsair Communications, Inc. ("Corsair" or the "Company") is a leading provider
of software and system solutions for the wireless industry, focusing on fraud
prevention and prepaid wireless billing. On June 23, 1998, Corsair acquired
Subscriber Computing, Inc. ("SCI") in a combination accounted for under the
pooling-of-interests method of accounting. Corsair's consolidated financial
statements have been restated to include the financial position and results of
SCI for all periods presented. Corsair's statement of operations for the
three-year period ended December 31, 1998 have been combined with SCI's
statement of operations for each of the years in the two-year period ended
September 30, 1997, and the year ended December 31, 1998, respectively. Due to
the fiscal year end conversion of SCI to that of Corsair, SCI's net revenues of
$2.9 million and net loss of $4.9 million for the three months ended December
31, 1997 are not included in the consolidated statements of operations.
The consolidated financial statements include the accounts of the Company and
its subsidiary. All significant intercompany accounts and transactions have been
eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue from hardware sales is recognized upon shipment, unless a sales
agreement contemplates that Corsair provide testing, integration or
implementation services, in which case hardware revenue is recognized upon
commissioning and acceptance of the product (the activation of the cell site
equipment following testing integration and implementation). Revenue from the
licensing of software products generally is recognized upon delivery of the
products, unless the sales includes post-contract customer support for which
vendor specific objective evidence does not exist, in which case the revenue is
recognized ratably over the term of the license period. Revenue from services is
recognized ratably over the term of the maintenance support, on a percentage of
completion basis over the term of the consulting effort, or during the month the
training or operations support is provided.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 97-2, Software Revenue Recognition (SOP
97-2). Effective January 1, 1998, the Company adopted SOP 97-2. SOP 97-2
generally requires revenue earned on software arrangements involving multiple
elements such as software products, upgrades, enhancement, post-contract
customer support, installation and training to be allocated to each element
based on the relative fair values of the elements. The fair value of an element
must be based on evidence which is specific to the vendor. The revenue allocated
to software products, including specified upgrades or enhancements, generally is
recognized as the services are performed. If evidence of the fair value for all
elements of the arrangement does not exist, all revenue for the arrangement is
deferred until such evidence exists or until all elements are delivered. There
was no material change to the Company's accounting for revenues as a result of
the adoption of SOP 97-2.
In December 1998, AcSEC issued SOP 98-9 "Software Revenue Recognition, with
Respect to Certain Arrangements", which requires recognition of revenue using
the "residual method" in a multiple element arrangement when fair value does not
exist for one or more of the delivered elements in the arrangement. Under the
"residual method", the total fair value of the undelivered elements is deferred
and subsequently recognized in accordance with SOP 97-2. The Company does not
expect a material change to its accounting for revenues as a result of the
provisions of SOP 98-9. SOP 97-2 is effective for transactions entered into
beginning January 1, 2000.
<PAGE>
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentrations of
credit risk principally consist of cash, cash equivalents, short-term
investments, and accounts receivable.
The Company limits the amounts invested in any one type of investment. The
Company maintains its cash investments with several financial institutions.
Management believes the financial risks associated with such deposits are
minimal.
The Company has historically sold its products directly to wireless
telecommunications carriers. Sales generally are not collateralized, credit
evaluations are performed as appropriate, and allowances are provided for
estimated credit losses. The Company has not experienced significant losses on
trade receivables from any particular customer or geographic region.
Fair Value of Financial Instruments
The fair values of the Company's cash, cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate their carrying values due to
the short maturity of those instruments.
Cash Equivalents and Short-Term Investments
Cash equivalents consist of instruments with remaining maturities of 90 days or
less at the date of acquisition. Certain cash equivalents and all of the
Company's investments are classified as available-for-sale. The securities are
carried at fair value, which approximates cost. To date, the fair value of the
securities has not differed significantly from the cost basis of the securities.
The amortized cost of available-for-sale debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Realized gains
and losses, and declines in value judged to be other than temporary on
available-for-sale securities, if any, are included in interest income, net. The
cost of securities sold is based on the specific identification method. Interest
and dividends on securities classified as available-for-sale are included in
interest income, net.
Investments, all of which are debt securities maturing in one year or less and
are classified as available-for-sale, consisted of the following (in thousands):
DECEMBER 31,
1997 1998
Corporate debt securities $ 25,505 $ 34,376
Certificates of deposit 15,405 2,291
Commercial paper 11,372 --
-------- --------
$ 52,282 $ 36,667
======== ========
As of December 31, 1997 and 1998, $7,557,000 and $2,290,000, respectively, of
the Company's investments were classified as cash and cash equivalents in the
accompanying balance sheets. Short-term investments as of December 31, 1997
included $992,000 of restricted cash under the terms of the Company's line of
credit and long-term debt agreements.
Inventories
Inventories, including evaluation inventory, are stated at the lower of
first-in, first-out cost, or market. Evaluation inventory is comprised of
finished hardware units delivered to a customer which are pending commissioning
of the product.
Property and Equipment
Property and equipment are recorded at cost. Equipment recorded under capital
leases is stated at the lower of fair value or the present value of minimum
lease payments at the inception of the lease. Depreciation is calculated under
the straight-line method over the estimated useful lives of the assets,
generally three to five years. Equipment recorded under capital leases is
amortized over the shorter of the lease term or the estimated useful life of the
asset. Leasehold improvements are amortized using the straight-line method over
the shorter of the lease term or the estimated useful life of the asset.
Software Research and Development Costs
All costs incurred to establish the technological feasibility of software are
expensed as incurred. Costs incurred subsequent to establishing technological
feasibility are capitalized and amortized on a straight-line basis over their
estimated useful lives. The Company determines that technological feasibility
has been established once a working model has been completed and tested. During
1996, the Company wrote off $3.8 million of previously capitalized software
costs after evaluating the recoverability of capitalized costs and determining
that such costs were not recoverable based on changes in product mix. No
software research and development costs have subsequently been capitalized as
qualified amounts have not been material.
Other Assets
Included in other assets are spare parts that are generally amortized on a
straight-line basis over the course of their respective useful lives, generally
two years.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years that those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is established
when necessary to reduce deferred tax assets to amounts more likely than not to
be recovered.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company evaluates long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Net Loss Per Share
Basic earnings per share is computed using the weighted average number of shares
of common stock outstanding. Diluted earnings per share is computed using the
weighted average number of shares of common stock and, when dilutive,
convertible preferred stock outstanding on an as if converted basis and common
equivalent shares from options to purchase common stock and warrants outstanding
using the treasury stock method.
The Company has excluded the impact of approximately 1,221,827, 1,268,289 and
1,951,331 outstanding options to purchase common stock and outstanding warrants
to purchase 243,822, 271,545 and 194,249 shares of common stock as of December
31, 1996, 1997 and 1998, respectively, since their inclusion in diluted per
share results would have been antidilutive.
Stock-Based Compensation
The company accounts for its stock-based compensation arrangements using the
intrinsic-value method. As such, deferred compensation is recorded on the date
of grant when the fair value of the underlying common stoc exceeds the exercise
price or the purchase price for issuances or sales of common stock. Deferred
compensation is amortized on an accelerated basis over the vesting period of the
individual award consistent with the method described in FASB Interpretation No.
28.
Comprehensive Loss
The Company has no significant components of other comprehensive loss, and
accordingly, the comprehensive loss is the same as net loss for all periods.
<PAGE>
Effect of New Accounting Standards.
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 133 establishes accounting and reporting standards for derivative financial
instruments and hedging activities and requires the Company to recognize all
derivatives as either assets or liabilities on the balance sheet and measure
them at fair value. Gains and losses resulting from changes in fair value would
be accounted for based on the use of the derivative and whether it is designated
and qualifies for hedge accounting. The Company will be required to implement
SFAS 133 for its fiscal year 2000. The Company has not determined the impact
that SFAS 133 will have on its financial statements and believes that such
determination will not be meaningful until closer to the date of initial
adoption.
3. BALANCE SHEET COMPONENTS
Inventories
Inventories consisted of the following (in thousands):
DECEMBER 31,
1997 1998
Raw materials $ 1,479 $ 2,600
Work in process 189 311
Finished goods 1,950 2,765
------- -------
$ 3,618 $ 5,676
======= =======
Property and Equipment
Property and equipment consisted of the following (in thousands):
DECEMBER 31,
1997 1998
Computer equipment $ 8,132 $10,059
Furniture and fixtures 991 1,093
Purchased software 665 1,233
Leasehold improvements 931 1,311
Machinery & equipment 1,326 1,795
------- -------
12,045 15,491
Less accumulated depreciation and amortization (4,935) (8,069)
------- -------
$ 7,110 $7,422
======= =======
The total amount of assets recorded under capital leases included in property
and equipment is approximately $2,513,000 and $2,505,000 as of December 31, 1997
and 1998, respectively. Accumulated amortization thereon was $1,048,000 and
$1,789,000 as of December 31, 1997 and 1998, respectively.
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
DECEMBER 31,
1997 1998
Accrued benefits $ 2,479 $ 2,261
Accrued warranty costs 1,571 2,093
Accrued professional fees 782 1,416
Other 3,049 1,961
------- -------
$ 7,881 $ 7,731
======= =======
<PAGE>
4. MERGERS & ACQUISITIONS
Acquisition of Intelligent Object Solutions, Inc.
On December 27, 1996, the Company acquired the net assets of Intelligent Object
Solutions, Inc. ("IOS"), a developer of cellular fraud prevention software. The
Company issued 49,916 shares of common stock, valued at $105,000, in exchange
for the net assets of IOS. The acquisition was recorded as a purchase and the
results of operations for the period from December 27, 1996 are included in the
accompanying consolidated financial statements. The purchase price was allocated
$750,000 to software license costs, $563,000 to other assets acquired, $211,000
to goodwill and $1,419,000 to liabilities assumed based on fair values at the
date of acquisition. Pursuant to the purchase agreement, the Company issued from
escrow an additional 8,912 and 13,575 shares of common stock, valued at a total
of $37,500, during 1997 and 1998, respectively. In 1997, the Company, evaluated
the recoverability of the remaining amounts recorded for goodwill and software
license costs related to the acquisition of IOS. Based on this evaluation, the
Company determined that $190,000 of goodwill and $600,000 of software license
costs were not recoverable and wrote-off those amounts during the three-month
period ended December 31, 1997.
Merger with Subscriber Computing Inc.
On June 23, 1998, Corsair issued approximately 3.9 million shares of its Common
Stock in exchange for all of the outstanding shares of common stock of SCI, a
provider of software systems to the paging, cellular and PCS industries. As a
result of the merger, each outstanding share of SCI Preferred Stock was
converted into shares of SCI Common Stock based on their respective liquidation
preference. Concurrently, each share of SCI Common Stock was converted into
0.238 shares of Corsair Common Stock, and SCI became a wholly owned subsidiary
of Corsair. In addition, Corsair has reserved approximately 464,500 shares of
its Common Stock for issuance upon the exercise of assumed SCI stock options and
warrants. The merger was accounted for as a pooling of interests, and
accordingly, the Company's consolidated financial statements have been restated
to include the financial position and results of SCI for all periods presented.
The results of operations previously reported by the separate enterprises and
the combined amounts presented at the time of the merger are summarized below
(in thousands):
Corsair SCI Combined
------------- ------------ ------------
Six Months Ended June 30, 1998
Total revenue $ 29,682 $ 7,879 $ 37,561
Extraordinary loss -- 226 226
Net income (loss) 3,861 (7,174) (3,313)
Year Ended December 31, 1997
Total revenue $ 47,838 $ 13,018 $ 60,856
Extraordinary loss 428 -- 428
Net loss (1,068) (7,556) (8,624)
Year Ended December 31, 1996
Total revenue $ 19,606 $ 11,610 $ 31,216
Net loss (12,761) (6,844) (19,605)
In the second quarter, Corsair recorded merger-related costs and expenses of
$4.2 million. The following table presents the components of the total expenses
along with the charges against the reserves through December 31, 1998 (in
thousands):
Non-cash December
Total Amounts Writedown 31, 1998
Charge Paid of Assets Balance
Transaction costs 2,535 2,221 -- 314
Termination benefits (20 employees) 1,511 1,511 -- --
Redundant facility and other 145 11 134 --
equipment costs ========================================
Total $4,191 $3,743 $ 134 $ 314
========================================
Corsair expects that all significant amounts included in the December 31, 1998
reserve will be paid within the next three months.
5. DEBT
Notes payable consist of the following at December 31 (in thousands, except per
share amounts):
1997 1998
--------- ---------
Note payable to a financial institution, monthly
payments of $74 at interest of 15.8% with lump sum
payment of $260 due on June 1, 2001, collateralized
by substantially all assets of the Company..... $2,600 $2,046
Note payable to a bank, monthly payments of $14
plus interest at the bank's prime rate (8.5% at
December 31, 1997) plus 1% per annum through
June 1, 1999, balance of principal and interset
due July 1, 1999, collateralized by substantially
all assets of the Company, including a minimum
deposit required with the bank, which was $319
at December 31, 1997. Early extinguishment
paid in June 1998 264 --
Note payable to a bank, monthly payments of $14
plus interest at the bank's prime rate (8.5% at
December 31, 1997) plus 1% per annum through
April 3, 2000, balance of principal and interst
due May 3, 2000, collateralized by substantially
all assets of the Company, including a minimum
deposit required with the bank, which was $458
at December 31, 1997. Early extinguishment paid
in June 1998 403 --
Note payable to a bank, monthly payments of $4
plus interest at the bank's prime rate (8.5% at
December 31, 1997) plus 1.5% per annum,
collateralized by substantially all assets of
the Company, due March 1998, including a minimum
deposit required with the bank, which was $29
at December 31, 1997 12 --
Unsecured subordinated note payable to a
customer, due on July 1, 1998, interest payable
quarterly at 9% per annum, through July 1, 1998 2,500 --
Line of credit, monthly payment of interest at
the bank's prime rate (8.5% at December 31, 1997)
with all borrowing payable on demand or upon
expiration of the line in April 1998.
Collaterialized by substantially all assets of
the Company, including a minimum deposit required,
which was $185 as of December 31, 1998. Warrants
were issued to purchase 6 shares of stock at $16.84
per share for a period of five years from date
of issuance 1,160 --
--------- ---------
6,939 2,046
Less current portion (4,559) (639)
========= =========
Notes payable, net of current portion 2,380 1,407
========= =========
During 1998, the Company incurred a loss on debt extinguishment of $226
associated with paying the principal and interest of $4.8 million of short-term
and long-term notes payable noted above. The loss was comprised of the
amortization of the remaining loan fees associated with the debt issuance.
In August 1995, the Company entered into a loan and security agreement with a
lending institution pursuant to which the Company borrowed $1.0 million, secured
by the Company's inventory and fixed assets, at a 14.95% stated interest rate.
In July 1996, the Company entered into additional agreements with two lending
institutions pursuant to which the Company borrowed $5.0 million at a 14.55%
stated interest rate. These creditors were granted a security interest in
certain of the Company's tangible and intangible assets. The Company issued
warrants in conjunction with both debt financings to purchase an aggregate
157,907 shares of Series B convertible preferred stock at an exercise price of
$5.91 to $6.65 per share. The warrants, exercisable until July 2002, were
assigned an aggregate value of $161,000, with the value being amortized over the
term of the loan and recorded as interest expense.
During 1997, the Company recorded an extraordinary loss of $428,000 in
connection with the payment of $5.1 million in principal and interest for the
early extinguishment of all three loan and security agreements. The loss was
comprised of pre-payment penalties and amortization of the remaining discount on
the debt associated with the warrants issued along with the notes payable.
In June 1997, the Company signed a Loan and Security Agreement which made
available a $3.0 million equipment term loan facility at prime plus 0.75% (9.25%
at December 31, 1998). The loan facility was available through July 1998 and
secured by any underlying equipment purchased. As of December 31, 1998, the
Company did not have any borrowings under the equipment term loan.
<PAGE>
6. INCOME TAXES
A reconciliation of the Federal statutory rate of 34% as applied to net loss
from continuing operations to the Company's effective tax rate is as follows (in
thousands):
Year Ended December 31,
--------------------------------------
1996 1997 1998
------------ ---------- -----------
Benefit at U.S. Federal statutory (6,665) (2,423) (2,258)
rate
S corporation loss not subject to 2,327 2,062 --
tax
Unutilized net operating losses 4,244 153 1,832
State income taxes 3 8 --
Nondeductible merger expenses -- -- 369
Other nondeductible expenses 94 208 57
=========== ========== ===========
Total tax expense 3 8 --
============ ========== ===========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below (in
thousands):
December 31,
------------------------
1997 1998
---------- -----------
Deferred tax assets:
Inventory, due to reserves and additional $ 401 $ 745
amounts capitalized for tax
Other accruals and reserves not currently 1,476 1,936
deductible for tax purposes
Technology asset 1,677 1,476
Net operating loss carryforwards and 10,155 10,717
deferred startup costs
Credit carryforwards 1,468 2,164
Fixed assets 182 627
Other -- 98
---------- -----------
Total gross deferred tax assets 15,359 17,763
Less valuation allowance (15,331) (17,763)
---------- -----------
Net deferred tax assets 28 --
---------- -----------
Deferred tax liabilities:
Other deferred liabilities (28) --
---------- -----------
Total deferred tax liabilities (28) --
---------- -----------
Net deferred tax assets -- --
========== ===========
The net change in the valuation allowance for the years ended December 31, 1997
and 1998, were increases of approximately $4,005,000 and $2,432,000,
respectively. Management believes that sufficient uncertainty exists as to
whether the deferred tax assets will be realized and, accordingly, a valuation
allowance is required.
As of December 31, 1998, the Company had net federal and California operating
loss carryforwards of approximately $26,960,000 and $16,988,000, respectively,
for income tax reporting purposes. The Federal net operating loss carryforwards
expire beginning in 2009 through the year 2011. The California net operating
loss carryforwards expire in 2002.
The Company also has research and experimental tax credit carryforwards
aggregating approximately $1,102,000 and $796,000 for Federal and California
purposes, respectively. The Federal credit carryforwards expire beginning in
2009 through 2018. The California credits carry over indefinitely until
utilized.
There are also California credit carryforwards for qualified manufacturing and
research and development equipment of approximately $133,000; these credits
expire in 2006.
The Tax Reform Act of 1986 imposed substantial restrictions on the utilization
of net operating losses and tax credits in the event of an "ownership change" of
a corporation. An "ownership change" occurred in October 1996. The approximate
amounts of carryforward items affected by this restriction are as follows (in
thousands):
Federal California
Net operating losses $13,400,000 9,800,000
Research credits 230,000 80,000
This restriction also applies to carryforward items resulting from the
"ownership change" upon the acquisition of SCI in June 1998. The approximate
amounts of carryforward items of this subsidiary which are affected by this
restriction are as follows:
Federal California
Net operating losses $13,600,000 6,800,000
Research credits 222,000 123,000
The "ownership change" restrictions are not expected to impair the Company's
ability to utilize the affected carryforward items. If there should be a
subsequent "ownership change," of the Company, as defined, its ability to
utilize all stated carryforwards could be reduced.
7. STOCKHOLDERS' EQUITY
Preferred Stock
Upon the Company's initial public offering of its common stock on July 29, 1997,
all shares of issued and outstanding Preferred Stock were converted to
11,344,907 shares of common stock. Following the conversion, the Company had no
preferred stock outstanding.
1997 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan
In February 1997, the Company's subsidiary, SCI, adopted the 1997 Incentive
Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan (the
"SCI" Plan) and authorized 653,290 shares of the Company's common stock to be
issued under the SCI Plan. Incentive options may be issued to officers and key
employees. Nonqualified options and restricted shares may be issued as
determined by the Board of Directors. The exercise prices are to be determined
pursuant to formulas specified in the SCI Plan but not less than the fair market
value at the grant date. Options expire within ten years from the date of grant.
In connection with the adoption of the SCI Plan, certain stockholders were
issued restricted stock in return for cancellation of options granted under the
previous plan. As consideration for the stock received, the stockholders issued
notes payable to the Company totaling $375,125. The notes bear interest at a
rate of 7% per annum, with principal and interest due on February 28, 2002, and
are secured by the stock received. The notes have been included as a separate
component of stockholders' equity in the accompanying financial statements.
The Company has assumed certain option plans in connection with the merger of
SCI as discussed in Note 4. These options were granted under terms similar to
the terms of the Plan at prices adjusted to reflect the relative exchange ratios
of the mergers. All former plans were terminated as to future grants upon
completion of the merger.
1997 Stock Incentive Plan
In May 1997, the Company adopted the 1997 Stock Incentive Plan (the "Plan") and
authorized 1,337,633 shares of the Company's common stock to be issued under the
Plan. Under provisions of the Plan, options are granted at fair market value at
date of grant for incentive stock options or no less than 85% of fair market
value for nonqualified options. Options generally vest over 4 years with 25%
vesting on the first anniversary of the vesting commencement date and monthly
thereafter. Options generally expire 10 years from the date of grant.
Included in the Plan is a provision for the automatic grant of nonstatutory
options to nonemployee Board of Director members of 1,500 shares per annum. The
options are exercisable at the then current fair market value and generally vest
over a 12-month period beginning one month after the grant date. The option
grants to nonemployees expire 10 years from grant date.
The 1997 Plan succeeds the 1996 Stock Option/Stock Issuance Plan and the 1997
Officer Stock Option Plan.
1997 Employee Stock Purchase Plan
In May 1997, the Board adopted the 1997 Employee Stock Purchase Plan (the
"Purchase Plan") and reserved 166,667 shares of Common Stock for issuance under
the Purchase Plan. No stock was issued under the Purchase Plan in 1997, while
106,900 shares were issued in 1998.
Accounting for Stock-based Compensation
The Company uses the intrinsic-value method to account for all of its
stock-based employee compensation plans. During 1996 and 1997 the Company
recorded deferred compensation costs totaling $1,202,000 related to its stock
option plans for the difference between the exercise price of each option and
the fair market value of the underlying common stock as of the grant date for
each stock option. This amount is being amortized over the vesting period of the
individual options, generally four years. Amortization of deferred compensation
totaled $550,000 and $360,000 in 1997 and 1998 respectively, and has been
charged to operating expenses.
Had compensation cost for the Company's stock option and employee purchase plans
been determined consistent with the fair value approach enumerated in SFAS No.
123, Accounting for Stock-Based Compensation, the Company's 1996 net loss would
not have been materially impacted. For pro forma purposes, the Company's 1997
and 1998 net loss would have been as follows (in thousands, except per share
data):
Year Ended December 31
1997 1998
----------- ------------
Net loss - as reported 8,624 6,866
Net loss - pro forma 9,315 8,790
Basic and diluted net loss per 0.86 0.39
share - as reported
Basic and diluted net loss per 0.93 0.50
share - pro forma
<PAGE>
The fair value of each option under the Plan is estimated based on the date of
grant using the Black-Scholes method in 1997 and 1998, using the following
weighted-average assumptions:
1997 1998
Expected life (years) 2.86 2.64
Expected stock price volatility 27% 60%
Risk-free interest rate 6.12% 4.83%
No dividend impact was considered as the Company has never declared, and does
not have plans to declare any future dividends.
The pro forma net loss and loss per share include expenses related to the
Purchase Plan. The weighted average fair value of purchase rights granted during
1998 under the Purchase Plan is $5.40. The fair value is estimated using the
Black-Scholes model assuming no expected dividends on the date of grant, a
risk-free rate of 5.107%, volatility of 60%, and an expected life of 1.14 years.
No employee stock purchase plan was in place in 1996.
Stock Option Activity and Status
The following table summarizes activity under the Company's Option Plans:
Weighted-Average
Weighted-Average Options Fair Value
Shares Exercise Vested at of Options
Price Period-End Granted
Outstanding as of 1,285,681 $0.48
December 31, 1995
Options granted 673,379 0.76
$0.20
=============
Options exercised (553,344) 0.42
Options cancelled (183,889) 0.56
---------- -------------
Outstanding as of 1,221,827 0.65
December 31, 1996
258,079
============
Options granted 1,090,534 6.50
$3.60
=============
Options exercised (730,416) 0.55
Options cancelled (313,656) 1.30
---------- -------------
Outstanding as of 1,268,289 5.58
December 31, 1997
254,065
============
Options granted 2,029,748 6.44
$2.79
=============
Option exercised (271,961) 1.91
Options cancelled 1,074,745) 11.74
---------- -------------
Outstanding as of 1,951,331 3.59 291,477
December 31, 1998
========== ============= ============
The following table summarizes information about stock options outstanding as of
December 31, 1998:
Outstanding Exercisable
Weighted-average
Number of Remaining Weighted-average Number of Weighted-average
Exercise shares Contractual exercise price shares Exercised
prices life prices
$0.30-$2.11 414,768 6.63 $0.82 256,631 $ 0.80
$2.88-$3.00 686,575 9.73 $2.93 497 $ 2.88
$3.06-$5.00 360,218 9.91 $4.85 2,903 $ 4.21
$5.13 396,563 9.95 $5.13 -- $ 5.13
$5.19-$19.50 93,207 6.74 $9.35 31,446 $ 10.14
==============================================================================
$0.30-$19.50 1,951,331 9.00 $3.59 291,477 $ 1.84
==============================================================================
<PAGE>
As of December 31, 1998, employees held 197,020 shares of common stock
outstanding by virtue of option exercises which were subject to repurchase by
the Company at prices ranging from $0.30 to $1.13 per share. The Company's right
of repurchase expires 25% on the first anniversary of the original issuance date
and monthly thereafter, over a four-year period.
During the fourth quarter of 1998, the Company's Board of Directors approved the
repricing of approximately 821,000 outstanding stock options held by existing
employees to the current fair market value of the Company's stock at the date of
the repricing.
Notes Receivable from Stockholder
In November 1996, the Company issued an aggregate of 370,101 shares of common
stock in connection with option exercises by the Company's President.
In connection with such issuance, the Company's President paid for the stock by
issuing a note payable (secured pursuant to a pledge agreement for 370,101
shares of common stock held by the Company's President) to the Company. The
Company has the right to repurchase such stock at the original purchase price
per share upon the purchaser's cessation of service prior to vesting in such
shares. The repurchase right lapses over the following four years. As of
December 31, 1998, 29,167 of such shares of common stock are included in the
197,020 total shares of common stock subject to repurchase by the Company. The
secured note payable bears interest at the rate of 7% per annum. In 1998, the
terms of the note were extended to October 1999.
8. COMMITMENTS AND CONTINGENCIES
Leases
In August 1995, the Company entered into a leasing agreement to finance the
purchase of up to $1.0 million in equipment. In 1996, the Company entered into a
second leasing agreement to finance the purchase of an additional $500,000 in
equipment. Lease terms under both agreements are for 42 months and are accounted
for as capital leases. As of December 31, 1998, the Company had no remaining
amounts available under these leasing agreements
The Company is obligated under certain noncancelable operating leases for office
space and equipment expiring at various dates through 1999. Total rental expense
was approximately $1,107,000, $1,539,000 and $1,938,000 for the years ended
December 31, 1996, 1997, and 1998 respectively.
Future minimum payments under capital and operating leases that have initial or
remaining noncancelable lease terms in excess of one year are as follows (in
thousands):
Year ending Capital Operating
December 31, leases leases
1999 $ 699 $ 2,390
2000 164 2,440
2001 17 2,149
2002 7 817
------ -------
Total minimum lease payments $ 887 $ 7,796
Less amount representing interest 61 =======
------
826
Less current portion of obligations 609
under capital lease ------
Long-term portion of capital lease obligations $ 217
======
Litigation
The Company is involved in various legal matters that have arisen in the normal
course of business. Management believes, after consultation with counsel, any
liability that may result from the disposition of such legal matters will not
have a material adverse effect on the Company's financial condition or results
of operations.
<PAGE>
9. SEGMENT INFORMATION
The Company has adopted the provision of SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas, and major
customers. The method for determining what information to report is based on the
way that management organizes the operating segments within the Company for
making operating decisions and assessing financial performance.
The Company's chief operating decision maker is considered to be the Company's
Chief Executive Officer ("CEO"). The CEO reviews financial information presented
on a consolidated basis accompanied by disaggregated information about revenues
by geographic region for purposes of making operating decisions and assessing
financial performance. The consolidated financial information reviewed by the
CEO is identical to the information presented in the accompanying consolidated
statement of operations. Therefore, the Company operates in, and measures its
results in a single operating segment, wireless system solutions, rather than
distinctive product segments.
The Company's operations are located in the United States. Revenues from
international sources relate to export sales primarily to distributors in
Europe, Latin America and Asia. The Company's revenue by geographic area is as
follows (in thousands):
Years Ended
December 31,
-----------------------------------
1996 1997 1998
----------- ----------- ---------
Revenues:
North America $ 27,321 $ 46,371 $ 38,022
Latin America 707 5,933 14,827
Pacific Rim 1,496 5,568 6,921
Europe 1,692 2,984 5,448
----------- ----------- ---------
Total $ 31,216 $ 60,856 $ 65,218
The Company has no material operating assets outside of the United States.
Significant Customers
The following tables summarize information relating to the Company's significant
customers as of December 31, 1997 and 1998 and for the years ended December 31,
1996, 1997 and 1998:
Percentage of Total
Revenues
1996 1997 1998
Customer A 3% 11% 13%
Customer B 6% 12% 10%
Customer C 8% 10% 9%
Customer D 12% 4% 1%
Customer E 10% 5% 3%
Percentage of Trade
Accounts Receivable
1997 1998
Customer B 12% --%
Customer C 14% --%
Customer F --% 12%
Customer G --% 11%
Customer H 13% --%
Customer I 13% --%
<PAGE>
10. SUBSEQUENT EVENTS
On February 3, 1999, the Company sold substantially all of the assets relating
to its Communication Resource Manager billing system and certain related
products to Wireless Billing Systems ("WBS"), a California corporation, pursuant
to the terms of an Asset Purchase Agreement.
Pursuant to the terms of the Asset Purchase Agreement, the Company made an
initial payment of $1,000,000 to WBS at the closing and agreed to loan WBS an
additional $200,000 pursuant to the terms of a secured promissory note bearing
interest at the rate of 10% per annum, due and payable in 24 months from the
date of issuance.
On or before April 15, 1999, the Company will prepare a closing balance sheet as
of January 31, 1999, reflecting the assets and liabilities transferred to WBS,
as adjusted to reflect (i) the actual book value of selected fixed assets to be
acquired by WBS, (ii) accounts receivable assumed by WBS and (iii) prepayments
received by the Company prior to the February 3, 1999 that are returned by WBS
to customers (the "Closing Balance Sheet"). In the event that the net asset
value, as reflected on the Closing Balance Sheet is negative, the Company shall
deliver to WBS the amount by which such net asset value is negative in cash. In
the event that the net asset value, as reflected on the Closing Balance Sheet is
positive, WBS shall deliver to the Company a secured promissory note in the
aggregate principal amount by which such net asset value is positive, bearing
interest at the rate of 10% per annum due and payable in 24 months from the date
of issuance. In addition, pending the consent of a customer impacted by this
transaction, the Company may be required to make an additional, significant
payment to WBS.
The Company is currently evaluating the impact of the sale and determination of
the accounting treatment, subject to the preparation of the Closing Balance
Sheet.
Also in February, the Company signed a letter of intent to develop a strategic
relationship for the development, sales and marketing of a wireless location
product. As a result of entering into the strategic relationship, the Company
has determined that it will discontinue a development project, which likely will
result in the recording of certain one time charges. The financial impact of
both events will be disclosed in the Company's first quarter filing of 1999.
<PAGE>
UNAUDITED QUARTERLY RESULTS
Quarters Ended
Mar 31 June 30 * Sept 30 Dec 31
------------ ------------- ------------ -----------
Total revenues $ 18,834 $ 19,049 $ 12,023 $ 15,312
Gross Profits 9,688 11,701 7,568 9,699
Operating expenses 10,071 15,097 11,280 11,308
Operating loss (383) (3,396) (3,712) (1,609)
Net income (loss) 307 (3,330) (3,089) (754)
Net income (loss) per $ 0.02 $ (0.19) $ (0.17) $ (0.04)
share:
Shares used in per 18,115 17,660 17,802 17,926
share computation
* Net income (loss) for the second quarter of 1998 is presented net of an
adjustment to the quarter's previously reported operating figures. The
adjustment was to decrease operating expenses by approximately $290 for the
second quarter. The adjustment caused related changes to operating loss, and net
income (loss).
<PAGE>
PART III
- ------------------------------------------------------------------------------
ITEM 10. Directors and Executive Officers of the Registrant
(a) Identification of Directors. The information under the heading
"Election of Directors," appearing in the Proxy Statement, is
incorporated herein by reference.
(b) Identification of Executive Officers. The information under the
heading "Executive Officers," appearing in the Proxy Statement, is
incorporated herein by reference.
(c) Business Expenses. The information under the heading "Business
Expenses," appearing in the Proxy Statement, is incorporated herein
by reference.
(d) Section 16(a) Beneficial Ownership Reporting Compliance. Based
solely upon a review of copies of Forms 3,4 and 5 and amendments
thereto furnished to the Registrant, or written representations that
no Form 5s were required, the Company believes that, during January
1, 1998 through December 31, 1998, all Section 16(a) filing
requirements applicable to its officers, directors and greater that
10% stockholders were satisfied.
ITEM 11. Executive Compensation
Pursuant to General Instruction G (3) to Form 10-K, the information
required by this item is incorporated by reference to the information contained
in the section captioned "Executive Compensation and Other Matters" in the Proxy
Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the
information contained in the section captioned "Ownership of Securities" in the
Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the
information contained in the section captioned "Certain Relationships and
Related Transactions" in the Proxy Statement.
<PAGE>
PART IV
- ------------------------------------------------------------------------------
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements
The financial statements of the Company are included herein as required
under Item 8 of this Annual Report on Form 10-K. See Index to
Consolidated Financial Statements on page 27.
(2) Financial Statement Schedules
Schedule II: Valuation of Qualifying Accounts page 53
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
(b) No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
(b) Exhibits
Exhibit
Number Description
3.1 + Amended and Restated Certificate of Incorporation of the Company
(Exhibit 3.2)
3.2 + Restated Bylaws of the(Exhibit 3.3) 4.1 + Form of Certificate for
Common Stock.
10.1 + Series A Preferred Stock Purchase Agreement between the Company and
the purchasers listed on Schedule A thereto, dated December 10, 1994
10.2 + Asset Purchase Agreement between the Company and ESL Incorporated,
dated December 14, 1994.
10.3 + Series A Preferred Stock Purchase Agreement between the Company and
ESL Incorporated, dated December 14, 1994.
10.4 + License and Technical Assistance Agreement between the Company, TRW
Inc. and ESL Incorporated, dated December 14, 1994.
10.5 + AirTouch Assignment Agreement between the Company and ESL
Incorporated, dated December 14,1994
10.6 + Development and License Agreement between ESL Incorporated and PacTel
Corporation, dated October 4, 1993.
10.7 + First Amendment to the Development and License Agreement between ESL
Incorporated and PacTel Corporation, dated October 23, 1994.
10.8 + Second Amendment to and Consent of Assignment of the Development and
License Agreement between the Company and AirTouch, dated December 14,
1994.
10.9 + Third Amendment to the Development and License Agreement between the
Company and AirTouch, dated August 18, 1995.
10.10 + 1995 Stock Option/Stock Issuance Plan.
10.11 + 1995 Stock Option/Stock Issuance Plan Form of Notice of Grant.
10.12 + 1995 Stock Option/Stock Issuance Plan Form of Stock Option Agreement.
10.13 + 1995 Stock Option/Stock Issuance Plan Form of Stock Purchase
Agreement.
10.14 + Patent License Agreement.
10.15 + Master Lease Agreement, as amended, and Schedules VL-1 and VL-2
between the Company and Comdisco, Inc., dated August 31, 1995.
10.16 + Loan and Security Agreement between the Company and Comdisco, Inc.,
dated August 31, 1995.
10.17 + Secured Promissory Note from the Company to Comdisco, Inc., dated
August 31, 1995.
10.18 + Warrant granted to Comdisco, Inc. to purchase Series B Preferred
Stock, dated August 31, 1995.
<PAGE>
10.19 + Series B Preferred Stock Purchase Agreement between the Company and
the investors listed on Schedule A thereto, dated October 31, 1995.
10.20 + 1996 Stock Option/Stock Issuance Plan, as amended.
10.21 + 1996 Stock Option/Stock Issuance Plan Form of Notice of Grant, as
amended.
10.22 + 1996 Stock Option/Stock Issuance Plan Form of Stock Option Agreement.
10.23 + 1996 Stock Option/Stock Issuance Plan Form of Stock Purchase
Agreement, as amended.
10.24 + Promissory Note from Martin Silver to the Company, dated April 10,
1996.
10.25 + Promissory Note from Martin Silver to the Company, dated April 10,
1996.
10.26 + Loan and Security Agreement between the Company and Comdisco, Inc.,
dated July 31, 1996.
10.27 + Warrant granted to Comdisco, Inc. to purchase Series B Preferred
Stock, dated July 31, 1996.
10.28 + Secured Promissory Note from the Company to Comdisco, Inc., dated
July 31, 1996.
10.29 + Loan and Security Agreement between the Company and MMC/GATX
Partnership No. 1, dated July 31, 1996.
10.30 + Warrant granted to MMC/GATX Partnership No. 1 to purchase Series B
Preferred Stock, dated July 31, 1996.
10.31 + Secured Promissory Note from the Company to MMC/GATX Partnership No.
1, dated July 31, 1996.
10.32 + Warrant granted to Comdisco, Inc. to purchase Series B Preferred
Stock, dated August 5, 1996.
10.33 + Loan and Security Agreement between the Company and Silicon Valley
Bank, dated August 30, 1996.
10.34 + Series C Preferred Stock Purchase Agreement between the Company and
the investors listed on Schedule A thereto, dated October 30, 1996.
10.35 + Amended and Restated Investors' Rights Agreement between the Company
and various stockholders, dated October 30, 1996.
10.36 + Amendment No. 1 to the Amended and Restated Investors' Rights
Agreement between the Company and various stockholders, dated March 7,
1997.
10.37 + Directed Share Agreement between the Company and the investors listed
on Exhibit A thereto, dated October 30, 1996.
10.38 + Promissory Note from Mary Ann Byrnes to the Company, dated November
14, 1996, as amended.
10.39 + 1997 Officer Stock Option Plan.
10.40 + 1997 Officer Stock Option Plan Form of Stock Option Agreement, as
amended.
10.41 + 1997 Employee Stock Purchase Plan.
10.42 + 1997 Stock Incentive Plan.
10.43 + 1997 Stock Incentive Plan Form of Notice of Grant.
10.44 + 1997 Stock Incentive Plan Form of Stock Option Agreement.
10.45 + Lease dated January 10, 1997 between the Company and San Thomas
Investment Company.
10.46 + Series D Preferred Stock Purchase Agreement between the Company and
the investors listed on Schedule A thereto, dated March 7, 1997.
10.47 + Form of Master Purchase and Licensing Agreement.
10.48 + Form of Confidential Disclosure Agreement.
10.49 + Form of Indemnification Agreement between the Company and each of its
directors.
10.50 + Form of Indemnification Agreement between the Company and each of its
officers.
10.51 + Form of Written Consent of Holders of Series A, Series B, Series C
and Series D Preferred Stock to cnversion.
10.52 + Form of Waiver of Registration Rights
23.1 * Report on Schedule and Consent of Independent Auditors, KPMG LLP.
23.2 * Consent of Deloitte & Touche LLP, Independent Accountants.
24.1 * Power of Attorney (See page 47 ).
27.1 * Financial Data Schedule
- ------------------------------------------------------------------------------
* Filed herewith.
+ Incorporated by reference to the same numbered exhibit (except as otherwise
indicated) to the Company's Registration Statement on Form S-1 (no.
333-28519), filed on June 4, 1997 as amended.
Supplemental Information
Copies of the Registrant's Proxy Statement for the annual Meeting of
Stockholders to be held June 16, 1999 and copies of the form of proxy to be used
for such Annual Meeting will be furnished to the Securities and Exchange
Commission prior to the time they are distributed to the Registrant's
stockholders.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: April 7, 1999 Corsair Communications, Inc.
By:/s/Mary Ann Byrnes
Mary Ann Byrnes
Chief Executive Officer
Power of Attorney
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Mary Ann Byrnes, his or her attorney-in-fact,
with power of substitution in any and all capacities, to sign any amendments to
this Annual Report on Form 10-K, and to file the same with exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that the attorney-in-fact or his
or her substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
April 7, 1999 /s/Kevin R. Compton
Kevin R. Compton, Chairman of the Board of Directors
April 7, 1999 /s/Mary Ann Byrnes
Mary Ann Byrnes, Director
April 7, 1999 /s/Peter L.S. Currie
Peter L.S. Currie, Director
April 7, 1999 /s/Stephen M. Dow
Stephen M. Dow, Director
April 7, 1999 /s/David H. Ring
David H. Ring, Director
April 7, 1999 /s/Rachelle B. Chong
Rachelle B. Chong, Director
<PAGE>
Schedule II
Corsair Communications, Inc.
Valuation and Qualifying Accounts
(in thousands)
RESERVE FOR BAD DEBT AND ALLOWANCES
Balance at Charged
beginning to costs Balance at
YEAR ENDED of the and Deductions end of the
period expenses period
December 31, 1996 $ 550 $ 445 $ 128 $ 867
December 31, 1997 $ 867 $ 2,018 $ 1,457 $ 1,428
December 31, 1998 $ 1,428 $ 2,692 $ 1,224 $ 2,896
<PAGE>
Exhibit 23.1
REPORT ON SCHEDULE AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Corsair Communications, Inc.
The audits referred to in our report dated February 2, 1999, included the
related financial statement schedule for each of the years in the three-year
period ended December 31, 1998, included in the annual report on Form 10-K of
Corsair Communications, Inc. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material aspects the information set forth therein.
We consent to incorporation by reference in the registration statement (No.
333-3231) on form S-8 of Corsair Communications, Inc. of our report dated
February 2, 1999, relating to the balance sheets of Corsair Communications, Inc.
as of December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31 1998, and the related schedule, which reports appear in
the December 31, 1998 annual report on Form 10-K of Corsair Communications, Inc.
KPMG LLP
San Francisco, California
April 8, 1999
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-3231 of Corsair Communications, Inc. on Form S-8 of our report on the
financial statements of Subscriber Computing, Inc. as of September 30, 1996
and 1997 dated January 7, 1998, appearing in the Annual Report on Form 10-K
of Corsair Communications, Inc. for the fiscal year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Costa Mesa, California
April 7, 1999
<PAGE>
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