UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-22859
CORSAIR COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
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 29, 2000 was
approximately $478,440,643. 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 29, 2000 there were 17,655,739 shares of the registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Corsair's Proxy Statement for the 2000 Annual Meeting of
Stockholders to be held on June 6, 2000 (the "Proxy Statement"), are
incorporated by reference into Part III of this Annual Report on Form 10-K.
<PAGE>
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 our expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements. Our 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 our Securities and Exchange Commission filings.
GENERAL
Corsair Communications, Inc. (Corsair) is a leading provider of system
solutions for the global wireless industry. Our PrePay(TM) billing system
provides wireless telecommunications carriers with a software solution designed
to integrate with the upcoming Wireless Intelligent Network standards. Over 12
service providers have installed PrePay and we believe that PrePay currently
serves over 7.2 million subscribers. Our PhonePrint(R) system has proven highly
effective in reducing cloning fraud. PhonePrint has prevented hundreds of
millions of fraudulent call attempts and saved our customers millions of dollars
in fraud losses. We believe that our products can provide a number of benefits
to wireless telecommunications carriers, including reduced costs, improved cash
flow, increased market penetration and improved customer service.
We sell and market our products to wireless telecommunications carriers
domestically and internationally. Customers of our software and systems include:
Alltel Communications, Inc., AT&T Wireless Services, Baja Celular 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 Celular, 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, 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., Telestar
Mexico, S.A. de C.V., United States Cellular Corp. and Vanguard Cellular
Financial Corp. We sell our products and services through our direct sales force
and our distribution partners, which include Aurora Wireless Technology,
Ericsson Radio Systems, A.B., Grupo Ozono, and Motorola, Inc.
Issues Facing Wireless Telecommunications Carriers
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. Baskerville
Communications, an independent market research firm, estimates that the number
of wireless telecommunications subscribers worldwide will reach approximately
928 million in 2003.
As the wireless telecommunications industry evolves, it faces severe
competitive pricing and cost pressures. In the U.S., existing carriers are
seeing increased competition as new Personal Communications Services and
Enhanced Specialized Mobile Radio 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 develop services that allow them to
maximize the size of their customer base. In order to maintain or expand their
customer base, carriers are being faced with a growing need to differentiate
service offerings using 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. Our products address two of these needs: prepaid
wireless services and fraud protection.
Prepaid Wireless Services
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.
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 countries. Baskerville
Communications estimates that between now and 2003 the number of prepaid
wireless telecommunications subscribers worldwide will increase at a rate in
excess of 50% per year. It estimates that in 1998 less than 10% of wireless
telecommunications subscribers worldwide were pre-paid and it estimates that by
2003 pre-paid subscribers will account for 40% of all subscribers.
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 have poor
credit or 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
acceptance.
Handset-based technology has proven popular in those European markets
that employ the standards of the global system for mobile telecommunications
networks, or GSM, through applications that run on a subscriber identification
module, or SIM card. Handset-based systems have met with limited success outside
of markets operating with these 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
the fraud associated with post-call systems. This is accomplished by
implementing an adjunct switching platform in the voice network connected by
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.
Cloning 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. We believe that
cloning fraud accounts for most fraud losses in analog networks. 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.
Cloning occurs when a thief uses a scanning device to steal the mobile
identification number and electronic serial number 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 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. Personal identification numbers involve the use of a numeric code
that must be dialed by the subscriber before a call is connected. Personal
identification numbers are considered inconvenient, and because they are
transmitted over the air during a call, they have been compromised in the same
manner as electronic serial 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, we believe that
it will not be cost effective to replace the large number of existing analog
phones that do not allow authentication. Domestically, the carriers have
deployed incompatible digital networks including GSM , Code Division Multiple
Access, or CDMA and Time Division Multiple Access, or TDMA, . Due to these
different digital networks, subscribers must utilize the analog network for
roaming when traveling in a market that has deployed a digital network that is
not compatible with the subscriber's handset. For this reason, the Company
believes the analog network will be maintained for several years to enable
roaming.
CORSAIR'S SOLUTIONS
Prepaid Metered Billing
Our PrePay(TM) system 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. Corsair's PrePay system is differentiated from most other
competitive offerings by its use of the Wireless Intelligent Network standards
and architecture, which enables carriers to use existing switch infrastructure
equipment rather than requiring costly additional adjunct switches and voice
trunk resources. The PrePay software architecture is designed to scale as the
number of PrePay subscribers on a system grows. Since prepaid calls are
controlled by the existing switch, there is no impact on call setup times. All
calls by prepaid subscribers are rated in real time, and an integrated
interactive voice response 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.
Corsair has enhanced and extended the PrePay system to make it
compatible with all wireless switch vendors through the introduction of PrePay
Open. We believe this enhancement will open many new market segments for our
product and enables roaming with our existing PrePay customers using Ericsson
infrastructure equipment. PrePay Open will be in preliminary customer testing
during the second quarter of 2000.
We recently introduced our m-commerce product, PhoneFuel, that further
extends the PrePay product line. PhoneFuel will allow our PrePay customers to
offer their subscribers the capability to add cash to their PrePay balance using
wireless application protocol, or WAP, phones directly from their bank accounts
or credit cards. PhoneFuel will support Internet connections for PrePay
subscribers enabling these subscribers to pay for services and products using
their prepaid monetary balance.
Cloning Fraud
Our PhonePrint system provides highly-effective cloning fraud
prevention to wireless telecommunications carriers by using proprietary radio
frequency 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 radio frequency
waveform to develop a radio frequency "fingerprint" that is a reliable tool to
distinguish between a legitimate phone and its clone. 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 fingerprint of one wireless phone cannot be emulated by
another wireless phone, and is therefore not subject to being compromised like
electronic serial numbers, personal identification numbers 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 our PhonePrint Roaming Network,
carriers can share these fingerprints in real-time between PhonePrint systems in
different markets to protect against losses associated with roaming fraud.
STRATEGY
Our objective is to be the leading provider of real-time billing
solutions to wireless telecommunications carriers. Key elements of our strategy
include:
Maintain Leadership in WIN-based Prepaid Metered Billing Solutions.
Corsair's PrePay system is designed to fully integrate with the upcoming
Wireless Intelligent Network standards, and we believe that PrePay systems
currently serve more prepaid subscribers worldwide than any other prepaid system
using these standards. We intend to leverage our reputation and experience in
operating PrePay in international markets to increase our share of the global
market for wireless prepaid billing solutions.
Develop New Services and Features to Compliment our PrePay Service. We
intend to capitalize on PrePay's installed user-base to offer expanded
functionality. We have developed and plan to offer expanded PrePay services
including the ability for end users to add money to their PrePay account via
PhoneFuel. We also plan to develop service offerings that will capitalize on the
growth of wireless Internet access and the need for convenient, secure, wireless
payment mechanisms to support Internet-based e-commerce.
Provide Superior Customer Support. We believe that providing superior
customer support is critical to maintaining long-term relationships and to
capitalizing upon future sales opportunities. We have invested in building a
customer support organization with the range of technical skills and depth of
expertise necessary to serve various wireless customers. We have 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. We intend
to use our core expertise in real-time billing and real-time networking in
distributed systems environments to develop and introduce other products. We
also seek to strategically acquire complementary businesses, products and
technologies from third parties. We have in the past evaluated and expect in the
future to pursue business combinations with third parties.
Serve the Market for Cloning Fraud Prevention Solutions. We intend to
leverage our reputation and experience as a leading provider of radio-frequency
fingerprinting solutions to maximize the available market for cloning fraud
prevention solutions. We believe that carriers in certain international markets
are experiencing cloning fraud on their analog networks and present the primary
future opportunity for any new PhonePrint sales. Domestically, we believe
carriers will keep their installed PhonePrint systems up and operating to
prevent the re-occurrence of cloning fraud within their analog networks as these
analog networks are used for roaming.
THE PREPAY SYSTEM
PrePay allows carriers to support prepaid service offerings using their
existing Mobile Switching Center/Home Location Registry infrastructure
equipment. The PrePay server communicates with this infrastructure and other
network elements with the PrePay server and customer service clients. Corsair's
new PrePay Open product supports several air interfaces, including: CDMA, GSM,
TDMA, Analog Mobile Phone System, or AMPS, Total Access Communications System ,
or TACS, and Extended Total Access Communications System, or ETACS.
When a subscriber initiates a call and the network registry validates
that it is a prepaid subscriber, a 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 network then processes the call in the same
manner as in the post-paid environment, but times the call against the allowed
call duration. If prepaid funds are depleted during a call, the call is
automatically terminated and service is suspended until additional funds are
deposited. When the call is released, the system passes a message to the PrePay
server for a post-call rating, and then the PrePay system adjusts the
subscriber's account balance to reflect the costs associated with the call. All
communications and processes occur in real time.
The PrePay server provides subscribers with automated telephone access
to the prepaid system. The mobile inquiry function allows subscribers to obtain
automated information regarding their balance and expiration date. The mobile
payment function allows subscribers to replenish their 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 balances and new expiration dates. The low
balance/funds expiration announcement provides an automated warning message to
subscribers warning them that their balance is getting low or expiration date is
getting near. If either the balance or expiration threshold are met, then the
PrePay system will instruct the network to route a new call to the PrePay server
for a warning prior to completing the call.
PrePay provides carriers with feature-rich customer care and
administration functions including: activation and provisioning, phone number
and phone card inventory control, and real-time account review and adjustment
capabilities for customer service representatives. Activation and provisioning
are done in real time through software. 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 under the UNIX operating system 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 originally developed proprietary Wireless Intelligent
Network-based interfaces in conjunction with Ericsson Radio Systems, A.B. to
accelerate the market development of PrePay in markets which have deployed
Ericsson switching equipment in advance of the final Wireless Intelligent
Network, or WIN standards. Prior to PrePay's launch, the use of existing network
equipment was impractical or impossible due to the proprietary nature of
Ericsson equipment. We are in the process of developing PrePay Open, a version
of PrePay that will work on switches manufactured by a wide range of companies
in addition to Ericsson. PrePay Open's development reflects two important
considerations. First, PrePay Open will extend roaming capability for our
existing and future Ericsson PrePay customers to markets that have installed
switching infrastructure from vendors other than Ericsson. Second, we believe
that our present system architecture and design will support a smooth transition
to Wireless Intelligent Network standards once the standards are released and
implemented commercially.
THE PHONEPRINT SYSTEM
PhonePrint is an open architecture hardware and software system that
reduces cloning fraud by detecting and promptly disconnecting fraudulent call
attempts. Its key factor is its very robust RF (radio frequency) signal analysis
techniques. The system supports real-time network connectivity, allowing
PhonePrint markets to inter-operate 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 radio frequency 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 a
radio frequency fingerprint by using complex proprietary algorithms to measure
the physical features of these waveforms. These fingerprints of legitimate
subscribers' phones are stored in a database. PhonePrint compares the observed
fingerprint of the caller with the 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
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 IP (internet protocol) network.
Radio Frequency Units. Each radio frequency unit is an intelligent,
self-contained unit that detects fraudulent calls. Key elements of the unit
include sophisticated receivers, a digital signal processor (DSP) a PC-based
processor and a database of subscriber fingerprints. The unit constantly
monitors the radio frequency waveforms generated by phones, analyzes them via
proprietary algorithms and initiates disconnections when fraud is detected. The
collection, signal analysis and fraud detection process requires less than 0.5
seconds. These units have been designed so that they can be installed, exchanged
or taken off-line without interrupting the carrier's wireless network.
System Control Center. A system control center administers and
maintains the master database of fingerprints and activates fingerprint
validation processes for a market. It also communicates with the market's radio
frequency unit to receive new fingerprint observations and update fingerprint
databases. The control center also supports remote system diagnostics and
configuration administration, as well as providing the connection to the roaming
network.
Real-Time Application Server. The real-time application server 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 radio frequency units, a system control center
and a real-time application server for each market are connected together, and
the PhonePrint system is connected to the carrier's network infrastructure,
using a real-time network. Carriers can subscribe to the PhonePrint Roaming
Network service to exchange 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.
PRODUCT DEVELOPMENT
Our product development enhancements to the PrePay and PhonePrint
systems and development of new products will address perceived market
opportunities. Future releases of PrePay are being developed to support
interfaces with additional switch manufacturers. We have developed and will
begin marketing PrePay Open, a switch-independent version of Prepay which will
allow more widespread adoption of PrePay including providing roaming capability
with our Ericsson PrePay customers.
Total research and development expenditures were $12.5 million, $18.3
million and $11.3 million in fiscal years 1997, 1998, and 1999, respectively. We
anticipate that we will continue to commit substantial resources to product
development in the future. All research and development expenditures have been
expensed as incurred. During this period, PrePay has been enhanced to increase
peak throughput capability and improve reliability. 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.
As of December 31, 1999, 54 employees were engaged in research and
development programs, including hardware and software development, test and
engineering support. We believe that recruiting and retaining engineering
personnel is essential to our success. Competition for such personnel is
intense.
CUSTOMERS
The end users of our products are both domestic and international
wireless telecommunications carriers. Ericsson Radio Systems, A.B. accounted for
greater than 43% of our total revenues in 1999. In 1998, BellSouth Cellular
Corporation and GTE Mobilnet Service Corporation each accounted for greater than
10% of our total revenues, and collectively accounted for over 23% of our total
revenues for the year. In 1997, BellSouth Cellular Corporation, GTE Mobilnet
Service Corporation, and Southwestern Bell Mobile Systems, Inc. each accounted
for greater than 10% of our total revenues, and collectively accounted for over
33% of our total revenues for the year.
The following is a partial list of wireless telecommunications carriers
that have deployed either our PhonePrint or PrePay systems:
Algar Telecom Leste
American Cellular Communications Corp.
AT&T Wireless Services
Bell Atlantic
BellSouth Cellular Corporation
Cable and Wireless, Ltd.
CCPR Services, Inc.(Celular One Puerto Rico)
Centennial Cellular Corporation
Comcast Cellular Communications, Inc.
Ericsson Telecom, S.A. de C.V.
GTE Mobilnet Services Corp.
Houston Cellular Telephone Company
Los Angeles Cellular Telephone Company
NYNEX Mobil
Pilipino Telephone Corporation (PILTEL)
Puerto Rico Celular Telephone Company
RadioMovil DIPSA, S.A. de C.V. (Telcel)
Servisio Di Telekomunikashon, Setel N.V.
Southwestern Bell Mobile Systems, Inc.
Telecomunicaciones Movilnet, C.A.
Telefonica Comunicaciones Personales S.A.
Tess Celular
United States Cellular Corporation
Vanguard Cellular Financial Corp.
VimpleCom
SALES, MARKETING, DISTRIBUTION AND CUSTOMER SUPPORT
We sell and license PrePay primarily pursuant to a non-exclusive
original equipment manufacturer agreement with Ericsson and through our direct
sales force. We market PhonePrint to wireless telecommunications carriers
domestically and internationally through our direct sales force and our
distribution partners. We sell and license PhonePrint pursuant to agreements
that typically provide for hardware purchases and software licenses, customer
service and support and roaming service fees. A carrier's decision to deploy
PrePay or PhonePrint typically involves a significant commitment of capital by
the carrier, with the delays frequently associated with significant capital
expenditures. In addition, purchases of PrePay or PhonePrint involve testing,
integration, implementation and support requirements. For these and other
reasons, the sales cycle associated with the purchase of PrePay or PhonePrint
typically ranges from three to 18 months and is subject to a number of risks
over which we have little control, including the carrier's budgetary and capital
spending constraints and the internal decision making processes.
For the year ended December 31, 1999, international revenues accounted
for approximately 74% of our total revenues. For the year ended December 31,
1998, international revenues accounted for approximately 42% of our total
revenues. Revenue from international customers accounted for approximately 24%
of our total revenues in 1997. We expect that revenue from international
customers will continue to grow and account for a larger portion of our total
revenues in the foreseeable future than it did in 1999. We have been expanding
our sales efforts outside of the United States, both directly and through
distributors and switch vendors.
We are actively seeking to enter into distribution agreements and other
marketing arrangements as we believe we will depend more on distributors in the
future, both with respect to PrePay, PhonePrint and any new products that we may
offer. During 2000 we also entered into an agreement with LightBridge, Inc.
under which it is going to co-market our products and services in a wide variety
of markets including Latin America and the United States. As a result of our
acquisition of Subscriber Computing, Inc. in 1998, we are party to a
non-exclusive agreement with Ericsson dated June 3, 1997 which provides Ericsson
the right to sub-license PrePay worldwide. During 1997, we entered into
distribution agreements with Motorola, Inc. and Ericsson, which provides these
companies the ability to distribute PhonePrint worldwide on a non-exclusive
basis.
We provide service and technical support for our products through both
our direct field service and support personnel and our distributors. A high
level of continuing service and support is critical to our objective of
developing long-term relationships with our customers. We also provide on-site
installations and technical assistance as part of the standard support and
service package that our customers typically purchase for the length of their
respective agreements with us. We also offer various training courses for our
distributors and customers.
COMPETITION
The market for PrePay is 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. We are
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., Compaq (Tandem Division)
and Northern Telecom Limited that currently offer or are expected to offer
prepaid wireless billing products.
The market for new sales of PhonePrint hardware is competitive. We
believe that the market for new installations of PhonePrint is significantly
limited by: the lack of new analog systems currently being built or planned;
carriers' timelines for phasing out analog standards; and our high degree of
market penetration. Other competitive factors include competition for capital
expenditures as customers continue to deploy their digital networks. The
expansion of digital networks and the reluctance of carriers to make further
investments in their existing analog infrastructure, as well as our high degree
of market penetration, has greatly limited the demand for PhonePrint. We do
believe that the number of domestically installed incompatible digital networks
provides an opportunity to continue the recurring revenues for keeping the
installed PhonePrint units operating. However, these recurring revenues are
competing with operating budgets that carriers use for expanding their
authentication programs and other fraud reduction programs.
MANUFACTURING
Our manufacturing objective is to produce products that conform to our
specifications. Manufacturing, system integration and certain testing operations
are performed at our headquarters in Palo Alto, California. Our manufacturing
operations consist primarily of assembling finished goods from components and
subassemblies purchased from third parties. We monitor 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.
We rely, to a substantial extent, on outside vendors to manufacture the
hardware and third party software used in PrePay, and many of the components and
subassemblies used in PhonePrint, are obtained from a single supplier or a
limited group of suppliers. The manufacturing volumes for PhonePrint have gone
down as the new sales of PhonePrint hardware have decreased. Despite the lower
volumes, we strive to maintain the high quality of manufacturing and reliability
that our customers expect from Corsair.
PATENTS AND PROPRIETARY RIGHTS
We rely on a combination of patent, trade secret, copyright and
trademark protection and nondisclosure agreements to protect our proprietary
rights. As of December 31, 1999, we had six issued U.S. patents, four pending
U.S. patent applications; one issued foreign patent and two pending foreign
patent applications. Our success will depend partly on our ability to obtain
patent protection, defend patents once obtained, license third-party proprietary
rights, maintain trade secrets and operate without infringing upon the patents
and proprietary rights of others.
EMPLOYEES
As of December 31, 1999, we had 165 employees, including 61 in sales,
marketing, and operations 24 in manufacturing, 54 in research and development,
and 26 in finance, information systems, and administration. None of our
employees are represented by a collective bargaining agreement, nor have we
experienced any work stoppages. We believe that our relations with our employees
are good.
RISKS AND UNCERTAINTIES
We operate in a rapidly changing environment that involves a number of risks,
many of which are beyond our control. The following discussion highlights some
of these risks. Our 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 our other SEC filings.
We Are Dependent on PrePay.
We anticipate that PrePay, our prepaid metered billing solution, will account
for a majority of our revenues in 2000. As a result, our 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 significantly in order to
achieve our revenue targets.
PrePay Has Only Been Commercially Deployed on Networks Using Ericsson Switching
Equipment.
To date our PrePay solution has only been commercially deployed on networks
which use Ericsson switching equipment. Therefore, only carriers that have
deployed Ericsson's infrastructure equipment are potential customers for PrePay.
In order to expand our potential customer base by making PrePay compatible with
other infrastructure equipment, we introduced our PrePay Open product in
February 2000. To date, this product has only been used under testing
arrangement and PrePay Open may never gain market acceptance.
We Rely on Ericsson as Our Only Marketing Partner for PrePay.
Our PrePay product has been sold commercially only by Ericsson. Ericsson, from
time to time, may evaluate and seek to distribute or acquire alternative
vendor's prepaid product offerings. Any change in the terms of Ericsson's
partnership or Ericsson's desire to discontinue our relationship would
drastically affect sales of PrePay. Although we plan to have our own sales
agents begin to sell PrePay Open, our sales force may not be effective and
PrePay Open may never gain market acceptance.
We Have Been Dependent on PhonePrint.
Until recently, our revenues have primarily been attributable to PhonePrint, a
cloning fraud prevention system, and we anticipate that PhonePrint will account
for a declining but still significant position of our revenues in 2000. As a
result, our future operating results will depend on the continued use of the
PhonePrint system by the deployed based of PhonePrint users.
Most Potential Customers of PhonePrint Have Already Adopted a Cloning Fraud
Solution.
A relatively small number of carriers that operate analog networks constitute
the potential customers for PhonePrint. Substantially all of the carriers that
operate analog networks have, to varying degrees, already implemented cloning
fraud solutions. We believe there will be limited demand for PhonePrint systems
in the future. As a result of the limited demand for PhonePrint systems, the
growth of our business will be principally dependant on the growth of our PrePay
solutions.
PhonePrint Only Works on the Decreasing Percentage of Networks Which are Analog.
All of our 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 GSM communications 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. We are 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, we do not believe that operators of
digital networks will purchase third party radio frequency 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. We are 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.
We Cannot Assure Our Future Profitability.
We have incurred net losses from our incorporation through 1998 resulting in an
accumulated deficit of $43.7 million as of December 31, 1999. Our existing
revenue levels may not be sustained, and past and existing revenue levels should
not be considered indicative of future results or growth. In addition, we may
not be able to continue to operate profitably on a quarterly or annual basis.
Operating results for future periods are subject to numerous uncertainties
specified elsewhere in this Annual Report. Our future operating results will
depend upon, among other factors: the demand for PrePay, the demand for
PhonePrint, our ability to introduce successful new products and product
enhancements, the level of product and price competition, our ability to expand
our international sales, our success in expanding distribution channels, our
success in attracting and retaining motivated and qualified personnel, and our
ability to avoid patent and intellectual property litigation.
Our Quarterly Operating Results Were Subject to Significant Fluctuations and Our
Stock Price May Decline if We Fail to Meet Quarterly Expectations of Investors
and Analysts.
We have experienced significant fluctuations in revenues and operating results
from quarter to quarter due to a combination of factors and expect significant
fluctuations to continue in future periods. Factors that are likely to cause our
revenues and operating results to vary significantly from quarter to quarter
include, among others: the level and timing of revenues associated with PrePay
and PhonePrint; the timing of the introduction or acceptance of new products and
services and product enhancements offered by us and our 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 we compete; 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 us 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 our
costs, including personnel and facilities costs, any unanticipated shortfall in
revenues in any quarter would have a material adverse impact on our operating
results in that quarter and would likely result in substantial adverse
fluctuations in the price of the our common stock. Accordingly, we expect that
from time to time our 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 our common stock.
Our Products Have Lengthy Sales Cycles and Potential Delays in the Cycle Make
Our Revenues Susceptible to Fluctuations.
A carrier's decision to deploy PrePay or PhonePrint typically involves a
significant commitment of capital by the carrier and approval by its senior
management. Consequently, the timing of purchases are subject to uncertainties
and delays frequently associated with significant expenditures, and we are not
able to accurately forecast future sales of PrePay or PhonePrint. In addition,
purchases of PrePay and PhonePrint can involve testing, integration,
implementation and support requirements. For these and other reasons, the sales
cycle associated with the purchase of PrePay and PhonePrint typically ranges
from three to 18 months and is subject to a number of risks over which we have
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 us or competitors of new products
or product enhancements or by regulatory developments. We expect that there will
be a lengthy sales cycle with respect to new products, if any, that we may offer
in the future. If revenues forecasted from a specific customer for a particular
quarter are not realized in that quarter, our sales for that quarter could be
significantly reduced.
We Are Dependent on Our Distributors.
PrePay is currently marketed primarily through our distribution agreement with
Ericsson, and to a limited extent, through our direct sales efforts and we
believe that with respect to PrePay, Ericsson, from time to time, may evaluate
and seek to distribute or acquire alternative vendor's prepaid product
offerings. PhonePrint is currently marketed primarily through our direct sales
efforts. We have entered into distribution agreements with respect to PhonePrint
with, among others, Motorola,, Ericsson and Aurora. We seek to pursue
distribution agreements and other forms of sales and marketing arrangements with
other companies and we believe that our dependence on distributors and these
other sales and marketing relationships will increase in the future, with
respect to PrePay, PhonePrint and new products, if any, that we may offer. There
are no minimum purchase obligations applicable to any existing distributor or
other sales and marketing partners and we do not expect to have any guarantees
of continuing orders. Our existing and future distributors and other sales and
marketing partners may become our competitors with respect to PrePay, PhonePrint
or any future product either by developing a competitive product themselves or
by distributing a competitive offering. Failure by our existing and future
distributors or other sales and marketing partners to generate significant
revenues could have a material adverse effect on our business, operating results
and financial condition.
New Competitors and Alliances Among Existing Competitors Could Impair Our
Ability to Retain and Expand our Market Share.
Because competitors can easily penetrate the software market, we anticipate
additional competition from other established and new companies as the markets
for billing and fraud solutions develop. In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties. Large software companies may acquire or
establish alliances with our smaller competitors. We expect that the software
industry will continue to consolidate. It is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share.
The Success of Our International Operations is Dependant Upon Many Factors Which
Could Adversely Affect Our Ability to Sell Our Products Internationally and
Could Affect Our Profitability.
We believe that both our PrePay and PhonePrint products are likely to generate a
majority of our future revenues from international markets. We intend to devote
significant marketing and sales efforts over the next several years to increase
our sales of PrePay to international customers. This expansion of sales efforts
outside of the U.S. will require significant management attention and financial
resources. We may not be successful in achieving significant growth of sales of
PrePay in international markets.
Additional risks inherent in our 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. We anticipate that product service and
support will be more complicated and expensive with respect to products sold in
international markets. We may need to adapt our 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, we may be limited in our ability to
enforce our rights under such agreements and to collect damages, if awarded.
Our International Operations May be Conducted in Currencies Other Than the U.S.
Dollar and Fluctuations in the Value of Foreign Currencies Could Result in
Currency Exchange Losses.
Our future international sales may be denominated in foreign or U.S. currencies.
We do 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 our international sales that are U.S.
dollar-denominated, such a decrease could make our systems less
price-competitive.
Our Past Acquisitions of Other Businesses and Potential Future Acquisitions
Present Risks that Could Adversely Affect Our Business.
We have, in the past, evaluated and expect in the future to pursue acquisitions
of businesses, products or technologies that complement our 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
our 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 we have little or no direct prior experience and the
potential loss of key employees of an acquired business. In addition, we may not
be successful in completing any acquisition. We currently have no agreements or
understandings with regard to any acquisition.
The Industry In Which We Operate Is Highly Competitive and New Product
Introductions or the Enhancement of Existing Products by Our Competitors Could
Adversely Affect Our Ability to Sell Our Products.
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. We are 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., Compaq (Tandem Division) and Northern
Telecom Limited that currently offer or are expected to offer prepaid wireless
billing products. Any other company or competitor could 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. A new technology
could render our PrePay system obsolete or significantly reduce the market share
afforded to prepaid wireless billing systems like PrePay.
The market for PhonePrint is competitive. We believe that the primary
competitive factors in the cloning fraud prevention market in which we currently
compete 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, we expect 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 radio frequency -based cloning fraud prevention systems to a
carrier, we expect that it is unlikely that we would be able to sell PhonePrint
to that carrier.
Our principal competitor for radio frequency-based cloning fraud prevention
systems has been Cellular Technical Services Company, Inc. This competitor has
agreements pursuant to which it has installed or will install its radio
frequency-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. We are 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. The demand for PhonePrint would be lessened 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. Any currently available alternative technology or a new technology may
render our products obsolete or significantly reduce the market share afforded
to radio frequency-based cloning fraud prevention systems like PhonePrint.
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 we 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 us, and could make it more difficult for us to offer a
cost-effective alternative to a wireless telecommunications carrier's own
capabilities.
We believe that our ability to compete in the future depends in part on a number
of competitive factors outside our control, including the ability to hire and
retain employees, the development by others of products and services that are
competitive with our products and services, the price at which others offer
comparable products and services and the extent of our competitors'
responsiveness to customer needs. Many of our competitors and potential
competitors have significantly greater financial, marketing, technical and other
competitive resources than we have. As a result, our 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, we will need
to continue to invest substantial resources in engineering, research and
development and sales and marketing. We may not have sufficient resources to
make such investments and we may not be able to make the technological advances
necessary to remain competitive.
Certain of Our Customers Have Accounted for a Substantial Portion of Our Sales
and a Loss of One or More of These Customers Would Hurt Our Profitability.
To date, a significant portion of our revenues in any particular period has been
attributable to a limited number of customers, comprised entirely of wireless
telecommunications carriers. Ericsson Radio Systems AB accounted for greater
than 43% of our total revenues in 1999. In 1998, BellSouth Cellular Corporation
and GTE Mobilnet Service Corporation each accounted for greater than 10% of our
total revenues, and collectively accounted for over 23% of our total revenues
for the year. In 1997, BellSouth Cellular Corporation, GTE Mobilnet Service
Corporation, and Southwestern Bell Mobile Systems, Inc. each accounted for
greater than 10% of our total revenues, and collectively accounted for over 33%
of our total revenues for the year.
A relatively small number of carriers that use Ericsson infrastructure equipment
are potential customers for PrePay and a relatively small number of carriers
that operate analog networks are potential customers for PhonePrint. We believe
that the number of potential customers for future products, if any, will be
relatively small. Any failure by us to capture a significant share of those
customers could have a material adverse effect on our business, operating
results and financial condition. We expect a relatively small number of
customers will continue to represent a significant percentage of our 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 our agreements with our 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, our current customers may
not generate significant revenues in future periods.
If We Fail to Protect Our Intellectual Property Rights, Competitors May Be Able
to Use Our Technology or Trademarks and This Could Weaken Our Competitive
Position, Reduce Our Revenue and Increase Our Costs.
We rely on a combination of patent, trade secret, copyright and trademark
protection and nondisclosure agreements to protect our proprietary rights. As of
December 31, 1999, the we had six issued U.S. patent, four pending U.S. patent
applications, one issued foreign patent and two pending foreign patent
applications. Our success will depend in large part on our ability to obtain
patent protection, defend patents once obtained, license third party proprietary
rights, maintain trade secrets and operate without infringing upon the patents
and proprietary rights of others. The patent positions of companies in the
wireless telecommunications industry, including us, are generally uncertain and
involve complex legal and factual questions. Our patent applications may not
result in issued patents and, if patents do issue, the claims allowed may not be
sufficiently broad to protect our technology. In addition, any issued patents
owned by or licensed to us may be challenged, invalidated or circumvented, and
the rights granted thereunder may not provide competitive advantages to us.
Patents issued and patent applications filed relating to products used in the
wireless telecommunications industry are numerous and it may be the case that
current and potential competitors and other third parties have filed, or in the
future will 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 us. We may not be aware of all patents
or patent applications that may materially affect our 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. Third parties may assert infringement claims against us in the future
and any such assertions may result in costly litigation or require us to obtain
a license to intellectual property rights of such parties. Such licenses may not
be available on terms acceptable to us, if at all. Furthermore, parties making
such claims may be able to obtain injunctive or other equitable relief that
could effectively block our ability to make, use, sell or otherwise practice our
intellectual property (whether or not patented or described in pending patent
applications), or to further develop or commercialize our products in the U.S.
and abroad and could result in the award of substantial damages.
We also rely on unpatented trade secrets to protect our proprietary technology,
and others may independently develop or otherwise acquire the same or
substantially equivalent technologies or otherwise gain access to our
proprietary technology or disclose such technology and we may never be able to
protect our rights to such unpatented proprietary technology. Third parties may
obtain patent rights to such unpatented trade secrets, which patent rights could
be used to assert infringement claims against us. We also rely on
confidentiality agreements with our employees, vendors, consultants and
customers to protect our proprietary technology. These agreements may be
breached, and we may not have adequate remedies for any breach and our trade
secrets may become known or developed by competitors.
We May Experience Delays In Developing Our Products That Could Adversely Affect
Our Ability to Introduce New Products, Maintain Our Competitive Position and
Grow Our Business.
Our future success depends on the timely introduction and acceptance of new
products and product enhancements. However, our new products or product
enhancements that we attempt to develop may not be developed successfully or on
schedule, or if developed, they may not achieve market acceptance. In addition,
there can be no assurance that we will successfully execute our strategy of
acquiring businesses, products and technologies from third parties.
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, we have experienced delays in the introduction
of certain product enhancements, and it is possible that new products or product
enhancements will not be introduced on schedule or at all.
Errors in Our Products Could Result in Significant Costs to Us and Could Impair
Our Ability to Sell Our Products.
Any new products or product enhancements may contain defects when first
introduced or when new versions are released. Our testing may not uncover all
defects and thus defects may 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 our business, operating results and financial
condition.
We Are Dependant On Certain Suppliers and Vendors and Changes in the Terms Of
Our Relationship Could Impair Our Ability to Produce Our Products for a
Reasonable Price or At All.
We rely, to a substantial extent, on outside vendors to manufacture the hardware
and third party software used in PrePay and to manufacture many of the
components and subassemblies used in PhonePrint, some of which are obtained from
a single supplier or a limited group of suppliers. Our 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, we have experienced delays in
receiving materials from vendors, sometimes resulting in delays in the assembly
of products by us. Such delays, or other significant vendor or supply quality
issues, may occur in the future, which could result in a material adverse effect
on our business, operating results or financial condition. The manufacture of
certain of these components and subassemblies is specialized and requires long
lead times, and delays and shortages caused by vendors may reoccur.
In addition, from time to time, we must also rely upon third parties to develop
and introduce components and products to enable us, in turn, to develop new
products and product enhancements on a timely and cost-effective basis. In
particular, we must rely on the development efforts of third party wireless
infrastructure providers in order to allow our PrePay product to integrate with
both existing and future generations of the infrastructure equipment. We may not
be able to obtain access, in a timely manner, to third-party products and
development services necessary to enable us to develop and introduce new and
enhanced products. We may not be able to obtain third-party products and
development services on commercially reasonable terms nor may we be able to
replace third-party products in the event such products become unavailable,
obsolete or incompatible with future versions of our products.
Our Senior Management and Other Key Personnel Are Critical to Our Business and
If They Choose to Leave Corsair, It Could Harm Our Business.
Our success is dependent, in part, on our ability to attract and retain highly
qualified personnel. Our future business and operating results depend upon the
continued contributions of our senior management and other employees, many of
whom would be difficult to replace and certain of whom perform important
functions for us 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 our senior management team or current employees,
particularly to competitors, could materially adversely affect our business,
operating results or financial condition. We may not be successful in hiring or
retaining requisite personnel. None of our employees have entered into
employment agreements with us, and we do not have any key-person life insurance
covering the lives of any members of our senior management team.
We Need to Recruit and Retain Additional Qualified Personnel to Successfully
Grow Our Business.
We plan to rapidly and significantly expanded our operations. Such growth will
place significant demands on our management, information systems, operations and
resources. The strain will be in hiring, integrating and effectively managing
sufficient numbers of qualified personnel to support the expansion of our
business. Our ability to manage any future growth, should it occur, will
continue to depend upon the successful expansion of our 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. We may not be able to attract, manage and
retain additional personnel to support any future growth, if any, and we may
experience significant problems with respect to infrastructure expansion or the
attempted implementation of systems, procedures and controls.
We Operate in a Highly-Regulated Industry and Unanticipated Changes to U.S. or
Foreign Regulations Could Harm Our Business.
While most of our operations are not directly regulated, our 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 our
products or impede our ability to offer competitive products and services to the
wireless telecommunications industry or otherwise have a material adverse effect
on our 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 us, decrease demand for our
products, increase our cost of doing business or otherwise have a material
adverse effect on our business, operating results and financial condition. 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, our business
would suffer.
If the Market for Billing Solutions Does Not Continue to Develop as We
Anticipate Our Ability to Grow Our Business and Sell Our Products Will Be
Adversely Affected.
Our future financial performance will depend primarily on the number of carriers
seeking to implement prepaid billing services. Although the wireless
telecommunications industry has experienced significant growth in recent years,
such growth may not continue at similar rates and if the industry does grow,
there may not be continued demand for prepaid metered billing or other products.
Despite the Precautions We Have Taken, Our Computer Systems Are Subject to Risk
of Damage from a Variety of Sources.
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
our business, operating results and financial condition. We currently do not
have liability insurance to protect against these risks and such insurance may
not be available to us on commercially reasonable terms, or at all. In addition,
if any carrier using PhonePrint encounters material performance problems, our
reputation would suffer.
When Needed, We May Not Be Able to Raise Funds on Beneficial Terms or At All.
Our future capital requirements will depend upon many factors, including the
commercial success of PrePay and PhonePrint, the timing and success of new
product introductions, if any, the progress of our research and development
efforts, our results of operations, the status of competitive products and the
potential acquisition of businesses, technologies or assets. We believe that our
combination of existing sources of liquidity and internally generated cash will
be sufficient to meet our projected cash needs for at least the next 12 months.
However, it is possible that we will require additional financing prior to such
date to fund our operations. In addition, we may require additional financing
after such date to fund our operations. Additional financing may not be
available to us on acceptable terms, or at all, when required by us. If
additional funds are raised by issuing equity securities, further dilution to
the existing stockholders will result. If adequate funds are not available, we
may be required to delay, scale back or eliminate one or more of our development
or manufacturing programs or obtain funds through arrangements with third
parties that may require us to relinquish rights to certain of our technologies
or potential products or other assets that we would not otherwise relinquish.
Our Stock Will Likely Be Subject to Substantial Price and Volume Fluctuations
Which May Prevent Stockholders from Reselling Their Shares at or Above the Price
at Which They Purchased Their Shares.
The market price of our 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 PrePay and PhonePrint, new products or
new contracts by us or our competitors, actual or anticipated variations in our
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, we expect that, from time to time, our 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.
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 us, could result in
substantial costs and a diversion of our management's attention and resources.
Provisions in our Charter Documents and in Delaware Law May Discourage Potential
Acquisition Bids for Corsair and May Prevent Changes in Our Management Which Our
Stockholders Favor.
Our Restated Certificate of Incorporation authorizes our 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
our voting stock. Our Restated Bylaws divide our 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 us, 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.
We maintain our corporate headquarters in Palo Alto, California. This
leased facility, totaling approximately 55,000 square feet, contains the
principal administrative, assembly, manufacturing, marketing and sales
facilities. The lease on this facility expires on May 31, 2002. We sublease
approximately 12,840 square feet which expires on May 31, 2002. In addition, we
sublease approximately 7,800 square feet to a second tenant which includes the
right for either party to terminate the sublease upon 90 days written notice. To
date, neither party has exercised this option.
We also maintain a facility in Irvine, California. This lease, for
approximately 41,000 square feet, expires on April 30, 2001. Corsair subleases
approximately 27,400 square feet with an expiration date of April 30, 2001.
ITEM 3. Legal Proceedings.
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this Report, we are not engaged in any legal proceedings that are expected,
individually or in the aggregate, to have a material adverse effect on us.
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, 1999.
PART II
- --------------------------------------------------------------------------------
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Price of and Dividends on the Registrant's Common Equity.
Corsair's common stock trades on The Nasdaq Stock Market under the
symbol "CAIR." High and low stock prices for the last two fiscal years were:
1998
----------------------------------------------
High Low
---- ---
Quarter Ended
-------------
March 31 $ 22.250 $ 14.000
June 30 $ 21.188 $ 6.500
September 30 $ 11.000 $ 2.625
December 31 $ 6.250 $ 2.625
1999
----------------------------------------------
High Low
---- ---
Quarter Ended
-------------
March 31 $ 6.219 $ 3.688
June 30 $ 5.000 $ 3.875
September 30 $ 8.063 $ 4.188
December 31 $ 12.000 $ 6.875
On February 29, 2000, the last reported sale price of Corsair's common
stock was $28.500 per share. As of February 29, 2000, the number of record
holders of our common stock was 189 and the number of beneficial holders was
approximately 11,200. Corsair has declared no cash dividends on its common
stock. We currently intend to retain all earnings for use in our business and do
not anticipate paying any cash dividends in the foreseeable future.
ITEM 6. Selected Financial Data
The following selected financial data should be read in conjunction
with Corsair's consolidated financial statements and related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report.
On June 23, 1998, we acquired Subscriber Computing, Inc. ("SCI") in a
merger 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. 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, 1998 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, 1995,
1996, 1997, 1998 and 1999 combines Corsair's statements of operations for each
of the years in the five-year period ended December 31, 1999 with SCI's
statements of operations for each of the years in the three-year period ended
September 30, 1997, and the years ended December 31, 1998 and 1999 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, 1999. 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.
<TABLE>
Year Ended December 31,
<CAPTION>
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Total revenues $ 15,139 $ 31,216 $ 60,856 $ 65,218 $ 66,207
Total cost of revenues 12,716 24,935 36,867 26,562 24,314
----------- ----------- ----------- ----------- ----------
Gross profit 2,423 6,281 23,989 38,656 41,893
Operating costs and expenses:
Research and development 3,421 8,583 12,525 18,289 11,312
Sales and marketing 4,274 7,764 11,411 16,775 13,421
General and administrative 3,547 5,282 9,432 8,501 6,606
Reorganization costs -- -- -- -- 856
Write-off of capitalized software -- 3,760 -- -- --
costs
Merger related expenses -- -- -- 4,191 --
----------- ----------- ----------- ----------- ----------
Total operating costs and expenses 11,242 25,389 33,368 47,756 32,195
----------- ----------- ----------- ----------- ----------
Operating income (loss) (8,819) (19,108) (9,379) (9,100) 9,698
Loss on sale of assets -- -- -- -- (2,176)
Interest income (expense), net 181 (494) 1,191 2,460 1,817
----------- ----------- ----------- ----------- ----------
Income (loss) before income taxes (8,638) (19,602) (8,188) (6,640) 9,339
Income tax expense 2 3 8 -- 498
----------- ----------- ----------- ----------- ----------
Income (loss) before extraordinary item (8,640) (19,605) (8,196) (6,640) 8,841
Loss on debt extinguishment, net -- -- (428) (226) --
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (8,640) $ (19,605) $ (8,624) $ (6,866) $ 8,841
=========== =========== =========== =========== ==========
Basic net income (loss) per share data:
Income (loss) per share before $ (5.49) $ (11.57) $ (0.82) $ (0.38) $ 0.50
extraordinary item
Extraordinary item $ -- $ -- $ (0.04) $ (0.01) $ --
----------- ----------- ----------- ----------- ----------
Basic net income (loss) per share $ (5.49) $ (11.57) $ (0.86) $ (0.39) $ 0.50
=========== =========== =========== =========== ==========
Shares used in per share calculation 1,573 1,694 10,017 17,749 17,700
=========== =========== =========== =========== ==========
Diluted net income (loss) per share data:
Income (loss) per share before $ (5.49) $ (11.57) $ (0.82) $ (0.38) $ 0.48
extraordinary item
Extraordinary item $ -- $ -- $ (0.04) $ (0.01) $ --
----------- ----------- ----------- ----------- ----------
Diluted net income (loss) per share $ (5.49) $ (11.57) $ (0.86) $ (0.39) $ 0.48
=========== =========== =========== =========== ==========
Shares used in per share calculation 1,573 1,694 10,017 17,749 18,315
=========== =========== =========== =========== ==========
</TABLE>
<TABLE>
Balance Sheet Data:
December 31,
<CAPTION>
1995 1996 1997 1998 1999
-------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents & short-
term investments $ 15,569 $ 22,081 $ 62,953 $ 38,573 $ 52,949
Working capital 15,145 17,670 51,321 45,424 51,305
Total assets 26,707 41,726 87,539 71,560 76,683
Long-term obligations 8,030 8,295 3,164 1,624 670
Total stockholders' equity 13,077 13,651 57,375 52,114 56,615
</TABLE>
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. Corsair's actual results may
differ materially from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in this Annual Report. We undertake 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.
Corsair acquired Subscriber Computing, Inc., or SCI, in a combination
accounted for under the pooling-of-interests method of accounting. As such,
Corsair'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 Corsair's consolidated financial
statements and notes thereto, and discussion of the our 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. Our PrePay(TM) billing system
provides wireless telecommunications carriers with a software solution designed
to fully integrate with the upcoming Wireless Intelligent Network standards.
Over 12 service providers have installed PrePay and we believe that PrePay
currently serves 7.2 million subscribers. Our 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 our customers have
reported up to a 95% reduction in cloning fraud losses after deploying
PhonePrint. We believe that our products can provide a number of benefits to
wireless telecommunications carriers, including reduced costs, improved cash
flow, increased market penetration and improved customer service.
We sell and market our products to wireless telecommunications
carriers domestically and internationally. End users of our software and systems
include: Algar Telecom Leste, Alltel Communications, Inc., AT&T Wireless
Services, Aurora Wireless Technology, Baja Cellular Mexicana, S.A. de C.V., Bell
Atlantic Mobile, BellSouth Cellular Corp., Cable and Wireless, Ltd., 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., Ericsson Telecom,
S.A. DE C.V., 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., Servisio Di Telekomunikashon, Setel
N.V., Southwestern Bell Mobile Systems Inc., Southwestern Bell Wireless, Telcel
Celular, S.A., Telecomunicaciones Movilnet, C.A., Telefonica Comunicaciones
Personales S.A., Telestar Mexico, S.A. de C.V., Tess Cellular, United States
Cellular Corp., Vanguard Cellular Financial Corp., and VimpleCom.
Our 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 we 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 our
test and assembly operation, materials purchased from our 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.
Our gross margin has grown significantly in the past and may vary
significantly in the future, depending on the mix of hardware, software and
services. Our software licenses have a higher gross margin than our service and
hardware revenue. In addition, our 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, our operating results
will be affected by the mix of hardware units, software licenses, and service
fees recognized during each period.
We sell PhonePrint primarily through our direct sales force, but have
also entered into distribution agreements with Motorola, Ericsson, Aurora and
Telesis, and seek to enter into additional distribution agreements for
international markets. We sell PrePay primarily through a distribution
arrangement with Ericsson and to a limited extent through our direct sales
force. Our gross margin will also vary depending on the mix of direct sales and
sales through distribution channels and sales referral arrangements.
We continue to make efforts to sustain profits by increasing sales
volume, decreasing costs of goods sold, and through certain other measures.
While we have certain programs in place intended to reduce operating costs, our
expenses could increase in the foreseeable future. As a result, there can be no
assurance that we will sustain profitability. See "Risks and Uncertainties - We
Cannot Assure Our Future Profitability".
Recent Events
On February 3, 1999, we sold substantially all of the assets relating
to our Communication Resource Manager, or CRM", billing system and certain
related products to Wireless Billing Systems, or WBS", a California corporation,
pursuant to the terms of an Asset Purchase Agreement. We recorded a loss on the
sale of assets approximately $2.2 million, for the difference between the
consideration received and the net book value of the net assets transferred to
WBS, consisting of cash, accounts receivable, property and equipment and
deferred revenue.
Also on February 3, 1999, we signed a letter of intent with True
Position to develop a strategic relationship for the development, sales and
marketing of a wireless location product. As a result of our intent to enter
into this strategic relationship, we discontinued development of a wireless
location project, resulting in a charge of $856,000, consisting of $649,000 in
accrued termination benefits for 13 employees and equipment write-downs of $207,
000. As of December 31, 1999, we had not entered into a strategic relationship
with True Position, and it is unclear whether the Company will be able to
successfully develop a strategic relationship in the future.
Results of Operations-Years Ended December 31, 1997, 1998 and 1999
Revenues. For the years ended December 31, 1997, 1998 and 1999, total
revenues were $60.9, $65.2 and $66.2 million, respectively. Hardware revenue
decreased 10% from $37.9 million in 1997 to $34.1 million in 1998, and 6% to
$32.0 million in 1999. The growth in the installed base of PhonePrint units
slowed in 1999 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 11% from $12.3 million in 1997 to $13.7
million in 1998, and increased 46% to $20.1 million in 1999. The growth in
software revenues was primarily due to the strong growth of the PrePay product,
following its launch in mid 1998. Service revenue increased 63% from $10.7
million in 1997 to $17.4 million in 1998, and decreased 18% to $14.2 million in
1999. 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. The decrease in 1999 was primarily
due to the sale of CRM assets in the first quarter of 1999 and the resulting
loss of consulting revenues caused by the discontinued product line.
Gross Profit. Gross profit increased from $24.0 million for 1997 to
$38.7 million for 1998 and $41.9 million for 1999, or 39%, 59% and 63% of total
revenues, respectively. The increase in gross profit was due primarily to
improved margins from software revenues, which contributed $10.4 million in
1997, $12.4 million in 1998, and $18.7 million in 1999. Hardware revenues
contributed $9.9, $16.9, and $14.8 million in 1997, 1998, and 1999, respectively
to the Company's gross profit. Service revenue gross profit for the year ended
December 31, 1997 improved from $3.6 million, to $9.3 million in 1998, and
decreased to $8.3 million in the 1999. The increasing software margins resulted
from improved pricing models as well as a higher installed. Hardware margins
decreased due to slower unit sales and a burdened hardware-pricing model while
service margins decreased due to the loss of consulting revenues caused by the
discontinued product line .
Research and Development. Research and development expenses were $12.5,
$18.3 and $11.3 million for the years ended December 31, 1997, 1998, and 1999,
or 21%, 28% and 17% of total revenues, respectively. The increase in absolute
dollars in 1998 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 relating to the SCI acquisition. The
decrease in dollars and percentage of revenues in 1999 was due to the sale of
assets related to the Communication Resource Manager billing system and related
products to Wireless Billing Systems. The sale resulted in a reduction in
engineering and support staff costs as well as costs for related product
development.
Sales and Marketing. Sales and marketing expenses were $11.4, $16.8 and
$13.4 million for the years ended December 31, 1997, 1998, and 1999, or 19%, 26%
and 20% of total revenues, respectively. The increase in dollars in 1998
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 dollars and percentage of total revenues in 1999 was
due primarily to the CRM sale in which certain sales positions and related staff
costs were eliminated.
General and Administrative. General and Administrative expenses were
$9.4, $8.5 and $6.6 million for the years ended December 31, 1997, 1998, and
1999, or 15%, 13% and 10% of total revenues, respectively. The decrease in 1998
was due to the consolidation of operations upon acquisition of SCI when
duplicate processes were eliminated. The decrease continued in 1999 with the
sale of CRM and further elimination of duplicate positions and related expenses.
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.
Reorganization Costs. On February 3, 1999, Corsair 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 our intent to enter
into this strategic relationship, we discontinued development of a wireless
location project, which resulted in a charge of $856,000, consisting of $649,000
in accrued termination benefits for 13 employees and equipment write-downs of
$207,000. As of December 31, 1999, all of the accrued termination benefits had
been paid.
Loss on Sale of Assets. Also on February 3, 1999, we sold substantially
all of the assets relating to our CRM billing system and certain related
products to WBS, a California corporation, pursuant to the terms of an Asset
Purchase Agreement.
In conjunction with the sale, we received from WBS a secured promissory
note receivable of $2.2 million, which was $2.2 million less than the net book
value of the net assets transferred to WBS, consisting of cash, accounts
receivable, property and equipment, and deferred revenue. The note bears
interest at the rate of 10% per annum, payable in equal monthly installments
based upon a sixty month amortization schedule with a final payment of the
remaining unpaid principal with all accrued interest due and payable in May,
2003. The Company recorded a loss on the sale of the net assets of approximately
$2.2 million, for the difference between the fair value of the consideration
received and the net book value of the assets transferred.
Interest Income, Net. Net interest income was $1.2 million for the year
ended December 31, 1997 as compared to $2.5 million in 1998 and $1.8 million in
1999. Net interest income consists of interest income from our cash, short-term
investments and notes receivable, net of interest expense on our equipment
loans, equipment lease lines and other loans outstanding primarily in 1997 and
1998. The increase in net interest income in 1998 was a result of larger average
cash investments attributable to the proceeds received from our initial public
offering which was completed in July 1998.
Extraordinary Item. During the years ended December 31, 1997 and 1998,
we 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 year ended December 31,
1997 represents minimum state tax liabilities. For 1999, we recorded an income
tax expense of $498,000 on pretax income of $9.3 million.
Liquidity and Capital Resources
Our operating activities provided cash of $21.0 million for the year
ended December 31, 1999. The generation of cash from operations in 1999 was
largely due to the company's net income of $8.8 million and a reduction of
inventory of $3.9 million and an increase of $2.9 million in accounts payable
and accrued expenses.
Our investing activities resulted in a net use of cash of $5.6 million
for the year ended December 31, 1999. Net cash of $4.9 million was used for the
purchase of additional short-term investments. During the year ended December
31, 1999, our financing activities used cash of $5.9 million primarily for the
purchase of treasury stock.
From inception, we have financed our operations primarily through a
series of preferred stock and debt financing, and an initial public offering. In
July 1997, our initial public offering generated $39.1 million of net proceeds.
At December 31, 1999, we had cash and cash equivalents of approximately $13.7
million and short-term investments of approximately $39.3 million. We believe
that existing sources of liquidity and internally generated cash, if any, will
be sufficient to meet our projected cash needs for at least the next 12 months.
We intend to continue significant product development efforts in the future and
expect these to fund activities out of working capital. There can be no
assurance, however, that we will not require additional financing prior to such
date to fund operations or possible acquisitions. In addition, we may require
additional financing after such date to fund 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.
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 with an average maturity 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, 1999, we had outstanding a note payable for $1.4 million which
matures in 2001. The note has a fixed interest rate of 14.4%. 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.
ITEM 8. Financial Statements and Supplementary Data
Annual Report on Form 10-K
For the Year Ended December 31, 1999
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
------
Independent Auditors' Report, KPMG LLP 24
Independent Auditors' Report, Deloitte & Touche LLP 25
Consolidated Balance Sheets as of December 31, 1998 and 1999 26
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 27
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1998 and 1999 28
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 29
Notes to Consolidated Financial Statements 30
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, 1998 and 1999, 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, 1999.
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
21.4% in fiscal 1997, 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, 1998 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Mountain View, California
February 4, 2000
<PAGE>
Independent Auditors' Report
The Board of Directors
Subscriber Computing, Inc.:
We have audited the balance sheet of Subscriber Computing, Inc.
("SCI") as of September 30, 1997 and the related statements of operations,
stockholders' equity (deficit) and cash flows for the year then ended (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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Subscriber
Computing, Inc. as of September 30, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
January 7, 1998
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
DECEMBER 31,
1998 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,196 $ 13,686
Short-term investments 34,377 39,263
Trade accounts receivable, less allowance for
doubtful accounts of $2,896 for 1998 and $2,115 for 1999 14,134 11,548
Evaluation inventory 2,597 1,163
Inventories, net 5,676 3,183
Prepaid expenses 2,266 1,475
Current portion of notes receivable -- 385
-------------- -------------
Total current assets 63,246 70,703
Notes receivable -- 1,325
Property and equipment, net 7,422 3,458
Other assets 892 1,197
-------------- -------------
$ 71,560 $ 76,683
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,706 $ 2,273
Accrued expenses 7,731 10,245
Current portion of notes payable 639 737
Current portion of capital lease obligations 609 80
Deferred revenue 7,137 6,063
-------------- -------------
Total current liabilities 17,822 19,398
Notes payable, net of current portion 1,407 670
Capital lease obligations, net of current portion 217 --
-------------- -------------
Total liabilities 19,446 20,068
-------------- -------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value; 20,000,000 shares authorized;
17,976,492 and 18,281,324 shares issued and outstanding at 18 18
December 31, 1998 and 1999, respectively
Treasury stock at cost, 1,075,000 shares -- (5,741)
Notes receivable from stockholders (468) (272)
Additional paid-in capital 105,433 106,445
Deferred compensation (288) (95)
Accumulated deficit (52,581) (43,740)
-------------- -------------
Total stockholders' equity 52,114 56,615
-------------- -------------
$ 71,560 $ 76,683
============== =============
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
---------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues:
Hardware $ 37,882 $ 34,089 $ 31,961
Software 12,303 13,717 20,083
Service 10,671 17,412 14,163
---------------- ---------------- -----------------
Total revenues 60,856 65,218 66,207
---------------- ---------------- -----------------
Cost of revenues:
Hardware 27,938 17,151 17,124
Software 1,903 1,317 1,336
Service 7,026 8,094 5,854
---------------- ---------------- -----------------
Total cost of revenues 36,867 26,562 24,314
---------------- ---------------- -----------------
Gross profit 23,989 38,656 41,893
---------------- ---------------- -----------------
Operating costs and expenses:
Research and development 12,525 18,289 11,312
Sales and marketing 11,411 16,775 13,421
General and administrative 9,432 8,501 6,606
Merger related expenses -- 4,191 --
Reorganization costs -- -- 856
---------------- ---------------- -----------------
Total operating costs and expenses 33,368 47,756 32,195
---------------- ---------------- -----------------
Operating income (loss) (9,379) (9,100) 9,698
Loss on sale of assets -- -- (2,176)
Interest income, net 1,191 2,460 1,817
---------------- ---------------- -----------------
Income (loss) before income taxes and (8,188) (6,640) 9,339
extraordinary item
Income tax expense 8 -- 498
---------------- ---------------- -----------------
Income (loss) before extraordinary item (8,196) (6,640) 8,841
Loss on debt extinguishment, net (428) (226) --
================ ================ =================
Net income (loss) $ (8,624) $ (6,866) $ 8,841
================ ================ =================
Basic net income (loss) per share data:
Income (loss) before extraordinary item $ (0.82) $ (0.38) $ 0.50
Extraordinary item (0.04) (0.01) --
---------------- ---------------- ----------------
Basic net income (loss) per share $ (0.86) $ (0.39) $ 0.50
================ ================ =================
Shares used in per share calculation 10,017 17,749 17,700
================ ================ =================
Diluted net income (loss) per share data:
Income (loss) before extraordinary item $ (0.82) $ (0.38) $ 0.48
Extraordinary item (0.04) (0.01) --
---------------- ---------------- ----------------
Diluted net income (loss) per share $ (0.86) $ (0.39) $ 0.48
================ ================ =================
Shares used in per share calculation 10,017 17,749 18,315
================ ================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
NOTE ADDITIONAL TOTAL
CONVERTIBLE RECEIVABLE PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK TREASURY STOCK FROM CAPITAL COMPENSATION DEFICIT EQUITY
STOCKHOLDER
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
as 9,166,288 9 2,368,207 2 -- -- (136) 45,774 (69) (31,929) 13,651
of
December
31,
1996
Exercise
of -- -- 730,417 1 -- -- -- 402 -- -- 403
common
stock
options
Issuance
of -- -- 58,828 -- -- -- -- 142 -- -- 142
common
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
related -- -- -- -- -- -- -- 1,129 (1,129) -- --
to
grant
of
stock
options
Amortization
of -- -- -- -- -- -- -- -- 550 -- 550
deferred
compensation
Conversion
of (11,344,907) (11) 11,344,907 11 -- -- -- -- -- -- --
preferred
stock
to
common
stock
Issuance
of
common -- -- 2,875,000 3 -- -- -- 39,055 -- -- 39,058
stock
net
of
issuance
costs
Repurchase
of -- -- (7,026) -- -- -- -- (3) -- -- (3)
common
stock
Accretion
attributable
to -- -- -- -- -- -- -- 180 -- (180) --
subsidiary's
preferred
stock
Net loss -- -- -- -- -- -- -- -- -- (8,624) (8,624)
Change
in -- -- -- -- -- -- -- -- -- (4,892) (4,892)
subsidiary's
year
end
-------------------------------------------------------------------------------------------------------------------------------
Balances
as of -- -- 17,548,562 $ 17 -- -- (511) 104,142 (648) (45,625) 57,375
December
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 -- -- 13,575 -- -- -- -- -- -- -- --
common
stock
for
an
acquisition
Accretion
attributable
to -- -- -- -- -- -- -- 90 -- (90) --
subsidiary's
preferred
stock
Repurchase
of -- -- (10,986) -- -- -- -- (8) -- -- (8)
common
stock
Amortization
of -- -- -- -- -- -- -- -- 360 -- 360
deferred
compensation
Net loss -- -- -- -- -- -- -- -- -- (6,866) (6,866)
-------------------------------------------------------------------------------------------------------------------------------
Balances
as of -- -- 17,976,492 $ 18 $ -- $ -- $(468) $ 105,433 $(288) $(52,581) $ 52,114
December
31, 1998
===============================================================================================================================
Stock
issued
under -- -- 299,802 -- -- -- -- 675 -- -- 675
stock
option
and
stock
purchase
plans
Stock
issued -- -- 5,030 -- -- -- -- (5) -- -- (5)
pursuant
to
exercise
of
warrants
Notes
receivable -- -- -- -- -- -- 196 (16) -- -- 180
repayments
Deferred
compensation-- -- -- -- -- -- -- 358 -- -- 358
related
to CRM sale
Amortization
of -- -- -- -- -- -- -- -- 193 -- 193
deferred
compensation
Purchase
of -- -- -- -- (1,075,000) (5,741) -- -- -- -- (5,741)
Treasury
Stock
Net -- -- -- -- -- -- -- -- -- 8,841 8,841
income
-------------------------------------------------------------------------------------------------------------------------------
Balances
as of -- -- 18,281,324 $ 18 $(1,075,000) $(5,741) $(272) $106,445 $(95) $(43,740) $ 56,615
December
31, 1999
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,624) $ (6,866) $ 8,841
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation and amortization 2,934 4,243 3,722
Amortization of deferred compensation 550 360 193
Extraordinary loss on extinquishment of debt 428 226 -
Noncash loss on disposition of assets 100 - 914
Noncash reorganization costs - - 412
Merger-related costs - 4,191 -
Changes in operating assets and liabilities:
Trade accounts receivable (886) (8,524) 665
Inventories 969 90 3,917
Prepaid expenses and other assets (2,341) (990) (697)
Accounts payable and accrued expenses 153 (4,054) 2,943
Deferred revenue 4,487 (5,215) 95
------------- ------------ -------------
Net cash (used in) provided by (2,230) (16,539) 21,005
operating activities
------------- ------------ -------------
Cash flow from investing activities:
Purchase of short-term investments (66,601) (29,514) (37,035)
Proceeds from sales and maturities of short-term investments 23,969 39,862 32,149
Purchases of property and equipment (4,822) (3,446) (717)
------------- ------------ -------------
Net cash (used in) provided by (47,454) 6,902 (5,603)
investment activities
------------- ------------ -------------
Cash flow from financing activities:
Proceeds from sale of preferred stock, net of offering costs 17,090 - -
Proceeds from issuance of common stock, net of offering costs 39,458 1,202 655
Proceeds from notes payable 660 4,128 207
Repurchase of common stock - - (5,741)
Payments on note payable (8,269) (9,021) (639)
Payments on capital lease (733) (747) (590)
Proceeds from notes receivable from stockholders - 43 196
------------- ------------ -------------
Net cash provided by (used in) 48,206 (4,395) (5,912)
financing activities
------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents (1,478) (14,032) 9,490
Change in subsidiary's year end 77 - -
Cash and cash equivalents, beginning of year 19,629 18,228 4,196
------------- ------------ -------------
Cash and cash equivalents, end of year $ 18,228 $ 4,196 $ 13,686
============= ============ =============
Cash paid during the year:
Interest $ 1,128 $ 1,188 $ 296
============= ============ =============
Income taxes $ 807 $ 364 $ 508
============= ============ =============
Noncash financing and investing activities:
Assets recorded under capital leases $ 864 $ -- $ --
============= ============ =============
Common stock issued upon exercise of stock option in exchange
for stockholders' note $ 375 $ -- $ --
============= ============ =============
Deferred compensation relating to stock option grants $ 1,129 $ -- $ --
============= ============ =============
Conversion of preferred stock to common stock $ 31,737 $ -- $ --
============= ============ =============
Accretion of subsidiary's preferred stock liquidation $ 180 $ 90 $ --
preference
============= ============ =============
Notes receivable in exchange for net assets sold $ -- $ -- $ 2,238
============= ============ =============
Options vesting in reorganization costs $ -- $ -- $ 358
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. BUSINESS
Corsair Communications, Inc. ("Corsair") is a leading provider of software and
system solutions for the wireless industry, focusing on prepaid wireless billing
and fraud prevention. On June 23, 1998, we acquired Subscriber Computing, Inc.
("SCI") in a combination accounted for under the pooling-of-interests method of
accounting. Our consolidated financial statements have been restated to include
the financial position and results of SCI for all periods presented.
The consolidated financial statements include the accounts of Corsair 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 we 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 objective evidence which is specific to Corsair. 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. The fair value of our products is
indicated by the standard sale price specific to each hardware element or the
annual software or service renewal rates agreed to and paid by our customers.
In December 1998, Accounting Standards Executive Committee (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. We do not expect a material change to our
accounting for revenues as a result of the provisions of SOP 98-9. SOP 98-9 is
effective for transactions entered into beginning January 1, 2000.
Concentration of Credit Risk
Financial instruments that potentially expose Corsair to concentrations of
credit risk principally consist of cash, cash equivalents, short-term
investments, and accounts receivable.
We limit the amounts invested in any one type of investment and maintain cash
investments with several financial institutions. As such, we believe the
financial risks associated with such deposits are minimal.
Corsair 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. We have not experienced significant losses on trade
receivables from any particular customer or geographic region.
Fair Value of Financial Instruments
Corsair's cash, cash equivalents, accounts receivable, accounts payable, and
accrued expenses are stated at fair value which approximates 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 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,
1998 1999
---- ----
Corporate debt securities $ 34,377 $ 39,263
Certificates of deposit 2,290 290
---------- ---------
$ 36,667 $ 39,553
========= =========
As of December 31, 1998 and 1999, $2,290,000 and $290,000, respectively, of
Corsair's investments were classified as cash and cash equivalents in the
accompanying balance sheets.
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. We determine that technological feasibility has been
established once a working model has been completed and tested. No software
research and development costs have 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
Corsair 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 Income (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 1,268,289 and 1,951,331
outstanding options to purchase common stock and outstanding warrants to
purchase 271,545 and 194,249 shares of common stock as of December 31, 1997 and
1998, respectively, since their inclusion in diluted per share results would
have been antidilutive.
The following tables set forth the computations of shares and net income (loss)
used in the calculation of basic and diluted net income (loss) per share (in
thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Basic net income (loss) per share data:
Net income (loss) $ (8,624) $ (6,866) $ 8,841
============ ============ ============
Actual weighted average common 10,017 17,749 17,700
shares outstanding for the period ============ ============ ============
Basic net income (loss) per share $ (0.86) $ (0.39) $ 0.50
------------ ------------ ------------
Diluted net income (loss) per share data:
Net income (loss) $ (8,624) $ (6,866) $ 8,841
============ ============ ============
Actual weighted average common
shares outstanding for the period 10,017 17,749 17,700
Stock options and warrants outstanding -- -- 615
------------ ------------- -----------
Shares used in diluted per share 10,017 17,749 18,315
============ ============ ============
Diluted net income (loss) per share $ (0.86) $ (0.39) $ 0.48
============ ============ ============
</TABLE>
Stock-Based Compensation
Corsair accounts for its stock-based compensation arrangements using the
intrinsic-value method prescribed in Accounting Principle Board Opinion No. 25
"Accounting for Stock Issued to Employees". As such, deferred compensation is
recorded on the date of grant when the fair value of the underlying common stock
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. Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting For Stock-Based Compensation" establishes accounting
and disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. Corsair has elected to remain on its
current method of accounting as described above, and has adopted the disclosure
requirements of SFAS No. 123.
Comprehensive Income (Loss)
Corsair has no significant components of other comprehensive income (loss), and
accordingly, the comprehensive income (loss) is the same as net income (loss)
for all periods.
3. BALANCE SHEET COMPONENTS AND RELATED VALUATION ACCOUNTS
Inventories
Inventories consisted of the following (in thousands):
DECEMBER 31,
1998 1999
---- ----
Raw materials $ 2,600 $ 948
Work in process 311 --
Finished goods 2,765 2,235
-------- ---------
$ 5,676 $ 3,183
======== =========
Property and Equipment
Property and equipment consisted of the following (in thousands):
DECEMBER 31,
1998 1999
---- ----
Computer equipment $10,059 $6,590
Furniture and fixtures 1,093 985
Purchased software 1,233 1,788
Leasehold improvements 1,311 1,261
Machinery & equipment 1,795 1,729
-------- --------
15,491 12,353
Less accumulated depreciation and amortization (8,069) (8,895)
-------- ---------
$ 7,422 $3,458
The total amount of assets recorded under capital leases included in property
and equipment is approximately $2,505,000 and 2,180,000 as of December 31, 1998
and 1999, respectively. Accumulated amortization thereon was $1,789,000 and
2,093,000 as of December 31, 1998 and 1999, respectively.
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
DECEMBER 31,
1998 1999
---- ----
Accrued benefits $ 2,261 $ 1,987
Accrued warranty costs 2,093 2,836
Accrued professional fees 1,416 1,279
Accrued taxes 291 1,327
Customer discounts - 1,207
Other 1,670 1,609
-------- ---------
$ 7,731 $ 10,245
======== =========
Allowance for Doubtful Accounts
Changes to the allowance for doubtful accounts consisted of the following (in
thousands):
Balance at Charged to
beginning of costs and Balance at end
YEAR ENDED the period expenses Deductions of the period
---------- ---------- -------- ---------- -------------
December 31, 1997 $ 867 $ 2,018 $ 1,457 $ 1,428
December 31, 1998 $ 1,428 $ 2,692 $ 1,224 $ 2,896
December 31, 1999 $ 2,896 $ 1,123 $ 1,904 $ 2,115
4. 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, 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,
1999 have been combined with SCI's statement of operations for the year ended
September 30, 1997, and the two year periods ended December 31, 1999,
respectively. Due to the fiscal year end conversion of SCI to that of Corsair,
the following summarized financial information for SCI for the three months
ended December 31, 1997 was not included in the consolidated statements of
operations:
Three Months Ended December 31, 1997
------------------------------------
Net revenue $ 2,854
Total cost of sales 1,758
------------
Gross profit 1,096
------------
Operating costs and expenses 5,946
------------
Operating loss (4,850)
Other expense, net (42)
============
Net loss $ (4,892)
============
SCI did not incur any significant operating, investing, or financing cash flow
events during the three months ended December 31, 1997.
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
------------- ------------- -------------
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)
In the second quarter of 1998, Corsair recorded merger-related costs and
expenses of $4.2 million. The one-time charges included $2.5 million in
transaction costs, $1.5 million of termination benefits for approximately 20
employees, and redundant facility and other equipment costs associated with the
merger of $145,000. As of December 31, 1999, all of the accrued merger-related
costs had been paid.
5. REORGANIZATION COSTS
On February 3, 1999, Corsair signed a letter of intent with True Position to
develop a strategic relationship for the development, sales and marketing of a
wireless location product. As a result of our intent to enter into this
strategic relationship, Corsair discontinued development of a wireless location
project, resulting in a charge of $856,000, consisting of $649,000 in accrued
termination benefits for 13 employees and equipment write-downs of $207, 000. As
of December 31, 1999, the Company had not developed a strategic relationship
with True Position, and it is unclear whether the Company will be able to
successfully develop a strategic relationship in the future.
6. LOSS ON SALE OF ASSETS
Also on February 3, 1999, we sold substantially all of the assets relating to
our 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.
In conjunction with the sale, we received from WBS a secured promissory note
receivable of $2.2 million, which was $2.2 million less than the net book value
of the net assets transferred to WBS, consisting of cash, accounts receivable,
property and equipment, and deferred revenue. The note bears interest at the
rate of 10% per annum, payable in equal monthly installments based upon a sixty
month amortization schedule with a final payment of the remaining unpaid
principal with all accrued interest due and payable in May, 2003. We recorded a
loss on the sale of the net assets of approximately $2.2 million, for the
difference between the consideration received and the net book value of the
assets transferred.
7. DEBT
Notes payable consists of a note to a financial institution, with monthly
payments of approximately $74,000 at an interest rate of 14.38% with a lump sum
payment of approximately $260,000 due on June 1, 2001, collateralized by
selected assets of the Corsair. The outstanding balance as of December 31, 1999
was approximately $1,407,000.
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 warrants issued along with the notes payable. In
addition, in 1998, the Company incurred a loss on debt extinguishment of
$226,000 associated with paying the principal and interest of $4.8 million of
short-term and long-term notes payable noted above. The loss was comprised of
the amortization of the remaining loan fees associated with the debt issuance.
8. INCOME TAXES
Income tax expense consists of the following for the years ended December 31 (in
thousands):
1997 1998 1999
------------- ------------- ---------------
Current
Federal $ - $ - $ 1,431
State 8 - 248
-------------- ------------ ---------------
Total current tax expense 8 - 1,679
Deferred
Federal - - (1,181)
State - - -
-------------- ------------ ---------------
Total deferred tax expense - - (1,181)
-------------- ------------ ---------------
Total tax expense $ 8 $ - $ 498
============== ============ ===============
A reconciliation of the Federal statutory rate of 34% as applied to income
(loss) before income taxes and extraordinary item from continuing operations to
Corsair's effective tax rate is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1997 1998 1999
---------------- -------------- ---------------
<S> <C> <C> <C>
Tax at U.S. Federal statutory rate (benefit) $ (2,423) $ (2,258) $ 3,176
S corporation loss not subject to tax 2,062 - -
Utilization of prior net operating losses and
temporary differences - - (1,240)
Utilization of prior year tax credits - - (645)
Change in beginning valuation allowance - - (1,181)
Unutilized net operating losses 153 1,832 -
State income taxes 8 - 248
Nondeductible merger expenses - 369 -
Other nondeductible expenses 208 57 140
---------------- ============== ===============
Total tax expense $ 8 $ - $ 498
================ ============== ===============
</TABLE>
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):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1998 1999
-------------- ---------------- --------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 10,155 $ 10,717 $ 9,910
Credit carryforwards 1,468 2,164 1,984
Inventory, due to reserves and additional amounts 401 745 928
capitalized for tax
Bad debt reserve - - 850
Accrued vacation - - 198
Accrued warranty and retrofit - - 1,140
Other accruals and reserves not currently deductible 1,476 1,936 139
for tax purposes
Technology asset 1,677 1,476 1,311
Fixed assets 182 627 906
Other - 98 -
-------------- ---------------- --------------
Total gross deferred tax assets 15,359 17,763 17,366
Less valuation allowance (15,331) (17,763) (16,185)
-------------- ---------------- --------------
Net deferred tax assets 28 - 1,181
-------------- ---------------- --------------
Deferred tax liabilities:
Other deferred liabilities (28) - -
-------------- ---------------- --------------
Total deferred tax liabilities (28) - -
-------------- ---------------- -------------
Net deferred tax assets $ - $ - $ 1,181
============== ================ =============
</TABLE>
The net change in the valuation allowance for the year ended December 31, 1999
was a decrease of approximately $964,000. We believe 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, 1999, Corsair had net Federal and California operating loss
carryforwards of approximately $26.1 and $16.2 million respectively, for income
tax reporting. The Federal net operating loss carryforwards expire beginning in
2009 through the year 2011. The California net operating loss carryforwards
expire in 2002.
Corsair also has research and experimental tax credits aggregating approximately
$932,000 and $857,000 for Federal and California purposes, respectively. The
Federal credits forwards 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 $79,000; 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:
Federal California
------- ----------
Net operating losses $ 13,900,000 $ 9,500,000
Research credits 230,000 80,000
This restriction also applies to carryforward items resulting from the
"ownership change" upon the acquisition of SCI Computing 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 $ 12,300,000 $ 6,700,000
Research credits 238,000 308,000
The "ownership change" restrictions are not expected to impair Corsair's ability
to utilize the affected carryforward items. If there should be a subsequent
"ownership change" as defined, Corsair's ability to utilize all stated
carryforwards could be reduced.
9. STOCKHOLDERS' EQUITY
Preferred Stock
Upon Corsair'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, Corsair had no preferred stock
outstanding.
1997 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan
In February 1997, Corsair'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 Corsair'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 Corsair 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.
Corsair 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, Corsair adopted the 1997 Stock Incentive Plan (the "Plan") and
authorized 1,337,633 shares of the 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
Corsair uses the intrinsic-value method to account for all of its stock-based
employee compensation plans. During 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 $360,000 and
$193,000 in 1998 and 1999 respectively, and has been charged to operating
expenses.
Had compensation cost for the Corsair'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, Corsair's pro forma net income
(loss) would have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31
1997 1998 1999
--------------- ---------------- ----------------
<S> <C> <C> <C>
Net income (loss) - as reported $ (8,624) $ (6,866) $8,841
Net income (loss) - pro forma (9,315) (8,790) 7,655
Diluted net income (loss) per share - as reported (0.86) (0.39) 0.48
Diluted net income (loss) per share - pro forma (0.93) (0.50) 0.42
</TABLE>
The fair value of each option under the Plan is estimated based on the date of
grant using the Black-Scholes method in 1997, 1998 and 1999, using the following
weighted-average assumptions:
1997 1998 1999
---- ---- ----
Expected life (years) 2.86 2.64 3.50
Expected stock price volatility 27% 60% 70%
Risk-free interest rate 6.12% 4.83% 5.90%
No dividend impact was considered as Corsair has never declared, and does not
have plans to declare any future dividends.
The pro forma net income (loss) and per share data include expenses related to
the Purchase Plan. The weighted average fair value of purchase rights granted
during 1999 under the Purchase Plan is $2.58. The fair value is estimated using
the Black-Scholes model assuming no expected dividends on the date of grant, a
risk-free rate of 5.47%, volatility of 70%, and an expected life which varies
over the exercise periods.
Stock Option Activity and Status
The following table summarizes activity under Corsair's Option Plans:
<TABLE>
<CAPTION>
Weighted-Average
Weighted-Average Options Vested Fair Value of
Shares Exercise Price at Options
Period-End Granted
------------- ------------------ ----------------- -------------------
<S> <C> <C> <C> <C>
Outstanding as of December 31, 1996 1,221,827 $ 0.65
258,079
=================
Options granted 1,090,534 6.50
$ 3.60
===================
Options exercised (730,416) 0.55
Options canceled (313,656) 1.30
------------- ------------------
Outstanding as of December 31, 1997 1,268,289 5.58
291,477
=================
Options granted 2,029,748 6.44
$ 2.79
===================
Options exercised (271,961) 1.91
Options canceled (1,074,745) 11.74
------------- ------------------
Outstanding as of December 31, 1998 1,951,331 3.59
432,614
=================
Options granted 1,433,350 6.89
$ 3.72
===================
Options exercised (200,764) 1.49
Options canceled (988,110) 4.10
------------- ------------------
Outstanding as of December 31, 1999 2,195,807 $ 5.70
============= ==================
</TABLE>
The following table summarizes information about stock options outstanding as of
December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
Weighted-average
Number of Remaining Weighted-average Number of Weighted-average
Exercise prices shares Contractual life exercise price shares Exercised prices
--------------- ------ ---------------- -------------- ------ ----------------
<S> <C> <C> <C> <C> <C>
$0.30 - $2.11 200,672 5.88 $ 0.84 170,322 $ 0.83
$2.88 - $3.00 343,117 8.73 2.93 118,552 2.93
$3.06 - $5.00 696,420 9.28 4.38 65,800 4.70
$5.13 - $5.50 236,788 8.95 5.14 50,433 5.13
$7.00 - $10.00 497,110 9.79 8.87 7,558 7.87
$11.06 - $19.50 221,700 9.63 11.45 19,949 14.63
=================== ============= ===================== ===================== ============= =====================
$0.30 - $19.50 2,195,807 9.00 5.64 432,614 3.25
=================== ============= ===================== ===================== ============= =====================
</TABLE>
As of December 31, 1999, employees held 23,179 shares of common stock
outstanding by virtue of option exercises which were subject to repurchase by
Corsair at prices ranging from $0.68 to $1.13 per share. Corsair'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, Corsair'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 Corsair's stock at the date of the
repricing.
Warrants
Corsair issued warrants to purchase an aggregate 243,822 shares of common stock
at an exercise price of $5.91 to $6.65 per share in conjunction with various
loan and security agreements. 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. As of December 31, 1999, one
warrant for the purchase of 52,500 shares of common stock remained outstanding.
10. COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under certain noncancelable operating leases for office
space and equipment expiring at various dates through 2002. Total rental expense
was approximately $1,539,000, $1,938,000 and $1,481,000 for the years ended
December 31, 1997, 1998, and 1999 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
- ------------ ------ ------
2000 89 1,296
2001 -- 1,124
2002 -- 449
Total minimum lease payments $ 89 $ 2,869
========
Less amount representing interest and taxes 9
-----
Current portion of obligations under capital lease $ 80
=====
Litigation
Corsair is involved in various legal matters that have arisen in the normal
course of business. We believe, after consultation with counsel, any liability
that may result from the disposition of such legal matters will not have a
material adverse effect on Corsair's financial condition or results of
operations.
Employee Benefit Plans
Corsair has two defined contribution 401(k) retirement plans for qualified
employees. Employer contributions made under the plans totaled approximately
$425,000 and $308,000 in 1998 and 1999, respectively. No employer contributions
were made in 1997.
11. SEGMENT INFORMATION
Corsair 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 Corsair for making operating
decisions and assessing financial performance.
Corsair's chief operating decision maker is considered to be the our 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, Corsair operates in, and measures its
results in a single operating segment, system solutions of the global wireless
industry, rather than distinctive product segments.
Corsair'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. Our revenues from two distinct products are
generated from one industry by the following geographic areas (in thousands):
Years Ended
December 31,
--------------------------------------------------
1997 1998 1999
--------------- -------------- ------------
Revenues:
North America $ 46,371 $ 38,022 $ 17,248
Latin America 5,933 14,827 36,655
Pacific Rim 5,568 6,921 11,538
Europe 2,984 5,448 766
--------------- -------------- ------------
Total $ 60,856 $ 65,218 $ 66,207
We have no material operating assets outside of the United States.
Significant Customers
The following tables summarize information relating to Corsair's significant
customers as of December 31, 1998 and 1999 and for the years ended December 31,
1997, 1998 and 1999:
Percentage of
Total Revenues
--------------
1997 1998 1999
---- ---- ----
Customer A 11% 13% 3%
Customer B 12% 10% 4%
Customer C 10% 9% 5%
Customer G - 6% 43%
Percentage of Trade
Accounts Receivable
-------------------
1998 1999
---- ----
Customer F 12% 5%
Customer G 11% 48%
Customer J - 11%
<TABLE>
UNAUDITED QUARTERLY RESULTS
(in thousands, except per share data)
<CAPTION>
Quarters Ended 1998
March 31 June 30 * September 30 December 31
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
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 share: $ 0.02 $ (0.19) $ (0.17) $ (0.04)
Shares used in per share computation 18,115 17,660 17,802 17,926
</TABLE>
* 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).
<TABLE>
<CAPTION>
Quarters Ended 1999
March 31 June 30 September 30 December 31
--------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Total revenues $ 15,278 $ 16,046 $ 17,087 $ 17,796
Gross Profits 9,524 9,657 10,663 12,049
Operating expenses 9,881 7,601 7,319 7,394
Operating income (loss) (357) 2,056 3,344 4,655
Net income (loss) (2,134) 2,421 2,867 5,687
Diluted net income (loss) per share: $ (0.12) $ 0.13 $ 0.16 $ 0.31
Shares used in diluted per share 18,032 18,236 18,073 18,484
computation
</TABLE>
<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 Corsair, or written
representations that no Form 5s were required, we believe
that, during January 1, 1999 through December 31, 1999, all
Section 16(a) filing requirements applicable to our 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) Financial Statements
Corsair's financial statements are included herein as required under
Item 8 of this Annual Report on Form 10-K. See Index to Consolidated
Financial Statements on page 23.
(b) No reports on Form 8-K have been filed during the last quarter of the period
covered by this report.
(c) 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.
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 conversion.
10.52+ Form of Waiver of Registration Rights
23.1 * Consent of Independent Auditors, KPMG LLP .
23.2 * Consent of Deloitte & Touche LLP, Independent Auditors.
24.1 * Power of Attorney (See page 45 ).
27.1 * Financial Data Schedule
- --------------------------------------------------------------------------------
* Filed herewith.
+ Incorporated by reference to the same numbered exhibit (except as otherwise
indicated) to Corsair's Registration Statement on Form S-1 (no. 333-28519),
filed on June 4, 1997 as amended.
Supplemental Information
Copies of our Proxy Statement for the annual Meeting of Stockholders to
be held June 6, 2000 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 our stockholders.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Corsair we have duly caused this Annual Report on Form
10-K to be signed on our behalf by the undersigned, thereunto duly authorized.
Date: March 30, 2000 Corsair Communications, Inc.
By:/s/Thomas C. Meyer
Thomas C. Meyer
Chief Executive Officer
Chairman of the Board
Power of Attorney
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Thomas C. Meyer, 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:
March 30, 2000 /s/Mary Ann Byrnes
Mary Ann Byrnes, Director
March 30, 2000 /s/Kevin R. Compton
Kevin R. Compton, Director
March 30, 2000 /s/Peter L.S. Currie
Peter L.S. Currie, Director
March 30, 2000 /s/Stephen M. Dow
Stephen M. Dow, Director
March 30, 2000 /s/David H. Ring
David H. Ring, Director
March 30, 2000 /s/Rachelle B. Chong
Rachelle B. Chong, Director
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Corsair Communications, Inc.
We consent to incorporation by reference in the registration statements (Nos.
333-32321, 333-59821, 333-51989 and 333-89483) on Form S-8 of Corsair
Communications, Inc. of our report dated February 4, 2000, relating to the
consolidated balance sheets of Corsair Communications, Inc. and subsidiaries as
of December 31, 1998 and 1999, 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, 1999, which report appears in the December
31, 1999, annual report on Form 10-K of Corsair Communications, Inc.
KPMG LLP
Mountain View, California
March 30, 2000
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-32321, 333-59821, 333-51989, and 333-89483 of Corsair Communications, Inc.on
Form S-8 of our report dated January 7, 1998, relating to the financial
statements of Subscriber Computing, Inc. as of September 30, 1997 and for the
year then ended (not presented separately herein)appearing in the Annual Report
on Form 10-K of Corsair Communications, Inc. for the fiscal year ended December
31, 1999.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 28, 2000
<PAGE>
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