21
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-22859
CORSAIR COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0390406
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
3408 Hillview Avenue Palo Alto, CA 94304
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE IS (650) 842-3300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No;
The number of shares of the Registrant's Common Stock outstanding as of
October 31, 1999 was 17,537,183.
INDEX
Page No.
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998................................................3
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 1999 and 1998 ...................4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 ........................5
Notes to Condensed Consolidated Financial Statements..............6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......21
Part II. Other Information
Item 2. Change in Securities and Use of Proceeds.........................21
Item 6. Exhibits and Reports on Form 8-K ................................21
Signatures ...............................................................22
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
CORSAIR COMMUNICATIONS, INC.
Unaudited Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
1999 1998
--------------- --------------
Assets
Cash and cash equivalents $ 22,618 $ 4,196
Short-term investments 22,688 34,377
Trade accounts receivable, net 15,007 14,134
Inventories, net 4,678 5,676
Evaluation inventory 1,791 2,597
Prepaids and other 1,647 2,266
Current portion of note receivable 375 --
--------------- --------------
Total current assets 68,804 63,246
Property and equipment, net 3,621 7,422
Note receivable, net of current portion 1,444 --
Other assets 604 892
=============== ==============
Total assets $ 74,473 $ 71,560
=============== ==============
Liabilities and Stockholders' Equity
Accounts payable $ 3,195 $ 1,706
Accrued benefits 2,045 2,261
Accrued expenses 6,605 5,470
Current portion of notes payable 711 639
Current portion of capitallease 111 609
obligations
Deferred revenue 7,369 7,137
--------------- --------------
Total current liabilities 20,036 17,822
Notes payable, net of current portion 864 1,407
Capital lease obligations, net of current 3 217
portion --------------- --------------
Total liabilities 20,903 19,446
--------------- --------------
Common stock 18 18
Notes receivable from stockholders (388) (468)
Additional paid-in capital 106,295 105,433
Treasury stock, at cost, 695 shares in 1999 (2,788) --
Deferred compensation (139) (288)
Accumulated deficit (49,428) (52,581)
--------------- --------------
Total stockholders' equity 53,570 52,114
--------------- --------------
Total liabilities and stockholders' $ 74,473 $ 71,560
equity
=============== ==============
See accompanying notes to Condensed Consolidated Financial Statements
CORSAIR COMMUNICATIONS, INC.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
--------------------- ---------------------
Revenues:
Hardware $ 8,463 $ 5,447 $ 26,000 $ 27,494
Software 5,183 2,228 12,094 9,444
Service 3,441 4,348 10,317 12,971
---------- ---------- ---------- ----------
Total revenues 17,087 12,023 48,411 49,909
Cost of revenues:
Hardware 4,656 2,487 13,341 13,779
Software 393 271 1,006 979
Service 1,375 1,697 4,220 6,191
---------- ---------- ---------- ----------
Total cost of revenues 6,424 4,455 18,567 20,949
---------- ---------- ---------- ----------
Gross profit 10,663 7,568 29,844 28,960
---------- ---------- --------- -----------
Operating costs and expenses:
Research and development 2,563 4,663 8,572 13,628
Sales and marketing 2,930 4,544 10,339 12,135
General and administrative 1,826 2,073 5,034 6,497
Merger related expenses -- -- -- 4,481
Reorganization costs -- -- 856 --
---------- ---------- ---------- ----------
Total operating costs and 7,319 11,280 24,801 36,741
expenses
---------- ---------- ---------- ----------
Operating income (loss) 3,344 (3,712) 5,043 (7,781)
Loss on sale of assets -- -- (2,176) --
Other income, net 505 623 1,270 1,969
---------- ---------- ---------- ----------
Income (loss) before income taxes 3,849 (3,089) 4,137 (5,812)
Income taxes 982 -- 984 364
-------------------------------- ----------
Income (loss) before extraordinary 2,867 (3,089) 3,153 (6,176)
item
Loss on debt extinquishment -- -- -- (226)
---------- ---------- ---------- ----------
Net income (loss) $ 2,867 $ (3,089) $ 3,153 $ (6,402)
========== ========== ========== ==========
Basic and diluted net income (loss) per share data:
Basic net income (loss) per share
before extraordinary item $ 0.16 $ (0.17) $ 0.18 $ (0.35)
Extraordinary item -- -- -- (0.01)
---------- ---------- ---------- ----------
Basic net income (loss) per $ 0.16 $ (0.17) $ 0.18 $ (0.36)
share
========== ========== ========== ==========
Shares used in basic per share 17,502 17,802 17,702 17,705
calculation ========== ========== ========== ==========
Diluted net income (loss) per $ 0.16 $ (0.17) $ 0.17 $ (0.35)
share before extraordinary item
Extraordinary item -- -- -- (0.01)
---------- ---------- ---------- ----------
Diluted net income (loss) per $ 0.16 $ (0.17) $ 0.17 $ (0.36)
share
========== ========== ========== ==========
Shares used in diluted per 18,073 17,802 18,677 17,705
share calculation ========== ========== ========== ==========
See accompanying notes to Condensed Consolidated Financial Statements
Statements CORSAIR COMMUNICATIONS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September 30,
------------------------
1999 1998
---------- -----------
Cash flows from operating activities:
Net income (loss) $ 3,153 $ (6,402)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 2,959 2,740
Amortization of deferred compensation and 149 380
compensation expense
Loss on sale of assets 2,176 --
Reorganization costs 856 --
Extraordinary loss on debt extinquishment -- 226
Merger related costs -- 4,481
Changes in operating assets andliabilities:
Trade accounts receivable (2,794) (5,666)
Inventories 1,794 1,348
Prepaid expenses and other assets (173) (1,794)
Accounts payable and accrued expenses 1,820 673
Deferred revenue 1,401 (3,959)
---------- -----------
Net cash provided by (used in) 11,341 (7,973)
operating activities ---------- -----------
Cash flows from investing activities:
Payment on sale of CRM assets (1,275) --
Purchase of short-term investments (2,153) (13,460)
Proceeds from sales and maturities of short-term 13,842 32,831
investments
Purchases of property and equipment (220) (2,117)
---------- -----------
Net cash provided by investing 10,194 17,254
activities ---------- -----------
Cash flows from financing activities:
Proceeds from stock options and purchase plans 485 1,010
Proceeds from debt -- 4,128
Principal payments on debt obligations (471) (8,875)
Proceeds from notes receivables 117 --
Proceeds from notes receivable from stockholder 100 43
Principal payment on capital lease (556) (595)
Repurchase of common stock (2,788) --
---------- -----------
Net cash used in financing activities (3,113) (4,289)
---------- -----------
Net increase in cash and cash equivalents 18,422 4,992
Cash and cash equivalents, beginning of period 4,196 16,915
========== ===========
Cash and cash equivalents, end of period $ 22,618 $ 21,907
========== ===========
Cash paid:
Interest $ 238 $ 983
========== ===========
Income taxes $ 27 $ 332
========== ===========
Noncash financing and investing activities:
Note receivable in exchange for net assets sold $ 1,976 $ --
========== ===========
Options vesting in reorganization costs $ 357 $ --
========== ===========
See accompanying notes to Condensed Consolidated Financial Statements
CORSAIR COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial information
has been prepared by Corsair Communications, Inc. ("Corsair" or the
"Company") in accordance with generally accepted accounting principles for
interim financial statements and pursuant to the rules of the Securities and
Exchange Commission for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnotes required by generally accepted
accounting principles for complete financial statements have been omitted. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included, and that all such adjustments are of a
normal and recurring nature. On June 23, 1998, Corsair acquired Subscriber
Computing, Inc. ("SCI") in a combination accounted for under the
pooling-of-interests method of accounting. Corsair's condensed consolidated
financial statements have been restated to include the financial position and
results of SCI for all periods presented. Operating results for the periods
presented are not necessarily indicative of the results that may be expected
for any future periods. These condensed consolidated financial statements
should be read in conjunction with Corsair's Annual Report on Form 10-K for
the year ended December 31, 1998.
The condensed consolidated financial statements include Corsair
Communications, Inc., and its subsidiary. Significant intercompany
transactions and accounts have been eliminated.
2. Net Income (Loss) Per Share
Basic net income (loss) per share is based on the weighted average
number of shares of common stock outstanding during the period. Diluted net
income (loss) per share is based on the weighted average number of shares of
common stock outstanding during the period and dilutive common shares from
options and warrants outstanding during the period. No potentially dilutive
common shares are included for loss periods as they would be antidilutive.
The effect of potentially dilutive common shares is computed using the
treasury stock method.
The following tables set forth the computations of shares and net income
(loss) used in the calculation of basic and diluted net income (loss) per
share for the three and nine months ended September 30, 1999 and 1998 (in
thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---------- --------- ---------- ---------
Basic net income (loss) per share data:
Net income (loss) $ 2,867 $ (3,089) $ 3,153 $ (6,402)
========== ========== ========== ==========
Actual weighted average
common shares outstanding 17,502 17,802 17,702 17,705
for the period =========== ========== ========== ==========
Basic net income (loss) per $ 0.16 $ (0.17) $ 0.18 $ (0.36)
share =========== ========== ========== ==========
Diluted net income (loss) per share data:
Net income (loss) $ 2,867 $ (3,089) $ 3,153 $ (6,402)
=========== ========== ========== ==========
Actual weighted average
common shares outstanding 17,502 17,802 17,702 17,705
for the period
Stock options outstanding 571 -- 975 --
----------- ---------- ---------- ----------
Shares used in diluted per 18,073 17,802 18,677 17,705
share: =========== ========== ========== ==========
Diluted net income (loss) per $ 0.16 $ (0.17) $ 0.17 $ (0.36)
share =========== ========== ========== ==========
Net Income (Loss) Per Share (continued)
The Company has excluded the impact of approximately 1,807,162 outstanding
options to purchase common stock at a weighted average exercise price of
$7.63 during the three and nine months ended September 30, 1998, and
outstanding warrants to purchase 108,334 and 194,249 shares of common stock
at a weighted average exercise price of $6.65 and $10.89 during the three and
nine months ended September 30, 1999 and 1998, respectively, since their
inclusion in diluted per share results would have been antidilutive.
3. Inventories
Inventories are stated at the lower of cost or market and are summarized as
follows (in thousands):
September December
30, 1999 31, 1998
----------- ----------
Raw materials $ 2,455 $ 2,600
Work in progress 370 311
Finished goods 1,853 2,765
=========== ==========
$ 4,678 $ 5,676
=========== ==========
4. Common Stock Repurchase
During the nine months ended September 30, 1999, the Company has repurchased
695,000 shares of its common stock at a cost of $2.8 million.
5. Merger with Subscriber Computing, Inc.
On June 23, 1998, Corsair issued approximately 3.9 million shares of its
common stock in exchange for all of the outstanding shares of common stock of
SCI, a provider of software systems to the paging, cellular and Personal
Communication Service industries. The merger was accounted for as a pooling
of interests, and accordingly, the Company's condensed consolidated financial
statements have been restated to include the financial position and results
of SCI for all periods presented. As a result of the merger, the Company
incurred merger related and other charges of $4.5 million consisting of $2.8
million in transaction costs, $1.5 million in accrued termination benefits
for 20 employees and redundant facility and other equipment costs of
$200,000. As of September 30, 1999, all accrued costs had been paid.
The results of operations previously reported by the separate enterprises and
the combined amounts presented at the time of the merger are summarized below
(in thousands):
Corsair SCI Combined
----------- ------------ ------------
Six months Ended June 30, 1998
Total revenue $ 29,682 $ 7,879 $ 37,561
Extraordinary loss -- 226 226
Net income (loss) 3,861 (7,174) (3,313)
6. Reorganization Costs
On February 3, 1999, the Company signed a letter of intent to develop a
strategic relationship for the development, sales and marketing of a wireless
location product. As a result of entering into the strategic relationship,
the Company discontinued a development 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 September 30, 1999,
all of the accrued termination benefits had been paid.
7. Loss on Sale of Assets
Also on February 3, 1999, the Company sold substantially all of the assets
relating to its Communication Resource Manager billing system and certain
related products to Wireless Billing Systems ("WBS"), a California
corporation, pursuant to the terms of an Asset Purchase Agreement.
In conjunction with the sale, the Company 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
consideration received and the net book value of the assets transferred.
8. Extraordinary Item
In the second quarter of fiscal 1998, Corsair incurred a loss on debt
extinguishment of $226,000 associated with paying the principal and interest
of $4.8 million of short-term and long-term notes payable. The loss was
comprised of the amortization of the remaining loan fees associated with the
debt issuance.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion may contain forward-looking statements that involve risks
and uncertainties. The actual results of Corsair Communications, Inc. and it's
subsidiary ("Corsair" or the "Company) may differ materially from the results
discussed in such forward-looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Risks and
Uncertainties" below. Corsair undertakes no obligation to release publicly the
results of any revisions to these forward-looking statements to reflect events
or circumstances arising after the date hereof.
The following should be read in conjunction with Corsair's unaudited condensed
consolidated financial statements and notes thereto.
Corsair is a leading provider of software and system solutions for the
wireless industry. Corsair's PhonePrint(R) system has proven highly effective in
reducing cloning fraud. The PhonePrint system has prevented hundreds of millions
of fraudulent call attempts; some of Corsair's customers have reported up to a
95% reduction in cloning fraud losses after deploying PhonePrint. The Company's
PrePay(TM) billing system provides wireless telecommunications carriers with a
prepaid system designed to fully integrate with the upcoming wireless
intelligent network standards. The Company believes that its products can
provide a number of benefits to wireless telecommunications carriers, including
reduced costs, improved cash flow, increased market penetration and improved
customer service.
Recent Events
On February 3, 1999, the Company sold substantially all of the assets
relating to its Communication Resource Manager ("CRM") billing system and
certain related products to Wireless Billing Systems ("WBS"), a California
corporation, pursuant to the terms of an Asset Purchase Agreement. The Company
recorded a loss on the sale of assets of 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, the Company 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 entering into the
strategic relationship, the Company discontinued a development 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 September
30, 1999, the Company has not been able to develop a strategic relationship with
True Position, and it is unclear whether the Company will be able to
successfully develop a strategic relationship for the development, sales and
marketing of a wireless location product.
Results of Operations
Revenues: For the three months ended September 30, 1999, total revenues
were $17.1 million, compared with $12.0 million for the same period in 1998. For
the nine months ended September 30, 1999, total revenues were $48.4 million,
compared with $49.9 million for the comparable 1998 period. The increase in
revenues for the three months ended September 30, 1999 was primarily due to the
increase in hardware and software revenues from the PrePay product following the
strong growth since its launch in the last fiscal year. The decrease in revenues
for the nine months ending September 30, 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. For the nine months ended
September 30, 1999, international revenues comprised 72% of total revenues,
compared with 36% of total revenues for the same period in the prior year. The
Company expects international revenues to increase both in absolute dollars as
well as in a percentage of revenues as the acceptance of the Company's products
continues to increase in international markets.
Gross Profit: Gross profit was relatively constant at 62% of total
revenues for the three months ended September 30, 1999 with 63% of total
revenues in the comparable three month period of 1998. For the nine months ended
September 30, 1999, gross profit was 62%, up from 58% in the same period of
1998. For the three months ended September 30, 1999, the increase in gross
profit on software was offset by a decrease in gross profits on hardware,
resulting from increased PrePay hardware sales at lower margins. For the nine
months ended, the increase in gross profit was due primarily to improved margins
on services resulting from lower personnel related costs previously required to
support the CRM products.
Research and Development: For the three months ended September 30, 1999,
research and development expenses were $2.6 million compared with $4.7 million
for the same period of 1998, a decrease of $2.1 million or 45%. For the first
nine months of 1999, research and development expenses were $8.6 million
compared with $13.6 million for the same period of 1998, a decrease of $5.1
million or 37%. The decrease in research and development expenses was due
primarily to the reduction in headcount resulting from the CRM sale and the
discontinued wireless location development project. Research and development
expenses were 18% and 27% of revenues for the nine months ended September 30,
1999 and 1998, respectively.
Sales and Marketing: For the three months ended September 30, 1999, sales
and marketing expenses were $2.9 million compared with $4.5 million for the same
period of 1998, a decrease of $1.6 million or 36%. For the first nine months of
1999, sales and marketing expenses were $10.3 million compared with $12.1
million for the same period of 1998, a decrease of $1.8 million or 15%. The
decrease in sales and marketing expenses was due to the reduction in sales force
and headcount following the CRM sale and the associated costs relating to
reduced travel and commissions costs associated with the decreased headcount.
Sales and marketing expenses were 21% and 24% of revenues for the nine months
ended September 30, 1999 and 1998, respectively.
General and Administrative: For the three months ended September 30, 1999,
general and administrative expenses were $1.8 million compared with $2.1 million
for the same period of 1998, a decrease of $247,000 or 12%. For the first nine
months of 1999, general and administrative expenses were $5.0 million compared
with $6.5 million for the comparable period of 1998, a decrease of $1.5 million,
or 23%. The decrease in general and administrative expenses is due to the
consolidation of operations following the merger in the second quarter of 1998.
General and administrative expenses were 10% and 13% of revenues for the nine
months ended September 30, 1999 and 1998, respectively.
Merger Related Expenses: As discussed in Note 5 of the Notes to the
Condensed Consolidated Financial Statements, the Company incurred $4.5 million
in merger related costs resulting from the acquisition of SCI. 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: As discussed in Note 6 of the Notes to the Condensed
Consolidated Financial Statements, the Company discontinued a development
project, which resulted in a charge of $856,000 in certain one-time charges,
consisting of termination benefits for 13 employees and equipment write-downs.
Loss on Sale of Assets: As discussed in Note 7 of the Notes to the
Condensed Consolidated Financial Statements, the Company sold substantially all
of the assets relating to its CRM billing system and certain related products to
WBS. The sale of assets resulted in a loss of $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.
Other Income, Net: Net other income and expense consists of interest
income from the Company's cash and short-term investments, net of interest
expense on the Company's equipment loans, equipment lease lines and other loans
and non-operating income. The decrease in net other income for the three and
nine months ended September 30, 1999 was due to the lower average cash
investment balances held in 1999 offset by a favorable settlement of $325,000
recorded in the first quarter of 1998 from a customer dispute.
Income Taxes: Income tax expense in the three months ended September 30,
1999 represents a provision of 25% of the income before income taxes, in
comparison to the provision of 8% established during the first quarter of 1998.
Liquidity and Capital Resources
Corsair has funded its operations through a series of Preferred Stock
private placements, debt financing, and an initial public offering in July 1997.
As of September 30, 1999, Corsair's cash and short-term investments were $45.3
million, an increase of $6.7 million from December 31, 1998. The increase is
primarily a result of cash generated by operations of $11.3 million and net
proceeds from the maturities of investments for $11.7 million. These cash flows
were partially offset by cash outflows for investing and financing activities,
such as payment for the sale of CRM assets of $1.2 million, repurchase of common
stock of $2.8 million, and cash paid on lease and debt obligations of $1.0
million.
Corsair believes that existing sources of liquidity and internally
generated cash, if any, will be sufficient to meet Corsair's projected cash
needs for at least the next 12 months. Corsair intends to continue product
development efforts in the future and expects to fund those activities out of
working capital. There can be no assurance, however, that Corsair will not
require additional financing prior to such date to fund its operations or
possible acquisitions. In addition, Corsair may require additional financing
after such date to fund its operations. There can be no assurance that any
additional financing will be available to Corsair on acceptable terms, or at
all, if and when required by Corsair.
Year 2000 Issue
The year 2000 issue refers to the inability of certain date-sensitive
computer chips, software and systems to recognize a two-digit date field as
belonging to the 21st Century. Mistaking "00" for 1900 or any other incorrect
year could result in a system failure or miscalculations, causing disruptions to
Corsair's products or operations (including manufacturing, or a temporary
inability to process transactions or send invoices, or engage in other normal
business activities). The year 2000 issue may create unforeseen risks to Corsair
from product or internal computer system failures, as well as from the failure
of third party computer systems with which it deals. Failures of Corsair's
products or computer systems and or third party computer systems could have a
material adverse impact on Corsair's ability to conduct its business.
Management initiated an enterprise-wide program which began in November
1998 to prepare Corsair's computer systems and applications for the year 2000
with respect to: (1) the portion of products developed internally by Corsair,
(2) systems and applications developed by third parties and incorporated in
Corsair's products, and (3) systems relied upon to conduct operations (including
payroll, accounting and cash management). With respect to software developed
internally by the Company, the results of that evaluation revealed certain
source codes that were unable to appropriately interpret the upcoming calendar
year 2000. The Company has completed its work to upgrade these programs to make
them capable of processing data incorporating year 2000 dates without material
errors or interruptions. With respect to third party systems and applications
incorporated in the Company's products or relied upon to conduct operations,
each was assigned a level of criticality based on their impact on the Company:
Mission Critical : The Company will be at significant risk because no
work-around is available
Business Critical: The Company can manage direct impact from loss of use
by using work-around
Non-Critical: Systems that do not directly affect daily operations,
office productivity tools scheduled to be upgraded
or systems that will be retired.
All vendors whose systems or applications are used by the Company under
the Mission Critical level have indicated that their software is year 2000
compliant, and the Company either has or is in the process of installing the
compliant version. Only one vendor listed under the Business Critical level
remains out of compliance, with all other vendor's products either installed or
in process of having the compliant version installed. This includes all systems
relied upon to conduct operations. The software upgrade for the pending Business
Critical system is expected to be installed by the end of November 1999. From
the remaining vendors with products listed as Non-Critical, over 90% have
represented that their products are year 2000 compliant. Testing of the vendor
representations, conducted as an in-house review of each workstation and server
to verify year 2000 compliance, was completed in October 1999. Based on this
review, all workstations appear to be year 2000 compliant.
Currently, the Company is establishing contingency plans to address the
impact to the Company in the event its suppliers, products and internal systems
are not year 2000 compliant. Such plans principally involve identifying
alternative vendors or internal remediation. Evaluation of year 2000 issues is
continuing, and there can be no assurance that additional issues, not presently
known by the Company, will not be discovered which could present a material risk
to the function of the Company's products and have a material adverse effect on
the Company's business, operating results and financial condition.
It is difficult to estimate the total costs of implementing the Company's
Year 2000 Efforts, as they are being conducted primarily by Corsair employees
and in Corsair facilities. However, the total cost of the testing and conversion
of internally developed hardware and software was expected to be approximately
$600,000 which has been substantially incurred by November 1999. A significant
portion of these costs were not incremental costs to Corsair, rather
redeployment of existing information technology resources. Corsair expects to
continue to incur internal staff costs as well as consulting and other expenses
related to infrastructure and facilities enhancements necessary to prepare the
systems for the year 2000.
RISKS AND UNCERTAINTIES
This Quarterly Report may contain predictions, estimates and other
forward-looking statements that involve risks and uncertainties. Such risks and
uncertainties could cause actual results to differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Quarterly Report. Corsair undertakes no obligation
to release publicly the results of any revisions to the forward-looking
statements to reflect events or circumstances arising after the date hereof.
Lack of Sustained Profitability. Despite achieving profitability in 1999,
the Company has incurred net losses since its incorporation resulting in an
accumulated deficit of $49.4 million as of September 30, 1999. There can be no
assurance that the Company's existing revenue levels can be sustained, and past
and existing revenue levels should not be considered indicative of future
results or growth. Moreover, there can be no assurance that the Company will
sustain profitability on a quarterly or annual basis. Operating results for
future periods are subject to numerous uncertainties specified elsewhere in this
Quarterly Report. The Company's future operating results will depend upon, among
other factors: the demand for PhonePrint; the demand for PrePay, the Company's
ability to introduce successful new products and product enhancements, including
products that are sold to both analog network carriers and digital network
carriers such as Personal Communications Services ("PCS") and Enhanced
Specialized Mobile Radio ("ESMR") carriers; the level of product and price
competition; the ability of the Company to expand its international sales; the
Company's success in expanding distribution channels; the Company's success in
attracting and retaining motivated and qualified personnel; and the ability of
the Company to avoid patent and intellectual property litigation. If the Company
is not successful in addressing such risks, as well as the others set forth in
this Quarterly Report, the Company's business, operating results and financial
condition will be materially adversely affected.
Dependence on PhonePrint; Dependence on Analog Networks. To date, the
Company's revenues have primarily been attributable to PhonePrint, the Company's
cloning fraud prevention system, and the Company anticipates that PhonePrint
will continue to account for a majority of the Company's revenues at least
through the end of 1999. As a result, the Company's future operating results
will depend on the demand for and market acceptance of PhonePrint. A relatively
small number of carriers that operate analog networks constitute the potential
customers for PhonePrint. A large majority of the carriers that operate analog
networks in the largest U.S. markets have to varying degrees already implemented
cloning fraud solutions, and the Company believes the demand for cloning fraud
solutions in the U.S. has begun to decline and will continue to decline in the
future. If not offset by growth in international markets, this trend will have a
material adverse effect on PhonePrint sales. Over time, this trend could also
occur in international markets. As carriers that operate analog networks adopt
cloning fraud solutions for their existing networks, the future commercial
success of PhonePrint will depend in part on the further expansion of analog
networks by those carriers. The rate of implementation of new analog networks
has slowed significantly and some carriers have determined not to make
additional investments in their existing analog networks. As analog networks
expand slowly or cease to expand, the future demand for PhonePrint will be
materially adversely affected. There can be no assurance that the international
market for cloning fraud solutions will grow as the U.S. market declines, or
that current or future levels of revenues attributable to PhonePrint will be
maintained or will not decline. Any reduction in the demand for PhonePrint would
have a material adverse effect on the Company's business, operating results and
financial condition.
All of the Company's customers for PhonePrint to date have been carriers
that operate analog networks. Wireless services operating in digital mode,
including PCS and ESMR in the U.S. and Global System for Mobile Communications
("GSM") in many foreign countries (including many European countries), use or
may use authentication processes that automatically establish the validity of a
phone each time it attempts to access the wireless telecommunications network.
The Company is not aware of any information that suggests that cloners have been
able to break the authentication encryption technologies. Unless the encryption
technologies that form the basis for authentication are broken by cloners, the
Company does not believe that operators of digital networks will purchase third
party radio frequency ("RF") fingerprinting solutions for cloning fraud such as
PhonePrint. In addition, authentication processes for analog networks are also
currently available and are being employed by a significant number of carriers.
The Company is also very dependent on the continued widespread use of analog
networks. Industry experts project that the number of analog phones and analog
networks will ultimately decline. Any reduction in demand by carriers that
operate analog networks for cloning fraud solutions would, or any reduction in
the use of analog phones could, have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on PrePay; Dependence on Ericsson Radio Systems AB Switching
Equipment. The Company anticipates that PrePay, the Company's prepaid metered
billing solution, will account for a growing percentage of the Company's
revenues. As a result, the Company's future operating results will depend on the
demand for and market acceptance of PrePay. To date, only a small number of
wireless carriers have deployed PrePay, and the rate of adoption of the PrePay
system will need to increase dramatically in order to achieve the Company's
revenue targets. The Company's PrePay solution currently only works in
conjunction with Ericsson switching equipment. Therefore, only carriers that
have deployed Ericsson's infrastructure equipment are potential customers for
PrePay. In order to expand the Company's potential customer base by making
PrePay compatible with other infrastructure equipment, the Company and the
infrastructure provider each would have to complete significant development
projects. There can be no assurance that Corsair will be able to cause PrePay to
work with any other infrastructure provider's equipment, or that Corsair will be
capable of causing PrePay to work on future versions of Ericsson equipment. Any
reduction in the demand for prepaid billing services or any failure to gain
market acceptance for Corsair's PrePay solution would have a material adverse
effect on the Company's business, operating results and financial condition.
Fluctuations in Quarterly Financial Results; Lengthy Sales Cycle. The
Company has experienced significant fluctuations in revenues and operating
results from quarter to quarter due to a combination of factors and expects
significant fluctuations to continue in future periods. Factors that are likely
to cause the Company's revenues and operating results to vary significantly from
quarter to quarter include, among others: the level and timing of revenues
associated with PhonePrint and PrePay; the timing of the introduction or
acceptance of new products and services and product enhancements offered by the
Company and its competitors; technological changes or developments in the
wireless telecommunications industry; dependence on a limited number of
products; the size, product mix and timing of significant orders; the timing of
system revenue; competition and pricing in the markets in which the Company
competes; possible recalls; lengthy sales cycles; production or quality
problems; the timing of development expenditures; expansion of sales and
marketing operations; changes in material costs; disruptions in sources of
supply; capital spending; the timing of payments by customers; and changes in
general economic conditions. These and other factors could cause the Company to
recognize relatively large amounts of revenue over a very short period of time,
followed by a period during which relatively little revenue is recognized.
Because of the relatively fixed nature of most of the Company's costs, including
personnel and facilities costs, any unanticipated shortfall in revenues in any
quarter would have a material adverse impact on the Company's operating results
in that quarter and would likely result in substantial adverse fluctuations in
the price of the Company's Common Stock. Accordingly, the Company expects that
from time to time its future operating results will be below the expectations of
market analysts and investors, which would likely have a material adverse effect
on the prevailing market price of the Common Stock.
A carrier's decision to deploy PhonePrint or PrePay typically involves a
significant commitment of capital by the carrier and approval by its senior
management. Consequently, the timing of purchases are subject to uncertainties
and delays frequently associated with significant expenditures, and the Company
is not able to accurately forecast future sales of PhonePrint or PrePay. In
addition, purchases of PhonePrint and PrePay involve testing, integration,
implementation and support requirements. For these and other reasons, the sales
cycle associated with the purchase of PhonePrint and PrePay typically ranges
from three to 18 months and is subject to a number of risks over which the
Company has little control, including the carrier's budgetary and spending
constraints and internal decision-making processes. In addition, a carrier's
purchase decision may be delayed as a result of announcements by the Company or
competitors of new products or product enhancements or by regulatory
developments. The Company expects that there will be a lengthy sales cycle with
respect to new products, if any, that the Company may offer in the future.
Because of this lengthy sales cycle and the relatively large size of a typical
order, if revenues forecasted from a specific customer for a particular quarter
are not realized in that quarter, the Company's operating results for that
quarter could be materially and adversely affected.
Dependence on Distributors. Domestically and in certain Latin American
countries, PhonePrint is currently marketed primarily through the Company's
direct sales efforts. The Company has entered into distribution agreements with
respect to PhonePrint with, amongst others, Motorola, Inc., Ericsson and Aurora
Wireless Technologies, Ltd. and a sales referral agreement with Sumitomo
Corporation of America. PrePay is currently marketed primarily through the
Company's distribution agreement with Ericsson, and to a limited extent, through
the Company's direct sales efforts. The Company seeks to pursue distribution
agreements and other forms of sales and marketing arrangements with other
companies and the Company believes that its dependence on distributors and these
other sales and marketing relationships will increase in the future, both with
respect to PhonePrint, PrePay and new products, if any, that the Company may
offer in the future. There are no minimum purchase obligations applicable to any
existing distributor or other sales and marketing partners and the Company does
not expect to have any guarantees of continuing orders. There can be no
assurance that any existing or future distributors or other sales and marketing
partners will not become competitors of the Company with respect to PhonePrint,
PrePay or any future product either by developing a competitive product
themselves or by distributing a competitive offering. In fact, the Company
believes that with respect to PrePay, Ericsson from time to time may evaluate
and seek to distribute or acquire alternative vendor's prepaid product
offerings. Any failure by the Company's existing and future distributors or
other sales and marketing partners to generate significant revenues could have a
material adverse effect on the Company's business, operating results and
financial condition.
Risks Associated with International Markets. In an effort to offset
declining demand in the U.S. for cloning fraud solutions, the Company intends to
devote significant marketing and sales efforts over the next several years to
increase its sales of PhonePrint and PrePay to international customers. This
expansion of sales efforts outside of the U.S. will require significant
management attention and financial resources. There can be no assurance that the
Company will be successful in achieving significant growth of sales of
PhonePrint and PrePay in international markets. The Company does not expect to
sell PhonePrint in the many international markets that rely primarily on digital
wireless networks, including many European countries. Currently, the Company
does not anticipate selling PrePay to any wireless carriers that do not employ
Ericsson switching equipment.
The Company's international sales may be denominated in foreign or U.S.
currencies. The Company does not currently engage in foreign currency hedging
transactions. As a result, a decrease in the value of foreign currencies
relative to the U.S. dollar could result in losses from transactions denominated
in foreign currencies. With respect to the Company's international sales that
are U.S. dollar-denominated, such a decrease could make the Company's systems
less price-competitive. Additional risks inherent in the Company's international
business activities include changes in regulatory requirements, the costs and
risks of localizing systems in foreign countries, tariffs and other trade
barriers, political and economic instability, reduced protection for
intellectual property rights in certain countries, difficulties in staffing and
managing foreign operations, difficulties in managing distributors, potentially
adverse tax consequences, foreign currency exchange fluctuations, the burden of
complying with a wide variety of complex foreign laws and treaties and the
possibility of difficulty in accounts receivable collections. The Company
anticipates that product service and support will be more complicated and
expensive with respect to products sold in international markets. The Company
may need to adapt its products to conform to different technical standards that
may exist in foreign countries. Future customer purchase agreements may be
governed by foreign laws, which may differ significantly from U.S. laws.
Therefore, the Company may be limited in its ability to enforce its rights under
such agreements and to collect damages, if awarded. There can be no assurance
that any of these factors will not have a material adverse effect on the
Company's business, operating results and financial condition.
Potential Acquisitions. The Company has in the past evaluated and expects
in the future to pursue acquisitions of businesses, products or technologies
that complement the Company's business. Future acquisitions may result in the
potentially dilutive issuance of equity securities, the use of cash resources,
the incurrence of additional debt, the write-off of in-process research and
development or software acquisition and development costs and the amortization
of expenses related to goodwill and other intangible assets, any of which could
have a material adverse effect on the Company's business, operating results and
financial condition. Future acquisitions would involve numerous additional
risks, including difficulties in the assimilation of the operations, services,
products and personnel of an acquired business, the diversion of management's
attention from other business concerns, entering markets in which the Company
has little or no direct prior experience and the potential loss of key employees
of an acquired business. In addition, there can be no assurance that the Company
would be successful in completing any acquisition. The Company currently has no
agreements or understandings with regard to any acquisition.
Highly Competitive Industry. The market for PhonePrint is competitive. The
Company believes that the primary competitive factors in the cloning fraud
prevention market in which it currently competes include product effectiveness
and quality, price, service and support capability and compatibility with
cloning fraud prevention systems used by the carrier in other geographic markets
and by the carrier's roaming partners. There has been a tendency for carriers
that purchase cloning fraud prevention systems to purchase products from the
company that supplies cloning fraud prevention systems to other carriers with
whom the purchasing carrier has a roaming arrangement. As a result, the Company
expects it will be significantly more difficult to sell PhonePrint to a carrier
if the carrier's roaming partners use cloning fraud prevention systems supplied
by a competitor. Furthermore, once a competitor has made a sale of RF-based
cloning fraud prevention systems to a carrier, the Company expects that it is
unlikely that the Company would be able to sell PhonePrint to that carrier.
The Company's principal competitor for RF-based cloning fraud prevention
systems is Cellular Technical Services Company, Inc. ("CTS"). CTS has agreements
pursuant to which it has installed or will install its RF-based cloning fraud
prevention system in many major U.S. markets. PhonePrint also competes with a
number of alternative technologies, including profilers, personal identification
numbers and authentication. The Company is aware of numerous companies,
including GTE Telecommunications Services, Inc., Authentix Network, Inc.,
Systems/Link and Lightbridge, Inc., that currently are or are expected to offer
products in the cloning fraud prevention area. The expansion of digital networks
and the reluctance of carriers to make further investments in their existing
analog infrastructure has limited the demand for PhonePrint. In addition,
carriers may themselves develop technologies that limit the demand for
PhonePrint. There can be no assurance that any such company or any other
competitor will not introduce a new product at a lower price or with greater
functionality than PhonePrint. Furthermore, the demand for PhonePrint would be
materially adversely affected if wireless telecommunications carriers implement
authentication technology applicable to analog phones as their sole cloning
fraud solution in major markets, if U.S. wireless telecommunications carriers
adopt a uniform digital standard that reduces the need for digital phones to
operate in analog mode while roaming, or if analog phone makers change product
designs and/or improve manufacturing standards to a point where the difference
from phone to phone in the radio waveform becomes so small that it is difficult
for PhonePrint to identify a clone. There can be no assurance that any currently
available alternative technology or any new technology will not render the
Company's products obsolete or significantly reduce the market share afforded to
RF-based cloning fraud prevention systems like PhonePrint.
The market for PrePay is new and increasingly competitive. PrePay competes
with a number of alternative prepaid billing products, including post-call
systems, handset-based systems and adjunct switch systems. The Company is aware
of numerous companies, including GTE Telecommunications Services, Inc., Boston
Communications Group, Inc., InterVoice-Brite, Inc., Comverse Technology, Inc.,
Glenayre Technologies, Inc., National Telemanagement Corporation, Telemac
Cellular Corporation, Systems/Link Corporation, Prairie Systems, Inc., ORGA
Kartensysteme GmbH, SEMA Group, Logica plc, Alcatel USA, Priority Call
Management, Lucent Technologies, Inc., TeleCommunication Systems, Inc. and
Northern Telecom Limited that currently are or are expected to offer prepaid
wireless billing products. There can be no assurance that any such company or
other competitor will not introduce a new product at a lower price or with
greater functionality than PrePay. Furthermore, the demand for PrePay would be
materially adversely affected if wireless carriers implement wireless
intelligent network standards and a prepaid offering other than PrePay as their
sole prepaid solution in major markets. There can be no assurance that any
currently available alternative technology or any new technology will not render
the Company's PrePay system obsolete or significantly reduce the market share
afforded to prepaid wireless billing systems like PrePay.
The market for other products and services provided to wireless
telecommunications carriers is highly competitive and subject to rapid
technological change, regulatory developments and emerging industry standards.
In addition, many wireless telecommunications carriers and vendors of switches
and other telecommunications equipment may be capable of developing and offering
products and services competitive with new products, if any, that the Company
may offer in the future. Trends in the wireless telecommunications industry,
including greater consolidation and technological or other developments that
make it simpler or more cost-effective for wireless telecommunications carriers
to provide certain services themselves could affect demand for new products, if
any, offered by the Company, and could make it more difficult for the Company to
offer a cost-effective alternative to a wireless telecommunications carrier's
own capabilities.
The Company believes that its ability to compete in the future depends in
part on a number of competitive factors outside its control, including the
ability to hire and retain employees, the development by others of products and
services that are competitive with the Company's products and services, the
price at which others offer comparable products and services and the extent of
its competitors' responsiveness to customer needs. Many of the Company's
competitors and potential competitors have significantly greater financial,
marketing, technical and other competitive resources than the Company. As a
result, the Company's competitors may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or may be able to
devote greater resources to the promotion and sale of their products and
services. To remain competitive in the market for products and services sold to
wireless telecommunications carriers, the Company will need to continue to
invest substantial resources in engineering, research and development and sales
and marketing. There can be no assurance that the Company will have sufficient
resources to make such investments or that the Company will be able to make the
technological advances necessary to remain competitive. Accordingly, there can
be no assurance that the Company will be able to compete successfully with
respect to new products, if any, it offers in the future.
Customer Concentration. To date, a significant portion of the Company's
revenues in any particular period has been attributable to a limited number of
customers, comprised entirely of wireless telecommunications carriers, or
distributors who resell the Company's products to wireless telecommunications
carriers. For the nine months ended September 30, 1999, Ericsson Radio Systems
AB and Communicacion Celular, S.A. each accounted for greater than 10% of the
Company's total revenues and collectively accounted for over 58% of the
Company's total revenues in the period. BellSouth Cellular Corporation and GTE
Mobilnet Service Corporation each accounted for greater than 10% of the
Company's total revenues in fiscal 1998 and collectively accounted for over 23%
of the Company's total revenues in fiscal 1998. In fiscal 1997, BellSouth
Cellular Corporation, GTE Mobilnet Service Corporation and Southwestern Bell
Mobile Systems, Inc. each accounted for greater than 10% of the Company's total
revenues in fiscal 1997, and collectively accounted for over 33% of the
Company's total revenues for the year. In fiscal 1996, AT&T Wireless Services,
and Los Angeles Cellular Telephone Company each accounted for greater than 10%
of the Company's total revenues, and collectively accounted for over 22% of the
Company's total revenues for the year. A relatively small number of carriers
that operate analog networks are potential customers for PhonePrint and a
relatively small number of carriers that use Ericsson infrastructure equipment
are potential customers for PrePay. The Company believes that the number of
potential customers for future products, if any, will be relatively small. Any
failure by the Company to capture a significant share of those customers could
have a material adverse effect on the Company's business, operating results and
financial condition. The Company expects a relatively small number of customers
will continue to represent a significant percentage of its total revenues for
each quarter for the foreseeable future, although the companies that comprise
the largest customers in any given quarter may change from quarter to quarter.
The terms of the Company's agreements with its customers are generally for
periods of between two and five years. Although these agreements typically
contain annual software license fees and various service and support fees, there
are no minimum payment obligations or obligations to make future purchases of
hardware or to license additional software. Therefore, there can be no assurance
that any of the Company's current customers will generate significant revenues
in future periods.
Uncertainty Regarding Patents and Protection of Proprietary Technology;
Risks of Future Litigation. The Company relies on a combination of patent, trade
secret, copyright and trademark protection and nondisclosure agreements to
protect its proprietary rights. The Company's success will depend in large part
on the ability of the Company to obtain patent protection, defend patents once
obtained, license third party proprietary rights, maintain trade secrets and
operate without infringing upon the patents and proprietary rights of others.
The patent positions of companies in the wireless telecommunications industry,
including the Company, are generally uncertain and involve complex legal and
factual questions. There can be no assurance that patents will issue from any
patent applications owned or licensed to the Company or that, if patents do
issue, the claims allowed would be sufficiently broad to protect the Company's
technology. In addition, there can be no assurance that any issued patents owned
by or licensed to the Company will not be challenged, invalidated or
circumvented, or that the rights granted thereunder will provide competitive
advantages to the Company.
Patents issued and patent applications filed relating to products used in
the wireless telecommunications industry are numerous and there can be no
assurance that current and potential competitors and other third parties have
not filed or in the future will not file applications for, or have not received
or in the future will not receive, patents or obtain additional proprietary
rights relating to products used or proposed to be used by the Company. There
can be no assurance that the Company is aware of all patents or patent
applications that may materially affect the Company's ability to make, use or
sell any current or future products. U.S. patent applications are confidential
while pending in the U.S. Patent and Trademark Office, and patent applications
filed in foreign countries are often first published nine months or more after
filing. There can also be no assurance that third parties will not assert
infringement claims against the Company in the future or that any such
assertions will not result in costly litigation or require the Company to obtain
a license to intellectual property rights of such parties. There can be no
assurance that any such licenses would be available on terms acceptable to the
Company, if at all. Furthermore, parties making such claims may be able to
obtain injunctive or other equitable relief that could effectively block the
Company's ability to make, use, sell or otherwise practice its intellectual
property (whether or not patented or described in pending patent applications),
or to further develop or commercialize its products in the U.S. and abroad and
could result in the award of substantial damages. Defense of any lawsuit or
failure to obtain any such license could have a material adverse effect on the
Company's business, operating results or financial condition.
The Company also relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire the same or substantially equivalent
technologies or otherwise gain access to the Company's proprietary technology or
disclose such technology or that the Company can ultimately protect its rights
to such unpatented proprietary technology. No assurance can be given that third
parties will not obtain patent rights to such unpatented trade secrets, which
patent rights could be used to assert infringement claims against the Company.
The Company also relies on confidentiality agreements with its employees,
vendors, consultants and customers to protect its proprietary technology. There
can be no assurance that these agreements will not be breached, that the Company
would have adequate remedies for any breach or that the Company's trade secrets
will not otherwise become known to or be independently developed by competitors.
Failure to obtain or maintain patent and trade secret protection, for any
reason, could have a material adverse effect on the Company's business,
operating results and financial condition.
Dependence on New Product Introductions and Product Enhancements. The
Company's future success depends on the timely introduction and acceptance of
new products and product enhancements. However, there can be no assurance that
any new products or product enhancements the Company attempts to develop will be
developed successfully or on schedule, or if developed, that they will achieve
market acceptance. In addition, there can be no assurance that the Company will
successfully execute its strategy of acquiring businesses, products and
technologies from third parties. Any failure by the Company to introduce
commercially successful new products or product enhancements or any significant
delay in the introduction of such new products or product enhancements would
have a material adverse effect on the Company's business, operating results and
financial condition.
The process of developing new products and product enhancements for use in
the wireless telecommunications industry is extremely complex and is expected to
become more complex and expensive in the future as new platforms and
technologies emerge. In the past, the Company has experienced delays in the
introduction of certain product enhancements, and there can be no assurance that
new products or product enhancements will be introduced on schedule or at all.
Any new products or product enhancements may also contain defects when first
introduced or when new versions are released. There can be no assurance that,
despite testing by the Company, defects will not be found in new products or
product enhancements after commencement of commercial shipments, resulting in
loss of or delay in market acceptance. Any loss of or delay in market acceptance
would have a material adverse effect on the Company's business, operating
results and financial condition.
Dependence on Third-Party Products and Services; Sole or Limited Sources
of Supply. The Company relies to a substantial extent on outside vendors to
manufacture many of the components and subassemblies used in PhonePrint and the
hardware and third party software used in PrePay, some of which are obtained
from a single supplier or a limited group of suppliers. The Company's reliance
on outside vendors generally, and a sole or a limited group of suppliers in
particular, involves several risks, including a potential inability to obtain an
adequate supply of required components and reduced control over quality, pricing
and timing of delivery of components. In the past, the Company has experienced
delays in receiving materials from vendors, sometimes resulting in delays in the
assembly of products by the Company. Such delays, or other significant vendor or
supply quality issues, may occur in the future, which could result in a material
adverse effect on the Company's business, operating results or financial
condition. The manufacture of certain of these components and subassemblies is
specialized and requires long lead times, and there can be no assurance that
delays or shortages caused by vendors will not reoccur. Any inability to obtain
adequate deliveries, or any other circumstance that would require the Company to
seek alternative sources of supply or to manufacture internally could delay
shipment of the Company's products, increase its cost of goods sold and have a
material adverse effect on the Company's business, operating results and
financial condition. In addition, from time to time, the Company must also rely
upon third parties to develop and introduce components and products to enable
the Company, in turn, to develop new products and product enhancements on a
timely and cost-effective basis. In particular, the Company must rely on the
development efforts of third party wireless infrastructure providers in order to
allow its PrePay product to integrate with both existing and future generations
of the infrastructure equipment. There can be no assurance that the Company will
be able to obtain access in a timely manner to third-party products and
development services necessary to enable the Company to develop and introduce
new and enhanced products, that the Company will obtain third-party products and
development services on commercially reasonable terms or that the Company will
be able to replace third-party products in the event such products become
unavailable, obsolete or incompatible with future versions of the Company's
products. The absence of, or any significant delay in, the replacement of
third-party products could have a material adverse effect on the Company's
business, operating results and financial condition.
Dependence on Personnel. The success of the Company is dependent, in part,
on its ability to attract and retain highly qualified personnel. The Company's
future business and operating results depend upon the continued contributions of
its senior management and other employees, many of whom would be difficult to
replace and certain of whom perform important functions for the Company beyond
those functions suggested by their respective job titles or descriptions.
Competition for such personnel is intense and the inability to attract and
retain additional senior management and other employees or the loss of one or
more members of the Company's senior management team or current employees,
particularly to competitors, could materially adversely affect the Company's
business, operating results or financial condition. There can be no assurance
that the Company will be successful in hiring or retaining requisite personnel.
None of the Company's employees has entered into employment agreements with the
Company, and the Company does not have any key-person life insurance covering
the lives of any members of its senior management team.
Management of Growth. The Company has rapidly and significantly expanded
its operations. Such growth has placed, and, if sustained, will continue to
place, significant demands on the Company's management, information systems,
operations and resources. The strain experienced to date has chiefly been in
hiring, integrating and effectively managing sufficient numbers of qualified
personnel to support the expansion of the Company's business. The Company's
ability to manage any future growth, should it occur, will continue to depend
upon the successful expansion of its sales, marketing, research and development,
customer support and administrative infrastructure and the ongoing
implementation and improvement of a variety of internal management systems,
procedures and controls. There can be no assurance that the Company will be able
to attract, manage and retain additional personnel to support any future growth,
if any, or will not experience significant problems with respect to any
infrastructure expansion or the attempted implementation of systems, procedures
and controls. Any failure in one or more of these areas could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Government Regulation and Legal Uncertainties. While most of the
Company's operations are not directly regulated, the Company's existing and
potential customers are subject to a variety of U.S. and foreign governmental
regulations. Such regulations may adversely affect the wireless
telecommunications industry, limit the number of potential customers for the
Company's products or impede the Company's ability to offer competitive products
and services to the wireless telecommunications industry or otherwise have a
material adverse effect on the Company's business, financial condition and
results of operations. Recently enacted legislation, including the
Telecommunications Act of 1996, deregulating the telecommunications industry may
cause changes in the wireless telecommunications industry, including the
entrance of new competitors and industry consolidation, which could in turn
increase pricing pressures on the Company, decrease demand for the Company's
products, increase the Company's cost of doing business or otherwise have a
material adverse effect on the Company's business, operating results and
financial condition. The Telecommunications Act of 1996 contains several
provisions that may bear directly on the Company's existing and potential
customers in the U.S., including provisions that require wireless carriers to
interconnect with local exchange carriers and contribute to a universal service
fund, that limit the ability of state and local governments to discriminate
against or prohibit certain wireless services and that may allow certain
companies to bundle local and long distance services with wireless offerings.
These provisions may cause an increase in the number of wireless
telecommunications carriers which could in turn increase the number of potential
customers of the Company. This could require the Company to expand its marketing
efforts with no assurance that revenues would increase proportionately or at
all. Alternatively, these provisions could encourage industry consolidation,
which would reduce the Company's potential customer base. Currently the FCC and
state authorities are implementing the provisions of the Telecommunications Act
of 1996 and several of the decisions by the FCC and state authorities are
already being challenged in court. Therefore, the Company cannot at this time
predict the extent to which the Telecommunications Act of 1996 will affect the
Company's current and potential customers or ultimately affect the Company's
business, financial condition or results of operations. If the recent trend
toward privatization and deregulation of the wireless telecommunications
industry outside of the U.S. were to discontinue, or if currently deregulated
international markets were to reinstate comprehensive government regulation of
wireless telecommunications services, the Company's business, operating results
and financial condition could be materially and adversely affected. In addition,
the problem of cloning fraud has received heightened attention from Congress and
the FCC, which are exploring legislative and regulatory initiatives that would
impose stricter penalties for, and increase enforcement against, cloning fraud.
The Company cannot predict the effect of such initiatives on the Company's
business, operating results or financial condition, including demand for the
Company's products.
Dependence on Growth of Wireless Telecommunications Industry. The
Company's future financial performance will depend in part on the number of
carriers seeking third-party solutions to the problem of cloning fraud and the
number of carriers seeking to implement prepaid billing services. Although the
wireless telecommunications industry has experienced significant growth in
recent years, there can be no assurance that such growth will continue at
similar rates, or that, if the industry does grow, there will be continued
demand for the Company's cloning fraud prevention, prepaid metered billing or
other products. Any decline in demand for wireless telecommunications products
and services in general would have a material adverse effect on the Company's
business, operating results and financial condition.
Risk of System Failure. The continued, uninterrupted operation of the
PhonePrint system depends on protecting it from damage from fire, earthquake,
power loss, communications failure, unauthorized entry or other events. Any
damage to or failure of a component or combination of components that causes a
significant reduction in the performance of a PhonePrint system could have a
material adverse effect on the Company's business, operating results and
financial condition. The Company currently does not have liability insurance to
protect against these risks and there can be no assurance that such insurance
will be available to the Company on commercially reasonable terms, or at all. In
addition, if any carrier using PhonePrint encounters material performance
problems, the Company's reputation and its business, operating results and
financial condition could be materially adversely affected.
Year 2000 Compliance. The Company's products use and are dependent upon
certain internally developed and third party software programs The Company has
initiated a review and assessment of all hardware and software used in its
products to confirm that they will function properly in the year 2000. With
respect to software developed internally by the Company, the results of that
evaluation to date initially revealed certain source codes that were unable to
appropriately interpret the upcoming calendar year 2000. The Company has
completed its work to upgrade these programs to make them capable of processing
data incorporating year 2000 dates without material errors or interruptions.
With respect to third party software incorporated in the Company's products, all
vendors whose software is used by the Company have indicated that their software
is or will be year 2000 compliant. Evaluation of year 2000 issues is continuing,
and there can be no assurance that additional issues, not presently known by the
Company, will not be discovered which could present a material risk to the
function of the Company's products and have a material adverse effect on the
Company's business, operation results and financial condition.
Future Capital Requirements. The Company's future capital requirements
will depend upon many factors, including the commercial success of PhonePrint
and PrePay, the timing and success of new product introductions, if any, the
progress of the Company's research and development efforts, the Company's
results of operations, the status of competitive products and the potential
acquisition of businesses, technologies or assets. The Company believes that
combination of existing sources of liquidity and internally generated cash will
be sufficient to meet the Company's projected cash needs for at least the next
12 months. There can be no assurance, however, that the Company will not require
additional financing prior to such date to fund its operations. In addition, the
Company may require additional financing after such date to fund its operations.
There can be no assurance that any additional financing will be available to the
Company on acceptable terms, or at all, when required by the Company. If
additional funds are raised by issuing equity securities, further dilution to
the existing stockholders will result. If adequate funds are not available, the
Company may be required to delay, scale back or eliminate one or more of its
development or manufacturing programs or obtain funds through arrangements with
third parties that may require the Company to relinquish rights to certain of
its technologies or potential products or other assets that the Company would
not otherwise relinquish. Accordingly, the inability to obtain such financing
could have a material adverse effect on the Company's business, operating
results and financial condition.
Volatility of Stock Price. The market price of the Common Stock is likely
to be highly volatile and could be subject to wide fluctuations in response to
numerous factors, including, but not limited to, revenues attributable to
PhonePrint and PrePay, new products or new contracts by the Company or its
competitors, actual or anticipated variations in the Company's operating
results, the level of operating expenses, changes in financial estimates by
securities analysts, potential acquisitions, regulatory announcements,
developments with respect to patents or proprietary rights, conditions and
trends in the wireless telecommunications and other industries, adoption of new
accounting standards affecting the industry and general market conditions. As a
result, the Company expects that from time to time its future operating results
will be below the expectations of market analysts and investors, which would
likely have a material adverse effect on the prevailing market price of the
Common Stock. The realization of any of the risks described in these "Risk and
Uncertainties" could have a dramatic and adverse impact on the market price of
the Common Stock.
Further, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of equity
securities of many companies in the telecommunications industry and that often
have been unrelated or disproportionate to the operating performance of such
companies. These market fluctuations, as well as general economic, political and
market conditions such as recessions or international currency fluctuations may
adversely affect the market price of the Common Stock. In the past, following
periods of volatility in the market price of the securities of companies in the
telecommunications industry, securities class action litigation has often been
instituted against those companies. Such litigation, if instituted against the
Company, could result in substantial costs and a diversion of management
attention and resources, which would have a material adverse effect on the
Company.
Antitakeover Effects of Stockholder Rights Plan, Charter, Bylaws and
Delaware Law. The Company has adopted a stockholders rights plan. This plan
would cause substantial dilution to any person or group that attempts to acquire
the Company on terms not approved by the Board of Directions. In addition, the
Company's Restated Certificate of Incorporation authorizes the Company's Board
of Directors (the "Board") to issue shares of undesignated Preferred Stock
without stockholder approval on such terms as the Board may determine. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any such Preferred Stock that may be
issued in the future. Moreover, the issuance of Preferred Stock may make it more
difficult for a third party to acquire, or may discourage a third party from
acquiring, a majority of the voting stock of the Company. The Company's Restated
Bylaws divide the Company's Board into three classes of directors. One class of
directors is elected each year with each class serving a three-year term. These
and other provisions of the Restated Certificate of Incorporation and the
Restated Bylaws, as well as certain provisions of Delaware law, could delay or
impede the removal of incumbent directors and could make more difficult a
merger, tender offer or proxy contest involving the Company, even if such events
could be beneficial to the interest of the stockholders. Such provisions could
limit the price that certain investors might be willing to pay in the future for
the Common Stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company invests its excess cash and short-term investment in corporate
debt securities with high quality credit ratings and maturities of less than one
year. These investments are not held for trading or other speculative purposes.
Changes in interest rates affect the investment income earned on investments
and, therefore, impact the Company's cash flows and results in operations. At
September 30, 1999, the Company had outstanding a note payable for $1.6 million
which matures in 2001. The note has a fixed interest rate of 15.8%. Accordingly,
while changes in interest rates may affect the fair market value of the notes,
they do not impact the Company's cash flows or results of operations. The
Company is not exposed to risks for changes in foreign currency exchange rates,
commodity prices, or any other market rates.
PART II - OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
From the effective date of Corsair's initial registration statement on
Form S-1 on July 29, 1997 (Registration No. 333-28519) to September 30, 1999,
the approximate use of the net offering proceeds were $13.2 million for the
repayment of indebtedness, $7.6 million for capital expenditures, and $4.3
million for acquisition costs paid through September 30, 1998. The remaining
balance from the net proceeds of $38.6 million have been invested in short-term
investments, pending future use. All payments were direct or indirect payments
to third-parties.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Corsair Communications, Inc.
Date: November 15, 1999 By: /s/ Martin J. Silver
Martin J. Silver
Chief Financial Officer and Secretary
(Duly Authorized Officer and Principal
Financial and Accounting Officer)