10-Q 1 e10-q.txt FORM 10-Q QUARTERLY PERIOD ENDED JUNE 30, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000. [ ] 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 July 31, 2000 was 17,335,291. 2 INDEX

2 3 PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements CORSAIR COMMUNICATIONS, INC. Unaudited Condensed Consolidated Balance Sheets (In thousands, except share data)

See accompanying notes to Condensed Consolidated Financial Statements 3 4 CORSAIR COMMUNICATIONS, INC. Unaudited Condensed Consolidated Statements of Income (In thousands, except share data)

See accompanying notes to Condensed Consolidated Financial Statements 4 5 CORSAIR COMMUNICATIONS, INC. Unaudited Condensed Consolidated Statements of Cash Flows (In thousands)

See accompanying notes to Condensed Consolidated Financial Statements 5 6 CORSAIR COMMUNICATIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation We have prepared the accompanying unaudited consolidated financial information 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 our opinion, all adjustments considered necessary for a fair presentation have been included, and all such adjustments are of a normal and recurring nature. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any future periods. These condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 1999. The condensed consolidated financial statements include Corsair Communications, Inc., and its subsidiary. Significant intercompany transactions and accounts have been eliminated. 2. Net Income Per Share Basic net income per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is based on the weighted average number of shares of common stock outstanding during the period and dilutive common equivalent shares from options and warrants outstanding during the period. Dilutive common equivalent shares consist of stock options computed using the treasury stock method. The following tables set forth the computations of shares and net income used in the calculation of basic and diluted net income per share for the three and six months ended June 30, 2000 and 1999 (in thousands, except per share data):

6 7 3. Inventories Inventories are stated at the lower of cost or market and are summarized as follows (in thousands):

4. Common Stock Repurchase During the six months ended June 30, 2000, we repurchased 120,000 shares of our common stock at a cost of $881,000. During the year ended December 31, 1999, we repurchased 1,075,000 shares of our common stock at a cost of $5.7 million. 5. 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 entering into the strategic relationship, we 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. All of the accrued termination costs were paid in 1999. 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, Corsair 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, 2001. 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 net assets transferred. 7. 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. 8. Recently Issued Accounting Pronouncements 7 8 In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities". We are required to adopt SFAS No. 133 in the first quarter of fiscal year 2002. We do not anticipate the SFAS No. 133 will have a material impact on our financial statements. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements", as amended by SAB 101A and SAB 101B, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. We do not expect the adoption of SAB 101 to have a material effect on our financial position or results of operations. In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation". FASB Interpretation No. 44 clarifies the application of APB opinion No. 25 for certain issues. The FASB Interpretation No. 44 was effective beginning July 1, 2000. We are in the process of assessing any impact that the adoption of FASB Interpretation No. 44 will have on our financial statements in future quarters. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion may contain forward-looking statements that involve risks and uncertainties. Corsair's actual results may differ materially from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risks and Uncertainties" below. 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. The following should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto. OVERVIEW Corsair Communications, Inc. 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. We believe that PrePay currently serves over 11 million subscribers. Our PhonePrint(R) system has proven highly effective in reducing cloning fraud. We believe 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. On February 3, 1999, we sold substantially all of the assets relating to our Communication Resource Manager ("CRM") billing system and certain related products to Wireless Billing Systems, a California corporation, pursuant to the terms of an Asset Purchase Agreement. We recorded a loss on the sale of assets of approximately $2.2 million, consisting of a cash payment of $1 million to WBS and $1.2 million in transaction costs and other charges related to the sale. Also on February 3, 1999, we 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. RESULTS OF OPERATIONS Revenues: For the three months ended June 30, 2000, total revenues were $17.0 million, compared with $16.0 million for the same period in 1999. For the six months ended June 30, 2000, total revenues were $33.1 million compared with $31.3 million for the comparable period in 1999. The increase in revenues for the three and six months ended June 30, 2000 was primarily due to the increase in software revenues, due to the continuing growth of our PrePay product. The increase in software revenues was partially offset by the limited PhonePrint hardware revenue recognized during the period due to the saturation of the domestic markets. The growth in the installed base of PhonePrint units has continued to slow in the three and six months ended June 30, 2000. Service revenues increased due to the increase in PrePay installations and the corresponding consulting and maintenance work required with the new license sales. For the six months ended June 30, 2000, international revenues comprised 78% of total revenues, compared with 69% of total revenues for the six months ended June 30, 1999. We expect international revenues to increase both in absolute dollars as well as in a percentage of revenues, as PrePay continues its growth in sales in the international markets. Gross Profit: Gross profit increased to 72% of total revenues in the three months ended June 30, 2000 from 60% of revenues in the comparable period of 1999. For the six months ended June 30, 2000 gross profit was 70% of total revenue, up from 61% for the same period of 1999. The increase in gross profit was due primarily to improved software revenue margins resulting from increased PrePay license sales. Software margins contributed $6.8 million to gross profit for the three months ended June 30, 2000 and $13.7 million for the six months ended June 30, 2000. Service gross profit of $3.7 million and $6.9 million for the three and six months ended June 30, 9 10 2000, was the result of increased PrePay installations along with professional services provided to the larger installed based. Hardware gross profit of $1.8 million in the three months ended June 30, 2000 decreased from $4.3 million in the three months ended June 30, 1999. For the six months ended June 30, 2000, and 1999, hardware gross margin decreased to $2.6 million from $8.9 million. This decrease was due to the saturation of the domestic markets and the decrease in growth of the installed base of PhonePrint units. Research and Development: For the three months ended June 30, 2000, research and development expenses were $3.4 million compared with $2.5 million for the same period of 1999, an increase of $826,000 or 33%. For the first six months of 2000, research and development expenses were $6.2 million compared with $6.0 million for the same period of 1999, an increase of 3%. The increase in research and development expenses was due primarily to the development of new products such as PrePay Open and PhoneFuel. Research and development expenses were 19% of revenues for both the six months ended June 30, 2000 and 1999. Sales and Marketing: For the three months ended June 30, 2000, sales and marketing expenses were $3.2 million compared with $3.5 million for the same period of 1999, a decrease of $275,000 or 8%. For the first six months of 2000, sales and marketing expenses were $6.5 million compared with $7.4 million for the same period of 1999, a decrease of 12%. The decrease in sales and marketing expense for the three and six months ended June 30, 2000 was due to lower headcount resulting from both the CRM sale in the first quarter of 1999 as well as a shift from the direct sales channel in the latter half of 1999. Sales and marketing expenses were 20% and 24% of revenues for the six months ended June 30, 2000 and 1999, respectively. General and Administrative: For the three months ended June 30, 2000, general and administrative expenses of $1.6 million remained consistent with the same period of 1999. For the first six months of 2000, general and administrative expenses were $3.1 million compared with $3.2 million for the same period of 1999, a decrease of 4%. The decrease from last year over the six month period, taking into account that the second quarter remained flat year over year, is due to the consolidation of operations in the first quarter of 1999 resulting from the CRM sale. General and administrative expenses were 9% and 10% of revenues for the six months ended June 30, 2000 and 1999, respectively. Reorganization Costs: As discussed in Note 5 of the Notes to the Condensed Consolidated Financial Statements, we discontinued a development project in the quarter ended March 31, 1999, which resulted in a charge of $856,000 in certain one-time charges, consisting of $649,000 in termination benefits for 13 employees and equipment write-downs of $207,000. Loss on Sale of Assets: As discussed in Note 6 of the Notes to the Condensed Consolidated Financial Statements, we sold substantially all of the assets relating to its Communication Resource Manager billing system and certain related products to Wireless Billing Systems during the first quarter of 1999. The sale of assets resulted in a loss of $2.2 million consisting of a payment of $1 million to Wireless Billing Systems and $1.2 million in transaction costs and other charges related to the sale. Interest Income, Net: Net interest income consists of interest income from our cash and short-term investments, net of interest expense on our equipment and other loans, and other non-operating income. The increase in net interest income for the three and six months ended June 30, 2000 was due to an increased balance in short-term investments to $63.0 million on June 30, 2000 from $28.2 million on June 30, 1999. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2000, our cash and short-term investments were $69.0 million compared with $52.9 million at December 31, 1999. The increase is primarily a result of cash generated by operations of $17.6 million, stock option and purchase plan activities of $699,000 and notes receivable collections of $345,000. These cash inflows were partially offset by cash outflows for investing and financing activities, such as purchase of capital equipment of $1.3 million, repurchase of common stock of $881,000 and notes and lease payments of $419,000. 10 11 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 product development efforts in the future and expect to fund those activities out of working capital. There can be no assurance, however, that we will not require additional financing prior to such date to fund our operations or possible acquisitions. In addition, we may require additional financing after such date to fund our operations. There can be no assurance that any additional financing will be available to us on acceptable terms, or at all, if and when required by us. 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 Quarterly 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 the second half of 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 Been Commercially Deployed Primarily on Networks Using Ericsson Switching Equipment. To date our PrePay solution has only been commercially deployed primarily on networks which use Ericsson switching equipment with the exception of our single PrePay Open installation at BCP in Brazil. Until recently, only carriers that deployed Ericsson's infrastructure equipment were 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 commercially by one carrier, 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 service and software license fees for PhonePrint systems that have been deployed 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 11 12 implemented cloning fraud solutions. We believe there will be little, if any, demand for PhonePrint systems in the future. As a result of the lack of 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 the second quarter of 2000, we finished development of the TDMA PhonePrint product. However, we have concluded that existing authentication techniques already available have been and will most likely continue to be effective deterrents to cloning fraud on digital networks. Accordingly, we will not market the TDMA PhonePrint product. 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. 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 Quarterly Report. Our future operating results will depend upon, among other factors: the demand for PrePay, the continued use of PhonePrint systems that already have been deployed, 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 12 13 PrePay Has Lengthy Sales Cycles and Potential Delays in the Cycle Make Our Revenues Susceptible to Fluctuations. A carrier's decision to deploy 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 we are not able to accurately forecast future sales of PrePay. In addition, purchases of PrePay can involve testing, integration, implementation and support requirements. For these and other reasons, the sales cycle associated with the purchase of PrePay 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 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 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 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. 13 14 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 or Strategic Investments Present Risks that Could Adversely Affect Our Business. We have, in the past, evaluated and expect in the future to pursue acquisitions or strategic investments in businesses, products or technologies that complement our business. Future acquisitions or investments 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 or investments 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, potential write-down of investment asset, and the potential loss of key employees of an acquired business. In addition, we may not be successful in completing any acquisition or investments. 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., Intellinet (National Telemanagement Corporation), Telemac Cellular Corporation, Systems/Link Corporation, Prairie Systems, Inc., ORGA Kartensysteme GmbH, SEMA Group (Priority Call Management), Logica plc, Alcatel USA, 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. 14 15 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, it is 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 an agreement pursuant to which it has installed 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 eliminated the demand for new PhonePrint systems. Our installed base of PhonePrint systems could be reduced and any recurring revenues associated with PhonePrint could be eliminated 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 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. 15 16 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 68% of our total revenues in the first six months of 2000. Ericsson 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 or the year. A relatively small number of carriers that use Ericsson infrastructure equipment are potential customers for our established PrePay product, and our PrePay Open product has not yet achieved market acceptance. Likewise, 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 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 June 30, 2000, 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. 16 17 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. 17 18 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 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. 18 19 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, 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 19 20 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We invest our excess cash and short-term investment in corporate debt securities with high quality credit ratings and maturities of less than one year. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income earned on investments and, therefore, impact our cash flows and results in operations. At June 30, 2000, we had outstanding a note payable for $1.1 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. PART II - OTHER INFORMATION ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS From the effective date of Corsair's initial registration statement on Form S-1 on July 29, 1997 (Registration No. 333-28519) to June 30, 2000, the approximate use of the net offering proceeds were $13.2 million for the repayment of indebtedness, $8.4 million for capital expenditures, and $4.3 million for acquisition costs paid through June 30, 1998. The remaining balance from the net proceeds of $39.1 million have been invested in short-term investments, pending future use. All payments were direct or indirect payments to third-parties. ITEM 5. OTHER EVENTS On August 11, 2000, Mr. Peter Currie tendered his resignation as a director. Mr. Currie resigned for personal reasons and not as a result of a disagreement on any matter relating to our operations, policies, or practices. 20 21 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: August 14, 2000 By: /s/ Martin J. Silver ------------------------------------------ Martin J. Silver Chief Financial Officer and Secretary (Duly Authorized Officer and Principal Financial and Accounting Officer) 21

CORSAIR COMMUNICATIONS INC 10-Q