PROSPECTUS
1,192,308 Shares
Socket Communications, Inc.
Common Stock
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This Prospectus covers 1,192,308 shares of Common Stock, par value $0.001 per
share (the "Common Stock"), of Socket Communications, Inc., a Delaware
corporation (the "Company"), which may be offered from time to time by one or
all of the selling stockholders named herein (the "Selling Stockholders").
All of the Common Stock offered hereby consists of shares of Common Stock to
be issued by the Company to the Selling Stockholders upon the conversion of
shares of Series A Convertible Preferred Stock (the "Preferred Stock") issued
by the Company in a private transaction exempt from the registration
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to Section 4(2) thereof (the "Private Offering"). Such Preferred
Stock may be converted into Common Stock at the option of the holder, in whole
or in part, at any time on or after December 31, 1996, into that number of
shares of Common Stock of the Company equal to $100 divided by the Common Stock
Price, which shall equal the lower of: (a) $2 5/8; and (b) 65% of the average
bid price of the Company's Common Stock on the OTC Bulletin Board for the five
business days prior to the business day on which notice of conversion is
transmitted by the holder of such Preferred Stock. The Common Stock Price
shall be subject to adjustment in certain events. For purposes of this
Registration Statement, the Company has assumed a Common Stock Price of $1.30.
The shares eligible for sale hereunder represent approximately 28% of the
Company's issued and outstanding shares of Common Stock, assuming conversion of
the Preferred Stock. See "Selling Stockholders" and "Plan of Distribution."
The Company will receive no part of the proceeds from the sale of the Common
Stock by the Selling Stockholders. See "Selling Stockholders" and "Use of
Proceeds." All expenses of registration incurred in connection with this
offering are being borne by the Company, but all selling and other expenses
incurred by the Selling Stockholders will be borne by such Selling
Stockholders. The Company and the Selling Stockholders have each agreed to
indemnify each other against certain liabilities, including certain liabilities
under the Securities Act.
The Company's Common Stock is currently traded on the OTC Bulletin Board
under the symbol SCKT, and listed on the Pacific Stock Exchange under the
symbol SOK. From the date of the Company's initial public offering (June 6,
1995) through November 26, 1996, the Company's Common Stock was listed on the
Nasdaq SmallCap Market under the symbol SCKT. On December 18, 1996, the last
sale price of the Company's Common Stock on the OTC Bulletin Board was $1.55
per share. See "Price Range of Common Stock."
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The Common Stock offered hereby involves a high degree of risk and should be
considered only by persons who can afford the loss of their entire investment.
See "Risk Factors" beginning on page 4.
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Each Selling Stockholder and any broker executing selling orders on behalf of
the Selling Stockholders may be deemed to be an underwriter within the meaning
of the Securities Act. Commissions received by any such broker may be deemed
to be underwriting commissions under the Securities Act.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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The date of this Prospectus is December 20, 1996
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No person is authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offering described herein, and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Company or any Selling Stockholder. This Prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, nor shall there be any
sale of these securities by any person in any jurisdiction in which it is
unlawful for such person to make such offer, solicitation or sale. Neither the
delivery of this Prospectus nor any sale made hereunder shall under any
circumstances create an implication that the information contained herein is
correct as of any time subsequent to the date hereof.
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AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Seven World Trade Center, New
York, New York 10007 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois, 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the site is http://www.sec.gov.
The Company has filed with the Commission a Registration Statement (which
term shall include all amendments, exhibits and schedules thereto) on Form S-3
under the Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, omits
certain of the information contained in the Registration Statement and the
exhibits and schedules thereto on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement and the exhibits and schedules thereto.
The Registration Statement, including exhibits thereto, may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices at 75 Park Place, Room 1400, New York, New
York 10007 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies may be obtained at the prescribed rates
from the Public Reference Section of the Commission at its principal office in
Washington, D.C. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are hereby incorporated by reference in this Prospectus the following
documents and information heretofore filed with the Commission:
(1) the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1995 (the "Form 10-KSB");
(2) the Company's Quarterly Reports on Form 10-QSB for the fiscal
quarters ended March 31, 1996, June 30, 1996 and September 30, 1996;
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(3) the description of the Company's Common Stock offered hereby
contained in the Company's Registration Statement on Form 8-A filed
by the Company with the Commission on April 11, 1995 and the
Company's Registration Statement on Form 8-A/A filed by the Company
with the Commission on June 15, 1995.
All reports and other documents subsequently filed by the Company pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of
filing of such reports and documents. Any statement incorporated herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus is delivered, upon written or oral request of
any such person, a copy of any and all of the information that has been or may
be incorporated by reference in this Prospectus, other than exhibits to such
documents unless such exhibits are specifically incorporated by reference into
such document. Requests for such copies should be directed to the Company at
Socket Communications, Inc., 37400 Central Court, Newark, California 94560,
Attention: Chief Financial Officer. The Company's telephone number at that
location is (510) 744-2700.
THE COMPANY
Socket Communications, Inc. develops and sells data communications solutions
for the mobile computer market. Socket's Wireless Messaging System consists of
the PageCard receiver, PageSoft software and Socket Wireless Messaging
Services. Other Socket products include serial PC Cards and wired Ethernet PC
Cards.
The Company was incorporated in California in March 1992 and reincorporated
in Delaware in June 1995. Its headquarters are located at 37400 Central Court,
Newark, California 94560 and its telephone number is (510) 744-2700.
Notice to California Investors
Each purchaser of Common Stock in California must meet one of the following
suitability standards: (i) a liquid net worth (excluding home, furnishings and
automobiles) of $250,000 or more and gross annual income during 1995, and
estimated during 1996, of $65,000 or more from all sources; or (ii) a liquid
net worth (excluding home, furnishings and automobiles) of $500,000 or more.
Each California resident purchasing Common Stock offered hereby will be
required to execute a representation that it comes within one of the
aforementioned categories.
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RISK FACTORS
This Prospectus contains forward-looking statements (identified with an
asterisk "*") that involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in these forward-
looking statements as a result of certain factors, including those set forth in
the following risk factors and elsewhere in, or incorporated by reference into,
this Prospectus. In addition to the other information in this Prospectus, each
prospective investor should carefully consider the following risk factors in
evaluating the Company and its business before purchasing the securities
offered hereby.
Future Capital Needs; Auditors' Report Contained Explanatory Paragraph
Regarding Going Concern
The Company will require additional capital to fund its operations.* The
Company believes its existing capital resources and revenue from operations
will be inadequate to satisfy its working capital requirements through the end
of 1997.* The Company will need to raise additional capital to fund operations
in 1997, which the Company intends to seek through the sale of debt or equity
securities.* There can be no assurances that such capital will be available on
acceptable terms, if at all, and such terms may be dilutive to existing
stockholders. The inability to obtain such financing would have a material
adverse effect on the Company's results of operations. The Company could be
required to significantly reduce or suspend its operations, seek a merger
partner or sell additional securities on terms that are highly dilutive to
current investors in the Company. The Company's independent auditors included
an explanatory paragraph in their audit opinion with respect to the Company's
1995 financial statements which indicated substantial doubt about the Company's
ability to continue as a going concern due to recurring operating losses and
the need for additional financing. The factors leading to, and the existence
of, the explanatory paragraph may materially adversely affect the Company's
relationship with customers and suppliers, its ability to obtain revenue and
manufacture products and its ability to obtain financing.
History of Operating Losses; Net Capital Deficiency; No Assurance of
Profitability
The Company was incorporated in March 1992 and has incurred significant
operating losses in every fiscal period since inception. The Company expects
to incur substantial quarterly operating losses at least through the first half
of 1997 and possibly longer.* In order to become profitable, the Company
must obtain market acceptance of the PageCard receiver and enhanced PageSoft
software products, develop page-enabled applications by independent software
vendors in selected vertical markets, obtain continued increases in the market
acceptance of the Company's serial and Ethernet cards, develop successful new
products for new and existing markets, increase gross margins through higher
sales volumes and contract manufacturing efficiencies, expand its distribution
capability and manage its operating expenses. There can be no assurance that
the Company will meet any of these objectives or ever achieve profitability.
Emerging Market for Wireless Data Communications Products
The market for wireless data communications products is only beginning to
emerge, and there can be no assurance that it will develop sufficiently to
enable the Company to achieve broad commercial acceptance of its products.
Because this market is relatively new, and because current and future
competitors are likely to introduce a variety of competing wireless data
communications solutions, it is difficult to predict the rate at which this
market will grow, if at all. If the wireless data communications market fails
to grow, or grows more slowly than anticipated, the Company's business,
operating results and financial condition will be materially adversely
affected. Although the Company intends to conform its products to meet
emerging standards in the wireless data communications market, there can be no
assurance that industry standards will emerge or, if they become established,
that the Company will be able to conform to these new standards in a timely
_____________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in "Risk Factors," and elsewhere in, or incorporated by reference
into, this prospectus.
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fashion. Even if the market for wireless data communications products does
develop, there can be no assurance that the Company's products will achieve
commercial success within such market. Furthermore, the Company is currently
focusing on developing and delivering wireless data solutions for the specific
needs of business in a number of vertical market segments such as field sales,
field service, finance, real estate, health care, and transportation. * The
Company believes that the preferred strategy for addressing such needs is to
"page-enable" existing applications to allow the transfer of data from an
application through the paging network to the PageCard receiver where it can be
downloaded into a mobile computer. In August 1995, the Company released a
software developer's kit ("SDK") for value added resellers and independent
software vendors, which is designed to provide program interfaces for software
developers to "page-enable" their applications and to work with major Microsoft
operating systems. The Company expects "page-enabled" applications in these
areas to become available beginning in the second half of 1996 and more
extensively in 1997 and beyond.* There can be no assurance that such page-
enabled applications will gain widespread commercial acceptance or that
adoption of such applications will drive increased purchases of PageCard
receivers. Finally, due to the unique nature of the PageCard receiver and
PageCard WMS, which combine certain technologies and features of paging and
mobile computing, the Company believes it will be required to incur significant
expenses for sales and marketing, including advertising, to educate potential
customers.* Broad commercialization of the Company's products will require the
Company to overcome significant technological and market development hurdles,
many of which may not be currently foreseen.*
The mobile computer market represents only a small percentage of the
installed base of personal computers, and there can be no assurance that the
mobile computer market will continue to grow. Because all of the Company's
products are used in mobile computing applications, the Company's future
operating results would be materially adversely affected by any reduction in
the rate of growth of the mobile computer market.
Rapid Technological Change; Dependence on Product Development; Product Defects
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and short product life cycles.
Accordingly, the Company's success will be substantially dependent on a number
of factors, including its ability to identify emerging standards in the
wireless data communications field, enhance its products by adding features to
provide a more complete solution and differentiate its products from those of
its competitors, maintain superior or competitive performance in its products
and bring products to market quickly. Given the emerging nature of the
wireless data communications market, there can be no assurance that the
Company's products or technology will not be rendered obsolete by alternative
technologies. Further, short product life cycles expose the Company's products
to the risk of obsolescence and require frequent new product introductions. If
the Company is unable to develop or obtain access to advanced one-way and
emerging two-way wireless data communications technologies as they become
available, or is unable to design, develop, contract for the manufacturing of
and introduce competitive new products on a timely basis, its future operating
results will be materially adversely affected. Any significant delays in the
design, development, manufacture or shipment of new or enhanced products would
also materially adversely affect the Company's results of operations.
The markets for mobile computers and their peripherals and for wireless data
communications are extremely competitive and characterized by rapidly advancing
technology, frequent changes in user preferences and frequent product
introductions. The future success of the Company will depend in large part on
its ability, and that of its strategic partners, to keep pace with advances in
software and hardware technologies for mobile computing and wireless data
communications. There can be no assurance that the Company will be able to
respond effectively to these technological changes or to new product
introductions by others. For example, the Company's PageCard receiver is
designed to operate on the worldwide POCSAG protocol, and operates on the FCC-
approved frequencies for paging and messaging technologies in the United States
and Canada in the 930 MHz frequency range. For the European market, the
PageCard receiver operates on the Euromessage frequency of 466 MHz. New
competitive wireless technologies, such as FLEX in the United States and ERMES
in Europe, being developed by various market participants are not compatible
_____________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in "Risk Factors," and elsewhere in, or incorporated by reference
into, this prospectus.
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with the POCSAG protocol and may be at different frequencies. If these new
technologies succeed, paging carriers may cease to support POCSAG, and there is
no assurance that the Company will be able to develop future products based
upon these new technologies. In addition, the Company's inability to develop
products within any new FCC allocated frequencies for these new technologies
could have a material adverse effect on the Company's business and results of
operations.
Although the Company performs testing prior to new product introductions, the
Company's hardware and software products may contain undetected flaws, which
may not be discovered until the products have been used by customers. From
time to time, the Company may temporarily suspend or delay shipments or divert
development resources from other projects to correct a particular product
deficiency. Such efforts to identify and correct errors and make design
changes may be expensive and time consuming. Failure to discover product
deficiencies in the future could delay product introductions or shipments,
require the Company to recall previously shipped products to make design
modifications or cause unfavorable publicity, any of which could have a
material adverse effect on the Company's operating results.
Competition
The Company anticipates intense competition from a number of companies. The
overall market for communications products is increasingly competitive, and the
Company expects competition in each of its market areas to intensify. *
Currently, the Company does not have a direct competitor for its PageCard;
however, Kokusai produces a PC Card data pager that does not have a display.
The Company faces indirect competition for short messaging applications from
alphanumeric pagers, which are produced by many companies (including Motorola,
NEC, Uniden, and others), and from alternative methods of downloading
information into a mobile computer, primarily over telephone lines. In
addition to competition from companies that offer wireless data communications
devices, the Company could face competition for its PageCard receiver and
PageCard WMS from companies that offer alternative wired or wireless
communications solutions, or from large computer and network equipment
companies.*
The Company competes with IBM and Smart Modular Technologies, among others,
in the serial card market, although the Company believes that it is the leading
worldwide seller of serial cards. The market for the Company's Ethernet card
is highly competitive. Market leaders for Ethernet cards include 3Com and
Xircom. The Company also faces competition from combination cards which
combine Ethernet and other functions such as fax/modem. Companies offering
combination cards include 3Com, Xircom and U.S. Robotics.
Many of the Company's present and potential competitors have substantially
greater financial, marketing, technical and other resources than the Company
and may succeed in establishing technology standards or strategic alliances in
the data communications or mobile computer market, obtain more rapid market
acceptance for their products, or otherwise gain a competitive advantage.
There can be no assurance that the Company will succeed in developing products
or technologies that are more effective or better accepted in the market than
those developed by its competitors. Furthermore, the Company will also be
competing with companies that have high volume manufacturing and extensive
marketing and distribution capabilities, areas in which the Company has limited
or no experience. Increased competition, direct and indirect, could materially
adversely affect the Company's revenues and profitability through pricing
pressure and loss of market share. There can be no assurance that the Company
will be able to compete successfully against existing and new competitors as
the market evolves and the level of competition increases.
Potential Fluctuations in Quarterly Results
The Company believes that its operating results will be subject to
substantial quarterly fluctuations due to several factors, some of which are
outside the control of the Company, including fluctuating market demand for,
and declines in the average selling price of, the Company's products, the
_____________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in "Risk Factors," and elsewhere in, or incorporated by reference
into, this prospectus.
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timing of significant orders from distributors and OEM customers, delays in the
introduction of enhancements to existing and new products, market acceptance of
existing and new products, competitive product introductions, the mix of
products sold, changes in the Company's distribution network, the failure to
anticipate changing customer product requirements, changes in the regulatory
environment, the cost and availability of components, the level of royalties
from and to third parties and general economic conditions.* The Company
generally does not operate with a significant order backlog, and a substantial
portion of the Company's revenue in any quarter is derived from orders booked
in that quarter. Accordingly, the Company's sales expectations are based
almost entirely on its internal estimates of future demand and not on firm
customer orders. The Company is making significant investments in sales and
marketing and in research and development, and if orders and sales do not meet
expectations, the Company's operating results will be materially adversely
affected. The Company expects to incur substantial quarterly operating losses
at least through the first half of 1997 and possibly longer.*
Reliance on Third Party Component Suppliers and Contract Manufacturers
The Company subcontracts the manufacturing of substantially all of its
products on a sole source basis to independent suppliers. Sole source
components include the Company's proprietary high integration serial ("HIS")
chip manufactured by AT&T Microelectronics that controls the signal
transmission between the Company's PageCard receiver and Serial I/O products
and the PC Card slot on the mobile computer, the PageCard receiver board and RF
display, which are purchased from Mitsubishi Corporation in Japan, the Ethernet
card purchased from Mitsubishi International Corporation in the United States,
and certain other cable and connector components. Although to date the Company
has generally been able to obtain adequate supplies of these components,
certain of these components are purchased on a purchase order basis, and the
Company does not have long-term supply contracts for these components. In
particular, the Company purchases HIS chips from AT&T Microelectronics,
Tamarack chips from Tamarack, Ethernet cards from Mitsubishi International and
Serial I/O cards from Hi-Tech Manufacturing by purchase order. There can be no
assurance that the Company will not be affected by component shortages.
Although the Company's suppliers are generally large, well financed
organizations, a supplier's experiencing financial or operational difficulties
that resulted in a reduction or interruption in supply to the Company would
materially adversely affect the Company's results of operations until the
Company established sufficient manufacturing supply through an alternative
source. The Company believes that there are alternative contract manufacturers
that could produce the Company's products, but is not pursuing agreements or
understandings with alternative sources. In the event of a reduction or
interruption of supply it could take a significant period of time for the
Company to qualify an alternative subcontractor, redesign the product as
necessary and commence manufacturing. The Company's inability in the future to
obtain sufficient sole or limited source components, or to develop alternative
sources, could result in delays in product introductions or shipments, which
could have a material adverse effect on the Company's results of operations.
Dependence on Third Party Strategic Alliances and Business Relationships
The Company's strategy is to establish strategic alliances and business
relationships with leading participants in various segments of the
communications and mobile computer markets.* The Company believes these
alliances enable it to take advantage of the superior financial resources,
technological capabilities, proprietary positions and market presences of these
companies in establishing and maintaining Socket's own position in the wireless
data communications industry. In accordance with this strategy, the Company
has entered into alliances or relationships with AT&T, Bell Mobility, Casio
Computer Co., Dell Computer, Ex Machina, GTE, London Pager, Mitsubishi, The
National Dispatch Center ("NDC"), PageNet and Stratus RTM.
The Company's success will depend not only on the Company's continued
relationships with these parties, but also on its ability to enter into
additional strategic arrangements with new partners on commercially reasonable
terms.* The Company believes that, in particular, relationships with
application software developers are extremely important in creating commercial
uses for the Company's products necessary to achieve growth.* Any future
_____________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in "Risk Factors," and elsewhere in, or incorporated by reference
into, this prospectus.
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relationships may require the Company to share control over its development,
manufacturing and marketing programs or to relinquish rights to certain
versions of its technology.
In particular, Mitsubishi's relationship with the Company includes technology
licensing, manufacturing and distribution rights. The Company has co-licensed
certain technologies applying to the PageCard receiver, has contracted with
Mitsubishi to supply the PageCard receiver and has granted Mitsubishi certain
distribution rights to the PageCard receiver on a worldwide basis excluding
North America. The Company's ability to manage the business relationship with
Mitsubishi effectively is important to the success and operating results of the
Company. The Company's operating results would be materially adversely
affected if it were required to replace Mitsubishi as a supplier. The Company
must purchase specified minimum volumes of the PageCard receiver to achieve
certain discounts which, if not obtained, could adversely affect the gross
margin or pricing for the PageCard.
The Company's relationship with NDC for SWiMS includes certain customer
service activities. NDC has agreements to page messages through PageNet and
other paging carriers. Should NDC go out of business, discontinue its
relationship with the Company or with PageNet or not be able to adequately
provide services for SWiMS, the market for the PageCard WMS would be materially
adversely affected until such time as a suitable replacement could be found.
Should PageNet go out of business, be incapable of providing low cost airtime
services or discontinue its relationship with NDC, the market for the PageCard
receiver and PageCard WMS would be materially adversely affected until such
time as a suitable replacement could be found.
The Company recently introduced its PageCard receiver and PageCard WMS in
France and the U.K. In France, paging services are provided by France Telecom
Mobiles Radiomessagerie, a nationwide paging network, and advanced messaging
services are provided by Stratus RTM. In the U.K., paging services are
provided by Hutchison Telecom, a nationwide paging network, and advanced
messaging services are provided by London Pager. The Company does not have any
commitment from any of these companies as to the level of sales and marketing
effort it will conduct or as to any minimum number of customers. Should the
sales and marketing effort of any of these companies fall short of
expectations, or should any of them go out of business or be incapable of
adequately providing wireless messaging services, the European market for the
PageCard receiver and PageCard WMS would be materially adversely affected until
such time as suitable replacements could be found.
Management of Growth
Depending on the extent of its future growth, the Company may experience a
significant strain on its management, operational and financial resources. The
Company's ability to manage its growth effectively may require it to continue
to implement and improve its operational and financial systems and may require
the addition of new management personnel. * In addition, three of the
Company's officers have joined the Company since March 1996. Martin Levetin
joined the Company in March 1996 as President and Chief Executive Officer,
Howard Case joined the Company in July 1996 as Vice President of Marketing and
John O'Leary joined the Company in August 1996 as Vice President of Sales. The
failure of the Company's management team to effectively manage growth, should
it occur, could have a material adverse impact on the Company's results of
operations.
Dependence on Key Employees
The Company's future success will depend in significant part upon the
continued service of certain key technical and senior management personnel, and
the Company's continuing ability to attract, assimilate and retain highly
qualified technical, managerial and sales and marketing personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
can retain its existing key managerial, technical or sales and marketing
personnel or that it can attract, assimilate and retain such employees in the
future. The loss of key personnel or the inability to hire, assimilate or
retain qualified personnel in the future could have a material adverse
_____________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in "Risk Factors," and elsewhere in, or incorporated by reference
into, this prospectus.
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effect upon the Company's results of operations. The Company does not have key
man life insurance for any of its employees.
Foreign Currency Fluctuations Affecting Costs
The PageCard receiver is supplied by Mitsubishi in Japan under an agreement
that provides for adjustment in the Company's purchase costs when the average
exchange rate of the Japanese yen is less than threshold levels of 95 yen to
the U.S. dollar (price increase) or more than 105 yen to the U.S. dollar (price
decrease). Purchase costs are adjusted by the ratio of the yen exchange rate
to the applicable threshold level. The Company experienced adjustments in 1995
as a result of exchange fluctuations. To date, such adjustments have not
materially affected the Company's costs but could do so in the future if the
Company cannot offset price increases through higher selling prices, other
operating efficiencies or a subsequent increase in the value of the dollar.
Distribution Risks, Product Returns and Warranties
The Company sells its products primarily through distributors, resellers and
OEMs. To date the Company has not achieved significant OEM sales and there can
be no assurance that the Company will achieve significant sales through this
channel. The Company's largest distributors, Tech Data, Inc. and Ingram Micro,
accounted for approximately 12% and 11%, respectively, of the Company's revenue
in 1995, and approximately 12.8% and 17.4%, respectively, of the Company's
revenue for the first nine months of 1996. The Company's agreements with OEMs,
distributors and resellers, in large part, are nonexclusive and may be
terminated on short notice by either party without cause. The Company's OEMs,
distributors and resellers are not within the control of the Company, are not
obligated to purchase products from the Company and may represent other lines
of products. A reduction in sales effort or discontinuance of sales of the
Company's products by its OEMs, distributors and resellers could lead to
reduced sales and could materially adversely affect the Company's operating
results. Use of distributors also entails the risk that distributors will
build up inventories in anticipation of a growth in sales. If such growth does
not occur as anticipated, these distributors may substantially decrease the
amount of product ordered in subsequent quarters. Such fluctuations could
contribute to significant variations in the Company's future operating results.
The distribution industry has been characterized by rapid change, including
consolidations and financial difficulties of distributors and the emergence of
alternative distribution channels. In addition, there are an increasing number
of companies competing for access to these channels. The loss or
ineffectiveness of any of the Company's major distributors could have a
material adverse effect on the Company's operating results. Moreover, the
Company is seeking to broaden its channels of distribution and intends to sell
its products through new distribution channels such as mass merchandisers. *
There can be no assurance that the Company will be able to successfully sell
its products through these new channels.
The Company allows its distributors to return a portion of their inventory to
the Company for full credit against other purchases. In addition, in the event
the Company reduces its prices, the Company credits its distributors for the
difference between the purchase price of products remaining in their inventory
and the Company's reduced price for such products. There can be no assurance
that actual returns and price protection will not have a material adverse
effect on future operating results, particularly since the Company seeks to
continually introduce new and enhanced products and is likely to face
increasing price competition. In addition, the Company's comprehensive two
year warranty for its wired products and one year warranty for its wireless
products permit customers to return any product if the product does not perform
as warranted. To date, the Company has not experienced any warranty claims,
returns, stock rotation exchanges or price protection adjustments materially
above those anticipated. However, future warranty claims, returns, stock
rotation exchanges, or price protection adjustments could be materially higher
then anticipated. The Company intends to continue to introduce new and
enhanced products, which could result in higher warranty or return claims due
to the risks inherent in the introduction of such products.* There can be no
assurance that warranty claims or returns will not have a material adverse
effect on future operating results.
_____________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in "Risk Factors," and elsewhere in, or incorporated by reference
into, this prospectus.
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<PAGE>
Export Sales
Export sales (sales to customers outside the United States) accounted for
approximately 40% of the Company's revenue in 1995 and 42% of revenue for the
nine months ended September 30, 1996, and the Company anticipates that export
sales will continue to account in 1996 for a significant portion of revenue. *
Accordingly, the Company's operating results are subject to the risks inherent
in export sales, including unexpected changes in regulatory requirements,
exchange rates, tariffs or other barriers and difficulties in managing foreign
sales operations.
Uncertainty of Protection of Patents and Proprietary Rights
The Company relies on a combination of patents, trademarks and non-disclosure
agreements in order to establish and protect its proprietary rights. The
Company has filed, and intends to continue to file, applications as appropriate
for patents covering its products.* There can be no assurance that patents will
issue from any of its pending applications or, if patents do issue, that the
claims allowed will be sufficiently broad to protect the Company's technology.
In addition, there can be no assurance that any patents issued to the Company
will not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide proprietary protection to the Company. Since U.S.
patent applications are maintained in secrecy until patents issue, and since
the publication of inventions in technical or patent literature tend to lag
behind such inventions by several months, the Company cannot be certain that it
was the first creator of inventions covered by its pending patent applications,
that it was the first to file patent applications for such inventions or that
the Company is not infringing on the patents of others. The Company has also
trademarked some of its proprietary product names and logos and claims
copyright protection for its proprietary software. Litigation may be necessary
to enforce the Company's patents, trademarks, copyrights or other intellectual
property rights, to protect the Company's trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on the
Company's business and results of operations regardless of the final outcome of
such litigation. Despite the Company's efforts to safeguard and maintain its
proprietary rights, there can be no assurance that the Company will be
successful in doing so or that the Company's competitors will not independently
develop or patent technologies that are substantially equivalent or superior to
the Company's technologies.
In addition, the laws of certain foreign countries do not protect the
Company's intellectual property rights to the same extent as do the laws of the
United States. Although the Company continues to implement protective measures
and intends to defend its proprietary rights vigorously, there can be no
assurance that these efforts will be successful. There can also be no
assurance that third parties will not assert intellectual property infringement
claims against the Company. Although no written claims or litigation related
to any such matter are currently pending against the Company, there can be no
assurance that none will be initiated, or that the Company would prevail in any
such litigation seeking either damages or an injunction against the sale of the
Company's products. Moreover, there can be no assurance that, if such an
injunction were to issue, the Company would be able to obtain any necessary
licenses on reasonable terms or at all.
Shares Eligible for Future Sale
Sales of substantial amounts of the Company's Common Stock in the public
market or the prospect of such sales by existing stockholders and
warrantholders could materially adversely affect the market price of the
Company's Common Stock. As of December 18, 1996 the Company had outstanding
3,028,976 shares of Common Stock. Of these shares, approximately 419,400
shares are restricted shares ("Restricted Shares") under the Securities Act of
1933, as amended (the "Securities Act") subject to contractual lock-up
agreements under which the holders of such shares and options have agreed that
they will not sell any shares owned by them (or subsequently acquired under any
option, warrant or convertible security owned prior to this Offering), except
_____________________
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in "Risk Factors," and elsewhere in, or incorporated by reference
into, this prospectus.
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<PAGE>
with the prior written consent of the Placement Agent, for certain periods of
time through January 6, 1997. All 419,400 Restricted Shares will be eligible
for sale on January 6, 1997. Sales in the public market of substantial amounts
of Common Stock or the perception that such sales could occur could depress
prevailing market prices for the Common Stock.
Possible Volatility of Stock Price
The trading price of the Company's Common Stock could be subject to
significant fluctuations in response to variations in quarterly operating
results, changes in analysts' estimates, announcements of technological
innovations by the Company or its competitors, general conditions in the mobile
computer or wireless data communications industries and other factors. In
addition, the stock market is subject to price and volume fluctuations that
affect the market prices for companies in general, and small capitalization,
high technology companies in particular, and are often unrelated to their
operating performance. No assurance can be given that the market price of the
Company's Common Stock will not experience significant fluctuations in the
future, including fluctuations which are unrelated to the Company's
performance.
Illiquidity of Trading Market
From the effective date of the Company's initial public offering (June 6,
1995) through November 26, 1996, the Company's Common Stock was listed on the
Nasdaq SmallCap Market. However, the Common Stock was de-listed from such
market effective November 27, 1996 and since then has traded on the OTC
Bulletin Board. The Company's Common Stock is also quoted on the Pacific Stock
Exchange. As a result of this de-listing, an investor will find it more
difficult to dispose of, or to obtain accurate quotations as to the price of,
the Company's securities. In addition, the Company's securities are now
subject to so-called "penny stock" rules that impose additional sales practice
and market making requirements on broker-dealers who sell and/or make a market
in such securities. Consequently, removal from the Nasdaq SmallCap Market
could affect the ability or willingness of broker-dealers to sell and/or make a
market in the Company's securities and the ability of purchasers of the
Company's securities to sell their securities in the secondary market.
No Anticipated Dividends
The Company has not previously paid any dividends on its Common Stock and for
the foreseeable future intends to continue its policy of retaining any earnings
to finance the development and expansion of its business.
Limitations on Liability and Indemnification Matters
As permitted by Delaware General Corporation Law, the Company has included in
its Certificate of Incorporation a provision to eliminate the personal
liability of its directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors, subject to certain exceptions. In
addition, the Bylaws of the Company provide that the Company is required to
indemnify its officers and directors under certain circumstances, including
those circumstances in which indemnification would otherwise be discretionary,
and the Company is required to advance expenses to its officers and directors
as incurred in connection with proceeding against them for which they may be
indemnified. The Company has entered into indemnification agreements with its
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law.
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<PAGE>
USE OF PROCEEDS
All 1,192,308 shares of Common Stock covered by this Prospectus may be
offered from time to time by one or all of the Selling Stockholders. The
Company will receive no part of the proceeds from such sales.
PRICE RANGE OF COMMON STOCK
From the effective date of the Company's initial public offering (June 6,
1995) through November 26, 1996, the Company's Common Stock was listed on the
Nasdaq SmallCap Market. However, the Common Stock was de-listed from such
market effective November 27, 1996 and since then has traded on the OTC
Bulletin Board under the symbol SCKT. The Company's Common Stock has been
quoted on the Pacific Stock Exchange under the symbol SOK since June 22, 1995.
Prior to June 6, 1995, there was no public market for the Common Stock. The
following table sets forth for the periods indicated the high and low closing
sale prices of the Common Stock as reported on the Nasdaq SmallCap Market.
1995 High Low
Quarter ended June 30, 1995 (from June 6, 1995) $6 3/4 $5 11/16
Quarter ended September 30, 1995 6 1/2 5 1/4
Quarter ended December 31, 1995 6 1/16 2 5/8
1996
Quarter ended March 31, 1996 4 3/4 3
Quarter ended June 30, 1996 7 3/8 2 7/8
Quarter ending September 30, 1996 4 3/8 2 7/8
Quarter ending December 31, 1996
(through December 18, 1996) 3 5/8 1 1/4
On December 18, 1996, the last sale price of the Common Stock on the OTC
Bulletin Board was $1.55 per share. As of December 18, 1996, there were
approximately 800 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future
earnings for the expansion and operation of its business and does not
anticipate paying cash dividends in the foreseeable future. The Company's bank
line of credit prohibits the payment of cash dividends without the written
consent of the lender.
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<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the names of the Selling Stockholders and the
number of shares of Common Stock being offered by each of them hereby. Upon
completion of the offering, assuming all shares of Common Stock being offered
are sold, none of the Selling Stockholders will own any shares of Common Stock.
The shares of Common Stock are being registered to permit secondary trading of
the shares of Common Stock, and the Selling Stockholders may offer shares of
Common Stock for resale from time to time. See "Plan of Distribution."
The Selling Stockholders acquired shares of Series A Convertible Preferred
Stock pursuant to Subscription Agreements (the "Agreements") dated as of
November 1, 1996, between the Company and each Selling Stockholder. The
Selling Stockholders purchased a total of 15,500 shares of Series A Convertible
Preferred Stock at a price of $100 per share. Each share of Series A
Convertible Preferred Stock is convertible at the option of the holder, in
whole or in part, at any time on or after December 31, 1996, into that number
of shares of Common Stock of the Company equal to $100 divided by the Common
Stock Price, which shall equal the lower of (a) $2 5/8 and (b) 65% of the
average bid price of the Company's Common Stock, on the OTC Bulletin Board, for
the five business days prior to the business day on which notice of conversion
is transmitted by the holder of such Share. The Common Stock Price shall be
subject to adjustment in certain events. For purposes of this Registration
Statement, the Company has assumed a Common Stock Price of $1.30.
The Selling Stockholders represented in the Subscription Agreements that they
were accredited investors and were purchasing the Series A Convertible
Preferred Stock and the Common Stock issuable upon exercise of the Series A
Convertible Preferred Stock for investment and not with a view to, or for a
sale in connection with, any distribution within the meaning of the Securities
Act. The Company has filed with the Securities and Exchange Commission under
the Securities Act a Registration Statement on Form S-3, of which this
Prospectus forms a part, with respect to the resale of the shares from time to
time on the OTC Bulletin Board or the Pacific Stock Exchange.
H.J. Meyers & Co., Inc. ("H.J. Meyers") acted as sales agent for the Company
in connection with the private placement. For the performance of such services
H.J. Meyers was paid a fee by the Company, including a warrant to purchase
435,393 shares of Common Stock.
Because the Selling Stockholders may sell all or some portion of the shares
covered by this Prospectus, no estimate can be given as to the number of shares
and the percentage of outstanding Common Stock that will be held by any of them
after any particular sale.
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<PAGE>
The following table and accompanying footnotes identify each Selling
Stockholder and based upon information provided to the Company, set forth
information as of November 25, 1996 with respect to the shares held by or
acquirable by, as the case may be, each Selling Stockholder. Except as
otherwise noted, the named beneficial owner has sole voting and investment
power with respect to the shares shown.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Owned
Before Offering (2) Shares After Offering (2)
------------------- Offered ------------------
Selling Stockholder (1) Number Percent Hereby Number Percent
- ----------------------------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Arnold Wong 19,230 * 19,230 - *
Berckeley Investment Group 384,615 9.1% 384,615 - *
Coutts & Co. AG 115,384 2.7% 115,384 - *
Harry Salzman 76,923 1.8% 76,923 - *
Jerry Houston 91,044 2.2% 38,461 52,583 1.2%
Julius Baer Securities 153,846 3.6% 153,846 - *
Peter G. Colmer 38,461 * 38,461 - *
Roderick Deleersnijder 38,461 * 38,461 - *
Ronald & Nancy Thomas
Family Trust 19,230 * 19,230 - *
Swedbank (Luxembourg) S.A. 192,307 4.6% 192,307 - *
Van Moer Santerre & Cie 76,923 1.8% 76,923 - *
Weinberg Family Trust 38,461 * 38,461 - *
</TABLE>
- -----------------
* Less than 1%
(1) To the Company's knowledge, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock shown
as beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes to this table.
(2) Percentage ownership is based on: (i) 3,028,976 shares of Common Stock
outstanding as of November 25, 1996, and any shares issuable pursuant to
warrants or options held by the person or group in question which may be
exercised or converted on November 25, 1996 or within 60 days thereafter;
and (ii)after the offering, assumes sale of all shares offered hereby.
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<PAGE>
PLAN OF DISTRIBUTION
The Selling Stockholders will act independently of the Company in making
decisions with respect to the timing, manner and size of each sale of the
Common Stock covered hereby. The Selling Stockholders may sell the Shares
being offered hereby: (i) on the OTC Bulletin Board, on the Pacific Stock
Exchange, or otherwise at prices and at terms then prevailing or at prices
related to the then current market price; or (ii)in private sales at negotiated
prices directly or through a broker or brokers, who may act as agent or as
principal or by a combination of such methods of sale. The Selling
Stockholders and any underwriter, dealer or agent who participate in the
distribution of such shares may be deemed to be "underwriters" under the
Securities Act, and any discount, commission or concession received by such
persons might be deemed to be an underwriting discount or commission under the
Securities Act.
Any broker-dealer participating in such transactions as agent may receive
commissions from the Selling Stockholders (and, if acting as agent for the
purchaser of such shares, from such purchaser). Usual and customary brokerage
fees will be paid by the Selling Stockholders. Broker-dealers may agree with
the Selling Stockholders to sell a specified number of shares at a stipulated
price per share, and, to the extent such a broker-dealer is unable to do so
acting as agent for the Selling Stockholders, to purchase as principal any
unsold shares at the price required to fulfill the broker-dealer commitment to
the Selling Stockholders. Broker-dealers who acquire shares as principal may
thereafter resell such shares from time to time in transactions (which may
involve crosses and block transactions and which may involve sales to and
through other broker-dealers, including transactions of the nature described
above) in the over-the-counter market, in negotiated transactions or by a
combination of such methods of sale or otherwise at market prices prevailing at
the time of sale or at negotiated prices, and in connection with such resales
may pay to or receive from the purchasers of such shares commissions computed
as described above.
The Company has advised the Selling Stockholders that the anti-manipulation
Rules 10b-6 and 10b-7 under the Exchange Act may apply to sales of Shares in
the market and to the activities of the Selling Stockholders and their
affiliates. In addition, the Company will make copies of this Prospectus
available to the Selling Stockholders and has informed them of the need for
delivery of copies of this Prospectus to purchasers on or prior to sales of the
Shares offered hereby. The Selling Stockholders may indemnify any broker-
dealer that participates in transactions involving the sale of the shares
against certain liabilities, including liabilities arising under the Securities
Act. Any commissions paid or any discounts or concessions allowed to any such
broker-dealers, and any profits received on the resale of such shares, may be
deemed to be underwriting discounts and commissions under the Securities Act if
any such broker-dealers purchase shares as principal.
The Selling Stockholders have advised the Company that no sale or
distribution, other than as disclosed herein, will be effected until after this
Prospectus shall have been appropriately amended or supplemented, if required,
to set forth the terms thereof. The Selling Stockholders have also agreed that
if any holder of such securities shall propose to sell any securities pursuant
to the Registration Statement, it shall notify the Company of its intent to do
so at least three full business days prior to such sale. At any time within
such period, the Company may refuse to permit the holder of such securities to
resell any securities pursuant to the Registration Statement. In order to
exercise this right, the Company must deliver a certificate in writing to the
holder of such securities to the effect that a delay in such sale is necessary
because a sale pursuant to such Registration Statement in its then-current form
could constitute a violation of the federal securities laws. In no event shall
such delay exceed ten trading days, provided that if, prior to the expiration
of such ten trading day period, the Company delivers a certificate in writing
to the holder of such securities to the effect that a further delay in such
sale beyond such ten trading day period is necessary because a sale pursuant to
such registration statement in its then-current form could constitute a
violation of the federal securities laws, the Company may refuse to permit the
holder of such securities to resell any Registrable Securities pursuant to the
registration statement for an additional period not to exceed ten trading days.
In order to comply with the securities laws of certain states, if applicable,
the Common Stock will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In addition, in certain states, the Common Stock
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<PAGE>
may not be sold unless such shares have been registered or qualified for sale
in the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.
At the time a particular offer of the shares of Common Stock registered
hereunder is made, if required, a Prospectus Supplement will be distributed
that will set forth the number of shares being offered and the terms of the
offering including the name of any underwriter, dealer or agent, the purchase
price paid by any underwriter for securities purchased from any discount,
commission and other item constituting compensation and any discount,
commission or concession allowed or reallowed or paid to any dealer, and the
proposed selling price to the public.
There can be no assurance that the Selling Stockholders will sell all or any
of the shares of Common Stock offered hereunder.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.
EXPERTS
The financial statements of Socket Communications, Inc. appearing in Socket
Communications, Inc.'s Annual Report (Form 10-KSB) for the year ended December
31, 1995, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon and incorporated herein by reference. Such
financial statements are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII of the Company's Certificate of
Incorporation and Article VI of the Company's Bylaws provide for
indemnification of the Company's directors, officers, employees and other
agents to the maximum extent permitted by Delaware Law. In addition, the
Company has entered into Indemnification Agreements with its officers and
directors and certain stockholders.
Insofar as indemnification by the Company for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the provisions referenced above or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer, or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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