<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
Commission file number 1-13810
SOCKET COMMUNICATIONS, INC.
(Name of small business issuer as specified in its charter)
Delaware 94-3155066
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
37400 Central Court, Newark, CA 94560
(Address of principal executive offices including zip code)
(510) 744-2700
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Number of shares of Common Stock ($0.001 par value) outstanding as of
November 10, 1997 was 6,501,275 shares.
Page 1
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INDEX
PAGE NO.
Part I. Financial information --------
Condensed Balance Sheets - September 30, 1997 and
December 31, 1996 ....................................... 3
Condensed Statements of Operations - Three Months and Nine
Months Ended September 30, 1997 and 1996 ................ 4
Condensed Statements of Cash Flows - Nine Months Ended
September 30, 1997 and 1996 ............................. 5
Notes to Condensed Financial Statements ...................... 6-9
Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................. 10-20
Part II. Other information
Item 2. Changes in Securities and Use of Proceeds ............ 21
Item 6. Exhibits and Reports on Form 8-K ..................... 22
Signatures ................................................... 23
Page 2
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SOCKET COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1997 1996*
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 161,070 $ 618,344
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . 813,696 833,259
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812,056 738,808
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 22,823 20,523
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 1,809,645 2,210,934
Property and equipment:
Machinery and office equipment. . . . . . . . . . . . . . . . . . . 554,777 495,199
Computer equipment. . . . . . . . . . . . . . . . . . . . . . . . . 509,850 452,713
------------- -------------
1,064,627 947,912
Accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . (741,932) (535,387)
------------- -------------
322,695 412,525
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,788 48,235
------------- -------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,203,128 $2,671,694
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit . . . . . . . . . . . . . . . . . . . . . . . . $ 421,715 $ 322,743
Convertible subordinated notes. . . . . . . . . . . . . . . . . . . 1,600,000 --
Accounts payable and accrued expenses . . . . . . . . . . . . . . . 1,922,492 1,295,913
Accrued payroll and related expenses. . . . . . . . . . . . . . . . 311,411 230,758
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . 199,436 238,776
Current portion of capital leases and equipment financing notes . . 65,968 109,236
------------- -------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . 4,521,022 2,197,426
Long-term portion of capital leases and equipment financing notes. . . 52,021 102,735
Stockholders' equity:
Undesignated preferred stock, $0.001 par value:
Authorized shares - 3,000,000
Issued and outstanding shares, Series A: 3,246 at
September 30, 1997 and 15,500 at December 31, 1996 . . . . . . 375,859 1,793,813
Common stock, $0.001 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 5,589,765 at September 30,
1997, and 3,028,976 at December 31, 1996 . . . . . . . . . . . 5,590 3,029
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 12,833,090 11,413,920
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (15,584,454) (12,839,229)
------------- -------------
Total stockholders' equity (deficit) . . . . . . . . . . . . . (2,369,915) 371,533
------------- -------------
Total liabilities and stockholders' equity (deficit). . . . $ 2,203,128 $ 2,671,694
------------- -------------
------------- -------------
</TABLE>
- ----------------
* Derived from audited financial statements.
See acompanying notes.
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SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
1997 1996 1997 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product ................................. $ 1,242,585 $ 1,117,218 $ 3,427,032 $ 3,242,668
Royalty and other ....................... 107,434 35,397 116,427 172,187
------------ ----------- ----------- -----------
Total revenue ........................ 1,350,019 1,152,615 3,543,459 3,414,855
Cost of revenue ............................ 681,479 598,805 1,767,186 1,886,854
------------ ----------- ----------- -----------
Gross profit ............................... 668,540 553,810 1,776,273 1,528,001
Operating expenses:
Research and development ................ 260,110 259,983 805,002 774,520
Sales and marketing ..................... 651,710 698,010 2,204,744 2,026,103
General and administrative .............. 495,222 436,225 1,361,026 1,211,410
------------ ----------- ----------- -----------
Total operating expenses ............. 1,407,042 1,394,218 4,370,772 4,012,033
------------ ----------- ----------- -----------
Operating loss ............................. (738,502) (840,408) (2,594,499) (2,484,032)
Interest income ............................ 17 2,644 2,158 26,776
Interest expense ........................... (45,333) (15,173) (108,791) (35,842)
------------ ----------- ----------- -----------
Net loss ................................... $ (783,818) $ (852,937) $(2,701,131) $(2,493,098)
Preferred stock dividend ................... (5,156) ----------- (44,094) -----------
------------ ----------- ----------- -----------
Net loss applicable to common
stockholders ............................... $ (788,974) $(2,745,225)
------------ -----------
------------ -----------
Net loss per share applicable to
common stockholders ........................ $ (0.14) $ (0.57)
------------ -----------
------------ -----------
Net loss per share ......................... $ (0.28) $ (0.83)
----------- -----------
----------- -----------
Weighted average shares outstanding .. 5,541,844 3,021,168 4,783,992 3,008,530
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
</TABLE>
See accompanying notes.
Page 4
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SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ....................................................... $ (2,701,131) $ (2,493,098)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .............................. 206,545 170,351
Changes in operating assets and liabilities:
Accounts receivable ...................................... 19,563 180,328
Inventories .............................................. (73,248) (210,982)
Prepaid expenses ......................................... (2,300) (16,411)
Other assets ............................................. (22,553) 18,038
Accounts payable and accrued expenses .................... 612,803 279,133
Accrued payroll and related expenses ..................... 80,653 (65,567)
Deferred revenue ......................................... (39,340) 19,285
-------------- --------------
Net cash used in operating activities .................. (1,919,008) (2,118,923)
INVESTING ACTIVITIES
Purchase of equipment .......................................... (116,715) (152,077)
-------------- --------------
Net cash used in investing activities .................. (116,715) (152,077)
FINANCING ACTIVITIES
Payments on capital leases and equipment financing notes ....... (93,982) (88,708)
Proceeds from equipment financing .............................. -- 85,861
Proceeds from issuance of convertible notes .................... 1,600,000 --
Preferred stock dividends paid ................................. (30,318) --
Stock options and warrants exercised ........................... 3,777 18,227
Proceeds from borrowing under bank line of credit .............. 98,972 231,004
-------------- --------------
Net cash provided by financing activities .............. 1,578,449 246,384
-------------- --------------
Net (decrease) in cash and cash equivalents ...................... (457,274) (2,024,616)
Cash and cash equivalents at beginning of period ................ 618,344 2,406,655
-------------- --------------
Cash and cash equivalents at end of period ...................... $ 161,070 $ 382,039
-------------- --------------
-------------- --------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest ......................................... $ 13,771 $ 35,842
Dividends accrued but unpaid ................................... $ 13,776 --
</TABLE>
See accompanying notes.
Page 5
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SOCKET COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements of Socket Communications, Inc. (the
"Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB item 310(b). Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for fair presentation have been included.
The financial statements have been prepared on a going concern basis. The
Report of Independent Auditors on the Company's financial statements for the
year ended December 31, 1996 included in Form 10-KSB contained an explanatory
paragraph which indicated substantial doubt about the Company's ability to
continue as a going concern because of the Company's recurring operating
losses and the need for additional financing. At September 30, 1997, the
Company has an accumulated deficit of $15,584,454. The Company will require
additional financing during 1997 and ultimately will need to achieve
profitable operations. The Company believes that sufficient outside financing
sources will be available, however, there can be no assurance that the
Company will be able to obtain such financing on commercially reasonable
terms, if at all, and such terms are likely to be dilutive to existing
stockholders. If the Company is unable to obtain the necessary funds, other
more substantial restructuring options may be necessary which may have
adverse effects on the Company's operations. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of assets and liabilities that may result from the outcome of this
uncertainty.
Operating results for the three months and nine months ended September 30,
1997 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997.
NOTE 2 - CASH EQUIVALENTS
Cash equivalents consist mainly of money market funds which are highly
liquid financial instruments that are readily convertible to cash. The
Company has not incurred losses related to these instruments. As of
September 30, 1997 and December 31, 1996, the Company had no material
investments in debt or equity securities.
NOTE 3 - INVENTORIES
Inventories consist principally of raw materials and sub-assemblies,
which are stated at the lower of cost (first-in, first-out) or market.
September 30, December 31,
1997 1996
-------------------------------
Raw materials and sub-assemblies ......... $ 790,955 $ 712,106
Finished goods ........................... 21,101 26,702
-------------------------------
$ 812,056 $ 738,808
-------------------------------
-------------------------------
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NOTE 4 - INCOME TAXES
Due to the Company's loss position, there was no provision for income
taxes for the three months and nine months ended September 30, 1997 and 1996.
NOTE 5 - NET LOSS PER SHARE AND NET LOSS PER SHARE APPLICABLE TO COMMON
STOCKHOLDERS
Net loss per share is calculated using the weighted average number of
common shares outstanding during the period. Common equivalent shares are
excluded from the calculation as the effect is antidilutive.
The Company is required to pay dividends on outstanding shares of its
Series A Convertible Preferred Stock. Dividends of $5,156 and $44,094 for
the quarter and nine months ended September 30, 1997 were added to the net
loss for the periods to determine the net loss per share applicable to common
stockholders. The net loss for the quarter and nine month periods ended
September 30, 1997 (excluding the effect of the dividends) was $(0.14) per
share and $(0.56) per share, respectively.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact is
expected to result in no change in loss per share for the quarters and nine
month periods ended September 30, 1997 and 1996.
NOTE 6 - BANK FINANCING ARRANGEMENTS
The Company entered into a credit agreement (the Agreement) with a bank,
which commenced in July 1995 and expires on December 15, 1997. The Agreement
is secured by the Company's current and future assets. The credit facility
under the Agreement allows the Company to borrow up to $500,000 based on the
level of qualified receivables. The Agreement contains covenants that
require the Company to maintain certain financial ratios. The Company was not
in compliance with the covenants at September 30, 1997 and December 31, 1996
and has obtained a temporary waiver through the expiration date. As of
September 30, 1997 there were $421,715 outstanding in borrowings under the
Agreement.
In October 1997, the Company entered into an international credit
agreement (the International Agreement) with a commercial lending institution
which expires on August 15, 1998. The International Agreement is secured by
the Company's international receivables and by the Company's current and
future assets. The credit facility under the International Agreement allows
the Company to borrow up to $500,000 based on the level of qualified
international receivables.
Page 7
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NOTE 7 - SERIES A CONVERTIBLE PREFERRED STOCK
On November 1, 1996, the Company sold 15,500 shares of its Series A
Convertible Preferred Stock ("Series A Stock") at $100 per share. The
holders of the Series A Stock are entitled to receive dividends at an annual
rate of 6%. Each share of Series A Stock was convertible at any time from
January 2, 1997 through November 1, 1997 (at which time conversion was
mandatory) at the option of the holder into that number of shares of the
Company's Common Stock equal to 100 divided by the lower of (a) 65% of the
average bid price of the Company's common stock as reported on the OTC
bulletin board for the five business days prior to the date of conversion
notice, or b) $2 5/8. During the nine month period ended September 30,
1997, holders of Series A Stock converted 12,254 shares of Series A Stock
into 2,555,139 common shares. As of November 1, 1997, all 15,500 shares had
converted into 3,466,649 common shares.
NOTE 8 - CONVERTIBLE SUBORDINATED NOTES
On January 29, 1997, the Company received a $500,000 loan from Cetronic
AB pursuant to a subordinated secured convertible promissory note (the
"Cetronic Note") issued by the Company to Cetronic. The interest rate on the
Cetronic Note is 8% and the term prior to its amendment was six months, with
the principal and accrued interest thereon convertible into the Company's
Common Stock at $1.00 per share at any time during the term at the option of
Cetronic. The Company may also prepay the Cetronic Note in whole or in part
at any time upon prior written notice to Cetronic. The Cetronic Note is
secured by certain marketing and manufacturing rights for the FLEX (a high
speed paging protocol) and ERMES/POCSAG (a worldwide standard for
transmitting alphanumeric messages to paging receivers) products being
developed jointly by Socket and Cetronic. Pursuant to signing a Combination
Agreement with Cetronic AB (see Note 9), the due date of this note was
extended to December 12, 1997.
On February 14, 1997, the Company received an aggregate of $500,000 in
loans from certain Cetronic shareholders (the "Cetronic Shareholders")
pursuant to subordinated convertible promissory notes issued by the Company
to the Cetronic Shareholders. The terms of each note are identical to the
terms of the Cetronic Note except that these notes are unsecured. Effective
as of their initial due date of August 14, 1997, the notes were amended to
extend their due date to August 14, 1998 and to reduce their conversion price
from $1.00 per share to $0.50 per share.
On June 12, 1997, pursuant to the Combination Agreement, the Company
received an additional $500,000 pursuant to unsecured subordinated
convertible promissory notes issued by the Company to Cetronic and an
additional $100,000 pursuant to unsecured subordinated convertible promissory
notes issued by the Company to the Company's directors or entities affiliated
with such directors with a due date of December 12, 1997. The terms of each
note are identical to the terms of the Cetronic Note except that these notes
are unsecured. On November 7, 1997, the notes to the Company's directors or
affiliated entities were further amended to extend their due date to December
12, 1998 and to reduce their conversion price from $1.00 per share to $0.53
per share.
Page 8
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On November 7, 1997, the Company received an additional $150,000 pursuant
to unsecured subordinated convertible promissory notes issued by the Company
to certain Cetronic shareholders. The terms of each note are identical to the
terms of the notes issued on February 14, 1997 to certain Cetronic
shareholders as amended. Also on November 7, 1997, the Company received an
additional $100,000 from a director of the Company. The terms of this note
are identical to the director notes issued on June 12, 1997 as amended.
NOTE 9 - AGREEMENT TO COMBINE WITH CETRONIC AB
On June 12, 1997, the Company and Cetronic AB signed a definitive
Combination Agreement. Under the terms of the Combination Agreement, the
Company will issue up to $11.7 million in Socket common stock in an exchange
offer for all the common shares of Cetronic AB. The number of shares in the
exchange offer will be determined by dividing $11.7 million by 80 percent of
the average market price of the Company's common stock over a 20 day period
prior to the expiration of the exchange offer, with a minimum of 5.2 million
and a maximum of 15.6 million common shares to be issued to Cetronic
shareholders in the combination. The purchase price in U.S. dollars will be
adjusted for currency fluctuations between the U.S. Dollar and the Swedish
Krona. The combination is subject to shareholder approval of both companies
and satisfaction of conditions to closing. The transaction will be accounted
for using the purchase method of accounting. The Combination Agreement, if
not extended, expires on December 12, 1997.
NOTE 10 - STOCK OPTION/STOCK ISSUANCE PLAN
At the Annual Meeting of Stockholders of the Company, held on June 17,
1997 and reconvened on July 1, 1997, the stockholders approved an amendment
to the 1995 Stock Plan to reserve an additional 300,000 shares of Common
Stock for issuance under the Plan.
Page 9
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SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SECTION 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 THE
FORWARD-LOOKING STATEMENTS. FOR A MORE COMPLETE DISCUSSION OF THE FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE, SEE "FACTORS THAT MAY AFFECT FUTURE
OPERATING RESULTS AND STOCK PRICE" BEGINNING ON PAGE 14.
OVERVIEW
The Company's family of serial PC card products and Ethernet card
products for PC Card mobile computers are its principal sources of revenues.
Beginning in December 1996, the Company expanded its serial and Ethernet card
lines into a family of PC card products including, in December 1996, a
ruggedized serial card, a dual serial card and a serial/Ethernet combination
card, and in October 1997, a barcode scanner PC card and a low power Ethernet
card for Windows CE handheld computers. The Company also sells a PageCard PC
Card wireless messaging system introduced in January 1995 and also sold in
the first half of 1996 a GPS card, which was subsequently discontinued. In
addition, the Company earns royalties from sale of certain of the Company's
products by the third party manufacturers of those products, and service
royalties on its Socket Wireless Messaging Services ("SWiMS") and on paging
revenues of certain third party paging carriers.
The Company was incorporated in March 1992 and has incurred significant
operating losses in every fiscal period since inception, and the Company
expects to incur substantial quarterly operating losses at least through the
end of fiscal 1997 and probably longer. As of September 30, 1997, the
Company had a net capital deficiency of $2,369,915 and a working capital
deficit of $2,711,377. Accordingly, it is likely that the Company will
require additional funding in 1998 to meet its working capital needs. The
inability to obtain such funding could require the Company to significantly
reduce or suspend operations, sell additional securities on terms that are
highly dilutive to investors or otherwise have a material adverse effect on
its financial condition or operating results. See "Factors That May Affect
Future Operating Results and Stock Price."
On June 12, 1997, the Company and Cetronic AB signed a definitive
Combination Agreement. Under the terms of the Combination Agreement, the
Company will issue up to $11.7 million in Socket common stock in an exchange
offer for all the common shares of Cetronic AB. The number of shares in the
exchange offer will be determined by dividing $11.7 million by 80 percent of
the average market price of the Company's common stock over a 20 day period
prior to the expiration of the exchange offer, with a minimum of 5.2 million
and a maximum of 15.6 million common shares to be issued to Cetronic
shareholders in the combination. The purchase price in U.S. dollars will be
adjusted for currency fluctuations between the U.S. Dollar and the Swedish
Krona. The combination is subject to shareholder approval of both companies
and satisfaction of conditions to closing. The transaction will be accounted
for using the purchase method of accounting. The Combination Agreement, if
not extended, expires on December 12, 1997. The Combination Agreement is not
expected to close by its expiration date. There can be no assurance that the
Combination Agreement will be extended at that time, or, if extended, that
the Combination will ultimately be consummated. Failure of the Company to
consummate the transaction would have a material adverse effect on the
Company's financial condition, results of operations and the liquidity of the
Company's stock price.
Page 10
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SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
Revenue for the quarter and nine months ended September 30, 1997 of
$1,350,019 and $3,543,459 increased 17% and 4%, respectively, in comparison
to the corresponding periods a year ago. The increase in product revenue for
the quarter ended September 30, 1997 over the same quarter in 1996 resulted
primarily from volume increases in sales of the Company's Ethernet PC cards,
due in part to a large order from a major customer. Other revenue for the
quarter included $100,000 in sales of prototype wireless receiver products.
The increase of 4% for the nine months ended September 30, 1997 resulted from
higher volumes of Serial PC Card and Ethernet PC Card sales for the nine
month period in comparison to the same period one year ago, partially offset
by lower sales of these products in the first quarter of 1997 compared to the
first quarter of 1996. Sales of PageCards, and of GPS cards in the first
half of 1996, were less than 10% of total revenue for the periods presented.
PRODUCT GROSS PROFIT
Product gross profit, excluding royalty and other revenue, is equal to
product revenue less the cost of revenue, because the costs of royalty and
other revenue generally are negligible. The Company's product gross profit
for the third quarter of 1997 was 45% of product revenue compared to 46% for
the same quarter a year ago. Product gross profit for the third quarter of
1997 compared to the third quarter one year ago reflected higher margins for
new serial PC card products introduced at the end of 1996 and manufacturing
cost reductions, offset by a higher percentage mix of the lower margin
Ethernet PC card revenue. The Company's product gross profit for the nine
month period in 1997 was 48% of product revenue compared to 42% for the same
period a year ago. The increase was primarily due to higher gross margins on
new serial PC card products and manufacturing cost reductions for serial PC
cards.
RESEARCH AND DEVELOPMENT
Research and development expenses for the quarter and nine months ended
September 30, 1997 were $260,110 and $805,002, respectively, relatively equal
to the corresponding periods a year ago, reflecting similar levels of
development activity in both years. The Company has not capitalized any
software development costs. The Company expects to maintain its level of
research and development in the fourth quarter of 1997.*
- ----------------
* 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 this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in Form 10-KSB for the year ended December 31,
1996.
Page 11
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SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SALES AND MARKETING
Sales and marketing expenses for the quarter and nine months ended
September 30, 1997 were $651,710 and $2,204,744, respectively, a 7% decrease
and a 9% increase over the corresponding periods a year ago. The decrease for
the third quarter compared to the previous year resulted from reduced
advertising and personnel costs. The increase for the nine month period over
the same period in 1996 resulted from higher advertising costs in the first
half of 1997 relating to new product introductions and from the cost of
completing certain marketing studies, partially offset by lower costs in the
third quarter of 1997. The Company expects to further reduce its sales and
marketing expense in the fourth quarter of 1997 resulting from a
reorganization of its sales and marketing activities along wired and wireless
product lines and a related reduction in total sales and marketing personnel
in the third quarter of 1997.*
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter and nine months ended
September 30, 1997 were $495,222 and $1,361,026, respectively, a 14% and 12%
increase over the corresponding periods a year ago. The increases primarily
reflected professional fees associated with the financing and merger
activities of the Company during 1997 and one-time severance costs for the
Company's CEO whose services terminated in April 1997, partially offset by
lower occupancy costs in 1997 from a move to smaller facilities in the fourth
quarter of 1996.
INTEREST INCOME AND EXPENSE
Interest income primarily reflects interest on cash balances. Interest
expense for the quarter and nine months ended September 30, 1997 was $45,333
and $108,791, respectively, and related to interest on equipment lease
financing obligations and interest on convertible subordinated debt issued in
1997. Interest expense for the quarter and nine months ended September 30,
1996 was $15,173 and $35,842, respectively, and related primarily to
interest on equipment lease financing obligations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities in the nine months ended September
30, 1997 was $1,919,008, resulting primarily from the net loss, an increase
in inventories and decreases in deferred revenues, partially offset by
decreases in accounts receivable and by increases in accounts payable and
accrued expenses and accrued payroll and related expenses. Net cash used for
operating activities in the nine months ended September 30, 1996 was
$2,118,923, resulting primarily from the net loss, an increase in inventories
and accrued payroll and related expenses, partially offset by increases in
accounts payable and accrued expenses and by decreases in accounts receivable.
- -----------------
* 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 this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in Form 10-KSB for the year ended December 31,
1996.
Page 12
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SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash provided by financing activities in the nine months ended
September 30, 1997 of $1,578,449 resulted from proceeds from the issuance of
subordinated convertible notes of $1,600,000 and an increase in borrowings
under the bank line of credit, partially offset by payments of capital leases
and equipment financing notes and payment of dividends to Series A preferred
stockholders. Net cash provided by financing activities in the nine months
ended September 30, 1996 of $246,384 primarily reflected borrowings under a
revolving credit line with a bank and equipment financing notes, partially
offset by payments of capital leases and equipment financing notes.
FUTURE CAPITAL NEEDS; INDEPENDENT AUDITORS' REPORT CONTAINED EXPLANATORY
PARAGRAPH REGARDING GOING CONCERN. As of September 30, 1997, the Company had
cash and cash equivalents of $161,070. The Company believes its existing
capital resources and revenue from operations will be insufficient to satisfy
its working capital requirements through the end of 1997. The Company will
need to raise additional capital to fund operations during the balance of
1997 and beyond, which the Company intends to seek through the issuance of
additional convertible subordinated notes as provided for in the Combination
Agreement with Cetronic (see Note 9 of Notes to Condensed Financial
Statements), through increased borrowings on the Company's bank line as the
levels of receivables permit, and through development funding from
development partners.* Further, upon completion of the combination with
Cetronic, Cetronic's cash balances would become available to the Company.
Cetronic raised $3.8 million in equity financing in June 1997, of which a
portion has been subsequently used for Cetronic operations and $500,000 has
been used for funding additional convertible subordinated notes to the
Company (see Note 8 to Condensed Financial Statements). The Report of
Independent Auditors on the Company's financial statements for the year ended
December 31, 1996 included in Form 10-KSB contains an explanatory paragraph
regarding the Company's need for additional financing and indicated
substantial doubt about the Company's ability to continue as a going concern
absent such financing. 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 Company's inability to complete the combination
with Cetronic or to otherwise secure the necessary funding would have a
material adverse affect on the Company's financial condition and results of
operations. The Company's actual working capital needs will depend upon
numerous factors, however, including the extent and timing of acceptance of
the Company's products in the market, the Company's operating results, the
progress of the Company's research and development activities, the cost of
increasing the Company's sales and marketing activities and the status of
competitive products, the costs of the combination with Cetronic, and the
timing and ultimate success at completing the combination, none of which can
be predicted with certainty.
- ---------------------
* 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 this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in Form 10-KSB for the year ended December 31,
1996.
Page 13
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS AND STOCK PRICE
FUTURE CAPITAL NEEDS; INDEPENDENT AUDITORS' REPORT CONTAINED EXPLANATORY
PARAGRAPH REGARDING GOING CONCERN. See "Liquidity and Capital Resources",
same title, in the preceding paragraph.
ILLIQUIDITY OF TRADING MARKET; POSSIBLE DELISTING OF SECURITIES FROM THE
PACIFIC EXCHANGE; RISK OF PENNY STOCK STATUS. From the effective date of
Socket's initial public offering (June 6, 1995) through November 26, 1996,
Socket'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 Nasdaq SmallCap Market
has recently adopted new, more stringent listing criteria. In order for the
Company to become listed in the Nasdaq SmallCap Market under the new listing
criteria, it must (i) either have net tangible assets of $4 million, a market
capitalization of $50 million or net income in two of the past three years of
$750,000; (ii) 1 million shares of public float; (iii) a market
capitalization of public float of $5 million; (iv) a bid price of $4.00 per
share; (v) three market makers; and (vi) 300 stockholders. The Company
currently does not meet these requirements, and there can be no assurance
that the Company will meet these requirements in any future period. Socket's
Common Stock is also quoted on the Pacific Exchange. However, because
Socket's stockholders' equity as of December 31, 1996 was below the
exchange's minimum capital requirements, the appropriateness of Socket's
continued listing thereon is currently being reviewed by the Pacific
Exchange's equity listing committee. In June 1997, the Pacific Exchange
advised Socket that it would next review Socket's continued qualification for
listing in December 1997. The Company currently falls below the Pacific
Exchange's minimum capital requirements and minimum share price. Accordingly,
there can be no assurance that such committee will not decide to initiate
delisting proceedings against Socket. If Socket's Common Stock remains
delisted from the Nasdaq SmallCap Market and becomes delisted from the
Pacific Exchange, the Company will become subject to the Commission's "penny
stock" rules and therefore an investor will find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, Socket's securities.
In the event that the Company's Common Stock is delisted from the Pacific
Exchange, its Common Stock will be subject to the so-called "penny stock"
rules under the Securities Exchange Act of 1934, as amended, which impose
additional sales practice and market making requirements on broker-dealers
who sell and/or make a market in such securities. For transactions covered
by the penny stock rules, a broker-dealer must make special suitability
determinations for purchasers and must have received the purchasers' written
consent to the transactions prior to sale. In addition, for any transaction
involving a penny stock, unless exempt, the rules require delivery prior to
any transaction in a penny stock of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure is also required
to be made about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, Socket's delisting from the
Pacific Exchange and its becoming subject to the rules on penny stocks would
affect the ability or willingness of broker-dealers to sell and/or make a
market in Socket's securities and therefore would severely adversely affect
the market liquidity for the Company's securities.
Page 14
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISKS ASSOCIATED WITH COMBINATION WITH CETRONIC AB. On June 12, 1997, the
Company and Cetronic AB signed a definitive Combination Agreement. Under the
terms of the Combination Agreement, the Company will issue up to $11.7
million in Socket common stock in an exchange offer for all the common shares
of Cetronic AB. The number of shares in the exchange offer will be
determined by dividing $11.7 million by 80 percent of the average market
price of the Company's common stock over a 20 day period prior to the
expiration of the exchange offer, with a minimum of 5.2 million and a maximum
of 15.6 million common shares to be issued to Cetronic shareholders in the
combination. The purchase price in U.S. dollars will be adjusted for
currency fluctuations between the U.S. Dollar and the Swedish krona. The
combination is subject to shareholder approval of both companies and
satisfaction of conditions to closing. The Combination Agreement, if not
extended, expires on December 12, 1997. If the Combination is consummated,
the combined company will be subject to a number of risks, including but not
limited to (i) risks relating to the integration of the operations of Socket
and Cetronic, including the risks of managing geographically dispersed
offices; (ii) risks associated with a variable exchange ratio that is
subject to fluctuations in Socket's stock price and the U.S. dollar/Swedish
krona exchange rate; (iii) the incurrence by the combined company of
significant non-recurring charges in connection with the transaction; (iv)
the dilutive effect of the issuance of additional shares of Common Stock in
the Combination and the depressant effect on the stock price that the
issuance of such shares may have; and (v) the risks associated with the
material interests that certain affiliates of the Company have in the
combination that are different from or in addition to the interests of
stockholders generally. Moreover, if the Combination is consummated, the
business of the combined company will be subject to the same risks that
currently face Socket on a stand alone basis, as well as risks associated
with increased international operations, managing more geographically
dispersed operations, increased exposure to currency fluctuations, and the
influence that Cetronic and its stockholders would have over the affairs of
the combined company. Accordingly, there can be no assurance that the
completion of the Combination would not have a material adverse effect on the
Company's business, operating results or financial condition or on the price
of the Company's stock.
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON MARKET PRICE OF
THE COMMON STOCK. As of September 30, 1997, there were 812,771 shares of
Common Stock issuable upon the exercise of options under Socket's 1995 and
1993 Stock Plans, as amended, and 757,590 shares of Socket Common Stock
issuable upon exercise of warrants. On November 1, 1997, all outstanding
shares of the Company's Series A Preferred Stock outstanding converted into
an aggregate of 3,466,649 shares of Common Stock, resulting in an adjustment
to the outstanding warrants so that after giving effect to such conversion,
such warrants are exercisable for 1,459,386 shares of the Company's Common
Stock. In addition, an aggregate of 377,358 shares of Common Stock may be
issued upon conversion of convertible promissory notes in the aggregate
amount of $200,000 held by certain directors of Socket or affiliated
entities, an aggregate of 1,300,000 shares of Common Stock may be issued upon
conversion of convertible promissory notes in the aggregate amount of
$650,000 held by certain stockholders of Cetronic, and an aggregate amount of
1,000,000 shares of Common Stock may be issued upon conversion of convertible
promissory notes in the aggregate amount of $1,000,000 plus accrued interest
held by Cetronic. All of the common shares, to the extent that they are
eligible or appear to be eligible for sale in the public market, could have a
materially adverse effect on the market price of the Socket Common Stock and
therefore make it more difficult for Socket to sell equity securities or
equity-related securities in the future at a time and price that Socket deems
appropriate.
Page 15
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HISTORY OF OPERATING LOSSES; NO ASSURANCE OF PROFITABILITY. Socket was
incorporated in March 1992 and has incurred significant operating losses in
every fiscal period since inception. Socket expects to incur substantial
quarterly operating losses at least through the end of fiscal 1997 and
probably longer. In order to become profitable, Socket must obtain continued
increases in the market acceptance of Socket's serial and Ethernet cards,
develop successful new products for new and existing markets, obtain market
acceptance of the PageCard receiver and enhanced PageSoft software products
requiring, in part, the development of third party applications using the
Company's wireless messaging capabilities, 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 Socket will meet any of these objectives or ever achieve
profitability.
EMERGING MARKET FOR WIRELESS DATA COMMUNICATION PRODUCTS
The market for wireless data communications products has been slow 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 has developed slowly, 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 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 believes that its products enable third parties to
develop and deliver 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 on either a
point to point or a group broadcasting basis. The Company's software
developers kit enables third parties to address such needs by page-enabling
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. The Company's software developer's kit is
designed to provide program interfaces for software developers to page-enable
their applications and to work with major Microsoft operating systems. The
Company is also developing a mobile information server that will extract
information from a web page, prepare the information for transmission over
the paging networks, and send the data to designated subscribers. The server
is expected to simplify the sending of data over the paging networks by
allowing data to be prepared for transmission by the server from a web page
instead of within the application program. Although a limited number of
page-enabled applications are now available, there can be no assurance that
any additional such applications will become available. Further, there can
be no assurance that such page-enabled applications will be developed, or if
developed, 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
Page 16
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
additional 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 frequencies approved by the Federal Communications Commission
("FCC") 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 with the
POCSAG protocol and may operate at different frequencies. If these new
technologies succeed, paging carriers may cease to support POCSAG. The
Company is jointly
- ------------------
* 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 this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in Form 10-KSB for the year ended December 31,
1996.
Page 17
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
developing with Cetronic AB a FLEX and ERMES version of the PageCard,
however, there is no assurance that the Company will be able to successfully
complete future products based upon these new technologies.
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.
RISK OF QUARTERLY FLUCTUATIONS OF OPERATING RESULTS; ABSENCE OF
SIGNIFICANT ORDER BACKLOG
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
the Company's products, the 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 and declines in the average selling price of the
Company's products, the mix of products sold, changes in the Company's
distribution network, changes in 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 could be materially
adversely affected.
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 GTE, Casio, Hitachi, NEC, Apple, Cetronic, Bell Mobility, PageNet, The
National Dispatch Center, Microsoft Corporation, Lucent Technologies, Welch
Allyn and Mitsubishi Corporation.
- ---------------------
* 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 this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in Form 10-KSB for the year ended December 31,
1996.
Page 18
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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.
DEPENDENCE ON KEY EMPLOYEES; NEED TO RECRUIT NEW CHIEF EXECUTIVE OFFICER
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 effect upon the Company's results of operations. The Company is
currently operating without a full time CEO to replace the previous CEO who
resigned in April 1997. The failure of the Company to hire and retain a new
CEO could have a material adverse impact on the Company's results of
operations.
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, Ingram Micro and
Tech Data, accounted for approximately 17% and 12%, respectively, of the
Company's revenue in 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.
- --------------------
* 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 this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in Form 10-KSB for the year ended December 31,
1996.
Page 19
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 than 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.
EXPORT SALES
Export sales (sales to customers outside the United States) accounted for
approximately 40% of the Company's revenue in 1996 and export sales continue
to account in 1997 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.
- ------------------
* 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 this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in Form 10-KSB for the year ended December 31,
1996.
Page 20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Not applicable.
Item 2. Unregistered Securities sold by the Registrant.
Registrant has privately placed during 1997 $1,850,000 in 8% convertible
subordinated notes. Principle and interest convert at the option of the
holder into unregistered common stock of the Registrant. These notes are
described in more detail in Note 8 to Notes to Condensed Financial
Statements. The notes have been issued to Cetronic AB (see Note 9 to
Condensed Financial Statements), certain Cetronic shareholders and to certain
directors of the Registrant as described in more detail in this section. The
notes contain registration rights which may be exercised by the largest
holders following conversion. No underwriter or agent was used. Notes to
Cetronic shareholders were issued in reliance on Regulation S of the
Securities Act of 1933, as amended (see Item 6 below). Proceeds have been
used to meet the working capital requirements of the Company.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Conversion
Issue Date Due Date Holder Price Note Amount
---------- -------- ------ ----- -----------
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jan 29, 1997 Dec 12, 1997 Cetronic AB $1.00 per share $500,000
as amended
Jun 12, 1997
- ------------------------------------------------------------------------------------------------------------------------------
Feb 14, 1997 Aug 14, 1998 Cetronic shareholders: $0.50 per share
as amended Telenor Venture AS 300,000
Aug 14, 1997 ForetagsByggarna BV 140,000
8 Others ($2,000 to $20,000) 60,000
- ------------------------------------------------------------------------------------------------------------------------------
Jun 12, 1997 Dec 12, 1997 Cetronic AB $1.00 per share 500,000
- ------------------------------------------------------------------------------------------------------------------------------
Jun 12, 1997 Dec 12, 1998 Cetronic Directors: $0.53 per share
as amended Bass Trust (Affiliate of
Nov 7, 1997 Charlie Bass) 60,000
Jack Carsten 30,000
El Dorado entities (affiliate of
Gary Kalbach) 10,000
- ------------------------------------------------------------------------------------------------------------------------------
Nov 7, 1997 Nov 7, 1998 Cetronic shareholders: $0.50 per share
ForetagsByggarna 75,000
5 others ($5,000 to $50,000) 75,000
- ------------------------------------------------------------------------------------------------------------------------------
Nov 7, 1997 Dec 12, 1998 Bass Trust (Affiliate of
Charlie Bass) $0.53 per share 100,000
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Item 3 - 5. Not applicable.
Page 21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
a. The following exhibits are filed herewith:
EXHIBIT
NUMBER EXHIBIT TITLE
- ------ -------------
10.1 Form of Employment Agreement dated October 15, 1997 with: Micheal
Gifford, Executive Vice President Business Development and General
Manager, Wireless Products Division; Kevin Mills, Vice President of
Engineering and Operations and General Manager, Wired Products
Division,; and David Dunlap, Vice President Finance and
Administration, Chief Financial Officer and Corporate Secretary.
10.2 Form of Amended and Restated Convertible Subordinated Note
27.1 Financial Data Schedule (Edgar)
b. Reports on Form 8-K
On October 3, 1997, the Registrant filed a report on Form 8-K with respect to
the amendment and restatement of convertible promissory notes and the
issuance of investment options pursuant to the Securities Act of 1993, as
amended.
Page 22
<PAGE>
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.
SOCKET COMMUNICATIONS, INC.
---------------------------
Registrant
Date: November 14, 1997 /s/ David W. Dunlap
---------------------------------
David W. Dunlap
Vice President of Finance
and Administration and
Chief Financial Officer
Page 23
<PAGE>
EXHIBIT 10.1 FORM OF EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of October
15, 1997 (the "Effective Date") by and between Socket Communications, Inc., a
Delaware corporation (the "Company"), and ____________________ ("Executive").
WHEREAS, the Company desires to continue to employ Executive and
Executive desires to be employed by the Company upon the terms and conditions
set forth below;
NOW, THEREFORE, the Company and Executive agree as follows:
1. TERM OF THE AGREEMENT. The Company hereby employs Executive and
Executive hereby accepts employment with the Company under this Agreement
commencing on the Effective Date and expiring on December 31, 2000 (the
"Initial Employment Period") subject, however, to prior termination as
provided pursuant to Paragraph 5 of this Agreement.
2. DUTIES AND OBLIGATIONS.
a. Executive shall report to, and follow the instructions and wishes
of, the Company's Chief Executive Officer.
b. Executive agrees that to the best of his ability and experience,
he will at all times loyally and conscientiously perform all of the duties
and obligations required of and from him pursuant to the express and implicit
terms hereof.
3. DEVOTION OF ENTIRE TIME TO THE COMPANY'S BUSINESS.
a. During the term of his employment, Executive shall, during
regular business hours, devote all of his attention, knowledge, skills,
interests, and productive time to the business of the Company, and the
Company shall be entitled to all of the benefits and profits arising from or
incident to all work, services, and advice of Executive.
b. During the term of his employment, Executive shall not, directly
or indirectly, either as an employee, employer, consultant, agent, principal,
partner, stockholder, corporate officer, director, or in any other individual
or representative capacity, engage or participate in any business that is
competitive in any manner whatsoever with the business of the Company.
4. COMPENSATION AND BENEFITS.
a. BASE COMPENSATION. During the term of this Agreement, the
Company shall pay to Executive a base annual salary of [CURRENT BASE SALARY]
payable in equal semi-monthly installments in accordance with the Company's
payroll schedule. During the term of this
Page 1
<PAGE>
Agreement, Executive shall be eligible for annual salary and merit increases
in his base salary as determined in the sole discretion of the Company's
Board of Directors.
b. BONUS. During the term of this Agreement, Executive is entitled
to participate in the Company's Management Incentive Bonus Plan (the "Bonus
Plan") according to its terms as set by the Company's Board of Directors.
c. INSURANCE. Executive shall be entitled to the perquisites and
benefits generally available to other executive employees or their families
through group insurance programs sponsored by the Company.
d. PAID TIME OFF. Executive shall be entitled to accrue paid time
off ("PTO") in accordance with the Company's PTO policy applicable to all
employees. Executive can request payment of PTO to reduce the PTO balance by
up to 20% of the maximum by giving fifteen (15) days notice prior to a
payroll date if the PTO accrual is within 10 hours of reaching the maximum
PTO accrual.
e. SAVINGS PLAN. Executive shall be entitled to the perquisites and
benefits generally available to other executive employees through tax
deferred savings, pension and similar programs when and if sponsored by the
Company.
5. TERMINATION OF EMPLOYMENT.
a. Executive understands that either he or the Company may terminate
the employment relationship between them at any time, for any reason, with or
without Cause. For purposes of this Agreement, "Cause" for termination of
employment by the Company is defined as a determination in the sole
discretion of the Company's Board of Directors of the occurrence of any of
the following:
(i) gross misconduct or fraud by Executive;
(ii) Misappropriation of the Company's proprietary information
by Executive;
(iii) willful and continuing breach by Executive of his duties
under this Agreement after the Company has given notice to Executive thereof
and Executive has had 30 days in which to cure such breach.
b. If at any time during the Initial Employment Period, the Company
terminates Executive's employment without Cause, as defined above, or in the
event of a disability which causes the Executive to be unable to perform the
Executive's duties in a satisfactory manner, it shall provide to Executive
each of the following:
Page 2
<PAGE>
(i) Executive's regular base salary for a period of six (6)
months, payable on normal Company paydays during that six month period (the
"Period"). Executive will be entitled to receive this payment regardless of
whether or not he secures other employment during the Period.
(ii) Continued health insurance benefits at its own expense
pursuant to COBRA until the earlier of either: a) such time as Executive
becomes eligible for the health insurance benefits provided by another
employer; or b) the expiration of the Period. Executive agrees that should
he become eligible for health insurance benefits provided by another employer
during the Period, he will immediately provide written notice of such event
to the Company's Board of Directors.
(iii) For quarter in which the Executive is terminated or
disabled, he will receive the full bonus amount, pursuant to terms of the
Bonus Program, to which he would otherwise have been entitled had he remained
employed with Company. For the quarter following Executive's termination, he
will receive one-half the bonus amount, pursuant to terms of the Bonus
Program, to which he would otherwise have been entitled had he remained
employed with Company. Executive understands that he is not entitled to, nor
will he receive, any further pay-out under the Bonus Program.
(iv) Within thirty (30) days of the date of the termination
without Cause of Executive's employment, and pursuant to mutual agreement
between the Company and Executive, Executive may purchase at book value
certain items of Company property which were purchased by the Company for the
use of Executive, which may include a personal computer, cellular phone, and
other similar items.
Executive agrees that in the event he accepts employment directly or
indirectly, either as an employee, employer, consultant, agent, principal,
partner, stockholder, corporate officer, director, or in any other individual
or representative capacity, in any business that is competitive in any manner
whatsoever with the business of the Company, the Company may discontinue any
of the benefits set forth in this Paragraph 5(b) not payable as of the date
of such employment. Executive understands that in the event his employment
is terminated for any reason, with or without Cause, after December 31, 2000,
he is not entitled to receive any of the benefits set forth in this Paragraph
5(b).
c. In the event of the termination of this Agreement for any reason,
at any time, with or without Cause, the Company agrees that it will pay to
Executive all his accrued but unused PTO.
d. In the event that the Company alters Executive's reporting
structure at any time during the Initial Employment Period so that Executive
does not report directly to the Chief Executive Officer, Executive may elect
to resign his employment. In such case, Executive will be entitled to
receive all of the benefits set forth under Paragraph 5(b).
Page 3
<PAGE>
6. GOVERNING LAW. This agreement shall be interpreted, construed, governed,
and enforced according to the laws of the State of Delaware.
7. ATTORNEYS' FEES. In event of any arbitration or litigation concerning
any controversy, claim, or dispute between the parties arising out of or
relating to this Agreement or the breach or the interpretation hereof, the
prevailing party shall be entitled to recover from the losing party
reasonable expense, attorneys' fees, and costs incurred therein or in the
enforcement or collection of any judgment or award rendered therein. The
"prevailing party" means the party determined by the arbitrator or court to
have most nearly prevailed, even if such party did not prevail in all
matters, not necessarily the one in whose favor a judgment is rendered.
8. ARBITRATION. Any controversy between the parties hereto involving the
construction or application of any terms, covenants, or conditions of this
Agreement, or any claim arising out of or relating to this Agreement, except
with respect to prejudgment remedies, will be submitted to and be settled by
final and binding arbitration in San Jose, California, in accordance with the
rules of the American Arbitration Association then in effect, and judgment
upon the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof.
9. AMENDMENTS. No amendment or modification of the terms or conditions of
this Agreement shall be valid unless in writing and signed by the parties
hereto.
10. SEVERABILITY. All agreements and covenants contained herein are
severable, and in the event any of them shall be held to be invalid or
unenforceable, this Agreement shall be interpreted as if such invalid
agreements or covenants were not contained herein.
11. SUCCESSORS AND ASSIGNS. The rights and obligations of the Company under
this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of the Company. Executive shall not be entitled to
assign any of his rights or obligations under this Agreement.
12. ENTIRE AGREEMENT. This Agreement and the Proprietary Information and
Inventions Agreement signed by Executive on May 5, 1992, a copy of which is
attached hereto as Exhibit A, constitute the entire agreement between the
parties with respect to the employment of Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above.
EXECUTIVE: SOCKET COMMUNICATIONS, INC.:
/s/Executive By: /s/Charlie Bass
- --------------------------- ------------------------------
Its: Chairman and Acting CEO
Page 4
<PAGE>
EXHIBIT 10.2 FORM OF AMENDED AND RESTATED CONVERTIBLE SUBORDINATED NOTE
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH
A VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE
SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION AND QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED
CIRCUMSTANCES, AN OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL
FOR THE COMPANY, THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
SOCKET COMMUNICATIONS, INC.
AMENDED AND RESTATED
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
Newark, California
$______________ Date, 1997
SOCKET COMMUNICATIONS, INC., a Delaware corporation (the "Company"), for
value received, hereby promises to pay to the order of ________ or holder
("Holder") in lawful money of the United States at the address of Holder set
forth below, the principal amount of ____________ Dollars ($______), together
with simple interest at the rate of eight percent (8%) per annum (calculated
on the basis of actual days elapsed and a year of 365 days). Subject to the
following sentence, accrued interest shall be payable in cash only at the
time the Company pays any portion of the principal amount of this Note. If
this Note is converted pursuant to Section 4 hereof, accrued interest may be
converted as set forth therein; any accrued interest that is not so converted
shall be payable in cash.
This Note was originally executed on [date, 1997] in connection with a
Combination Agreement dated as of June 12, 1997 (the "Combination Agreement")
by and between the Company and Cetronic Aktiebolag [Publ], a Swedish
corporation ("Cetronic"), pursuant to which the Company will acquire all of
the outstanding shares of Cetronic and Cetronic will become a wholly-owned
subsidiary of the Company. This Note was amended and restated as of
[date, 1997] to, among other
Page 1
<PAGE>
things, extend the Maturity Date (as defined in Section 1(a) hereof), expand
the definition of Senior Indebtedness (as defined in Section 2(a) hereof),
and restate the Conversion Price (as defined in Section 4(a) hereof).
The following is a statement of the rights of Holder and the conditions
to which this Note is subject, and to which the Holder hereof, by the
acceptance of this Note, agrees.
1. PAYMENTS; PREPAYMENTS.
(a) All principal, interest and other amounts due hereunder shall be due
and payable on the earlier of (i) [Date] (the "Maturity Date") and (ii) the
day on which this Note becomes immediately due and payable pursuant to
Section 9 hereof.
(b) This Note may be prepaid, in whole or in part, from time to time ten
(10) business days after Holder receives written notice of such prepayment
from the Company; Holder shall then have until the end of such ten (10)
business day period to notify the Company in writing that it wishes to
convert all or part of the outstanding principal and accrued interest under
this Note into Common Stock pursuant to Section 4 below. Prepayments shall
be (i) reduced by any amounts that Holder desires to so convert into Common
Stock and then (ii) applied first to outstanding interest, and then to
principal.
(c) Upon payment in full of all principal and interest payable
hereunder, this Note shall be surrendered to Company for cancellation.
2. SUBORDINATION
(a) "Senior Indebtedness" means (A) the principal of and premium, if
any, and interest on indebtedness of the Company incurred pursuant to the
Promissory Note and Loan Agreement, each dated as of July 5, 1995, between
the Company and CivicBank of Commerce; and (B) all present and future
indebtedness, obligations, liabilities, claims, rights and demands of any
kind which may be now or hereafter owing from the Company to World Trade in
connection with that certain Note in the amount of $500,000 (or such lesser
amount as the Company and World Trade may finally agree) issued by the
Company in favor of World Trade and a related Commercial Security Agreement
and Commercial Pledge Agreement between the Company and World Trade,
including, without limitation, all principal, all interest, all costs and
attorneys' fees, all sums paid for the purpose of protecting World Trade's
rights in security (such as paying for insurance on collateral if the owner
fails to do so), and all other obligations of the Company to World Trade,
secured or unsecured, of any nature whatsoever. The Company agrees and the
holder of this Note, by acceptance thereof, agrees, expressly for the benefit
of the holder of the Senior Indebtedness, that, except as otherwise provided
herein, upon (i) an event of default under the Senior Indebtedness, or (ii)
any dissolution, winding up, or liquidation of the Company, whether or not in
bankruptcy, insolvency or receivership proceedings, the Company shall not
pay, and the holder of such Note shall not be entitled to receive, any amount
in respect of the principal and interest of such Note unless and
Page 2
<PAGE>
until the Senior Indebtedness shall have been paid or otherwise discharged.
Upon (1) an event of default under the Senior Indebtedness, or (2) any
dissolution, winding up or liquidation of the Company, any payment or
distribution of assets of the Company, which the holder of this Note would be
entitled to receive but for the provisions hereof, shall be paid by the
liquidating trustee or agent or other person making such payment or
distribution directly to the holders of the Senior Indebtedness ratably
according to the aggregate amounts remaining unpaid on the Senior
Indebtedness after giving effect to any concurrent payment or distribution to
the holders of the Senior Indebtedness. Subject to the payment in full of
the Senior Indebtedness and until this Note is paid in full, the holder of
this Note shall be subrogated to the rights of the holders of the Senior
Indebtedness (to the extent of payments or distributions previously made to
the holders of the Senior Indebtedness pursuant to this Section 2(a)) to
receive payments or distributions of assets of the Company applicable to the
Senior Indebtedness.
(b) This Section 2 is not intended to impair, as between the Company,
its creditors (other than the holders of the Senior Indebtedness) and the
holder of this Note, the unconditional and absolute obligation of the Company
to pay the principal of and interest on the Note or affect the relative
rights of the holder of this Note and the other creditors of the Company,
other than the holders of the Senior Indebtedness. Nothing in this Note
shall prevent the holder of this Note from exercising all remedies otherwise
permitted by applicable law upon default under the Note, subject to the
rights, if any, of the holders of the Senior Indebtedness in respect to cash,
property or securities of the Company received upon the exercise of any such
remedy.
3. EVENTS OF DEFAULT. The Company's failure to pay (i) when due any
principal payment on the due date hereunder or (ii) any interest or other
payment required under the terms of this Note on the date due, and failure to
make such payment within five (5) business days of Company's receipt of
Holder's written notice to Company of such failure to pay, shall constitute
an "Event of Default" under this Note.
4. CONVERSION.
(a) In lieu of receiving cash payment for principal amounts and accrued
interest due under this Note, Holder shall have the right to convert
outstanding principal and accrued interest under this Note into Common Stock
of the Company at a conversion price per share equal to $____ (the
"Conversion Price") at any time on or prior to the Maturity Date.
(b) In addition to the conversion right provided in Section 4(a) above,
upon an Event of Default, in lieu of receiving cash payment for principal
amounts and accrued interest due under this Note, Holder shall have the right
to convert outstanding principal and accrued interest under this Note into
Common Stock of the Company at a conversion price per share equal to the
lower of (i) the Conversion Price or (ii) 65% of the average closing price of
the Company's Common Stock on the OTC Bulletin Board or Nasdaq SmallCap
Market, as applicable, for the five (5) business days prior to the date of
the Event of Default.
-3-
<PAGE>
(c) Holder may exercise its conversion right by providing written notice
to the Company of Holder's intention to exercise its conversion right and the
amount of principal and accrued interest that it wishes to convert (the
"Conversion Amount") at least ten (10) days prior to the date on which it
wishes to convert (the "Conversion Date") (unless such notice is given
pursuant to the terms of Section 1(b) above, in which event notice shall
comply with the terms thereof). No fractional shares of Common Stock shall
be issued upon conversion of this Note. Promptly after the conversion of
this Note, the Holder shall surrender this Note, duly endorsed, at the
principal office of Company. At its expense, Company shall, as soon as
practicable thereafter (or as otherwise noted in the provisions above), issue
and deliver to such Holder at such principal office a certificate or
certificates for the number of shares of such Common Stock to which the
Holder shall be entitled upon such conversion (bearing such legends as are
required by applicable state and federal securities laws in the opinion of
counsel to Company). In addition, unless this Note has been fully converted,
a new Note representing the principal amount that shall not have been
converted into Common Stock shall also be issued to Holder as soon as
possible thereafter. Upon conversion of this Note in full, Company shall be
forever released from all its obligations and liabilities under this Note
including principal, interest and any other amounts due and owing pursuant
hereto. Any notice from the Holder of an election to convert by the Company
shall be irrevocable.
(d) If at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of the entire
outstanding principal amount and accrued interest under this Note, Company
will use its best efforts to take such corporate action as may be necessary,
in the opinion of its counsel, to increase its authorized but unissued shares
of Common Stock to such number of shares as shall be sufficient for such
purposes.
5. REGISTRATION RIGHT.
(a) Following the Maturity Date, and within a reasonable amount of time
following the conversion by Holder of any outstanding principal and accrued
interest under this Note into Common Stock of the Company, the Company will
use reasonable efforts to (i) file a registration statement under the
Securities Act of 1933, as amended (the "Securities Act") registering such
shares for resale to the public, (ii) have such registration statement
declared effective by the Securities and Exchange Commission, (iii) register
and qualify the securities covered by such registration statement under the
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holder (provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions,
unless the Company is already subject to service in such jurisdiction and
except as may be required by the Securities Act), (iv) cause all securities
registered pursuant hereunder to be listed on each securities exchange on
which similar securities issued by the Company are then listed, and (v) file
updates to such registration statement as necessary to keep it effective
until the date that all remaining such shares may be sold to the public
without registration within a period of 90 days; PROVIDED THAT, the Company
may suspend such registration for up to two periods of not more than 90 days
each in any 12-month period if necessary (x) to enable the Company to update
the registration statement or (y) to undertake another sale of securities.
-4-
<PAGE>
(b) All Registration Expenses (as hereafter defined) incurred in
connection with any registration pursuant to this Section 5 shall be borne by
the Company. "Registration Expenses" shall mean all expenses incurred by the
Company in complying with this Section 5, including, without limitation, all
registration, qualification and filing fees, printing expenses, fees and
disbursements of counsel for the Company, the reasonable cost of one special
legal counsel to represent Holder in any such registration, and blue sky fees
and expenses. "Registration Expenses" shall not include (if applicable) any
underwriting discounts or selling commissions.
(c) INDEMNIFICATION.
(i) The Company will indemnify the Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 5, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or
based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, preliminary
prospectus, offering circular or other document, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading, or any violation or any alleged violation by the Company of
any rule or regulation promulgated under the Securities Act or the Exchange
Act or any state securities law applicable to the Company in connection with
any such registration, qualification or compliance, and the Company will
reimburse each such Holder, each of its officers and directors, and each
person controlling such Holder, for any legal and any other expenses
reasonably incurred in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, as such expenses are
incurred, provided that the Company will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder or controlling person and stated to be specifically for use therein.
(ii) The Holder will indemnify the Company, each of its directors
and officers, and each person who controls the Company within the meaning of
Section 15 of the Securities Act against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained
in any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company, such directors,
officers or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, as such expenses are incurred, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue
-5-
<PAGE>
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon
and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder and stated to be specifically for use
therein.
6. REPRESENTATIONS AND WARRANTIES OF HOLDER. By its acceptance hereof,
Holder represents and warrants to Company that:
(a) Holder has been advised that this Note and the Common Stock of the
Company issuable upon conversion of the Note (with the Note and such Common
Stock being hereinafter collectively referred to as the "Securities") have
not been registered under the Securities Act, or any state securities laws
and, therefore, cannot be resold unless such Securities are registered under
the Securities Act and applicable state securities laws or unless an
exemption from such registration requirements is available. Holder has not
been formed solely for the purpose of making this investment and is acquiring
the Securities for its own account for investment, not as a nominee or agent,
and not with a view to, or for resale in connection with, the distribution
thereof. Holder has such knowledge and experience in financial and business
matters that such Holder is capable of evaluating the merits and risks of
such investment, is able to incur a complete loss of such investment and is
able to bear the economic risk of such investment for an indefinite period of
time.
(b) Holder acknowledges that Company has given Holder access to all
documents and other information required for Holder to make an informed
decision with respect to the acceptance of the Securities. In this regard,
Holder acknowledges that it has received and reviewed, among other things,
the following documents filed by the Company with the Securities and Exchange
Commission: (i) the Company's Quarterly Report on Form 10-QSB for the
quarters ended March 31, 1997 and June 30, 1997, (ii) the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1996, and (iii) the
Proxy Statement relating to the Company's 1997 Annual Meeting of Stockholders.
(c) At the time of both the offer and execution of the Note, the holder
was neither a United States citizen nor a person in the United States.
(d) During the term of the Note, the Holder does not intend to sell any
of the Company Common Stock issuable upon conversion of the Note to any
United States citizen or person in the United States.
7. ATTORNEYS' FEES. If the indebtedness represented by this Note or any
part thereof is collected in bankruptcy, receivership or other judicial
proceedings or if this Note is placed in the hands of attorneys for
collection after default, Company agrees to pay, in addition to the principal
and interest payable hereunder, reasonable attorneys' fees and costs incurred
by Holder.
8. NOTICES. Except as otherwise provided herein, all notices, requests,
demands, consents, instructions or other communications to or upon the
Company or Holder hereunder shall be
-6-
<PAGE>
by telecopy or in writing and telecopied, mailed or delivered to each party
at telecopier number or its address set forth below (or to such other
telecopy number or address as the recipient of any notice shall have notified
the other in writing). All such notices and communications shall be
effective (a) when sent by Federal Express or other overnight service of
recognized standing, on the business day following the deposit with such
service (if sent to an address in the same country as the sender) or on the
third business day following the deposit with such service (if sent to an
address in a different country from the sender); (b) when mailed, by
registered or certified mail, first class postage prepaid and addressed as
aforesaid through the United States Postal Service, upon receipt; (c) when
delivered by hand, upon delivery; and (d) when telecopied, upon confirmation
of receipt.
Holder: [Name of Holder]
[Address of Holder]
[City, State, ZIP of Holder]
_______________ (telephone)
_______________ (telecopy)
Company: Socket Communications, Inc.
37400 Central Court
Newark, CA 94560
Attention: Chief Financial Officer
(415) 744-2700 (telephone)
(415) 744-2727 (telecopy)
9. ACCELERATION. This Note shall become immediately due and payable (a)
upon an Event of Default, (b) if the Company commences any proceeding in
bankruptcy or for dissolution, liquidation, winding-up, composition or other
relief under state or federal bankruptcy laws, or (c) if such proceedings are
commenced against the Company, or a receiver or trustee is appointed for the
Company or a substantial part of its property, and such proceeding or
appointment is not dismissed or discharged within 60 days after its
commencement.
10. WAIVERS. Company hereby waives presentment, demand for performance,
notice of non-performance, protest, notice of protest and notice of dishonor.
No delay on the part of Holder in exercising any right hereunder shall
operate as a waiver of such right or any other right.
11. PAYMENT. Payment shall be made in lawful tender of the United States.
12. USURY. In the event any interest is paid on this Note which is deemed to
be in excess of the then legal maximum rate, then that portion of the
interest payment representing an amount in excess of the then legal maximum
rate shall be deemed a payment of principal and applied against the principal
of this Note.
13. GOVERNING LAW. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance
with the laws of the State of California,
-7-
<PAGE>
without regard to the conflicts of law provisions of the State of California
or of any other state or country.
14. SUCCESSORS AND ASSIGNS.
(a) The rights and obligations of the Company and the Holder of this
Note shall be binding upon and benefit the successors, assigns, heirs,
administrators and transferees of the parties.
(b) Holder shall not transfer this Note without the prior written
consent of Company, except that Holder may transfer the Note without such
prior written consent to a collection agency following an Event of Default.
(c) Neither this Note nor any of the rights, interests or obligations
hereunder may be assigned, by operation of law or otherwise, in whole or in
part, by Company without the prior written consent of the Holder except in
connection with an assignment in whole to a successor corporation to Company,
provided that such successor corporation acquires all or substantially all of
Company's property and assets and Holder's rights hereunder are not impaired.
SOCKET COMMUNICATIONS, INC.
Signature: _____________________________
Name: __________________________________
Title: _________________________________
Agreed and accepted:
[HOLDER]
Signature: ___________________________________________________________________
Name: ______________________________
Title: _____________________________
-8-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SOCKET
COMMUNICATIONS, INC. CONDENSED FINANCIAL STATEMENTS FOR THE INTERIM PERIOD ENDED
SEPTEMBER 30, 1997 INCLUDED IN FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 161,070
<SECURITIES> 0
<RECEIVABLES> 813,696
<ALLOWANCES> 0
<INVENTORY> 812,056
<CURRENT-ASSETS> 1,809,645
<PP&E> 1,064,627
<DEPRECIATION> 741,932
<TOTAL-ASSETS> 2,203,128
<CURRENT-LIABILITIES> 4,521,022
<BONDS> 0
0
375,859
<COMMON> 5,590
<OTHER-SE> (2,751,364)
<TOTAL-LIABILITY-AND-EQUITY> 2,203,128
<SALES> 3,543,459
<TOTAL-REVENUES> 3,543,459
<CGS> 1,767,186
<TOTAL-COSTS> 1,767,186
<OTHER-EXPENSES> 4,370,772
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,791
<INCOME-PRETAX> (2,701,131)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,701,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,701,131)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
