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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 1-13810
SOCKET COMMUNICATIONS, INC.
(Name of small business issuer 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)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock OTC (Bulletin Board) and Pacific Stock
($0.001 par value) Exchange
Securities registered under Section 12(g) of the Exchange Act: none
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. /X/
Revenue for the fiscal year ended December 31, 1996: $4,570,000
Aggregate market value of Common Stock ($0.001 par value) held by non-
affiliates on February 28, 1997 based on closing price on such date:
$3,200,000. For purposes of this disclosure, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of Common Stock and
shares held by officers and directors of the registrant have been excluded
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily conclusive for other purposes.
Number of shares of Common Stock ($0.001 par value) outstanding as of
February 28, 1997 is 4,197,582 shares.
Documents Incorporated by Reference:
Document Part of Form 10-KSB
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Proxy Statement for the Annual Meeting of Part III
Stockholders to be held June 17, 1997.
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PART I
ITEM 1. BUSINESS
THIS BUSINESS SECTION AND OTHER PARTS OF THIS ANNUAL REPORT ON FORM 10-KSB
CONTAIN 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.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN THIS BUSINESS SECTION INCLUDING "ADDITIONAL RISK FACTORS
AFFECTING FUTURE PERFORMANCE," AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
GENERAL DESCRIPTION OF THE BUSINESS
Socket Communications, Inc. ("Socket" or "Company") develops and sells data
communications solutions for the mobile computer market.
Socket's products include PC Card hardware, software and services for
wireless messaging, a family of serial cards and an Ethernet card. PC Card
(formerly PCMCIA) standards, Type II or Type III, have been widely adopted as
the computer interface standard that enables small form factor peripheral
devices to be easily added to, removed from and interchanged among a broad range
of mobile computers. Socket's Wireless Messaging System ("WMS") consists of the
PageCard-Registered Trademark- receiver, PageSoft-Registered Trademark-
software, and Socket Wireless Messaging Services. Socket's PageCard is a PC
Card alphanumeric pager that can download wireless data to a mobile computer
through a PC Card interface. The PageSoft suite of software applications and
utilities includes development tools and middleware, send and receive
applications, plus rules-based e-mail forwarding agents designed to facilitate
the transmission of information from the office to the mobile computer through
the PageCard receiver. Socket Wireless Messaging Services include operator
dispatch, Internet and World Wide Web gateways for wireless messages, plus voice
mail and fax forwarding with automatic wireless notification. Other Socket
products include: a family of serial PC Cards which add one or two serial ports
to a mobile computer through the PC Card slot, including standard, ruggedized,
dual and serial/Ethernet combination cards; and Ethernet PC Cards that connect a
mobile computer to an Ethernet LAN connection. Socket intends to continue to
develop and market an expanding family of easy-to-use, cost-effective, wireless
data communications solutions based on one-way paging in 1997 and one-way and
two-way paging in 1998 and beyond for Windows-based mobile computers and
selected other vertical market terminals and PDAs, including the Apple Newton
and Hewlett Packard LX series, and to expand its family of Serial PC Card
products.*
The Company was founded and incorporated in California in 1992. The
Company reincorporated in Delaware in 1995 prior to the Company's initial public
offering in June 1995. The Company is located at 37400 Central Court, Newark,
California 94560. The telephone number is (510) 744-2700.
INDUSTRY OVERVIEW
The market for mobile computers has grown rapidly in recent years. Demand
for notebook computers has increased as their capabilities have expanded and
their size, weight and price have
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* 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 "Management's Discussion and Analysis" and in "Business" including
"Additional Risk Factors Affecting Future Performance."
2
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been reduced. Demand for handheld personal computers ("H/PCs"), such as
palmtops and personal digital assistants, although slow to materialize
initially, is projected to increase as a result of the November 1996 launch
of the Microsoft Windows CE operating system and Windows CE-based devices
from Casio, Compaq and other electronic appliance manufacturers.* The Yankee
Group, an independent market research firm, projects that the installed base
of mobile computers, including all varieties of H/PCs and notebook computers,
will grow from 10.2 million in 1995 to 43.2 million in 2000.*
The growth in the number of mobile computers has corresponded with a
significant increase in the quantity and complexity of information that
businesses need to deliver to their mobile workforces. In response to these
data delivery requirements, several technologies and approaches have been
developed to effectively monitor, collect, deliver and efficiently use vast
amounts of relevant data. Such emerging solutions include: narrowcasting or
"webcasting," the ability to deliver highly customized information to users from
multiple data sources; software that enables the automation of sales processes
and information exchanges between hundreds or thousands of mobile computer users
and central information systems containing enterprise-wide customer databases;
Windows CE, the first standard operating system for H/PCs, which is expected to
result in a significant increase in the development of third-party applications
software for such devices; and the resulting launch of Windows CE-based H/PCs by
leading vendors such as Casio and Compaq.*
Furthermore, in an environment where service responsiveness and cost
efficiency are key competitive differentiators, enterprises must have the
ability to deliver time-sensitive and relevant information to their off-site
employees immediately and not wait until such employees can obtain access to a
telephone line or other means of wired transmission. For example, financial
service firms need to deliver up-to-the minute stock quotes and company news to
their brokers, and sales organizations need to transmit promising leads and
appointment changes to their field representatives. More generally, the mobile
professional needs to receive time-sensitive messages and calendar updates as
soon as possible.
To date, no vendor has been able to provide an effective solution that
enables the delivery of sufficient quantities of relevant data on a timely basis
to mobile computer users. The paging network is generally superior for such
purposes to two-way radio networks (such as Ram, Ardis and CDPD) and to the
cellular network because paging provides significantly more extensive coverage,
and lower equipment and service costs. Until recently, paging was optimized
for, and restricted to, numeric and limited alphanumeric notification. However,
the Company believes that data paging has the potential to provide an effective
solution to more complex wireless information delivery needs as a result of the
recently increased capacity of paging networks, the decreasing costs of data
pagers and related services, the growing number of page-enabled applications and
the introduction of certain proprietary technologies developed by the Company.*
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* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future
Performance."
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STRATEGY
Socket's objective is to provide the leading wireless solution to the
need to deliver time sensitive data to mobile computer users.* The Company's
strategy for achieving this objective includes the following key elements:
LEVERAGE SOCKET'S HARDWARE AND SOFTWARE TECHNOLOGY TO INTRODUCE INNOVATIVE
WIRELESS SOLUTIONS
Socket has developed a set of hardware and software building blocks
which are designed to enable the Company to bring innovative products to
market, to offer these products for multiple host platforms and to
manufacture and package them at low cost. These building blocks include: (i)
a library of software tools which are designed to minimize product
development time and maximize platform independence; (ii) the Company's high
integration serial ("HIS") chip, which is designed to serve as the basis for
single or dual port serial communications devices, thereby reducing cost,
component count, power requirements and software development effort; and
(iii) Socket's universal bus interface, which enables Socket's products to
work with a variety of PC Card hosts.
FACILITATE AND LEVERAGE EMERGING INDUSTRY STANDARDS
Socket is continually enhancing the PageCard WMS to optimize it for
those industry standards that the Company believes will serve as the
foundation for future wireless data transfer and mobile workforce solutions.*
With regard to national one-way paging technologies, the Company believes
that FLEX will eventually replace POCSAG because it is faster and more
efficient.* The Company is therefore working with Cetronic AB to develop a
FLEX-compatible version of the PageCard WMS, which the Company expects to be
commercially available by the fourth quarter of 1997.* With regard to
two-way paging, the Company is a founding member of the Personal Air
Communications Technology ("PACT") vendor forum to promote and facilitate the
development of end-to-end two-way wireless messaging products and
applications using the PACT two-way messaging protocol being developed by
AT&T. The Company also expects to develop a version of the PageCard WMS that
will be compatible with the REFLEX two-way paging technology by the end of
1998.* Finally, the Company has adapted the PageCard WMS to operate with
Microsoft's Windows CE operating system platform for H/PCs.
EXPAND MARKET BY PROVIDING EASY-TO-USE WIRELESS SOLUTIONS
The Company believes that management information system administrators and
corporate mobile workforces prefer to work with familiar software applications.
The Company intends to expand the market for the PageCard WMS 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. For this purpose, the Company has developed a software
developers kit ("SDK"), which is designed to provide program interfaces that
make it easy for software developers to page-enable their applications and to
work with major Microsoft environments, both in real and protected mode,
including DOS, Windows, Windows for Workgroups, Windows NT, Windows 95 and
Windows CE. The SDK is designed to facilitate the page-enabling of emerging
software applications in areas such as groupware, contact management and sales
force automation, news and information alerts, and investment portfolio
management.
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* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future Performance."
4
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ESTABLISH STRATEGIC ALLIANCES AND BUSINESS RELATIONSHIPS
The Company has established and intends to continue to establish strategic
alliances with leading participants in various segments of the communications,
software and mobile computer markets.* The Company believes these alliances and
relationships enable it to take advantage of the superior financial resources,
technological capabilities, proprietary positions and market presence 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, Mitsubishi, Casio, Apple
Computer, Cetronic AB, Bell Mobility, The National Dispatch Center, PageNet, and
Lucent Technologies. In addition, the Company intends to establish technology
partnerships and cross-marketing agreements with leading vendors in the
narrowcasting or "webcasting" software market, the groupware software market,
the sales force automation software market and the H/PC market, each of which
the Company believes will broaden the acceptance of, and expand the need for,
the PageCard WMS.*
ESTABLISH AND LEVERAGE THIRD-PARTY INTEGRATOR AND DISTRIBUTION CHANNELS
The Company has adopted a multichannel distribution strategy which focuses
on OEM and integrator channels. Due to the unique characteristics that
differentiate the PageCard WMS from most other paging devices, the Company
believes that its products will be sold primarily through a third-party
integrator channel which provides mobile computing products and strategies to
organizations, rather than the traditional retail pager and cellular channels.*
The Company's direct sales force calls upon paging service providers, computer
resellers, VARs, ISVs, distributors and network administrators and mobile
computer professionals within major corporate accounts to create product
awareness, assist in product evaluations, provide ongoing education and support
and expand the use of the PageCard WMS.
The Company is currently working with several third-party integrators to
develop PageCard WMS solutions targeted toward selected vertical markets.
For example, the Company is working with a leading third-party integrator in
the home health care field to develop a solution that would resemble the
following description.* Home health care nurses would download patient care
information from a central computer over the telephone line into their Apple
Newton Messagepads each day before beginning their visits. The patient
records would include patient care instructions and pertinent patient
information. At the conclusion of the patient visit, the nurse would write a
service report on the Messagepad server, which record would be added to the
electronic patient record. Updated patient records would be uploaded by the
nurse at the end of the day to the central computer, which would update the
master patient file and provide data for use by medical personnel (patient
monitoring) and by administration personnel (billing). The patient record
system is being page-enabled to allow patient data to be forwarded to a nurse
wirelessly when changes occur to patient instructions during the day of a
visit, or when a nurse is redirected to a patient not previously scheduled
for a visit. As a result, nurses would have current patient care information
available and current patient care record information would be maintained.*
- ---------
* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future Performance."
5
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PRODUCTS
The Company's products include, in addition to the PageCard WMS, "page-
enabled" applications software and a family of serial and Ethernet card
products.
PAGECARD WIRELESS MESSAGING SYSTEM
The PageCard WMS has three components: the PageCard receiver, PageSoft
communications software and Socket's Wireless Messaging Services.
PAGECARD RECEIVER. The PageCard receiver is a dual-mode pager that
functions as a stand-alone alphanumeric pager and connects to a mobile computer
through a Type II or Type III PC Card interface enabling wireless messages to be
delivered directly to a mobile computer. An easy-to-read LCD display, two
control buttons and an audible beeper enable the PageCard receiver to replace
the mobile professional's existing pager. A typical alphanumeric pager weights
6 oz., can store up to 40 messages and has a total memory capacity of 6,000
characters. The PageCard receiver weighs 2.2 oz., holds up to 370 messages and
has a total memory capacity of 128,000 characters.
Developed in partnership with Mitsubishi, the PageCard receiver is
compatible with the POCSAG worldwide paging transmission standard and is
available in the 900 MHz range, the primary frequency range in North America,
and 466 MHz, the Euromessage paging frequency. The Company believes that the
PageCard receiver is the only commercially available PC Card pager which
supports the 466 MHz frequency. These capabilities enable the PageCard
receiver to take advantage of the extensive wireless data networks already in
place.* The Company expects to complete the development of its next generation
PageCard WMS for the higher-capacity paging networks based on the FLEX
protocol during 1997.* The Company also intends to continue developing its
two-way PageCard WMS product during 1998.*
The PageCard receiver can be used with any Windows-based H/PC, the Hewlett-
Packard LX Series, the Apple PowerBook and the Newton MessagePad. The plug-and-
play capability of the PageCard receiver and the software tools included in
Socket's SDK enable mobile computer users to download wireless data into their
mobile computers simply by inserting the PageCard receiver into a Type II or
Type III PC card slot. Such data messages would be difficult or impossible to
read using a conventional alphanumeric pager.
The PageCard receiver handles numeric, alphanumeric and binary data and
three categories of messages:
PRIVATE MESSAGES are sent to the primary address of the PageCard receiver
and are usually intended for a single user. They can be numeric pages, text
messages, e-mail, binary file updates or notification of faxes, caller holding
or voice mail.
GROUP MESSAGES can be broadcast to multiple PageCard receivers. Examples
of group messages include text messages to a field sales or service force,
binary file updates to price lists or inventory databases or any other
information that an enterprise generates internally and wishes to distribute
efficiently to a local or national field force. The most significant cost
advantage of group message broadcasting is that there is no cost difference
between sending a paging message to a single
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* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future Performance."
6
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PageCard receiver and sending one to an unlimited number of PageCard
receivers. Group messages which update binary files also save the time a
field force would otherwise spend calling the corporate network and
downloading file updates via a modem.
INFORMATION SERVICE MESSAGES are for public information services and may
include stock prices, mortgage rates, currency exchange rates, news feeds,
weather, sports scores, traffic information and other data.
PAGESOFT COMMUNICATIONS SOFTWARE. PageSoft is a suite of applications and
utilities designed to make it easy to transmit relevant information from the
office to the PageCard receiver and to download it from the PageCard receiver
into a mobile computer. PageSoft currently consists of send, receive and mail
forwarding software. The current Windows versions of the send and receive
software support Windows 3.1, Windows 95 and Windows CE. The Company's Windows
send and receive software incorporates advanced messaging features including
binary file transfers, compression, encryption, and the Company's message
intercept protocol which facilitates the routing of multiple types of messages
to the applications for which they were intended or to the e-mail in-boxes of
Microsoft Mail, cc:Mail, Windows CE e-mail, Lotus Notes Mail or a generic e-mail
in-box. Mail forwarding software for Microsoft Mail is a rules-based mail
forwarding agent that resides on a server (or a second desktop system) and
automatically forwards user-selected e-mail messages to the PageCard. Users are
able to instruct the forwarding agent to monitor their e-mail inbox on the
office network, check for specified criteria such as the sender or the subject
and forward either the entire message or a specified number of characters of the
message to the user's PageCard receiver via a modem. E-mail forwarding software
for cc:Mail is also available. E-mail forwarding software for Lotus Notes Mail
is available from Lotus Corporation.
SOCKET WIRELESS MESSAGING SERVICES ("SWiMS"). SWiMS is a low cost, turnkey
messaging and support system that includes a personal toll-free number,
immediate activation, unified billing, modem-based message dispatch, operator
assisted dispatch and message reconciliation, an Internet gateway with a
personal PageCard receiver Internet address, fax notification with on-demand
forwarding, voice messaging and annotation of faxes with on-demand playback,
message scheduling and a 24-hour bulletin board system that enables a computer
with a modem to send messages to the PageCard receiver. SWiMS currently uses
the nationwide carrier service of PageNet, the largest paging carrier in the
U.S., with over 6.2 million subscribers. SWiMS is administered by The National
Dispatch Center.
SWiMS is an integrated service for monitoring and managing major forms of
electronic business communications, including:
TELEPHONE: A colleague can call the personal toll-free number of a SWiMS
subscriber and dictate a message to an on-line operator. The message will then
be sent to the subscriber's PageCard receiver. This operator dispatch service
is available 24 hours a day, seven days a week.
FAX: A colleague can send a fax to the personal toll-free number of a SWiMS
subscriber. SWiMS will store the fax and send wireless notification to the
subscriber's PageCard receiver that a fax is waiting. The SWiMS subscriber can
locate the most convenient fax machine (e.g., at a hotel, a copy center, a
customer's site), call the toll-free number, supply a password and specify the
phone number of the fax machine. SWiMS will then forward the fax to that phone
number. A SWiMS
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operator will also read the fax message to the subscriber if requested, which
facilitates getting the information if a fax machine is not readily available.
VOICE MAIL: Colleagues can send voice messages of up to five minutes in
conjunction with, or in lieu of, a fax. SWiMS will store the voice message and
immediately send wireless notification to the subscriber's PageCard receiver.
Subscribers can play these voice messages back over the phone after supplying
the correct password.
CALL CONNECT: Colleagues can call the subscriber's toll-free number and ask
to be connected to the subscriber. SWiMS will immediately send wireless
notification to the subscriber's PageCard receiver that a caller is waiting.
The subscriber can call in on the toll-free number and will be connected. If
the subscriber does not call in, the colleague is routed to voice mail.
PAGER: SWiMS enables colleagues to send messages to the personal toll-free
number of a SWiMS subscriber via telephone dictation or, for numeric messages,
via touch-tone phone input. Colleagues can send messages via modem to a special
toll-free number by using specialized software, or by logging into the SWiMS BBS
with a modem using conventional communications software. Subscribers can also
schedule pages to be sent to themselves for remembering important information
and events by dictating the message and transmission time to an operator.
E-MAIL: SWiMS offers an Internet e-mail gateway which enables a colleague
to send a wireless message of up to 690 characters to the SWiMS subscriber's
PageCard receiver simply by sending e-mail to the user's PageCard receiver's
Internet address.
MESSAGE RECONCILIATION: SWiMS offers on-demand message reconciliation and
reading or retransmission via operator or the BBS. Messages will be stored for
message reconciliation and retransmission for up to 30 days. SWiMS sequentially
numbers messages sent to a subscriber which assists the subscriber in
determining that all messages sent have been received.
PAGE-ENABLED SOFTWARE APPLICATIONS
The Company's SDK facilitates the page-enabling of software applications
and allows software developers to work with major Microsoft operating systems,
both in real and protected mode, including DOS, Windows, Windows for Workgroup,
Windows NT, Windows 95 and Windows CE. The Company has also developed software
to page-enable Symantec's Act!, a popular contact management program. The
Company intends to work with VARs and ISVs to page-enable additional
applications.*
SERIAL I/O CARDS
Socket developed the first commercially available PC Card serial card in
1993 and believes that it is the leading worldwide supplier of serial cards. In
1996, Socket developed and introduced other serial card products including a
ruggedized serial card, a dual serial card and an serial-Ethernet combination
card. The Company expects to introduce an infrared serial card in the second
quarter of 1997.* On a PC Card mobile computer, the Socket Serial I/O card
operates as a standard communication port, and can work with conventional serial
communications programs such as
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* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future Performance."
8
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LapLink and PROCOMM. Uses for the serial cards include attaching input
devices such as stenography machines for court reporting or bar code
scanners, data collection devices such as medical monitoring instruments or
data scopes, high speed fax/modems, or output devices such as label printers.
The Serial I/O cards can be used with any Windows-based PC Card mobile
computer, Windows CE-based H/PC, the HP 100/200 LX palmtop, the Sun Voyager,
the Apple PowerBook and the Newton MessagePad, the Sharp Zaurus and others.
ETHERNET CARDS
Socket released the first commercially available PC Card Ethernet card in
1992. The 16-bit Socket EA and EA+ cards enable a PC Card mobile computer user
to communicate with an Ethernet network at speeds comparable to the internal
cards installed in workstations, which can be up to four times faster than
network adapters based on parallel ports.
The Socket EA adapter includes a 10BaseT connector for unshielded twisted
pair cabling, while the Socket EA+ adapter includes both a 10BaseT and a 10Base2
connector. The Socket EA and EA+ are compatible with the popular NE2000 network
controller, making them compatible with the major PC-based network operating
systems.
STRATEGIC ALLIANCES AND BUSINESS RELATIONSHIPS
The Company has established strategic alliances and business relationships
with the following companies:
GTE, a telecommunications company, bundles the Company's PageCard receiver
and wireless messaging software with GTE's wireless message services for a
single monthly service fee. The Company and GTE also engage in joint selling
and marketing activities in selected vertical markets.
CASIO COMPUTER CORPORATION, a consumer-electronics product manufacturer and
a leading supplier of Windows CE H/PCs, has a joint development, marketing and
distribution agreement with the Company for the Company's Windows CE messaging
software.
APPLE COMPUTER, a computer manufacturer, is promoting the development of
wireless vertical applications for the Newton MessagePad. The Company and Apple
have completed a joint development program to page-enable the Newton MessagePad
operating system to employ the Company's PageCard receiver for Newton-based
wireless applications and are undertaking joint sales and marketing activities
in selected markets.
CETRONIC AB, a wireless products and technology company, and the Company
are jointly developing a PageCard receiver that is compatible with the higher
speed FLEX paging networks.
BELL MOBILITY, a telecommunications company, distributes the Company's
PageCard in Canada.
PAGENET, the largest paging carrier in the U.S., is the paging network
provider for the paging frequencies used by the Company's U.S. PageCard.
PageNet's services are provided through the Company's contract with The National
Dispatch Center and through GTE.
THE NATIONAL DISPATCH CENTER, a paging gateway service provider,
administers SWiMS.
LUCENT TECHNOLOGIES (formerly AT&T Microelectronics), a semiconductor chip
manufacturer, collaborated with the Company on the development of the Company's
proprietary HIS chip and currently serves as the foundry for the HIS chip.
MITSUBISHI CORPORATION, a manufacturer and distributor, supplies the
Company's PageCard receiver.
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PROPRIETARY TECHNOLOGY
Socket has developed a number of technology building blocks to enhance its
ability to develop new hardware and software products, to offer products which
run on multiple host platforms and to manufacture and package products
efficiently.
Socket's most important hardware building block is the universal bus
interface, a highly flexible implementation of the PC Card interface whose
features include programmable bus steering, dual mapping of control and data
registers into both memory and I/O space, an extensive card information
structure which includes function ID and function extension tuples, shared-
memory arbitration circuitry, support for "execute-in-place," the ability to
support both level and edge triggered interrupts from multiple sources, host
synchronization during initialization and complete polarity and masking control
of interrupts. Socket's universal bus interface enables Socket's products to
work with major PC Card hosts. Socket's PageCard receiver is compatible with PC
Card Windows notebooks, Windows CE H/PCs, the Apple PowerBook, the Apple Newton
MessagePad and the HP 100/200 LX palmtop.
Socket's universal bus interface has been incorporated into several
application specific integrated circuits, including Socket's HIS chip, a highly
integrated general purpose serial interface used in both the PageCard receiver
and the Serial I/O Card to control signal transmission between these products
and the mobile computer's PC Card slot.
Socket has also developed a library of software tools which are used to
reduce product development time and maximize platform independence. These tools
include smart installation software which works across Socket's entire product
line, ODI and NDIS network driver software for the Ethernet card, direct enabler
software for major PC Card hosts and Card Service client drivers for plug-and-
play "Hot Swap" operation.
Socket's PageSoft communications software and SDK form the basis of an
extensive suite of one-way messaging tools and utilities that are designed to
enable Socket to add value to the PageCard WMS and its derivatives and establish
a family of proprietary software products.
SALES AND MARKETING
The Company markets its products through OEMs, paging service providers,
computer platform vendors, vertical market VARs, and a worldwide network of
distributors and resellers. The Company is also collaborating with independent
software vendors to develop applications and tools to be used with the PageCard
WMS, some of which are expected to be jointly marketed by the Company.* The
Company supports its distributors and resellers through education, training and
customer assistance by the Company's sales, marketing and technical support
staff and third party manufacturers' representatives. During 1996, distributors
Ingram Micro and Tech Data accounted for 17% and 12%, respectively, of the
Company's revenues. As of December 31, 1996, the Company had 12 persons in
sales, marketing and technical support. The Company intends to increase its
sales and marketing activities by adding personnel and increasing promotional
activities.*
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* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future Performance."
10
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Consistent with industry practice, the Company provides its distributors
with stock balancing and price protection rights which permit these distributors
to return slow moving products to the Company for credit and to receive price
adjustments for inventories of the Company's products held by distributors if
the Company lowers the price of those products. The effect of such returns and
adjustments on the Company's operating results is minimized since the Company
recognizes revenues on products shipped to distributors at the time the
merchandise is sold by the distributor. To date, the Company has not
experienced any significant returns or price protection adjustments.
The Company relies significantly on its OEMs, distributors and resellers
for the marketing and distribution of its products. Of particular importance to
the Company are its relationships with GTE, Casio Computer, Apple Computer and
Bell Mobility for the distribution of its wireless messaging products. 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; furthermore, the Company's OEMs, distributors and resellers are not
within the control of the Company and 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 OEM's,
distributors and resellers could lead to reduced sales and could materially
adversely affect the Company's operating results.
The Company is generally able to ship orders when received and does not
have significant backlog.
Export sales represented approximately 40%, 40% and 52% of the Company's
revenue for the years ended December 31, 1996, 1995 and 1994, respectively.
Export sales are subject to the complications of complying with laws of various
countries and the risk of import/export restrictions and tariff regulations.
MANUFACTURING
The Company subcontracts the manufacture of substantially all of its
products to independent, third party contract manufacturers on a sole source
basis. The Company performs final product testing and packages its products at
its Newark, California facility.
Sole source components include the Company's proprietary HIS chip
manufactured by Lucent Technologies that controls the signal transmission
between the Company's PageCard receiver and Serial I/O products and the PC Card
slot on the mobile computer, the PageCard receiver board and RF display, which
are purchased from Mitsubishi Corporation in Japan, the Ethernet card purchased
from Quanto Electro in the United States, the Serial I/O card manufactured by
Hi-Tech Manufacturing in the United States, and certain other cable and
connector components. Although to date the Company has generally been able to
obtain adequate supplies of these components, certain of these components are
purchased on a purchase order basis, and the Company does not have long-term
supply contracts for these components. In particular, the Company purchases HIS
chips from Lucent Technologies, Tamarack chips from Tamarack, Ethernet cards
from Quanto Electro and Serial I/O cards from Hi-Tech Manufacturing by purchase
order under standard commercial terms and conditions in the industry. The
Company has an agreement with Mitsubishi Corporation with a three year term
ending December 1997 subject to automatic renewals and termination for material
breach and certain other events. The Mitsubishi agreement covers the
development of the current PageCard POCSAG receiver and subsequent improvement
and modifications as determined by the parties, as well as the mutual provision
of engineering and technical assistance. The agreement also sets forth
11
<PAGE>
procedures for orders, purchases, forecasts and pricing, and requires that
the Company maintain a standby letter of credit to cover PageCard purchases
from Mitsubishi.
Although the Company's suppliers are generally large, well financed
organizations, in the event that a supplier were to experience financial or
operational difficulties that resulted in a reduction or interruption in supply
to the Company, it would materially adversely affect the Company's results of
operations until the Company established sufficient manufacturing supply through
an alternative source which could take a significant period of time including
qualifying an alternative subcontractor, redesigning the product as necessary,
and commencing manufacturing.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has made substantial investments in
research and development. The Company believes that its future performance
will depend in large part on its ability to develop significant enhancements
to its PageCard receiver and PageSoft communications software and to develop
new products for new and existing markets.* In particular, the Company
believes the timely completion and expected introduction of a FLEX version of
the PageCard in the second half of 1997 and the development and introduction
of a two-way paging product after 1997 is important to maintain a
technological leadership position in wireless solutions and remain
competitive.* As of December 31, 1996, the Company had seven persons on its
product development staff and hires engineering consultants to perform
additional engineering services from time to time as required. Research and
development expenditures were $1.1 million, $1.1 million and $1.3 million for
the years ended December 31, 1996, 1995 and 1994, respectively. The Company
anticipates that it will continue to commit substantial resources to research
and development in the future.*
COMPETITION
The overall market for communications products is increasingly competitive,
and the Company expects competition in each of its market areas to intensify.*
The Company anticipates intense competition from a number of new and established
wired and wireless computer, communications and network equipment companies.*
Increased competition, direct and indirect, could materially adversely affect
the Company's revenues and ability to achieve profitability through pricing
pressure and loss of market share.
Many of the Company's present and potential competitors have substantially
greater financial, marketing, technical and other resources than the Company and
may succeed in establishing technology standards or strategic alliances in the
data communications market, obtain more rapid market acceptance for their
products or otherwise gain a competitive advantage.
Currently, the Company does not have a direct competitor for its
PageCard whose unique features as a data pager include its capability to
receive, store and download long messages and data, the ability to direct
multiple simultaneous messages from different applications to their intended
laptop application or electronic mail inbox, and the capability to read
messages on a digital display. The Company faces indirect competition for
short messaging applications from alphanumeric pagers which are produced by
many companies including Motorola, NEC, and others, and from alternative
- ---------
* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future Performance."
12
<PAGE>
methods of downloading information into a mobile computer, primarily over
telephone lines or other wireless data networks.
The Company competes with IBM and Smart Modular Technologies, among others,
in the serial card market. The market for the Company's Ethernet card is highly
competitive. Market leaders for Ethernet cards include 3Com and Xircom. The
Company also faces competition from combination cards which combine Ethernet and
other functions such as fax/modem. Companies offering combination cards include
3Com, Xircom, and U.S. Robotics.
INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of patent, copyright, trademark and
trade secret laws and confidentiality procedures to protect its proprietary
rights. The Company has filed applications for two patents in the United
States. As part of its confidentiality procedures, the Company generally enters
into non-disclosure agreements with its employees, distributors and strategic
partners, and limits access to and distribution of its software, documentation
and other proprietary information. Despite these precautions, it may be
possible for a third party to copy or otherwise to obtain and use the Company's
products or technology without authorization, or to develop similar technology
independently. In addition, effective protection of intellectual property
rights may be unavailable or limited in certain foreign countries.
There are no current pending material claims that the Company's products,
trademarks or other proprietary rights significantly infringe the proprietary
rights of third parties. However, there can be no assurance that the Company
will not receive in the future communications from third parties asserting that
the Company's products infringe, or may infringe, the proprietary rights of
third parties which could result in significant additional expense to the
Company or the discontinuation of use or redesign of infringing products.
PERSONNEL
As of December 31, 1996, the Company employed 28 people on a full-time
basis. Of these, 12 were responsible for sales, marketing and customer
technical support, seven were in research and development, five were in
finance and administration and four were involved in operations. The
Company's employees are not represented by a union, and the Company considers
its relationship with its employees to be good. 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.* The Company does not have key
man life insurance for any of its employees.
- ---------
* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future Performance."
13
<PAGE>
ADDITIONAL RISK FACTORS AFFECTING FUTURE PERFORMANCE
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 is currently focusing on
developing and delivering wireless data solutions for the specific needs of
business in a number of vertical market segments such as field sales, field
service, finance, real estate, health care, and transportation. The Company
believes that the preferred strategy for addressing such needs is to page-enable
existing applications to allow the transfer of data from an application through
the paging network to the PageCard receiver where it can be downloaded into a
mobile computer. The Company's software developers kit is designed to provide
program interfaces for software developers to page-enable their applications and
to work with major Microsoft operating systems. 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
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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business - Industry Overview" and " -
Strategy."
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.
- ---------
* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future Performance."
14
<PAGE>
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, and there is no assurance that the Company will be
able to develop future products based upon these new technologies. In addition,
the Company's inability to develop products within any new FCC-allocated
frequencies for these new technologies could have a material adverse effect on
the Company's business and results of operations.
Although the Company performs testing prior to new product introductions,
the Company's hardware and software products may contain undetected flaws, which
may not be discovered until the products have been used by customers. From time
to time, the Company may temporarily suspend or delay shipments or divert
development resources from other projects to correct a particular product
deficiency. Such efforts to identify and correct errors and make design changes
may be expensive and time consuming. Failure to discover product deficiencies
in the future could delay product introductions or shipments, require the
Company to recall previously shipped products to make design modifications or
cause unfavorable publicity, any of which could have a material adverse effect
on the Company's operating results. See "Business - Industry Overview" and
"-Strategy."
15
<PAGE>
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, Apple,
Cetronic, Bell Mobility, PageNet, The National Dispatch Center ("NDC"),
Lucent Technologies and Mitsubishi.
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.
In particular, Mitsubishi's relationship with the Company includes
technology licensing, manufacturing and distribution rights. The Company has
co-licensed certain technologies applying to the PageCard receiver, has
contracted with Mitsubishi to supply its PageCard receiver and has granted
Mitsubishi certain distribution rights to the PageCard receiver on a worldwide
basis excluding North America. The Company's ability to manage the business
relationship with Mitsubishi effectively is important to the success and
operating results of the Company. The Company's operating results would be
materially adversely affected if it were required to replace Mitsubishi as a
supplier.
The Company's relationship with NDC for SWiMS includes certain customer
service activities. NDC has agreements to page messages through PageNet and
other paging carriers. Should NDC go out of business, discontinue its
relationship with the Company or with PageNet or not be able to adequately
provide services for SWiMS, the market for the PageCard WMS would be materially
adversely affected until such time as a suitable replacement could be found.
Should PageNet go out of business, be incapable or unwilling to provide low cost
airtime services or discontinue its relationship with NDC, the market for the
PageCard receiver and PageCard WMS would be materially adversely affected until
such time as a suitable replacement could be found.
The Company recently introduced its PageCard receiver and PageCard WMS in
France and the U.K. In France, paging services are provided by France Telecom
Mobiles Radiomessagerie, a nationwide paging network, and advanced messaging
services are provided by Stratus RTM. In the U.K., paging services are provided
by Hutchison Telecom, a nationwide paging network, and advanced messaging
services are provided by London Pager. The Company does not have any commitment
from any of these companies as to the level of sales and marketing effort it
will conduct or as to any minimum number of customers. Should the sales and
marketing effort of any of these companies fall short of expectations, or should
any of them go out of business or be incapable of adequately providing wireless
messaging services, the European market for the PageCard receiver and
- ---------
* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future Performance."
16
<PAGE>
PageCard WMS would be materially adversely affected until such time as
suitable replacements could be found. See "Business."
MANAGEMENT OF GROWTH
Depending on the extent of its future growth, if any, the Company may
experience a significant strain on its management, operational and financial
resources. The Company's ability to manage its growth effectively may require
it to continue to implement and improve its operational and financial systems
and may require the addition of new management personnel. In addition, three of
the Company's officers have joined the Company since March 1996. Martin Levetin
joined the Company in March 1996 as President and Chief Executive Officer,
Howard Case joined the Company in July 1996 as Vice President of Marketing and
John O'Leary joined the Company in August 1996 as Vice President of Sales. The
failure of the Company's management team to effectively manage growth, should it
occur, could have a material adverse impact on the Company's results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business -- Personnel."
DEPENDENCE ON KEY EMPLOYEES
The Company's future success will depend in significant part upon the
continued service of certain key technical and senior management personnel, and
the Company's continuing ability to attract, assimilate and retain highly
qualified technical, managerial and sales and marketing personnel.*
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its existing key managerial, technical or sales and
marketing personnel or that it can attract, assimilate and retain such employees
in the future. The loss of key personnel or the inability to hire, assimilate
or retain qualified personnel in the future could have a material adverse effect
upon the Company's results of operations. The Company currently has employment
agreements with Martin Levetin and Micheal Gifford. The Company does not have
key man life insurance for any of its employees.
NEED FOR ADDITIONAL CAPITAL
The Company will require additional capital in 1997 to fund its
operations.* 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. See Note 1 to Notes to Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
FOREIGN CURRENCY FLUCTUATIONS AFFECTING COSTS
The PageCard receiver is supplied by Mitsubishi in Japan under an agreement
that provides for adjustment in the Company's purchase costs when the average
exchange rate of the Japanese yen is less than threshold levels of 95 yen to the
U.S. dollar (price increase) or more than 105 yen to the U.S. dollar (price
decrease). Purchase costs are adjusted by the ratio of the yen exchange rate to
the applicable threshold level. The Company experienced adjustments in 1996 as
a result of exchange fluctuations. To date, such adjustments have not materially
affected the Company's costs but could do so in the future if the Company cannot
offset price increases through higher selling prices, other operating
efficiencies or a subsequent increase in the value of the dollar.
- ---------
* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future Performance."
17
<PAGE>
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. Moreover, the Company is seeking to broaden its
channels of distribution and intends to sell its products through new
distribution channels such as mass merchandisers. There can be no assurance
that the Company will be able to successfully sell its products through these
new channels.
The Company allows its distributors to return a portion of their
inventory to the Company for full credit against other purchases. In
addition, in the event the Company reduces its prices, the Company credits
its distributors for the difference between the purchase price of products
remaining in their inventory and the Company's reduced price for such
products. There can be no assurance that actual returns and price protection
will not have a material adverse effect on future operating results,
particularly since the Company seeks to continually introduce new and
enhanced products and is likely to face increasing price competition. In
addition, the Company's comprehensive two year warranty for its wired
products and one year warranty for its wireless products permit customers to
return any product if the product does not perform as warranted. To date,
the Company has not experienced any warranty claims, returns, stock rotation
exchanges or price protection adjustments materially above those anticipated.
However, future warranty claims, returns, stock rotation exchanges, or price
protection adjustments could be materially higher 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. See "Business -- Sales and Marketing."
- ---------
* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future Performance."
18
<PAGE>
EXPORT SALES
Export sales (sales to customers outside the United States) accounted for
approximately 40% of the Company's revenue in 1996 and the Company anticipates
that export sales will 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. See "Business -- Sales and Marketing."
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a 23,000 square foot facility in Newark, California.
The facility is subject to a lease which expires in 2001. The current monthly
rent is approximately $16,325. The Company believes that its current facilities
are sufficient to meet its needs for the foreseeable future.*
Financial information regarding lease commitments is contained in Note 7 of
Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company has no material legal actions pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for vote by security holders during the fourth
quarter of 1996.
- ---------
* 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 "Management's Discussion and Analysis" and in "Business"
including "Additional Risk Factors Affecting Future Performance."
19
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From the effective date of the Company's initial public offering (June 6,
1995) through November 26, 1996, the Company's Common Stock and Common Stock
Warrants were listed on the Nasdaq SmallCap Market under the symbol SCKT and
SCKTW, respectively. The Common Stock and Common Stock Warrants were de-listed
from such market effective November 27, 1996 because the Company's net capital
was below that required for continued listing, and since then have been traded
on the OTC Bulletin Board under the symbols SCKT and SCKTW, respectively. The
Company's Common Stock is also quoted on the Pacific Stock Exchange; however,
because the Company's stockholders' equity as of December 31, 1996 was below the
exchange's minimum capital requirements, the appropriateness of the Company's
continued listing thereon is currently under review by the Pacific Stock
Exchange's equity listing committee. This committee has granted the Company
until May 5, 1997 to comply with the Pacific Stock Exchange's minimum net
tangible assets and share bid price requirements. There can be no assurance
that such committee will not decide to initiate delisting proceedings against
the Company. The Company intends to seek relisting on the Nasdaq SmallCap
Market as soon as it meets the applicable listing qualifications, which will
require, among other things, net capital of at least $2 million and a common
stock price of at least $3.00 per share. These listing requirements are
currently under review by Nasdaq for possible changes including higher net
capital requirements. If the Company's Common Stock is not accepted for
quotation on the Nasdaq SmallCap Market and/or is delisted from the Pacific
Stock Exchange, an investor will find it more difficult to dispose of, or to
obtain accurate quotations as to the price of, the Company's securities. In
addition, the Company's securities are now subject to so-called "penny stock"
rules that impose additional sales practice and market making requirements on
broker-dealers who sell and/or make a market in such securities. Consequently,
the Company's inability to obtain listing on the Nasdaq SmallCap Market,
subsequent removal from the Nasdaq SmallCap Market if listed thereon, or
delisting from the Pacific Stock Exchange could affect the ability or
willingness of broker-dealers to sell and/or make a market in the Company's
securities and the ability of purchasers of the Company's securities to sell
their securities in the secondary market.
The quarterly high and low sales prices of the Company's Common Stock since
June 6, 1995, the effective date of its initial public offering, are as follows:
QUARTER ENDED HIGH LOW
------------- ----- -----
June 30, 1995 (from June 6, 1995). . . . . . . . . $6.75 $5.25
September 30, 1995 . . . . . . . . . . . . . . . . $6.50 $5.25
December 31, 1995. . . . . . . . . . . . . . . . . $6.06 $2.63
March 31, 1996 . . . . . . . . . . . . . . . . . . $4.38 $3.00
June 30, 1996. . . . . . . . . . . . . . . . . . . $7.38 $2.88
September 30, 1996 . . . . . . . . . . . . . . . . $4.38 $2.88
December 31, 1996. . . . . . . . . . . . . . . . . $3.62 $0.75
20
<PAGE>
The quarterly high and low sales prices of the Company's Common Stock
Warrants since June 6, 1995, the effective date of its initial public offering,
are as follows:
QUARTER ENDED HIGH LOW
------------- ----- -----
June 30, 1995 (from June 6, 1995) . . . . . . . . $1.50 $1.06
September 30, 1995. . . . . . . . . . . . . . . . $1.75 $1.44
December 31, 1995 . . . . . . . . . . . . . . . . $1.75 $1.13
March 31, 1996. . . . . . . . . . . . . . . . . . $1.50 $1.13
June 30, 1996 . . . . . . . . . . . . . . . . . . $2.38 $1.06
September 30, 1996. . . . . . . . . . . . . . . . $1.44 $0.75
December 31, 1996 . . . . . . . . . . . . . . . . $1.00 $0.25
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions. As of
February 28, 1997, there were approximately 800 holders of record of the
Company's Common Stock and Warrants.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for the expansion and operation of its business and does not anticipate paying
cash dividends in the foreseeable future.
In November 1996, the Company sold 15,500 shares of its Series A
Convertible Preferred Stock for aggregate cash consideration of $1,550,000
pursuant to the registration exemption provided by Regulation D of the
Securities Act of 1933, as amended (the "Securities Act") to: Arnold Wong,
Berckeley Investment Group, Coutts & Co. AG, Harry Salzman, Jerry Houston,
Julius Baer Securities, Peter G. Colmer, Roderick Deleersnijder, Ronald &
Nancy Thomas Family Trust, Swedbank (Luxembourg) S.A., VanMoer Santerre & Cie
and Weinberg Family Trust. The issuance of these securities was deemed to be
exempt from registration under the Securities Act in reliance on Regulation D
under the Securities Act as a transaction by an issuer not involving a public
offering. The shares of Series A Convertible Preferred Stock are convertible
at the option of the holder, in whole or in part, at any time, into shares of
Common Stock of the Company equal to $100 divided by the lower of (i) $2 5/8
and (ii) 65% of the average bid price of the Company's Common Stock on the
OTC Bulletin Board for the five business days prior to the business day on
which notice of conversion is transmitted by the holder of such share of
Series A Convertible Preferred Stock, subject to adjustment upon certain
events. Each share of Series A Convertible Preferred Stock shall be
converted automatically into shares of Common Stock on the earliest of (i)
immediately preceding a merger or consolidation of the Company if as a result
of such transaction the holder of Series A Convertible Preferred Stock would
receive publicly traded securities with a market value greater than the
initial liquidation preference of the Series A Convertible Preferred Stock or
(ii) November 1, 1997. The conversion ratio of Series A Convertible
Preferred Stock into Common Stock is subject to certain antidilution
protection, including for stock splits, dividends and other
recapitalizations, as well as certain sales of Common Stock below the then
effective conversion price. Upon such conversion, no fractional shares shall
be issued but instead the holder shall receive cash at the fair market value
for such fractional share. There are a number of exceptions to the
antidilution provisions, including in connection with the grant and exercise
of options under the Company's 1995 Stock Plan, the sale of the Series A
Convertible Preferred Stock; and the conversion or exercise of any option,
warrant, right or other convertible security.
21
<PAGE>
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 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. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECTION AND IN "BUSINESS"
INCLUDING "ADDITIONAL RISK FACTORS AFFECTING FUTURE PERFORMANCE."
OVERVIEW
The Company's serial and Ethernet card products for PC Card mobile
computers, introduced in 1993, are its principal sources of revenues. The
Company also sells a PageCard PC Card wireless messaging system introduced in
December 1994. In addition, the Company earns royalties from sale of certain of
the Company's products by the third-party manufacturers of those products and
royalties on wireless messaging services provided by third party carriers.
The Company completed its initial public offering ("IPO") in June 1995,
with net proceeds of approximately $4.8 million. Prior to the IPO, the
Company's working capital requirements were met primarily through the private
sale of equity and debt securities. In November 1996, the Company sold $1.6
million of its convertible preferred stock through a private placement, and in
January and February 1997 the Company issued $1.0 million in convertible
promissory notes through a private placement. See "--Liquidity and Capital
Resources." See also Notes 4 and 16 to Notes to Financial Statements.
The Company has sustained significant quarterly operating losses in every
fiscal period since its inception. The Company expects to incur substantial
quarterly operating losses at least through the first half of 1997 and possibly
longer.* The Company's ability to achieve profitability will be highly
dependent upon the market acceptance of the PageCard receiver and enhanced
PageSoft software products, the development of page-enabled applications for
selected vertical markets, continued increases in the market acceptance of the
Company's serial and Ethernet cards, the development of successful new products
for new and existing markets, the improvement of gross margins through
maintaining of sales prices, higher sales volumes and contract manufacturing
efficiencies, and the ability of the Company to expand its distribution
capability and manage its operating expenses. There can be no assurances
that the Company will meet any of these objectives or ever achieve
profitability. The Company's ability to continue its operations is also
dependent upon the availability of additional capital. * See "--Liquidity and
Capital Resources."
The Company believes that its operating results will be subject to
substantial quarterly fluctuations due to several factors, some of which are
outside the control of the Company, including fluctuating market demand for, and
declines in the average selling price of, the Company's products, the timing of
significant orders from distributors and OEM customers, delays in the
introduction of
- ---------
* 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 section, and in
"Business" including "Additional Risk Factors Affecting Future Performance."
22
<PAGE>
enhancements to existing and new products, market acceptance of existing and
new products, competitive product introductions, the mix of products sold,
changes in the Company's distribution network, changes in customer product
requirements, changes in the regulatory environment, the cost and
availability of components 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.
ANNUAL RESULTS OF OPERATIONS
REVENUE
In 1996, revenue was $4,570,438, substantially unchanged from 1995 revenue
of $4,530,479. In 1995, revenue was $4,530,479, an increase of 47% over revenue
of $3,074,843 in 1994. The substantial majority of revenue in all three years
was derived from sales of serial and Ethernet cards. In 1996, sales growth of
the Company's serial card and, to a lesser extent, PageCard, was offset by
declines in Ethernet card sales volumes and, to a lesser extent, GPS card sales,
which were discontinued in the second half of 1996. The increase in 1995
revenue over 1994 was due to significant sales growth of the Company's serial
card and, to a lesser extent, PageCard. Ethernet card volumes in 1995 increased
moderately over 1994 but were more than offset by Ethernet card price
reductions, resulting in a moderate decrease in Ethernet revenue in 1995
compared to 1994. Royalty and service revenue was primarily related to sales by
third party manufacturers of the Company's GPS and Ethernet cards.
The Company markets its products primarily through distributors and OEMs.
Recognition of revenue on shipments to distributors and the related cost of
sales are deferred until such distributors resell the products to their
customers. Recognition of revenue on shipments to customers other than
distributors occurs generally at the time of shipment. Export sales constituted
40%, 40%, and 52% of revenue in 1996, 1995, and 1994, respectively.
PRODUCT GROSS PROFIT
Product gross profit, excluding royalty and service revenue, is equal to
product revenue less the cost of revenue, because the costs of royalty and
service revenue generally are negligible. The Company's product gross profit
for 1996 was $1,889,223, or 43% of product revenue, compared to $1,478,306, or
34% of product revenue, in 1995 and $636,927, or 22% of product revenue, in
1994. The product gross margin increase in 1996 over 1995 resulted from a
higher percentage of revenues attributable to the higher margin serial card,
lower cost of products sold due to engineered cost decreases and vendor volume
price discounts. The product gross margin increase in 1995 over 1994 resulted
primarily from a higher percentage of revenues attributable to the higher margin
serial card, volume price discounts from certain Company vendors, engineered
cost decreases in the unit cost of
- ---------
* 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 section, and in
"Business" including "Additional Risk Factors Affecting Future Performance."
23
<PAGE>
products, and the allocation of fixed manufacturing operating costs over a
higher volume base, offset in part by a selling price reduction for Ethernet
cards.
RESEARCH AND DEVELOPMENT
Research and development expenses in 1996 were $1,067,399, a decrease of 3%
from 1995 expenses of $1,098,766. The decrease in 1996 reflected a decrease in
costs of development tooling partially offset by an increase in personnel
expenses, including employees, engineering contractors and consultants.Research
and development expenses in 1995 of $1,098,766 decreased 13% from 1994 expenses
of $1,261,549. The decrease in 1995 primarily reflected reductions in contract
engineering services resulting from the completion of engineering projects. The
Company has not capitalized any software development costs. The Company expects
to increase its research and development expenses in 1997.*
SALES AND MARKETING
Sales and marketing expenses in 1996 were $2,666,933, an increase of 19%
from 1995 expenses of $2,232,276. The increase primarily reflected higher
staffing levels, increased advertising activity and increased levels of travel.
Sales and marketing expenses in 1995 of $2,232,276 increased 45% over 1994
expenses of $1,535,483. The increase reflected higher staffing levels, increased
advertising, increased sales commissions, and higher facilities costs. The
Company expects to increase its sales and marketing expenses in 1997.*
GENERAL AND ADMINISTRATIVE
General and administrative expenses in 1996 were $1,647,335, substantially
unchanged from 1995 expenses of $1,630,668. The increase reflected higher
recruiting and relocation fees, insurance costs and professional fees partially
offset by reduced staffing levels, lower rent in November and December 1996
resulting from a relocation into new facilities, and by a two-month vacancy in
the Chief Executive Officer position which was filled March 1, 1996. General
and administrative expenses in 1995 of $1,630,668 increased 31% over 1994
expenses of $1,242,308. The 1995 increase reflected a full year of higher
executive and administrative staffing levels added in 1994, and a full year of
higher occupancy costs associated with a new facility which was occupied in the
fourth quarter of 1994. The Company expects its general and administrative
expenses to decline moderately in 1997 due to a relocation in October 1996 into
less expensive facilities.*
INTEREST INCOME, INTEREST EXPENSE, NET
Interest income primarily reflects interest earned on cash balances.
Interest expense primarily reflects interest expense on convertible notes issued
and outstanding during portions of 1994 and 1995 to provide interim bridge
financing relating to equity offerings, and interest expense relating to
equipment lease financing obligations.
INCOME TAXES
There was no provision for federal or state income taxes for the years
ended December 31, 1996, 1995 and 1994, as the Company incurred net operating
losses. As of December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately $9,100,000 and $4,500,000, respectively.
The Company also has federal and state tax credit carryforwards of
- ---------
* 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 section, and in
"Business" including "Additional Risk Factors Affecting Future Performance."
24
<PAGE>
approximately $139,000 and $113,000, respectively. The net operating losses
and credit carryforwards will expire at various dates beginning in 1997
through 2011, if not utilized. The utilization of the federal net operating
loss and the deduction of equivalent federal tax credit carryforwards of
approximately $5,200,000 included in the above amounts will be subject to a
cumulative annual limitation of approximately $600,000 per year pursuant to
the stock ownership change provision of the Tax Reform Act of 1986. Future
changes in ownership, including stock offerings, may result in additional
limitations.
For financial reporting purposes, a valuation allowance of $4,877,000 has
been recorded to offset deferred tax assets recognized under Financial
Accounting Standards No. 109, "Accounting for Income Taxes," primarily related
to net operating losses and capitalized research and development costs. See
Note 11 of Notes to Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth summary quarterly statements of operations for
each of the quarters in 1996 and 1995. This unaudited quarterly information has
been prepared on the same basis as the annual information presented elsewhere
herein, and, in the Company's opinion, includes all adjustments (consisting only
of normal recurring entries) necessary for a fair presentation of the
information for the quarters presented. The operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31,
1995 1995 1995 1995 1996 1996 1996 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY QUARTERLY DATA:
Revenue:
Product . . . . . . . . . . . . . . . $1,116 $1,125 $ 937 $1,174 $1,217 $ 908 $1,117 $1,143
Royalty . . . . . . . . . . . . . . . 47 55 63 13 77 60 35 13
------------------------------------------------------------------------------
Total revenue. . . . . . . . . . . . . . 1,163 1,180 1,000 1,187 1,294 968 1,152 1,156
Gross profit . . . . . . . . . . . . . . 396 431 451 378 576 399 554 545
OPERATING EXPENSES:
Research and development. . . . . . . 262 265 242 330 271 244 260 292
Sales and marketing . . . . . . . . . 506 497 609 620 631 697 698 641
General and administrative. . . . . . 385 366 363 516 367 408 436 436
------------------------------------------------------------------------------
Total operating expenses . . . . . . . . 1,153 1,128 1,214 1,466 1,269 1,349 1,394 1,369
Net loss . . . . . . . . . . . . . . . . $ (803) $ (744) $ (721) $(1,048) $ (685) $ (955) $ (853) $ (835)
</TABLE>
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future.* The Company generally
ships orders as received and as a result typically has little or no backlog.
Quarterly revenues and operating results therefore depend on the volume and
timing of orders received during the quarter, which are difficult to forecast.
Historically, the Company has often recognized a substantial portion of its
revenues in the last month of the quarter, typically in the last week.
Operating results may also fluctuate due to factors such as the demand for the
Company's products, the size and timing of customer orders, the introduction of
new products and product enhancements by the Company or its competitors, changes
in the proportion of
- ---------
* 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 section, and in
"Business" including "Additional Risk Factors Affecting Future Performance."
25
<PAGE>
revenues attributable to royalties and service, product mix, timing of
software enhancements, changes in the level of operating expenses, and
competitive conditions in the industry. Because the Company's staffing and
other operating expenses are based on anticipated revenue, a substantial
portion of which is not typically generated until the end of each quarter,
delays in the receipt of orders can cause significant variations in operating
results from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company had cash and cash equivalents of $0.6
million. Subsequently, on January 29, 1997 the Company issued a $0.5 million
subordinated secured convertible promissory note to Cetronic AB, and February
14, 1997 the Company issued $0.5 million of subordinated unsecured convertible
promissory notes to certain shareholders of Cetronic AB. See Note 16 of Notes
to Financial Statements.
Net cash used for operating activities was $3.1 million in 1996, 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 deferred revenue. Net cash used for operating activities was $3.2
million in 1995, resulting primarily from the net loss, an increase in
inventories and a decrease in accrued payroll and related expenses, partially
offset by increases in accounts payable and accrued expenses.
Net cash used in investing activities was $0.3 million in 1996 and $0.15
million in 1995, used for the purchase of furniture, test and manufacturing
equipment.
Net cash provided by financing activities was $1.6 million in 1996. On
November 1, 1996, the Company sold $1.6 million of Series A Convertible
Preferred Stock with net proceeds of $1.3 million (see Note 4 of Notes to
Financial Statements). Other financing activities in 1996 consisted of proceeds
from equipment financing, advances on the Company's revolving line of credit
(see Note 5 of Notes to Financial Statements) and proceeds from the exercise of
stock options, partially offset by the repayment of amounts due on capital
leases and equipment financing notes. Net cash provided by financing activities
was $5.4 million in 1995 consisting of net proceeds of $4.8 million from the
IPO, the issuance of $1.5 million of 8% convertible notes, proceeds from
equipment financing and proceeds from the exercise of stock options, partially
offset by the repayment on the closing of the IPO of $1.0 million of 8%
convertible notes and the repayment of amounts due on capital leases and
equipment financing notes.
The Company has a $500,000 revolving credit line with a bank, with amounts
available for borrowing based upon the level of qualified receivables and upon
maintaining certain financial covenants. As of December 31, 1996, the Company
was not in compliance with several of these covenants; however, the bank has
temporarily waived the compliance requirement. The balance of outstanding
borrowings under the line at December 31, 1996 was $322,743. As of February 20,
1997, there were no outstanding borrowings under the credit line. The bank line
of credit arrangement expires June 15, 1997.
26
<PAGE>
The Company will require additional capital to fund its operations.*
Although its losses are expected to continue at least through the
first half of 1997, and there can be no assurance that the Company will ever
achieve profitability, the Company anticipates that its existing capital
resources, its bank line and revenues from operations will be adequate to
satisfy its working capital requirements through the first half of 1997.* The
Company has filed a registration statement on Form SB-2 with the Securities and
Exchange Commission to register Common Stock for a public offering with net
proceeds to the Company of approximately $4.0 million. If the public offering
is completed, the Company anticipates that its working capital requirements will
be satisfied through the first quarter of 1998.* 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, and the continued availability of the
bank line, none of which can be predicted with certainty. As a result, there
can be no assurance that the Company will not require additional funding prior
to such date. If required, there can be no assurances that such capital will be
available on acceptable terms, if at all, and such terms may be dilutive to
existing stockholders. The inability to obtain such financing would have a
material adverse effect on the Company's results of operations. The Company
could be required to significantly reduce or suspend its operations, seek a
merger partner or sell additional securities on terms that are highly dilutive
to current investors in the Company. The Company's independent auditors
included an explanatory paragraph in their audit opinion with respect to the
Company's 1996 financial statements which indicated substantial doubt about the
Company's ability to continue as a going concern due to recurring operating
losses and the need for additional financing. The factors leading to, and the
existence of, the explanatory paragraph may materially adversely affect the
Company's relationship with customers and suppliers, its ability to obtain
revenue and manufacture products and its ability to obtain financing.
- ---------
*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 section, and in
"Business" including "Additional Risk Factors Affecting Future Performance."
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Socket Communications, Inc.
We have audited the accompanying balance sheets of Socket Communications,
Inc. as of December 31, 1996 and 1995, and the related statements of operations,
redeemable convertible preferred stock and stockholders' equity (deficit), and
cash flows for each of the three years in the period ended December 31, 1996.
Our audits also included the financial statement schedule listed in the index at
Item 13(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Socket Communications, Inc.
at December 31, 1996 and 1995 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
The accompanying financial statements have been prepared assuming Socket
Communications, Inc. will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company's recurring operating losses and the need
for additional financing raise substantial doubt about its ability to continue
as a going concern. Management's plans as to these matters are also discussed in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ERNST & YOUNG LLP
San Jose, California
January 31, 1997
28
<PAGE>
SOCKET COMMUNICATIONS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 618,344 $ 2,406,655
Accounts receivable, net of allowance for doubtful accounts of $35,330 in 1996
and $47,790 in 1995........................................................... 833,259 900,717
Inventories.................................................................... 738,808 510,331
Prepaid expenses............................................................... 20,523 31,880
--------------- --------------
Total current assets......................................................... 2,210,934 3,849,583
Property and equipment:
Machinery and office equipment................................................. 495,199 340,108
Computer equipment............................................................. 452,713 345,571
--------------- --------------
947,912 685,679
Accumulated depreciation....................................................... (535,387) (332,300)
--------------- --------------
412,525 353,379
Other assets..................................................................... 48,235 72,436
--------------- --------------
Total assets................................................................. $ 2,671,694 $ 4,275,398
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit............................................................ $ 322,743 $ --
Accounts payable and accrued expenses.......................................... 1,277,259 1,089,676
Accounts payable to related parties............................................ 18,654 39,763
Accrued payroll and related expenses........................................... 230,758 357,771
Deferred revenue............................................................... 238,776 112,143
Current portion of capital leases and equipment financing notes................ 109,236 106,629
--------------- --------------
Total current liabilities.................................................... 2,197,426 1,705,982
Long-term portion of capital leases and equipment financing notes................ 102,735 141,121
Stockholders' equity:
Undesignated preferred stock, $0.001 par value:
Authorized shares -- 2,000,000
Issued and outstanding shares -- none in 1996 and 1995....................... -- --
Series A Convertible Preferred Stock, $0.001 par value:
Designated shares -- 1,000,000
Issued and outstanding shares -- 15,500 in 1996, none in 1995................ 1,793,813 --
Common stock, $0.001 par value:
Authorized shares -- 15,000,000
Issued and outstanding shares -- 3,028,976 in 1996 and 2,990,870 in 1995..... 3,029 2,991
Additional paid-in capital..................................................... 11,413,920 11,393,663
Accumulated deficit............................................................ (12,839,229) (8,968,359)
--------------- --------------
Total stockholders' equity................................................... 371,533 2,428,295
--------------- --------------
Total liabilities and stockholders' equity................................. $ 2,671,694 $ 4,275,398
--------------- --------------
--------------- --------------
</TABLE>
See accompanying notes.
29
<PAGE>
SOCKET COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue:
Product......................................................... $ 4,385,251 $ 4,352,368 $ 2,925,942
Royalty and service............................................. 185,187 178,111 148,901
-------------- -------------- --------------
Total revenue................................................. 4,570,438 4,530,479 3,074,843
Cost of revenue................................................... 2,496,028 2,874,062 2,289,015
-------------- -------------- --------------
Gross profit...................................................... 2,074,410 1,656,417 785,828
Operating expenses:
Research and development........................................ 1,067,399 1,098,766 1,261,549
Sales and marketing............................................. 2,666,933 2,232,276 1,535,483
General and administrative...................................... 1,647,335 1,630,668 1,242,308
-------------- -------------- --------------
Total operating expenses...................................... 5,381,667 4,961,710 4,039,340
-------------- -------------- --------------
Operating loss.................................................... (3,307,257) (3,305,293) (3,253,512)
Interest income and other (expense), net.......................... 29,496 101,203 (2,852)
Interest expense.................................................. (50,609) (111,435) (61,196)
-------------- -------------- --------------
Net loss.......................................................... (3,328,370) $ (3,315,525) $ (3,317,560)
-------------- --------------
-------------- --------------
Accretion of preferred stock...................................... (542,500)
--------------
Net loss applicable to common stockholders........................ $ (3,870,870)
--------------
--------------
Net loss per share applicable to common stockholders.............. $ (1.28)
--------------
--------------
Net loss per share (pro forma in 1994)........................ $ (1.63) $ (1.71)
-------------- --------------
-------------- --------------
Weighted average shares outstanding........................... 3,015,263 2,034,653 1,941,081
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes.
30
<PAGE>
SOCKET COMMUNICATIONS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
<TABLE>
<CAPTION>
SERIES A
REDEEMABLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
----------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993............ 415,339 $ 1,623,479 -- $ --
Conversion of stockholders' notes to
Series C redeemable convertible
preferred stock at $6.68 per share in
March 1994, net of issuance costs of
$29,800................................ 165,236 1,074,471 -- --
Conversion of stockholders' notes and
sale of Series D redeemable convertible
preferred stock for $8.02 per share in
May 1994, net of issuance costs of
$32,512................................ 188,818 1,481,729 -- --
Issuance of common stock for services
rendered............................... -- -- -- --
Exercise of common stock options........ -- -- -- --
Net Loss................................ -- -- -- --
------------- ------------- ------------- -------------
Balance at December 31, 1994............ 769,393 4,179,679 -- --
Issuance of Initial Public Offering
common stock for $6.00 per share in
June 1995, net of issuance costs of
$1,805,924............................. -- -- -- --
Conversion of all redeemable convertible
preferred stock to common stock in June
1995................................... (769,393) (4,179,679) -- --
Conversion of convertible notes and
accrued interest to common stock in
June 1995.............................. -- -- -- --
Exercise of common stock options........ -- -- -- --
Exercise of warrants.................... -- -- -- --
Net Loss................................ -- -- -- --
------------- ------------- ------------- -------------
Balance at December 31, 1995............ -- -- -- --
Issuance of Series A Convertible
Preferred Stock........................ -- -- 15,500 1,251,313
Exercise of common stock options........ -- -- -- --
Accretion of preferred stock............ -- -- -- 542,500
Net Loss................................ -- -- -- --
------------- ------------- ------------- -------------
Balance at December 31, 1996............ -- $ -- 15,500 $ 1,793,813
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
----------------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993............ 235,204 $ 235 $ 2,183 $ (2,335,274) $ (2,332,856)
Conversion of stockholders' notes to
Series C redeemable convertible
preferred stock at $6.68 per share in
March 1994, net of issuance costs of
$29,800................................ -- -- -- -- --
Conversion of stockholders' notes and
sale of Series D redeemable convertible
preferred stock for $8.02 per share in
May 1994, net of issuance costs of
$32,512................................ -- -- -- -- --
Issuance of common stock for services
rendered............................... 25,188 25 6,521 -- 6,546
Exercise of common stock options........ 6,322 7 4,049 -- 4,056
Net Loss................................ -- -- -- (3,317,560) (3,317,560)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1994............ 266,714 267 12,753 (5,652,834) (5,639,814)
Issuance of Initial Public Offering
common stock for $6.00 per share in
June 1995, net of issuance costs of
$1,805,924............................. 1,100,550 1,100 4,796,276 -- 4,797,376
Conversion of all redeemable convertible
preferred stock to common stock in June
1995................................... 953,053 953 4,178,726 -- 4,179,679
Conversion of convertible notes and
accrued interest to common stock in
June 1995.............................. 597,291 597 2,388,635 -- 2,389,232
Exercise of common stock options........ 23,596 24 12,058 -- 12,082
Exercise of warrants.................... 49,666 50 5,215 -- 5,265
Net Loss................................ -- -- -- (3,315,525) (3,315,525)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1995............ 2,990,870 2,991 11,393,663 (8,968,359) 2,428,295
Issuance of Series A Convertible
Preferred Stock........................ -- -- -- -- 1,251,313
Exercise of common stock options........ 38,106 38 20,257 -- 20,295
Accretion of preferred stock............ -- -- -- (542,500) --
Net Loss................................ -- -- -- (3,328,370) (3,328,370)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 1996............ 3,028,976 $ 3,029 $ 11,413,920 $ (12,839,229) $ 371,533
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes.
31
<PAGE>
SOCKET COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................................. $ (3,328,370) $ (3,315,525) $ (3,317,560)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation....................................................... 79,095 160,929 139,692
Amortization....................................................... 150,634 95,847 --
Accrued interest on converted notes................................ -- 110,232 26,714
Issuance of common stock for services rendered..................... -- -- 6,546
Loss on disposal of property and equipment......................... 7,173 -- --
Changes in operating assets and liabilities:
Accounts receivable.............................................. 67,458 36,101 (517,759)
Inventories...................................................... (228,477) (300,270) (137,037)
Prepaid expenses................................................. 11,357 6,708 (34,888)
Other assets..................................................... 24,201 (26,426) (33,436)
Accounts payable and accrued expenses............................ 191,583 (102,908) 466,465
Accounts payable to related parties.............................. (25,109) (41,695) 42,001
Accrued payroll and related expenses............................. (127,013) 156,953 153,156
Deferred revenue................................................. 126,633 (9,267) 88,137
------------- ------------- -------------
Net cash used in operating activities.......................... (3,050,835) (3,229,321) (3,117,969)
INVESTING ACTIVITIES
Purchase of equipment................................................ (296,048) (146,799) (242,076)
------------- ------------- -------------
Net cash used in investing activities.......................... (296,048) (146,799) (242,076)
FINANCING ACTIVITIES
Payments on capital leases and equipment financing notes............. (121,640) (79,043) (30,593)
Proceeds from equipment financing.................................... 85,861 125,493 --
Net advances on revolving line of credit............................. 322,743 -- --
Proceeds from issuance of convertible notes.......................... -- 1,469,000 2,696,011
Repayment of convertible notes....................................... -- (955,000) --
Stock options exercised.............................................. 20,295 12,082 4,056
Stock warrants exercised............................................. -- 5,265 --
Net proceeds from sale of preferred stock............................ 1,251,313 -- 950,212
Net proceeds from sale of common stock............................... -- 4,797,376 --
------------- ------------- -------------
Net cash provided by financing activities...................... 1,558,572 5,375,173 3,619,686
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................. (1,788,311) 1,999,053 259,641
Cash and cash equivalents at beginning of year....................... 2,406,655 407,602 147,961
------------- ------------- -------------
Cash and cash equivalents at end of year............................. $ 618,344 $ 2,406,655 $ 407,602
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest............................................... $ 50,609 $ 25,599 $ 13,564
Lease obligations incurred for equipment............................. $ -- $ -- $ 288,389
Notes payable and accrued interest converted to preferred stock...... $ -- $ -- $ 1,605,988
Notes payable and accrued interest converted to common stock......... $ -- $ 2,389,232 $ --
Issuance of common stock for services rendered....................... $ -- $ -- $ 6,546
Accretion of preferred stock......................................... $ 542,500 $ -- $ --
</TABLE>
See accompanying notes.
32
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION
Socket Communications, Inc. ("Socket" or "the Company") develops and sells
data communications connection solutions for the mobile computer market.
Socket's Narrowband Personal Communications Services (NPCS) products include
hardware, software and services for wireless messaging. Socket's
PageCard-Registered Trademark- is a PC Card alphanumeric pager that can download
wireless data to a mobile computer. The PageSoft-Registered Trademark- library
of wireless messaging software includes NPCS development tools, send and receive
applications, plus rules-based e-mail forwarding agents. Socket Wireless
Messaging Services include operator dispatch, Internet and World Wide Web
gateways for wireless messages, plus voice mail and fax forwarding services with
automatic wireless notification. Other Socket products include a family of
serial PC Cards and a family of wired Ethernet PC Cards. In 1995, the Company
was reincorporated in the state of Delaware.
BASIS OF PRESENTATION
The financial statements have been prepared on a going concern basis. The
Company has incurred cumulative losses to date of $12,839,229. The Company
expects product revenue to increase in 1997 with growth in sales of its PageCard
product, which was introduced in December 1994, and the expansion of its serial
card product line. However, 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 the Company is unable to obtain the
necessary funds, the Company could be required to significantly reduce or
suspend its operations, seek a merger, or sell additional securities on terms
that are highly dilutive to current investors in the Company. 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 December 31, 1996
and 1995, the Company had no material investments in debt or equity securities.
INVENTORIES
Inventories consist principally of raw materials and sub-assemblies, which
are stated at the lower of cost (first-in, first-out) or market.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Raw materials and sub-assemblies.............................................. $ 712,106 $ 481,592
Finished goods................................................................ 26,702 28,739
----------- -----------
$ 738,808 $ 510,331
----------- -----------
----------- -----------
</TABLE>
33
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method, over the estimated useful lives of the
assets which range from one to five years. Assets under capital leases are
amortized over the shorter of the asset life or the remaining lease term.
CONCENTRATION OF CREDIT RISK
The Company uses financial instruments that potentially subject it to
concentrations of credit risk. Such instruments include cash equivalents and
accounts receivable. The Company invests its cash in cash deposits and money
market funds. The Company places its investments with high-credit-quality
financial institutions and limits the credit exposure to any one financial
institution or instrument. To date, the Company has not experienced losses on
these investments. The Company sells primarily to distributors and original
equipment manufacturers. The Company performs ongoing credit evaluations of its
customers' financial condition but generally requires no collateral. Reserves
are maintained for potential credit losses, and such losses have been within
management's expectations.
REVENUE RECOGNITION
Product revenue to customers other than distributors is recognized at the
time of shipment. Revenue on shipments to distributors, which are subject to
certain rights of return and price protection, is deferred until the merchandise
is sold by the distributors. Certain royalty agreements provide for per unit
royalties to be paid to the Company based on the sale of certain of the
Company's products by third party manufacturers. Revenue under such agreements
is recognized at the time of shipment by the third party manufacturer. The cost
of such royalty revenue is immaterial.
SALES RETURNS AND WARRANTIES
The Company accrues for estimated sales returns/exchanges for end user sales
and warranty costs upon recognition of sales. The Company has not experienced
significant warranty claims to date.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred
$370,945, $340,086 and $292,608 in advertising costs during 1996, 1995 and 1994,
respectively.
NET LOSS PER SHARE
Net loss per share applicable to common stockholders in 1996 is computed
using the weighted average number of shares of common stock outstanding during
the period.
The 1995 and 1994 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, however,
pursuant to the Securities and Exchange Commission Staff Accounting Bulletins,
common stock and common equivalent shares issued by the Company at prices below
the public offering price during the four quarters ended March 31, 1995 have
been included in the calculation as if they were outstanding for all periods
through March 31, 1995 (using the treasury stock method for warrants and options
at the initial public offering price). Net loss per share for 1994 calculated on
this basis was $(2.44).
In 1994 pro forma net loss per share, which is disclosed on the statement of
operations, has been computed as described above and also gives effect, even if
antidilutive, to common equivalent shares
34
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
from redeemable convertible preferred stock that converted upon the closing of
the Company's initial public offering (using the if-converted method). All of
the convertible preferred stock outstanding as of the closing date of the
offering automatically converted into 953,054 shares of common stock.
SUPPLEMENTAL NET LOSS PER SHARE
Supplemental net loss per share for 1995 computed to give effect to the
conversion of redeemable convertible preferred shares as of January 1, 1995
(using the if-converted method) was $(1.44). Supplemental net loss per share
excluding the accretion of preferred stock was $(1.10) for 1996.
NOTE 3 -- CONVERTIBLE NOTES AND WARRANTS ISSUED PRIOR TO THE IPO
During August through December 1994 and January through April 1995, the
Company issued $1,765,000 and $1,469,000, respectively, of convertible notes
(collectively the "Pre-IPO Debt Financing"). In June 1995, on completion of the
IPO, $955,000 in convertible note principal was repaid and the balance of
$2,279,000 plus accrued interest of $110,232 (total $2,389,232) was converted to
597,291 shares of common stock.
In return for pro rata participation by Series D redeemable convertible
preferred stockholders in the Pre-IPO Debt Financing, the Company exchanged each
participating stockholder's existing Series D preferred shares purchased at
$8.02 per share for Series D-1 preferred shares at $5.88 per share, and each
participating stockholder's outstanding warrants to purchase Series D preferred
shares at $8.02 per share were exchanged for warrants to purchase an equal
number of common shares at the then fair market value of $0.59 per share. In
June 1995, antidilution provisions in the Series D stockholder agreements
further reduced the conversion price to $5.80 per share for Series D and $4.93
per share for Series D-1. In return for pro rata participation by Series C
preferred stockholders in the Pre-IPO Debt Financing, each participating
stockholder's outstanding warrants to purchase Series C preferred shares at
$6.68 per share were exchanged for warrants to purchase an equal number of
common shares at the then fair market value of $0.59 per share. In June 1995,
antidilution provisions in the Series C stockholder agreements reduced the
conversion price of Series C stock to $5.26 per share. Antidilution provisions
applicable to the Series A and Series B preferred stockholders were waived by
the stockholders. As a result of additional shares issued in the Pre-IPO Debt
Financing for Series D-1 and the additional shares issued to Series C, D and D-1
preferred shareholders for antidilution protection, 769,393 originally issued
preferred shares, constituting all of the preferred shares outstanding at the
time of the IPO, were converted in June 1995 into 953,053 common shares.
During 1993, 1994, and 1995, in connection with the issuance of convertible
notes, the Company issued warrants to purchase 60,458 shares of the Company's
preferred stock. In return for pro rata participation in the Pre-IPO Debt
Financing 53,053 of these warrants were exchanged for an equal number of
warrants to purchase shares of the Company's common stock. After adjustments for
antidilution, these common warrants and remaining preferred warrants were net
exercised into 49,666 shares of common stock. Also, in connection with the
Pre-IPO Debt Financing the Company issued warrants to purchase 165,064 shares of
the Company's common stock. These warrants were subsequently canceled in
connection with the IPO.
NOTE 4 -- SERIES A CONVERTIBLE PREFERRED STOCK
The Board of Directors may issue up to 3,000,000 shares of undesignated
preferred stock in one or more series and may fix the rights, privileges and
restrictions granted to or imposed upon any wholly unissued series of
undesignated preferred stock, as well as to fix the number of shares
constituting any
35
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- SERIES A CONVERTIBLE PREFERRED STOCK (CONTINUED)
series and designations of such series, without any further vote or action by
the stockholders. In October 1996, the Company designated 1,000,000 shares of
the 3,000,000 Undesignated Preferred Stock as Series A Convertible Preferred
Stock.
On November 1, 1996 (the "Closing"), the Company sold 15,500 shares of its
Series A Convertible Preferred Stock, $0.001 par value, at $100 per share
pursuant to Regulation D of the Securities Act of 1933, as amended (the
"Transaction"). The Transaction was effected pursuant to a Private Offering
Memorandum.
The holders of the Series A Convertible Preferred Stock are entitled to
receive dividends at an annual rate of 6% (adjusted ratably if a holder converts
Series A Convertible Preferred Stock into Common Stock prior to a Dividend
Payment Date, as defined hereafter), payable on April 1, 1997 and November 1,
1997 (each a "Dividend Payment Date"), and otherwise when, and as and if
declared by the Board of Directors at the same rate as to which any dividend is
declared and paid on shares of Common Stock. No dividends shall be declared or
paid on any shares of Common Stock unless an equal or greater dividend is paid
on the Series A Convertible Preferred Stock in the same year. Each share of
Series A Convertible Preferred Stock is convertible at the option of the holder,
in whole or in part, at any time on or after the 60th day following the Closing,
into shares of Common Stock of the Company equal to $100 divided by the lower
of: (i) $2 5/8; and (ii) 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 business day on which notice of conversion is transmitted by the holder
of such share of Series A Convertible Preferred Stock, subject to adjustment in
certain events. Each share of Series A Convertible Preferred Stock shall be
converted automatically into shares of Common Stock on the earliest of (i)
immediately preceding a merger or consolidation of the Company if as a result of
such transaction the holders of Common Stock would receive publicly traded
securities with a market value greater than the initial liquidation preference
of the Series A Convertible Preferred Stock or (ii) November 1, 1997. The
Company recorded accretion of $542,500 for the 35% discount given to the Series
A convertible preferred stockholders in the fourth quarter of 1996.
In the event of any liquidation, dissolution or winding up of the Company,
the assets of the Company are to be distributed first to each holder of the
Series A Convertible Preferred Stock in an aggregate amount equal to the number
of shares of the Series A Convertible Preferred Stock held by such holder
multiplied by $100, plus any declared or unpaid dividends thereon; next to the
holders of the Common Stock in an aggregate amount equal to the number of shares
of Common Stock held by each holder multiplied by the per share Stated Value (as
such term is defined in the Certificate of Designation); and thereafter the
holders of the Common Stock and the Series A Convertible Preferred Stock are
entitled to share pro rata in all remaining assets of the Company available for
distribution, with the number of shares held by each holder of Series A
Convertible Preferred Stock deemed to be the number of shares of Common Stock
into which the shares of Series A Convertible Preferred Stock are then
convertible. As long as any Preferred Stock is outstanding, certain
consolidations or mergers, sales or dispositions of all or substantially all of
the assets of the Company or a transaction resulting in the sale of the shares
representing a majority of the voting power of the Company are deemed to be a
liquidation, dissolution or winding up of the Company for these purposes.
Holders of the Series A Convertible Preferred Stock have no voting rights,
provided that the consent of the holders of record of a majority of the
outstanding shares of Series A Convertible Preferred Stock is required in order
to authorize or issue any shares of any new class of shares having preferences
greater than the Series A Convertible Preferred Stock as to change the
designation of the
36
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- SERIES A CONVERTIBLE PREFERRED STOCK (CONTINUED)
rights, preferences or privileges of the Series A Convertible Preferred Stock so
as to materially adversely affect the Series A Convertible Preferred Stock, to
increase the number of shares of Series A Convertible Preferred Stock, and in
order to reissue any shares that are acquired by the Company.
In connection with the Transaction, the placement agent received a warrant
to purchase 43,539 shares of common stock at an exercise price of $3.56 per
share. The warrant is immediately exercisable and has a 5 year term. No shares
were converted as of December 31, 1996.
NOTE 5 -- BANK FINANCING ARRANGEMENTS
The Company entered into a credit agreement (the Agreement) with a bank,
which commenced in July 1995 and expires in June 1997. The Agreement is secured
by all of 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 at an interest rate of the lenders index rate, which is
based on prime, plus 1.5% (9.75% at December 31, 1996). The Agreement contains
covenants that require the Company to maintain certain financial ratios. The
Company was not in compliance with the covenants at December 31, 1996 which
include tangible net worth, total liability to tangible net worth and current
ratios, and has obtained a waiver from the bank. As of December 31, 1996,
outstanding borrowings under the Agreement were $322,743.
In addition to the line of credit, the Company has an available letter of
credit for $500,000 under an agreement with a bank. This agreement is secured by
various international accounts receivables and a California Export Finance
Program Guarantee. At December 31, 1996, no amounts were outstanding under the
letter of credit.
NOTE 6 -- CAPITAL LEASE OBLIGATIONS AND EQUIPMENT FINANCINGS
The Company leases certain of its equipment under capital leases. At
December 31, 1996 and 1995, property and equipment with a cost of $478,165 and
$387,656, respectively, were subject to such financing arrangements. Related
accumulated amortization at December 31, 1996 and 1995, amounted to $271,569 and
$120,935, respectively. Future minimum payments under capital lease and
equipment financing arrangements as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997.................................................................... $ 139,534
1998.................................................................... 94,695
1999.................................................................... 27,206
---------
Total minimum payments................................................ 261,435
Less amount representing interest....................................... (49,464)
---------
Present value of net minimum payments................................... 211,971
Less current portion.................................................... (109,236)
---------
Long-term portion..................................................... $ 102,735
---------
---------
</TABLE>
37
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- COMMITMENTS
The Company leases its operating facilities under a five-year noncancelable
operating lease which expires in October 2001. Future minimum lease payments
under operating leases net of sublease receipts are as follows:
<TABLE>
<S> <C>
1997..................................................................... $ 210,467
1998..................................................................... 195,905
1999..................................................................... 195,905
2000..................................................................... 195,905
2001..................................................................... 163,254
---------
$ 961,436
---------
---------
</TABLE>
Rental expense under all operating leases was $330,097, $413,616 and
$222,816 for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company subleases a former facility under a noncancelable operating
lease which expires in November 1997. Future minimum lease receipts under this
sublease are $33,534.
NOTE 8 -- STOCK OPTION PLANS
The Company's 1993 Stock Option/Stock Issuance Plan (the 1993 Plan) provides
for the grant of incentive stock options and nonstatutory stock options or the
immediate issuance of the Company s common stock to employees, directors, and
consultants of the Company at prices not less than 85% of the fair market value
of the common stock on the date of grant, as determined by the Board of
Directors. The vesting and exercise provisions are determined by the Board of
Directors, with a maximum term of ten years. Options granted and shares issued
under the 1993 Plan generally vest over a four-year period, with 25% vesting
after one year and 2.08% each month afterwards. Unvested shares which have been
purchased are subject to repurchase by the Company.
Information with respect to the 1993 Plan is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------
AVAILABLE NUMBER OF WEIGHTED AVERAGE
FOR GRANT SHARES PRICE PER SHARE
---------- --------- -----------------
<S> <C> <C> <C>
Balance at December 31, 1993................................. 53,597 58,628 $ 0.49
Increase in shares authorized.............................. 121,577 -- --
Granted.................................................... (177,568) 177,568 0.62
Canceled................................................... 16,249 (16,249) 0.38
Exercised.................................................. -- (6,322) 0.64
---------- --------- ------
Balance at December 31, 1994................................. 13,855 213,625 0.60
Increase in shares authorized.............................. 23,380 -- --
Granted.................................................... (16,617) 16,617 0.59
Canceled................................................... 62,887 (62,887) 0.60
Exercised.................................................. -- (23,596) 0.51
---------- --------- ------
Balance at December 31, 1995................................. 83,505 143,759 0.61
Canceled................................................... 13,386 (13,386) 0.62
Exercised.................................................. -- (38,106) 0.56
---------- --------- ------
Balance at December 31, 1996................................. 96,891 92,267 $ 0.63
---------- --------- ------
---------- --------- ------
</TABLE>
38
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- STOCK OPTION PLANS (CONTINUED)
As of December 31, 1996, 67,286 options were exercisable. The Company has
not granted options from the 1993 Plan since February 1995 and does not intend
to make any future grants from the 1993 Plan. The weighted average contractual
life for options outstanding under the 1993 Plan at December 31, 1996 is
approximately 7.1 years.
The Company's 1995 Stock Plan (the 1995 Plan) provides for the grant of
incentive stock options and nonstatutory stock options to employees, directors,
and consultants of the Company. The exercise price per share of all incentive
stock options granted must be at least equal to the fair market value per share
of Common Stock on the date of grant. The exercise price per share of all
nonstatutory stock options shall be not less than 85% of the fair market value
of the common stock on the date of grant. The vesting and exercise provisions
are determined by the Board of Directors, with a maximum term of ten years.
Information with respect to the 1995 Plan is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------
AVAILABLE NUMBER OF WEIGHTED AVERAGE
FOR GRANT SHARES PRICE PER SHARE
---------- ---------- -----------------
<S> <C> <C> <C>
Shares authorized.......................................... 285,000 -- $ --
Granted.................................................... (175,749) 175,749 5.00
Canceled................................................... 48,047 (48,047) 5.00
---------- ---------- ------
Balance at December 31, 1995................................. 157,298 127,702 5.00
Increase in shares authorized.............................. 150,000 -- --
Granted.................................................... (360,650) 360,650 2.98
Canceled................................................... 91,254 (91,254) 4.60
Repriced options canceled.................................. 260,192 (260,192) 4.12
Repriced options granted................................... (260,192) 260,192 1.55
---------- ---------- ------
Balance at December 31, 1996................................. 37,902 397,098 $ 1.57
---------- ---------- ------
---------- ---------- ------
</TABLE>
In December 1996, the Company granted employees, including executives, the
option to exchange 260,192 options with an aggregate exercise price of
$1,073,260 for new options with an exercise price of $1.55 per share. All vested
options that are repriced will vest monthly over an additional one year period
and the unvested repriced options will vest under the original terms of the
option grant. As of December 31, 1996, no options were exercisable. The weighted
average contractual life for options outstanding under the 1995 Stock Plan at
December 31, 1996 is approximately 10 years.
The Company has elected to follow Accounting Principle Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. For options granted prior to the initial public offering, the fair
value for these options was estimated at the date of grant using the Minimum
Value option pricing method with the following assumption for 1995: a risk-free
interest rate of 5.67%; a dividend yield of
39
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- STOCK OPTION PLANS (CONTINUED)
0%; and an expected life of options of 5.5 years. For options granted subsequent
to the initial public offering, the fair value for these options was estimated
at the date of grant using the Black-Scholes option pricing model with the
following assumptions: a risk-free interest rate of 5.43%; a dividend yield of
0%; a volatility factor of the expected market price of the Company's common
stock of .60; and an expected life of the option of 5.5 years.
The Minimum Value option valuation method may be used by nonpublic companies
to value an award. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement 123, the Company's net loss per
share would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Pro forma net loss applicable to common stockholders.................... $ (3,921,363)
Pro forma net loss...................................................... $ (3,381,295)
Pro forma loss per share................................................ $ (1.30) $ (1.66)
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1999.
NOTE 9 -- WARRANTS
The Company issued warrants to purchase common stock in connection with its
initial public offering and periodically granted warrants in connection with
certain note agreements and certain lease agreements. The Company has the
following warrants outstanding to purchase common stock at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER PRICE PER
CAPITAL STOCK OF SHARES SHARE EXPIRATION DATE
- -------------------------------------------------- --------- --------- -------------------
<S> <C> <C> <C>
Common............................................ 4,985 $ 5.26 June 1998
Common............................................ 550,275 $ 7.20 June 2000
Common............................................ 150,000 $ 7.20 June 2000
Common............................................ 43,539 $ 3.56 November 2001
Common............................................ 8,791 $ 5.6875 December 2001
</TABLE>
The common warrants expiring in June 2000 are subject to certain dilution
adjustments resulting from the subsequent issuance of common stock at prices
below the initial public offering price for the Company's common stock.
40
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- SHARES RESERVED
Common stock reserved for future issuance was as follows at December 31,
1996:
<TABLE>
<S> <C>
Stock option plans outstanding (see Note 8).............................. 489,365
Reserved for future stock option grants (see Note 8)..................... 134,793
Common stock warrants (see Note 9)....................................... 564,051
Underwriter's warrants (see Notes 4 and 9)............................... 193,539
Series A Preferred Stock (see Note 4).................................... 3,000,000
---------
Total common stock reserved for future issuance........................ 4,381,748
---------
---------
</TABLE>
NOTE 11 -- INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes
for the years ended December 31, 1996, 1995, and 1994.
As of December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately $9,100,000 and $4,500,000, respectively. The
Company also had federal and state tax credit carryforwards of approximately
$139,000 and $113,000, respectively. The net operating loss and credit
carryforwards will expire at various dates beginning in 1997 through 2011, if
not utilized.
The utilization of the federal net operating loss, and the deduction of
equivalent federal tax credit carryforwards of approximately $5,200,000 included
in the above amounts will be subject to a cumulative annual limitation of
approximately $600,000 per year pursuant to the stock ownership change provision
of the Tax Reform Act of 1986. Future changes in ownership, including stock
offerings, may result in additional limitations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Net operating loss carryforwards........................................ $ 3,370,000 $ 2,183,000
Credits................................................................. 213,000 181,000
Capitalized research and development costs.............................. 854,000 774,000
Reserves................................................................ 158,000 79,000
Other................................................................... 282,000 291,000
-------------- --------------
Total deferred tax assets............................................. 4,877,000 3,508,000
Valuation allowance for deferred tax assets............................. (4,877,000) (3,508,000)
-------------- --------------
Net deferred tax assets............................................... $ -- $ --
-------------- --------------
-------------- --------------
</TABLE>
NOTE 12 -- INDUSTRY AND GEOGRAPHIC INFORMATION
The Company conducts its business within one industry segment. Export
revenues, predominately representing sales to European countries, accounted for
approximately 40% of total revenue for the years ended December 31, 1996 and
1995, and 52% for the year ended December 31, 1994. The Company had no
significant operations outside the United States through December 31, 1996.
41
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13 -- MAJOR CUSTOMERS
Customers who accounted for at least 10% of total revenues were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Ingram Micro..................................................................... 17% 11% *
Tech Data........................................................................ 12% 12% 16%
Mitsubishi (UK).................................................................. * 20% 16%
</TABLE>
- ------------------------
* Revenues were less than 10%
NOTE 14 -- RELATED PARTIES
The Company had outstanding accounts payable to the Impact Zone of $18,654,
$39,763 and $56,984 at December 31, 1996, 1995, and 1994 respectively, and
incurred expenses during the years ended December 31, 1996, 1995, and 1994 of
$211,329, $130,340 and $361,169 respectively. The former Vice President of
Engineering, currently technical consultant to the Company is a principal
stockholder of The Impact Zone. The Impact Zone provides consulting services,
rents office space, and rents equipment on a month-to-month basis to the
Company.
The Company incurred expenses during the years ended December 31, 1995, and
1994 of $11,314 and $69,917, respectively, to a director and stockholder of the
Company for consulting services. No amounts were incurred or outstanding for the
year ended December 31, 1996.
NOTE 15 -- RETIREMENT PLAN
During fiscal year 1996, the Company adopted a tax-deferred savings plan,
the Socket Communications, Inc. 401(k) Plan, for the benefit of qualified
employees. The plan is designed to provide employees with an accumulation of
funds at retirement. Qualified employees may elect to make contributions to the
plan on a quarterly basis. No contributions are made by the Company.
NOTE 16 -- EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF INDEPENDENT AUDITOR'S
REPORT
On January 29, 1997, the Company received a $500,000 loan from Cetronic AB
("Cetronic") 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 is 6 months. The principal and accrued interest
thereon may be converted 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 page receivers) products
being developed jointly by Socket and Cetronic.
On February 14, 1997, the Company received an aggregate of $500,000 in loans
from several 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.
42
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
The information required in Items 9-12 is hereby incorporated by reference
from the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on June 17, 1997.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. All financial statements.
INDEX TO FINANCIAL STATEMENTS PAGE
----
Report of Ernst & Young LLP, Independent Auditors. . . . . . 28
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . 29
Statements of Operations . . . . . . . . . . . . . . . . . . 30
Statements of Redeemable Convertible Preferred Stock
And Stockholders' Equity (Deficit) . . . . . . . . . . . . 31
Statements of Cash Flows . . . . . . . . . . . . . . . . . . 32
Notes to Financial Statements. . . . . . . . . . . . . . . . 33-42
2. Financial statement schedules.
II. Valuation and Qualifying Accounts . . . . . . . . . . . S-1
3. Exhibits.
3.1 Certificate of Incorporation. Reference is made to Exhibit 3.1 of
the Company's Registration Statement on Form SB-2 No. 33-91210-LA
filed on June 2, 1995 and declared effective on June 6, 1995,
which is incorporated herein by reference.
3.3 By-laws. Reference is made to Exhibit 3.3 of the Company's
Registration Statement on Form SB-2 No. 33-91210-LA filed on June
2, 1995 and declared effective on June 6, 1995, which is
incorporated herein by reference.
10.1 Form of Indemnification Agreement entered into between the Company
and its directors and officers. Reference is made to Exhibit 10.1
of the Company's Registration Statement on Form SB-2 No. 33-91210-
LA filed on June 2, 1995 and declared effective on June 6, 1995,
which is incorporated herein by reference.
43
<PAGE>
10.2 1993 Stock Option/Stock Issuance Plan and forms of agreement
thereunder. Reference is made to Exhibit 10.2 of the Company's
Registration Statement on Form SB-2 No. 33-91210-LA filed on June
2, 1995 and declared effective on June 6, 1995, which is
incorporated herein by reference.
10.3 1995 Stock Plan and forms of agreement thereunder. Reference is
made to Exhibit 10.3 of the Company's Registration Statement on
Form SB-2 No. 33-91210-LA filed on June 2, 1995 and declared
effective on June 6, 1995, which is incorporated herein by
reference.
10.4 Amended and Restated Investors' Rights Agreement among the Company
and certain stockholders of the Company dated May 6, 1994.
Reference is made to Exhibit 10.5 of the Company's Registration
Statement on Form SB-2 No. 33-91210-LA filed on June 2, 1995 and
declared effective on June 6, 1995, which is incorporated herein
by reference.
10.5 Standard Lease Agreement by and between Central Court, LLC and the
Company dated September 15, 1996. Reference is made to Exhibit
10.5 of the Company's Registration Statement on Form SB-2 No. 333-
22273 filed on February 24, 1997, which is incorporated herein by
reference.
10.6* PageCard Development, Manufacturing and Distribution Agreement by
and between Mitsubishi Corporation and the Company, dated
December 1, 1994. Reference is made to Exhibit 10.7 of the
Company's Registration Statement on Form SB-2 No. 33-91210-LA
filed on June 2, 1995 and declared effective on June 6, 1995,
which is incorporated herein by reference.
10.7* Co-Marketing and Services Agreement by and between The National
Dispatch Center, Inc. and the Company dated February 6, 1995.
Reference is made to Exhibit 10.9 of the Company's Registration
Statement on Form SB-2 No. 33-91210-LA filed on June 2, 1995 and
declared effective on June 6, 1995, which is incorporated herein
by reference.
10.8 Employment Agreement between Micheal Gifford and the Company dated
July 17, 1996.
10.9 Employment Agreement between Martin Levetin and the Company dated
February 2, 1996.
(b) Reports on Form 8-K during the fourth quarter: None.
11.1 Statement of computation of earnings per share
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule.
- ---------
* Confidential treatment has been granted with respect to certain portions of
this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
SOCKET COMMUNICATIONS, INC.
---------------------------
Registrant
Date: March 14, 1997 /s/ Martin S. Levetin
--------------------------------------
Martin S. Levetin
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Martin Levetin
and David Dunlap as his attorneys-in-fact, each with the power of substitution,
for him in any and all capacities, to sign any and all amendments to this Report
on Form 10-KSB and to file the same, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By /s/ Martin S. Levetin President and Chief Executive March 14, 1997
- ------------------------- Officer
Martin S. Levetin
By /s/ David W. Dunlap Vice President of Finance March 14, 1997
- ------------------------- and Administration and
David W. Dunlap Chief Financial Officer
By /s/ Micheal L. Gifford Executive Vice President March 14, 1997
- ------------------------- and Director
Micheal L. Gifford
By /s/ Charlie Bass Chairman of the Board March 14, 1997
- ------------------------- of Directors
Charlie Bass
By /s/ Jack C. Carsten Director March 14, 1997
- -------------------------
Jack C. Carsten
By /s/ Gary W. Kalbach Director March 14, 1997
- -------------------------
Gary W. Kalbach
45
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SOCKET COMMUNICATIONS, INC.
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at Charged to Balance at
Beginning of Costs and Charged to Amounts End of
Description Period Expenses Other Written Off Period
- --------------------------------------------------- -------------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Accounts Receivable Allowance for Doubtful
Accounts:
1996. . . . . . . . . . . . . . . . $ 47,790 $ 4,830 -- $ 17,290 $ 35,330
1995. . . . . . . . . . . . . . . . $ 24,899 $ 38,774 -- $ 15,883 $ 47,790
1994. . . . . . . . . . . . . . . . $ 35,922 -- -- $ 13,122 $ 24,899
</TABLE>
S-1
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of July 17,
1996 (the "Effective Date") by and between Socket Communications, Inc., a
Delaware corporation (the "Company"), and Micheal Gifford ("Executive").
WHEREAS, Executive has been employed as an officer of the Company under an
employment agreement which expired on May 5, 1996: and
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 employes 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.
<PAGE>
4. COMPENSATION AND BENEFITS.
a. BASE COMPENSATION. During the term of this Agreement, the
Company shall pay to Executive a base annual salary of One Hundred Twenty
Thousand Dollars ($120,000), payable in equal semi-monthly installments in
accordance with the Company's payroll schedule. During the term of this
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, a copy of which is attached hereto as
Exhibit A.
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 agrees that should his PTO accrual reach the maximum under
the Company's policy, he will cease accruing PTO until he uses enough PTO to
bring it below the maximum. Notwithstanding the foregoing, if Executive is
expressly requested by the Chief Executive Officer of the Company to work in
lieu of taking time off and as a result Executive accrues PTO in excess of the
maximum, Executive will be paid for such PTO in excess of the maximum.
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 the 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;
<PAGE>
(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, it
shall provide to Executive each of the following:
(i) Executive's regular base salary for a period
of six (6) months, payable on normal Company paydays during that six month
period (the "Severance Period"). Executive will be entitled to receive this
payment regardless of whether or not he secures other employment during the
Severance 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 Severance Period. Executive agrees that
should he become eligible for health insurance benefits provided by another
employer during the Severance Period, he will immediately provide written notice
of such event to the Company's Board of Directors.
(iii) For the first quarter following Executive's
termination, 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 second 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. In the event of termination in the first half of the
quarter, the quarter in which the termination occurs shall be the "first
quarter" pursuant to this paragraph. In the event of termination in the second
half of the quarter, the "first quarter" shall be the quarter following the
quarter in which the termination occured. Executive understands that he is not
entited 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 the 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 by 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).
6. GOVERNING LAW. This agreement shall be interpreted, construed,
governed, and enforced according to the laws of the State of Delaware.
<PAGE>
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 and be settled by final
and binding arbitration in Alameda County, 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 amendments 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
<PAGE>
hereto as Exhibit B, 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:
/s/ Micheal Gifford
---------------------------------------
Micheal Gifford
COMPANY:
SOCKET COMMUNICATIONS, INC.
/s/ David W. Dunlap
--------------------------------------
By: David W. Dunlap
Its: Vice President Finance &
Administration
<PAGE>
EXHIBIT 10.9
Martin Levetin February 2, 1996
38 Springhill Road
Randolph, N.J. 07869
Dear Martin,
On behalf of the Board of Directors, I am pleased to offer you the position of
President and Chief Executive Officer of Socket Communications, Inc. as an
exempt employee, with employment commencing on March 1, 1996. In this position,
you will report directly to Socket's Board of Directors. You will be elected to
Socket's Board at the first Board meeting following your start of employment.
Thereafter, your tenure as a Board member will be determined by the Company's
Articles of Incorporation.
The terms and conditions which will apply to your compensation and employment
are as follows:
For calendar year 1996, your base salary will be $13,333.34 per month, payable
semi-monthly (equivalent to $160,000 annualized rate). In January 1997, your
base salary will be reviewed. In addition to the base salary, you will
participate in Socket's Management Incentive Compensation Program. Your portion
of the Program for calendar year 1996 will be $65,000 at plan ($16,250 per
quarter) and will be based on the current 1996 Business Plan or any plan
subsequently approved by the Board. The full $16,250 amount for Q1 1996 will be
paid to you in April 1996 if you begin employment by March 1, 1996.
This offer of employment includes a stock option grant of 100,000 shares of
Common Stock to be vested over a four year period according to Socket's 1995
Stock Option Plan. These stock options will be authorized at the Board meeting
following your hire date with an exercise price equal to the fair market value
of the Common Stock at that time. Shares vest 25% after 12 months and 1/48
monthly thereafter except that if you should be involuntary terminated without
cause in the first 12 months, your shares will vest prorata through the date of
termination.
The Company will pay for a portion of your costs of relocation as follows:
twelve coach round-trip airline trips (SFO, Oakland or San Jose - Newark) may be
used by you or your wife through October 1, 1996; temporary housing and
automobile allowance of $2,500 per month for six months; payment of the real
estate commission on the sale of your New Jersey residence if sold prior to
March 1, 1997; $10,000 moving allowance for household goods, payable at the time
of move if the move occurs prior to March 1, 1997 and an additional $10,000
moving allowance if the move occurs prior to October 1, 1996.
<PAGE>
Martin Levetin
February 2, 1996
Page 2
Commencing with full-time employment, you will be entitled to all such holiday,
sick, health and medical benefits as are provided to other employees of Socket
Communications, Inc. You must be a regular full-time employee in order to
become eligible for the health plan, other insurance benefits, participation in
the Flexible Benefits Program, Paid Time Off (PTO) program, and when initiated,
the 40l(K) program. Socket Communications, Inc. reserves the right to modify,
amend, or terminate any employee benefits at any time for any reason.
Employment with Socket Communications, Inc. is not for a specific term and can
be terminated by yourself or by Socket Communications, Inc. at any time for any
reason, with or without cause. Any contrary representations which have been
made or which may be made to you are superseded by this offer. In the event of
your involuntary termination for other than cause, vesting of stock options
will cease on the date of termination and the Company shall (i) continue your
base salary payments semi-monthly for six months (ii) continue health insurance
until the earlier of the date of your eligibility for the health insurance
benefits provided by another employer or the expiration of six months (iii) pay
you when paid to Socket employees the full bonus amount to which you would have
been entitled for the first quarter following termination and one-half of such
bonus amount for the second quarter following termination (for this measurement,
if your termination occurs in the first half of a quarter, the first quarter
following termination will be the quarter in which you are terminated,
otherwise, it will be the following quarter) and (iv) offer you the right to
purchase at book value certain items of Company property purchased by the
Company for your use, which may include a personal computer, a cellular phone,
and other similar items.
Socket Communications, Inc. maintains a policy of non-discrimination with all
employees and applicants for employment. All aspects of employment with Socket
Communications, Inc. are governed on the basis of merit, competence,
qualifications and the ability to do the job and will not be influenced in any
manner by race, color, religion, sex, age, national origin, handicap, marital
status, medical condition, or veteran service.
Your employment pursuant to this offer is contingent on you executing Socket's
Proprietary Information and Inventions Agreement (enclosed) and upon you
providing Socket Communications, Inc. with legally required proof of your
identity.
If you accept this offer, the terms described in this letter shall be the
terms of your employment which will begin on March 1, 1996. Any
modifications of these terms must be in writing and signed by yourself and
Socket Communications' Chairman. This offer, if not accepted, will expire on
February 15, 1996.
<PAGE>
Martin Levetin
February 2, 1996
Page 3
This offer comes as a result of the significant due diligence conducted by the
Socket Board of Directors and is conveyed with enthusiasm and optimism for the
prospect of you leading Socket to achieve its full potential. If you accept the
above described offer, please return to me a signed copy of this letter.
Sincerely,
SOCKET COMMUNICATIONS, INC.
/s/ Charlie Bass
By: _____________________________________________
Charlie Bass
Chairman
I accept this offer:
/s/ Martin Levetin
______________________________________________ February 5, 1996
Martin Levetin
<PAGE>
Exhibit 11.1
SOCKET COMMUNICATIONS, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE LOSS
(In thousands, except per share data)
Years Ended December 31,
1996 1995 1994
---------- ----------- -----------
Net loss . . . . . . . . . . . . . $ (3,328) $ (3,316) $ (3,318)
Accretion of preferred stock . . . $ (543)
----------
Net loss . . . . . . . . . . . . . $ (3,871)
----------
----------
Computations of weighted average common and common equivalent
shares outstanding:
Weighted average common shares outstanding . . . 3,015 1,757 249
Common equivalent shares from stock
options, convertible preferred stock, and
convertible notes granted or issued during
the twelve-month period prior to the
Company's initial public offering. . . . . . . -- 278 1,111
-------- ------- ------
Shares used in computing net loss per share. . . . 3,015 2,035 1,360
-------- ------- ------
-------- ------- ------
Net loss per share applicable to common
stockholders . . . . . . . . . . . . . . . . . . . $ (1.28)
--------
--------
Net loss per share . . . . . . . . . . . . . . . . $ (1.63) $(2.44)
------- ------
------- ------
Computation of shares used in pro forma net loss per share:
Total Weighted average common an
common equivalent shares outstanding (as
above). . . . . . . . . . . . . . . . . . . . . 1,360
------- ------
Common equivalent shares attributable to
convertible preferred stock (if-converted
method. . . . . . . . . . . . . . . . . . . . . 581
------- ------
Shares used in computing pro forma net loss per
share. . . . . . . . . . . . . . . . . . . . . . . 1,941
------- ------
------- ------
Pro forma net loss per share . . . . . . . . . . . $(1.71)
------- ------
------- ------
<PAGE>
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-97350) pertaining to Socket Communications, Inc. 1993 Stock
Option/Stock Issuance Plan and 1995 Stock Plan of our report dated January 31,
1997, with respect to the financial statements and schedule of Socket
Communications, Inc. included in this Annual Report (Form 10-KSB) for the year
ended December 31, 1996.
ERNST & YOUNG LLP
San Jose, California
March 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 29 AND 30 OF THE COMPANY'S
FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 618,344
<SECURITIES> 0
<RECEIVABLES> 833,259
<ALLOWANCES> 0
<INVENTORY> 738,808
<CURRENT-ASSETS> 2,210,934
<PP&E> 947,912
<DEPRECIATION> 535,387
<TOTAL-ASSETS> 2,671,694
<CURRENT-LIABILITIES> 2,197,426
<BONDS> 0
1,793,813
0
<COMMON> 3,029
<OTHER-SE> (1,425,309)
<TOTAL-LIABILITY-AND-EQUITY> 2,671,694
<SALES> 4,385,251
<TOTAL-REVENUES> 4,570,438
<CGS> 2,496,028
<TOTAL-COSTS> 2,496,028
<OTHER-EXPENSES> 5,381,667
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,609
<INCOME-PRETAX> (3,870,870)<F1>
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,870,870)<F1>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,870,870)<F1>
<EPS-PRIMARY> (1.28)
<EPS-DILUTED> (1.28)
<FN>
(1) Loss includes one-time charge of $542,500 for
accretion of preferred stock relating to a 35% discount
on conversion of Series A Preferred Stock to common stock
issued in the fourth quarter of 1996.
</FN>
</TABLE>
