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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 1-13810
SOCKET COMMUNICATIONS, INC.
(Name of small business issuer as specified in its charter)
Delaware 94-3155066
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
37400 Central Court, Newark, CA 94560
(Address of principal executive offices including zip code)
(510) 744-2700
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES X NO
--- ---
Number of shares of Common Stock ($0.001 par value) outstanding as of August
10, 1998 was 7,316,027 shares.
This report, including all attachments, contains 24 pages.
1
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INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial information
Condensed Balance Sheets - June 30, 1998 and
December 31, 1997....................................... 3
Condensed Statements of Operations - Three Months and
Six Months Ended June 30, 1998 and 1997................. 4
Condensed Statements of Cash Flows - Six Months Ended
June 30, 1998 and 1997.................................. 5
Notes to Condensed Financial Statements................... 6 - 9
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10 - 21
Part II. Other information
Item 2. Changes in Securities and Use of Proceeds......... 22
Item 4. Submission of Matters to a Vote of Security
Holders................................................. 22
Item 6. Exhibits and Reports on Form 8-K.................. 22 - 23
Signatures................................................ 24
</TABLE>
2
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PART I. FINANCIAL INFORMATION
SOCKET COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31,
1998 1997 *
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 591,641 $ 276,900
Accounts receivable, net................................................................ 1,268,526 899,296
Inventories............................................................................. 315,943 195,127
Prepaid expenses........................................................................ 7,483 9,048
--------------- -------------
Total current assets................................................................. 2,183,593 1,380,371
Property and equipment:
Machinery and office equipment.......................................................... 602,745 600,851
Computer equipment...................................................................... 525,875 530,239
--------------- -------------
1,128,620 1,131,090
Accumulated depreciation................................................................ (901,301) (807,502)
--------------- -------------
227,319 323,588
Other assets............................................................................... 66,878 66,305
--------------- -------------
Total assets......................................................................... $ 2,477,790 $ 1,770,264
--------------- -------------
--------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank lines of credit.................................................................... $ 758,751 $ 523,941
Convertible subordinated notes.......................................................... -- 1,950,000
Accounts payable and accrued expenses................................................... 1,465,673 1,962,354
Accrued payroll and related expenses.................................................... 212,327 277,553
Deferred revenue........................................................................ 187,945 178,625
Current portion of capital leases and equipment financing notes......................... 56,914 61,804
--------------- -------------
Total current liabilities............................................................ 2,681,610 4,954,277
Long-term portion of capital leases and equipment financing notes.......................... 12,879 40,931
Stockholders' net capital deficiency:
Preferred stock, $0.001 par value; Authorized shares - 3,000,000
Series B Convertible Preferred Stock:
Designated shares-37,500; Issued and outstanding shares-30,065
at June 30, 1998 and none at December 31, 1997.................................... 1,565,976 --
Series C Convertible Preferred Stock:
Designated shares-175,000; Issued and outstanding shares-163,468
at June 30, 1998 and none at December 31, 1997................................... 1,714,043 --
Common stock, $0.001 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 7,272,167 at June 30, 1998 and
6,501,275 at December 31, 1997..................................................... 7,272 6,501
Additional paid-in capital.............................................................. 13,818,931 13,208,038
Accumulated deficit..................................................................... (17,322,921) (16,439,483)
--------------- -------------
Total stockholders' net capital deficiency........................................... (216,699) (3,224,944)
--------------- -------------
Total liabilities and stockholders' net capital deficiency........................ $ 2,477,790 $ 1,770,264
--------------- -------------
--------------- -------------
</TABLE>
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* Derived from audited financial statements.
See accompanying notes.
3
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SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues......................................... $1,486,262 $ 1,122,692 $ 2,661,932 $ 2,193,440
Cost of revenue.................................. 564,248 545,584 1,084,331 1,085,707
----------- ------------ ------------ ------------
Gross profit..................................... 922,014 577,108 1,577,601 1,107,733
Operating expenses:
Research and development...................... 253,915 273,105 505,712 544,892
Sales and marketing........................... 500,671 796,234 957,779 1,553,034
General and administrative.................... 290,189 536,817 588,789 866,172
----------- ------------ ------------ ------------
Total operating expenses................... 1,044,775 1,606,156 2,052,280 2,964,098
----------- ------------ ------------ ------------
Operating loss................................... (122,761) (1,029,048) (474,679) (1,856,365)
Interest income.................................. 0 639 4 2,510
Interest expense................................. (13,874) (36,477) (76,574) (63,458)
----------- ------------ ------------ ------------
Net loss......................................... (136,635) (1,064,886) (551,249) (1,917,313)
Preferred stock dividend......................... (67,395) (8,620) (82,189) (38,938)
Accretion of preferred stock.................... -- -- (250,000) --
----------- ------------ ------------ ------------
Net loss applicable to common
stockholders............................... $ (204,030) $(1,073,506) $ (883,438) $(1,956,251)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Net loss per share applicable to
common stockholders........................ $ (0.03) $ (0.22) $ (0.13) $ (0.44)
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
Weighted average shares outstanding.............. 7,230,364 4,955,822 6,865,820 4,405,066
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
See accompanying notes.
4
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SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss................................................................ $ (551,249) $(1,917,313)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 105,260 139,495
Changes in operating assets and liabilities:
Accounts receivable............................................... (369,230) 181,441
Inventories....................................................... (120,816) (198,082)
Prepaid expenses.................................................. 1,565 10,822
Other assets...................................................... (573) (16,004)
Accounts payable and accrued expenses............................. (356,541) 149,149
Accrued payroll and related expenses.............................. (65,226) 104,190
Deferred revenue.................................................. 9,320 (105,368)
-------------- -------------
Net cash used in operating activities........................... (1,347,490) (1,651,670)
INVESTING ACTIVITIES
Purchase of equipment................................................... (8,991) (117,482)
-------------- -------------
Net cash used in investing activities........................... (8,991) (117,482)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of costs of $30,646.......... 1,469,354 --
Payments on capital leases and equipment financing notes................ (32,942) (67,839)
Proceeds from issuance of convertible notes............................. -- 1,600,000
Preferred stock dividends paid.......................................... -- (30,318)
Stock options and warrants exercised.................................... -- 3,777
Proceeds (repayment) from borrowing under bank lines of credit.......... 234,810 (102,006)
-------------- -------------
Net cash provided by financing activities....................... 1,671,222 1,403,614
-------------- -------------
Net increase(decrease) in cash and cash equivalents....................... 314,741 (365,538)
Cash and cash equivalents at beginning of period.......................... 276,900 618,344
-------------- -------------
Cash and cash equivalents at end of period................................ $ 591,641 $ 252,806
-------------- -------------
-------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................................................. $ 25,070 $ 36,477
Dividends accrued but unpaid............................................ $ 4,608 $ 8,620
Dividends paid in common stock.......................................... $ 77,581 --
Notes payable and accrued interest converted to preferred stock......... $ 1,714,043 --
Notes payable and accrued interest converted to common stock............ $ 380,705 --
Accretion of preferred stock............................................ $ 250,000 --
Warrants issued in connection with preferred stock financing............ $ 153,378 --
</TABLE>
See accompanying notes.
5
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SOCKET COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements of Socket Communications, Inc. (the
"Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB item 310(b). Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for fair presentation have been included.
The financial statements have been prepared on a going concern basis. The
Report of Independent Auditors on the Company's financial statements for the
year ended December 31, 1997 included in Form 10-KSB contained an explanatory
paragraph which indicated substantial doubt about the Company's ability to
continue as a going concern because of the Company's recurring operating
losses, net capital deficiency and working capital deficit. As of June 30,
1998, the Company had cumulative losses of $17,322,921, a net capital
deficiency of $216,699, and a working capital deficit of $498,017. The
Company believes its existing capital resources will be insufficient to
satisfy its working capital requirements through the end of 1998. The
Company will need to raise additional capital to fund operations during 1998
and beyond which the Company intends to accomplish through the issuance of
additional equity securities, through increased borrowings on the Company's
bank lines as the levels of receivables permit, and through development
funding from development partners. The Company believes that sufficient
outside financing sources will be available, however, there can be no
assurance that the Company will be able to obtain such financing on
commercially reasonable terms, if at all, and such terms may be dilutive to
existing stockholders. The Company's inability to secure the necessary
funding would have a material adverse affect on the Company's financial
condition and results of operations. The Company's actual working capital
needs will depend upon numerous factors, however, including the extent and
timing of acceptance of the Company's products in the market, the Company's
operating results, the progress of the Company's research and development
activities, the cost of increasing the Company's sales and marketing
activities and the status of competitive products, none of which can be
predicted with certainty. 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.
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.
Operating results for the three months ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
NOTE 2 - CASH EQUIVALENTS
Cash equivalents consist mainly of money market funds, which are highly
liquid financial instruments that are readily convertible to cash. The
Company has not incurred losses related to these instruments. As of June 30,
1998 and December 31, 1997, the Company had no material investments in debt
or equity securities.
6
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NOTE 3 - INVENTORIES
Inventories consist principally of raw materials and sub-assemblies, which
are stated at the lower of cost (first-in, first-out) or market.
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- -------------
<S> <C> <C>
Raw materials and sub-assemblies $ 294,271 $ 179,267
Finished goods 21,672 15,860
----------- -------------
$ 315,943 $ 195,127
----------- -------------
----------- -------------
</TABLE>
NOTE 4 - INCOME TAXES
Due to the Company's loss position, there was no provision for income
taxes for the three and six months ended June 30, 1998 and 1997.
NOTE 5 - NET LOSS PER SHARE AND NET LOSS PER SHARE APPLICABLE TO COMMON
STOCKHOLDERS
In 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE. Statement 128 replaced the calculation of primary
and fully diluted loss per share with basic and diluted loss per share.
Unlike primary loss per share, basic loss per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted net loss per
share includes potential common shares, when dilutive, from stock options
(using the treasury stock method), from convertible preferred stock (using
the if-converted method), from convertible notes (using the if-converted
method) and from warrants (using the treasury stock method). As the Company
has experienced losses in all periods presented, no potential common shares
have been included in the net loss per share calculation as they are
antidilutive.
The Company is required to accrue dividends on shares of its outstanding
preferred stock. Dividends of $67,395 and $8,620 for the quarters ended June
30, 1998 and 1997 respectively, and $82,189 and $38,938 for the six months
ended June 30, 1998 and 1997 respectively, and accretion of $250,000 for the
six months ended June 30, 1998, were added to the net loss to determine the
net loss per share applicable to common stockholders.
NOTE 6 - BANK FINANCING ARRANGEMENTS
The Company entered into a credit agreement with a bank("Original
Agreement") which commenced in July 1995 and expired on March 15, 1998. In
March 1998 the Company entered into a new credit agreement with a bank("New
Agreement") which expires on April 15, 1999 (together the "Agreements"). The
Agreements are secured by the Company's current and future assets. The
credit facility under the Agreements allows the Company to borrow up to
$500,000 based on the level of qualified receivables at the lenders index
rate, which is based on prime, plus 1.5% (10% at June 30, 1998). The New
Agreement contains covenants that require the Company to maintain certain
financial ratios including current ratio and tangible net worth. As of June
30, 1998 the Company was not in compliance with the covenants and has
obtained a waiver from the bank. As of June 30, 1998 and December 31, 1997,
outstanding borrowings under the Agreement were $498,607 and $268,908
respectively, which were the amounts available under the line.
7
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In 1997, the Company entered into an international credit agreement
("International Agreement") with a commercial lending institution which
expires on August 15, 1998. The Company is currently in the process of
renewing the International Agreement. The International Agreement is secured
by the Company's international receivables and by the Company's current and
future assets. The credit facility under the International Agreement allows
the Company to borrow up to $500,000 based on the level of qualified
international receivables. As of June 30, 1998 and December 31, 1997,
outstanding borrowings under the International Agreement were $260,144 and
$255,033 respectively, which were the amounts available under the line.
NOTE 7 - SERIES B CONVERTIBLE PREFERRED STOCK
In January 1998, the Board of Directors designated 37,500 shares of
Preferred Stock as Series B Convertible Preferred Stock ("Series B Preferred
Stock). Series B Preferred Stock is convertible into Common Stock at the
option of the Holder anytime from 60 days to two years after issue
("mandatory conversion date") and automatically converts earlier in the event
of a merger or consolidation of the Company if, as a result of such
transaction, the holders of Common Stock immediately prior to such merger or
consolidation would hold less than 50% of the voting securities of the
surviving entity immediately following such merger or consolidation. In the
event of liquidation, holders of Series B Preferred Stock are entitled to
liquidation preferences over common stockholders equal to their initial
investment plus all accrued but unpaid dividends. Dividends accrue at the
rate of 8% per annum and are payable quarterly in cash or in Common Stock, at
the option of the Company.
On January 21, 1998 (the "Series B Closing"), the Company sold 12,500
shares of its Series B Convertible Preferred Stock, $0.001 par value, at $40
per share (total of $500,000) pursuant to Regulation D of the Securities Act
of 1933, as amended (the "Series B Transaction"). The Series B Transaction
was effected pursuant to a Private Offering Memorandum. Each share of Series
B Convertible Preferred Stock is convertible into 100 shares of Common Stock
at the option of the holder, in whole or in part, at any time for a period of
two years following the Series B Closing. The Series B stock will convert
into a total of 1,250,000 shares of Common Stock. The conversion ratio for
the Series B Transaction was based upon the average bid price of the
Company's Common Stock for the ten days prior to the Series B Closing. The
Company also issued five-year warrants to acquire 187,500 shares of Common
Stock at $0.40 per share and granted two options to invest an additional
$500,000 on similar terms, with the first option expiring on February 15,
1998 and the second option expiring on March 15, 1998.
On February 6, 1998, (the "Series B-1 Closing"), the Company sold 8,850
shares of Series B Convertible Preferred Stock, $.001 par value, at $56.50
per share, pursuant to exercise of the option to invest an additional
$500,000 expiring on February 15, 1998. On March 18, 1998, such 8,850 shares
of Series B were exchanged for a like number of Series B-1 Convertible
Preferred Stock, $.001 par value (the "Series B-1 Transaction"). Each share
of Series B-1 Convertible Preferred Stock is convertible into 100 shares of
Common Stock at the option of the holder, in whole or in part, at any time
for a period of two years following February 6, 1998. The Series B-1 stock
will convert into a total of 885,000 shares of Common Stock. The conversion
ratio for the Series B-1 Transaction was based upon 80% of the average high
and low sales price of the Company's Common Stock for the ten days prior to
the Series B-1 Closing. Dividends accrue at the rate of 8% and are payable
quarterly in
8
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cash or in Common Stock at the option of the Company. The Company also
issued five-year warrants to acquire 132,750 shares of Common Stock at $0.565
per share. The Company recorded Accretion of Preferred Stock of $125,000 in
the first quarter of 1998 for the 20% discount given to the Series B-1
holders.
On March 16, 1998, (the "Series B-2 Closing"), the Company sold 8,715
shares of Series B-2 Convertible Preferred Stock, $.001 par value, at $57.375
per share, pursuant to exercise of the option to invest an additional
$500,000 expiring on March 15, 1998 (the "Series B-2 Transaction"). Each
share of Series B-2 Convertible Preferred Stock is convertible into 100
shares of Common Stock at the option of the holder, in whole or in part, at
any time for a period of two years following the Series B-2 Closing. The
Series B-2 stock will convert into a total of 871,500 shares of Common Stock.
The conversion ratio for the Series B-2 Transaction was based upon 80% of
the average high and low sales price of the Company's Common Stock for the
ten days prior to the Series B-2 Closing. Dividends accrue at the rate of 8%
and are payable quarterly in cash or in Common Stock at the option of the
Company. The Company also issued five-year warrants to acquire 130,725
shares of Common Stock at $0.57375 per share. The Company recorded Accretion
of Preferred Stock of $125,000 in the first quarter of 1998 for the 20%
discount given to the Series B-2 holders.
These transactions resulted in the valuation of warrants of
approximately $153,378 which was recorded as additional paid in capital in
the first quarter of 1998.
NOTE 8 - CONVERSION OF CONVERTIBLE SUBORDINATED NOTES INTO SERIES C CONVERTIBLE
PREFERRED SHARES AND COMMON STOCK
On March 31, 1998, $1,750,000 of convertible subordinated notes and
$140,076 of accrued interest were converted into 95,037 shares of Series C
Preferred Stock, 51,574 shares of Series C-1 Preferred Stock and 671,803
shares of Common Stock. On May 15, 1998, $200,000 of convertible
subordinated notes and $13,353 of accrued interest were converted into 16,857
shares of Series C-2 Preferred Stock and 84,535 shares of Common Stock.
Series C, C-1, and C-2 Preferred Stock plus accrued dividends at 8% per annum
are convertible into Common Stock at the option of the holder, with a
mandatory conversion date of March 31, 2000 for Series C and C-1 and May 15,
2000 for Series C-2. At June 30, 1998, Series C, C-1, and C-2 shares, if
converted, would have converted into 2,937,118 shares of Common Stock.
9
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SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SECTION CONTAINS FORWARD-LOOKING STATEMENTS (IDENTIFIED WITH AN
ASTERISK "*") THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FOR A MORE COMPLETE DISCUSSION OF THE FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE, SEE "BUSINESS" AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IN
THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
1997 (COLLECTIVELY, THE "FORM 10-KSB SECTIONS").
OVERVIEW
The Company's family of serial PC card products and Ethernet card products
for PC card mobile computers are its principal sources of revenues with a
focus beginning in 1997 on connection products for devices using the Windows
CE operating system from Microsoft, including handheld computers (H/PCs and
Palm-size PCs) and embedded devices. In December 1996, the Company expanded
its serial and Ethernet card lines into a family of PC card products
including a ruggedized serial card, a dual serial card and an Ethernet/serial
multifunction card, and in October 1997, the Company introduced a barcode
scanner PC card and a low power Ethernet card for Windows CE handheld
computers. In August 1998, the Company announced that its serial and Ethernet
card products are available in a CompactFlash-TM- format for use with smaller
Windows CE handheld computers, such as the Palm-size PC. The Company
expects to be volume shipping its entire family of PC card products in a
CompactFlash format in the second half of 1998.*
The Company has also developed wireless messaging products including a
PageCard PC Card wireless messaging system introduced in January 1995 that
use the POCSAG paging protocols, and developed its PageSoft messaging
software, introduced in 1996, that sends messages and files over the paging
networks for downloading into a mobile computer. The Company also earns
royalties on wireless messaging services provided by third party carriers and
revenue from development work performed for others. Revenue from wireless
messaging products have been less than 10% of the Company's total revenues
and in the fourth quarter of 1997, the Company wrote off its POCSAG PageCard
inventories because of low demand and the development in 1998 of wireless
receivers that utilize the higher speed FLEX networks.
The Company has developed a number of strategic relationships that are
important to its product development and marketing programs. In June 1998,
the Company signed a contract with Motorola to adapt the Company's messaging
software, under development in 1997, to work as a software driver with
Motorola's Windows CE 2.0 CompactFlash wireless receiver and embedded module
products under development. The Company earned development revenues of
$100,000 from this contract in the second quarter of 1998 and expects to earn
additional development revenues in the second half of 1998. The Company will
also earn a royalty on all receivers sold after the product begins volume
- ---------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
10
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SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
shipments, expected in the first quarter of 1999.* The Company has developed
with the National Dispatch Center ("NDC") Socket Wireless Messaging Services
("SWiMS") which provides paging, operator message dispatch and personal
service features such as call connect, fax and call notification, and
internet gateways and the Company shares the profits from this service with
NDC. The Company believes that it has developed strong working relationships
with Microsoft and with Windows CE handheld computer manufacturers for
integrating connection solutions into Windows CE devices, with data
collection companies such as Welch Allyn which manufactures the bar code
scanning wand used with the data collection PC card for Windows CE, and with
software application developers in providing technical assistance in the
porting of their applications to the Windows CE operating system, the Company
expects to continue to work closely with such companies in providing
connection solutions for Windows-CE based applications and devices.*
Although the Company believes that its focus on the Windows CE operating
system for handheld computers and its strategic relationship with Motorola
and other strategic partners position the Company for additional revenue
growth beginning in the third quarter of 1998, the Company has incurred
significant quarterly and annual operating losses in every fiscal period
since its inception, and the Company may continue to incur quarterly
operating losses at least through the second half of 1998 and possibly
longer.* The Company's ability to achieve profitability will be highly
dependent upon: increased market acceptance of the Company's serial,
Ethernet, data collection cards and wireless messaging products including
recently introduced products; growth and acceptance of handheld computers and
devices using the Windows CE operating system; the ability to raise capital
to fund the Company's product development and sales and marketing efforts;
the development of new products for new and existing markets; the improvement
of gross margins through maintaining of sales prices, higher sales volumes
and contract manufacturing efficiencies; expanding its distribution
capability; completing its software development contracts; and managing its
operating expenses. There can be no assurances that the Company will meet
any of these objectives or ever achieve profitability.
In addition, as of June 30, 1998, the Company had a net capital
deficiency of $216,699 and a working capital deficit of $498,017. The Company
will require additional funding in 1998 to meet its working capital needs.*
The inability to obtain such funding could require the Company to
significantly reduce or suspend operations, sell additional securities on
terms that are highly dilutive to investors or otherwise have a material
adverse effect on its financial condition or operating results. See
"--Liquidity and Capital Resources" and "--Risk Factors" for a discussion of
the Company's need for additional capital, the uncertainty regarding the
Company's continued listing on the Pacific Exchange and other risks that may
affect the Company's ability to attain profitability.
- ---------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
11
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SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUE
Revenue for the quarter and six months ended June 30, 1998 of $1,486,262
and $2,661,932 increased 32% and 21%, respectively, over the corresponding
periods a year ago. The increases in the quarter and six month periods ended
June 30, 1998 resulted from volume increases in the sale of the Company's
serial PC cards and Ethernet cards in both periods and, in addition for the
quarter, from volume increases in the sale of data collection cards and from
revenues from a software development contract with Motorola Corporation that
commenced in the quarter.
GROSS PROFIT
The Company's gross profit for the second quarter of 1998 was 62% of
revenue compared to 51% for the same quarter a year ago. The Company's gross
profit for the six months in 1998 was 59% of revenue compared to 51% for the
same period a year ago. The increases resulted primarily from favorable
product mix from increasing sales volumes of newer higher margin products for
the quarter and six month periods and, in the second quarter of 1998, from
the addition of high-margin revenues from a software development contract.
RESEARCH AND DEVELOPMENT
Research and development expenses for the quarter and six months ended
June 30, 1998 were $253,915 and $505,712, respectively, a 7% decrease versus
the corresponding periods a year ago, primarily reflecting lower travel costs
and contract engineering services. To date, the Company has not capitalized
any software development costs. The Company expects to moderately increase
its research and development expenses in the second half of 1998.*
SALES AND MARKETING
Sales and marketing expenses for the quarter and six months ended June 30,
1998 were $500,671 and $957,779, respectively, a 37% and 38% decrease,
respectively, over the corresponding periods a year ago. The decreases
primarily reflected lower 1998 staffing levels, severance costs associated
with staff reductions in the second quarter of 1997, and the expense in 1997
of a new products marketing study. The Company expects to moderately
increase its sales and marketing expenses in the second half of 1998.*
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the quarter and six months ended
June 30, 1998 were $290,189 and $588,789, respectively, a 46% and 32%
decrease over the corresponding periods a year
- ---------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
12
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ago. The decreases primarily reflect professional fees associated with
contemplated financing and merger activities of the Company during the first
half of 1997 and one-time severance costs for the Company's former CEO whose
services terminated in April 1997. The Company expects to incur moderate
increases in its general and administrative expenses in the second half of
1998.*
INTEREST AND OTHER INCOME / EXPENSE
Interest income primarily reflects interest on cash balances and is
negligible. Interest expense for the quarter and six months ended June 30,
1998 was $13,874 and $76,574, respectively, and related to interest on
convertible subordinated debt issued in 1997 and to interest on equipment
lease financing obligations and bank credit line balances outstanding.
Interest expense for the quarter and six months ended June 30, 1997 was
$36,477 and $63,458, respectively, and related to interest on equipment lease
financing obligations and to interest on convertible subordinated debt issued
in 1997. The decrease in interest expense in 1998 reflected the conversion
into equity in March and May 1998 of all outstanding convertible subordinated
notes.
PREFERRED STOCK DIVIDEND; ACCRETION OF PREFERRED STOCK
Preferred stock dividends in 1998 reflect dividends earned at 8% per annum
on Series B and Series C preferred stock issued during the first and second
quarters of 1998. Preferred stock dividends in 1997 reflect dividends earned
at 6% per annum on Series A preferred stock issued in November 1996 and
converted at the option of the holder into common stock at various dates
through November 1997. Accretion of preferred stock in the first quarter of
1998 reflected a purchase price discount of 20% from market for $1.0 million
of Series B Preferred Stock issued during the quarter. The accounting effect
of accretion is to increase by 20% the amount of the Series B Preferred Stock
and to charge accumulated deficit by the same amount as if the Series B
Preferred Stock had been issued at market price.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities in the six months ended June 30,
1998 was $1,347,490, resulting primarily from the net loss, an increase in
accounts receivable and inventories, and decreases in accounts payable and
accrued expenses and accrued payroll and related expenses. Net cash used for
operating activities in the six months ended June 30, 1997 was $1,651,670,
resulting primarily from the net loss, an increase in inventories and
decreases in deferred revenues, partially offset by decreases in accounts
receivable and by increases in accounts payable and accrued expenses and
accrued payroll and related expenses.
Net cash provided by financing activities during the first half of 1998 of
$1,671,222 resulted from proceeds from the issuance of Series B Convertible
Preferred Stock of $1,500,000 during the first quarter of 1998 and from an
increase in borrowings under the bank lines of credit, partially offset by
- ---------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
13
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
payments on capital leases and equipment financing notes. Net cash provided
by financing activities during the first half of 1997 of $1,403,614 resulted
from proceeds from the issuance of subordinated convertible notes of
$1,600,000 partially offset by a reduction in borrowings under the bank lines
of credit, payments of capital leases and equipment financing notes and
payment of dividends to Series A Preferred stockholders.
FUTURE CAPITAL NEEDS; INDEPENDENT AUDITORS' REPORT CONTAINED EXPLANATORY
PARAGRAPH REGARDING GOING CONCERN.
As of June 30, 1998, the Company had cash and cash equivalents of
$591,641. Although the Company sold $1,500,000 of Series B Convertible
Preferred Stock during the first quarter of 1998, the Company believes its
existing capital resources will be insufficient to satisfy its working
capital requirements through the end of 1998. The Company will need to raise
additional capital to fund operations during 1998 and beyond, including
planned increases in its sales and marketing and research and development
efforts which the Company intends to accomplish through the issuance of
additional equity securities, through increased borrowings on the Company's
bank line as the levels of receivables permit, and through development
funding from development partners.* The Report of Independent Auditors on the
Company's financial statements for the year ended December 31, 1997 included
in Form 10-KSB contains an explanatory paragraph regarding the Company's need
for additional financing and indicated substantial doubt about the Company's
ability to continue as a going concern. There can be no assurances that such
capital will be available on acceptable terms, if at all, and such terms may
be dilutive to existing stockholders. The Company's inability to secure the
necessary funding would significantly impair the ability of the Company to
carry out its strategy of increasing its sales and marketing and research and
development efforts and otherwise would have a material adverse affect on the
Company's financial condition and results of operations.
RISK FACTORS
FUTURE CAPITAL NEEDS; INDEPENDENT AUDITORS' REPORT CONTAINED EXPLANATORY
PARAGRAPH REGARDING GOING CONCERN See "Liquidity and Capital Resources" ,
same title, in the preceding paragraph.
ILLIQUIDITY OF TRADING MARKET; POSSIBLE DELISTING OF SECURITIES FROM THE
PACIFIC EXCHANGE; RISK OF PENNY STOCK STATUS
From the effective date of Socket's initial public offering (June 6, 1995)
through November 26, 1996, Socket's Common Stock was listed on the Nasdaq
SmallCap Market. However, the Common Stock was de-listed from such market
effective November 27, 1996 and since then has traded on the OTC Bulletin
Board. The Nasdaq SmallCap Market has recently adopted new, more stringent
listing criteria. In order for the Company to become listed in the Nasdaq
SmallCap Market under the new listing criteria, it must (i) either have net
tangible assets of $4 million, a market capitalization of $50 million or net
income in two of the past three years of $750,000; (ii) 1 million shares of
public float; (iii) a market capitalization of public float of $5 million;
(iv) a bid price of $4.00 per share; (v) three
- ---------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
14
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
market makers; and (vi) 300 stockholders. The Company currently does not
meet these requirements, and there can be no assurance that the Company will
meet these requirements in any future period. Socket's Common Stock is also
quoted on the Pacific Exchange. The continued listing criteria of the Pacific
Exchange requires the Company to have (i) at least 300,000 publicly held
shares of Common Stock with a market value of at least $500,000, (ii) at
least 250 public beneficial holders of its Common Stock, (iii) total net
tangible assets of at least $500,000 or net worth of at least $2,000,000, and
(iv) a share bid price of at least $1 per share of Common Stock. The Company
has not been in compliance with the net tangible asset requirements of the
Pacific Exchange since December 31, 1996 and has, therefore, been subject to
possible delisting procedures since that time. In August 1998, the Pacific
Exchange granted the Company an extension to bring itself into compliance
with the continued listing criteria and advised Socket that it would next
review Socket's continued qualification for listing in November 1998. As of
June 30, 1998, the Company had a net tangible asset deficit of $216,699.
Accordingly, the Company will need to raise additional equity capital or
increase net worth through profitability in order to comply with the Pacific
Exchange listing criteria, and there can be no assurance that the Company
will be successful in doing so. In that case, there can be no assurance that
the Pacific Exchange will not decide to initiate delisting proceedings
against Socket. If Socket's Common Stock remains delisted from the Nasdaq
SmallCap Market and becomes delisted from the Pacific Exchange, the Company
will become subject to the Commission's "penny stock" rules and therefore an
investor will find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, Socket's securities.
In the event that the Company's Common Stock is delisted from the Pacific
Exchange, its Common Stock will be subject to the so-called "penny stock"
rules under the Securities Exchange Act of 1934, as amended, which impose
additional sales practice and market making requirements on broker-dealers
who sell and/or make a market in such securities. For transactions covered
by the penny stock rules, a broker-dealer must make special suitability
determinations for purchasers and must have received the purchasers' written
consent to the transactions prior to sale. In addition, for any transaction
involving a penny stock, unless exempt, the rules require delivery prior to
any transaction in a penny stock of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure is also required
to be made about commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, Socket's delisting from the
Pacific Exchange and its becoming subject to the rules on penny stocks would
affect the ability or willingness of broker-dealers to sell and/or make a
market in Socket's securities and therefore would severely adversely affect
the market liquidity for the Company's securities.
SIGNIFICANT DILUTIVE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON MARKET
PRICE OF THE COMMON STOCK
As of June 30, 1998, there were 1,918,508 shares of Common Stock issuable
upon the exercise of options under Socket's 1995 and 1993 Stock Plans, as
amended, and 3,079,169 shares of Socket Common Stock issuable upon exercise
of warrants, including certain dilution adjustments resulting from the
subsequent issuance of Common Stock or securities converting into Common
Stock at prices below the initial public offering price for the Company's
Common Stock. In addition, an aggregate of 2,879,518 shares of Common Stock
are issuable upon conversion of the remaining convertible promissory notes
plus additional shares for accrued dividends through the date of conversion,
and 3,006,500 shares are issuable upon the conversion of Series B Preferred
Stock (See
15
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Notes 7 and 8 to Notes to Condensed Financial Statements). All of the common
shares, to the extent that they are eligible or appear to be eligible for
sale in the public market, could have a materially adverse effect on the
market price of the Socket Common Stock and therefore make it more difficult
for Socket to sell equity securities or equity-related securities in the
future at a time and price that Socket deems appropriate.
The Company intends to issue additional equity securities in 1998 in order
to fund working capital requirements and to achieve compliance with the net
tangible asset requirements of the Pacific Exchange.* To the extent the
Company does so, existing stockholders of the Company may experience
substantial dilution, particularly if the terms of such issuance include
discounts to market prices or the issuance of warrants, as the Company did in
the first quarter of 1998 with the issuance of $1,500,000 worth of Series B
Convertible Preferred Stock and related warrants. Common shares issuable
upon the conversion of Series B and Series C Convertible Preferred Stock have
been registered by the Company and may be traded immediately upon conversion.
In addition, the holders of warrants have registration rights under which the
Company will register the common shares issued upon the exercise of warrants.
Registered shares are immediately eligible to be sold in the public market
without restriction under Rule 144 under the Securities Act of 1933, which,
given the relatively low trading volumes for the Company's Common Stock,
would likely have a significant depressant effect of the per share market
price of the Company's Common Stock.
HISTORY OF OPERATING LOSSES; NO ASSURANCE OF PROFITABILITY
Socket was incorporated in March 1992 and has incurred significant
operating losses in every fiscal period since inception. Although the
Company has reduced its operating losses during 1998, Socket may continue to
incur quarterly operating losses at least through the second half of 1998 and
possibly longer.* Profitability, if any, will depend upon increased market
acceptance of Socket's serial and Ethernet cards, Socket's ability to obtain
additional capital to fund its working capital requirements, market
acceptance of mobile computers that use Microsoft's Windows CE operating
system, the continuation of Socket's development contract with Motorola, the
expansion of development and OEM customer relationships to increase
development and product sales revenues, the development of successful new
products for new and existing markets, Socket's ability to increase gross
margins through higher sales volumes and contract manufacturing efficiencies,
expand its distribution capability, perform on development contracts, and
manage its operating expenses. There can be no assurance that Socket will
meet any of these objectives or ever achieve profitability.
SLOWLY 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. 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
- ---------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
16
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
DEPENDENCE ON THE MARKET FOR MOBILE COMPUTERS; DEPENDENCE ON MARKET SUCCESS
OF WINDOWS CE
Substantially all of the Company's products are designed for use in mobile
computers, including handheld PCs and, beginning in the second half of 1998,
Palm-size PCs. The Company expects to continue to derive a significant
portion of revenues from the sale of its products for use in mobile
computers, particularly those that use the Windows CE operating system. The
market for mobile computers is characterized by rapidly changing technology,
evolving industry standards, frequent new product introductions and
significant price competition, resulting in short product life cycles and
regular reductions of average selling prices over the life of a specific
product. Although the market for mobile computers has grown substantially in
recent years, there can be no assurance that such growth will continue. A
reduction in sales of the market for mobile computers or a reduction in the
growth rate of such sales, would likely reduce demand for the Company's
products. Any reduction in the demand for mobile computers would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company's ability to compete
successfully will depend on its ability to identify and ensure compliance
with evolving industry standards. Unanticipated changes in industry
standards could render the Company's products incompatible with products
developed by major hardware manufacturers and software developers, including
Microsoft and Motorola. The Company could be required, as a result, to
invest significant time and resources to redesign the Company's products to
ensure compliance with relevant standards. If the Company's products are not
in compliance with prevailing industry standards for a significant period of
time, the Company would miss opportunities to have its products specified as
standards for new hardware components designed by mobile computer
manufacturers and OEMs. The failure to achieve any such design win would
result in the loss of any potential sales volume that could be generated by
such newly designed hardware component which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Beginning in 1997, the Company implemented a strategy of focusing its
product development efforts on mobile computers and other devices that use
the Windows CE operating system of Microsoft. As a result, the Company's
success is substantially dependent on the commercial success of handheld PCs,
palm PCs and other devices that operate on the Windows CE operating system
for which the Company's current products and products under development are
designed. Therefore, the Company's future success depends on factors outside
of its control, including market acceptance of Windows CE generally and other
factors affecting the commercial success of Windows CE computers and devices,
including changes in industry standards or the introduction of new or
competing technologies. Accordingly, there can be no assurance that Windows
CE will achieve the market acceptance anticipated by the Company. Any delays
in or failure of Windows CE to achieve such market acceptance would reduce
the number of potential customers of the Company's products, which could
result in a material adverse effect on the Company's business, operating
results or financial condition.
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
17
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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.
POTENTIAL QUARTERLY FLUCTUATIONS; ABSENCE OF SIGNIFICANT ORDER BACKLOG
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.
Operating results may also fluctuate due to factors such as the demand for
the Company's products, the size and timing of customer orders, unanticipated
delays or problems in the introduction of new products and product
enhancements by the Company or the introduction of new products and product
enhancements by its competitors, changes in the proportion of revenues
attributable to royalties and engineering development services, product mix,
timing of software enhancements, changes in the level of operating expenses,
and competitive conditions in the industry including competitive pressures
resulting in lower average selling prices. 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
18
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
significant variations in operating results from quarter to quarter. As a
result of any of the foregoing factors, the Company's results of operations
in any given quarter may be below the expectations of public market analysts
or investors, in which case the market price of the Company's Common Stock
would be materially and adversely affected.
DEPENDENCE ON 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.* In accordance with this
strategy, the Company has entered into alliances or relationships with
Cetronic AB, Compaq Computer Corporation, Lucent Technologies, Microsoft,
Mitsubishi Corporation, Motorola, the National Dispatch Center, PageNet and
Welch Allyn. 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. There can be no assurance that the
Company's strategic partners will not revoke their commitment to the
Company's products or services at any time in the future, that they will not
develop their own competitive products or services, or that the hardware or
software of such companies that is integrated into the Company's products
will not contain defects or errors. Accordingly, there can be no assurance
that the Company's existing or future strategic relationships will result in
sustained business alliances, successful product or service offerings or the
generation of significant revenues for the Company. Failure of one or more
of such alliances could result in delay or termination of product development
projects, reduction in market penetration, decreased ability to win new
customers or loss of confidence by current or potential customers, any of
which could have a material adverse effect on the Company's business, results
of operations or financial condition.
As part of its strategy, the Company has developed a close working
relationship with Microsoft to design products for use with the handheld PCs
and palm PCs that use Microsoft's Windows CE operating system. Beginning in
1997, the Company has increasingly devoted significant research and
development resources to such design activities for Microsoft's standards,
diverting financial and personnel resources from other development projects.
The Company's design activities are not undertaken pursuant to any agreement
under which Microsoft is obligated to continue the collaboration or to
support resulting products. Consequently, Microsoft may terminate its
collaborations with the Company for a variety of reasons including the
Company's failure to meet agreed-upon standards or for reasons beyond the
Company's control, including changing market conditions, increased
competition, discontinued product lines and product obsolescence. Although
the Company believes that its recent software development contract with
Motorola will enhance its collaboration with Microsoft with respect to the
design of products for Microsoft's Windows CE operating system, there can be
no assurance that Microsoft will not in the future discontinue
- ---------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
19
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
collaborating with the Company on the design of the Company's current and
future products, which would result in the Company having expended
significant research and development resources without benefit and having
lost potential revenues from the development and sale of alternative
products. In such event, the Company's business, operating results and
financial condition would be materially adversely affected.
DEPENDENCE ON KEY EMPLOYEES, NEED TO HIRE ADDITIONAL SALES AND MARKETING AND
PRODUCT DEVELOPMENT PERSONNEL
The Company's future success will depend in significant part upon the
continued service of certain key technical and senior management 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. The loss of key personnel in the future could have a
material adverse effect upon the Company's results of operations.
The Company believes its ability to achieve increased revenues and to
develop successful new products and product enhancements will depend in part
upon its ability to attract and retain highly skilled sales and marketing and
product development personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to retain its key
employees or that it will be successful in attracting and retaining such
personnel in the future. In addition, the Company's ability to hire and
retain such personnel will depend upon the Company's ability to raise capital
or achieve increased revenue levels to fund the costs associated with such
personnel. Failure to attract and retain key personnel will have a material
adverse effect on the Company's business, operating results and financial
condition.
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 in the U.S. and PPCP in the U.K., accounted for approximately 21%,
15%, and 21% respectively, of the Company's revenue in 1997. 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.
20
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company allows its distributors to return a portion of their inventory
to the Company for full credit against other purchases. In addition, in the
event the Company reduces its prices, the Company credits its distributors
for the difference between the purchase price of products remaining in their
inventory and the Company's reduced price for such products. There can be no
assurance that actual returns and price protection will not have a material
adverse effect on future operating results, particularly since the Company
seeks to continually introduce new and enhanced products and is likely to
face increasing price competition. In addition, the Company's comprehensive
two year warranty for its wired products and one year warranty for its
wireless products permit customers to return any product if the product does
not perform as warranted. To date, the Company has not experienced any
warranty claims, returns, stock rotation exchanges or price protection
adjustments materially above those anticipated. However, future warranty
claims, returns, stock rotation exchanges, or price protection adjustments
could be materially higher than anticipated. The Company intends to continue
to introduce new and enhanced products, which could result in higher warranty
or return claims due to the risks inherent in the introduction of such
products.* There can be no assurance that warranty claims or returns will not
have a material adverse effect on future operating results.
EXPORT SALES
Export sales (sales to customers outside the United States) accounted for
approximately 49% of the Company's revenue in 1997 and approximately 42% of
the Company's revenue in the first half of 1998. Accordingly, the Company's
operating results are subject to the risks inherent in export sales,
including longer payment cycles, unexpected changes in regulatory
requirements, import and export restrictions and tariffs, difficulties in
managing foreign operations, the burdens of complying with a variety of
foreign laws, greater difficulty or delay in accounts receivable collection,
potentially adverse tax consequences and political and economic instability.
In addition, the Company's export sales are currently denominated
predominately in United States dollars, and accordingly, an increase in the
value of the United States dollar relative to foreign currencies could make
the Company's products more expensive and therefore potentially less
competitive in foreign markets.
- ---------------------
* This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
21
<PAGE>
PART II. OTHER INFORMATION
Item 1. Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
On May 15, 1998, $200,000 of convertible subordinated notes and $13,353 of
accrued interest held by certain directors of the Company and their
affiliated entities were converted into 16,857 shares of Series C-2 Preferred
Stock, which will convert into 318,056 shares of Common Stock, and 84,535
shares of Common Stock. Series C-2 Preferred Stock accrues dividends at the
rate of 8% per annum and is convertible into Common Stock at the option of
the holder, with a mandatory conversion date of May 15, 2000. The Series
C-2 Preferred Stock was issued pursuant to an exemption from registration
under the Securities Act of 1933 provided by Section 4(2) under such Act.
Item 3. Not applicable.
Item 4. Submission of matters to a vote of Security Holders.
At the Annual Meeting of Stockholders of the Company, held at the
Company's Newark facilities on June 10, 1998, the stockholders elected six
directors to serve until the next Annual Meeting of Stockholders, approved an
amendment to the 1995 Stock Plan to reserve an additional 1,000,000 shares of
Common Stock for issuance thereunder, approved a one-for-three reverse stock
split of the outstanding Common Stock of the Company subject to further
approval by the Board of Directors, and ratified the appointment of Ernst &
Young LLP as independent public accountants of the Company for the fiscal
year ending December 31, 1998. Total voting shares on the record date of
April 24,1998 consisted of 7,187,632 common shares issued and outstanding and
3,006,500 common shares assuming conversion of Series B convertible preferred
stock, total of 10,194,132 shares.
22
<PAGE>
Results of the stockholder vote:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
AGAINST/
ITEM FOR WITHHOLD
- ----------------------------------------------------------------------------
<S> <C> <C>
ELECTION OF DIRECTORS:
Charlie Bass 9,130,916 107,600
Micheal Gifford 9,130,916 107,600
Jack Carsten 9,130,916 107,600
Edward Esber, Jr. 9,130,916 107,600
Gianluca Rattazzi 9,130,916 107,600
Lars Lindgren 9,130,916 107,600
AMEND 1995 STOCK PLAN 5,613,606 150,550
REVERSE STOCK SPLIT 5,833,147 3,360,253
APPOINT ERNST & YOUNG LLP 9,230,916 5,200
- ----------------------------------------------------------------------------
</TABLE>
Item 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
3.1 Certificate of Designations of Preferences and Rights of Series C-2
Convertible Preferred Stock
27.1 Financial Data Schedule (Edgar only)
b. Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange Commission
during the quarter ended June 30, 1998.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOCKET COMMUNICATIONS, INC.
---------------------------
Registrant
Date: August 10, 1998 /S/ DAVID W. DUNLAP
---------------------
David W. Dunlap
Vice President of Finance
and Administration and
Chief Financial Officer
24
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF DESIGNATIONS
OF PREFERENCES AND RIGHTS OF SERIES C-2 CONVERTIBLE PREFERRED STOCK OF
SOCKET COMMUNICATIONS, INC.
Pursuant to Section 151 of the General Corporation Law of the State of Delaware
Socket Communications, Inc., a Delaware corporation (the "Company"),
certifies that pursuant to authority given by the Company's Amended and
Restated Certificate of Incorporation, and in accordance with the provisions
of Section 151 of the General Corporation Law of the State of Delaware, the
Board of Directors of the Company has duly adopted the following recitals and
resolutions creating the Series C-2 Convertible Preferred Stock of the
Company:
WHEREAS, the Amended and Restated Certificate of Incorporation of the
Company provided for a class of shares known as Preferred Stock,
issuable from time to time in one or more series; and
WHEREAS, the Board of Directors of the Company is authorized to
determine or alter the rights, preferences, privileges and
restrictions relating to any unissued series of said Preferred Stock
and the number of shares constituting and the designation of said
series; and
NOW, THEREFORE, BE IT RESOLVED: that the Board of Directors hereby
designates, fixes the number of shares constituting, and determines
the rights, preferences, privileges and restrictions relating to the
Series C-2 Convertible Preferred Stock:
1. DESIGNATION. The new series of Preferred Stock shall be designated
"Series C-2 Convertible Preferred Stock." The number of shares constituting
the Series C-2 Convertible Preferred Stock shall be 16,857. The Board of
Directors may at any time amend this Certificate of Designations of
Preferences and Rights to decrease the authorized number of shares of Series
C-2
<PAGE>
Convertible Preferred Stock to a number equal to or greater than the number
of shares of Series C-2 Convertible Preferred Stock issued and outstanding at
the time of the amendment. The "Initial Price" of shares of the Series C-2
Convertible Preferred Stock shall be $10.00 per share and the "Original Issue
Date" shall mean the date on which shares of Series C-2 Convertible Preferred
Stock are first issued to investors. The relative rights, preferences,
privileges and restrictions granted to or imposed upon the Series C-2
Convertible Preferred Stock or the holders thereof are specified below.
2. DIVIDEND RIGHTS OF SERIES C-2 CONVERTIBLE PREFERRED STOCK. The
holders of the Series C-2 Convertible Preferred Stock shall be entitled to
receive dividends, out of any assets at the time legally available therefor,
at the rate of 8% of the Initial Price for each share of the Series C-2
Convertible Preferred Stock. Such dividends shall accrue quarterly on each
March 31, June 30, September 30 and December 31, each a "Quarter End" after
the Original Issue Date through and including the Mandatory Conversion Date
(as defined in Section 4(b) hereto). Such dividends may be paid in cash or
in shares of Common Stock of the Company, as the Board of Directors may
determine; provided, however, that all accrued and unpaid dividends shall be
paid on the Mandatory Conversion Date; provided, further, that if such
dividend is to be paid in Common Stock, the value of the Common Stock shall
be the average of the high and low sales prices of the Common Stock of the
Company over the ten (10) trading days immediately preceding the applicable
Quarter End. No dividend may be paid on or declared or set apart for the
Common Stock in any one fiscal year unless an equal or greater dividend is
paid on, or declared and set apart for, each share of Series C-2 Convertible
Preferred Stock.
3. LIQUIDATION PREFERENCE. In the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the Company, no
distribution shall be made on the shares of Common Stock without first making
a distribution to the holders of Series B Convertible Preferred Stock, Series
B-1 Convertible Preferred Stock, Series B-2 Convertible Preferred Stock
(collectively, the "Series B Preferred Stock"), Series C Convertible
Preferred Stock, the Series C-1 Convertible Preferred Stock, and the Series
C-2 Convertible Preferred Stock (collectively, the "Series C Preferred
Stock") in an amount equal to the number of shares of the applicable Series B
Preferred Stock and applicable Series C Preferred Stock, as the case may be,
multiplied by the Initial Price with respect to such series of Preferred
Stock, plus all accrued but unpaid dividends (if any) thereon (the "Stated
Value"). The Series B Preferred Stock and the Series C Preferred Stock shall
rank on a parity as to the receipt of the respective preferential amounts for
each such series upon the occurrence of such a liquidation, dissolution or
winding up of the Company. If upon occurrence of such event, the assets and
property thus distributed among the holders of the Series B Preferred Stock
and the Series C Preferred Stock shall be insufficient to permit the payment
to such holders of their full respective preferential amounts, then the
entire assets and property of the Company legally available for distribution
shall be distributed ratably among the holders of the Series B Preferred
Stock and Series C Preferred Stock such that the same percentage of the
preferential amount to which each series of Preferred Stock is entitled is
paid on each share of Preferred Stock. If upon occurrence of such event, the
assets and property thus distributed among the holders of the Series B
Preferred Stock and Series C Preferred Stock are sufficient to permit the
payment to such holders of their full respective preferential amounts, then
the Company shall make a distribution out of the remaining assets and
<PAGE>
property of the Company legally available for distribution to the holders of
Common Stock in an amount equal to the Stated Value. In the event that both
the holders of the Preferred Stock and the holders of Common Stock are paid
their respective preferential amounts, thereafter the holders of the Common
Stock and the holders of the 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 Preferred Stock deemed to be the
number of shares of Common Stock into which the Series B Preferred Stock and
the Series C Preferred Stock, as the case may be, are then convertible. A
consolidation or merger of the Company with or into any other corporation or
corporations, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty
percent (50%) of the total voting power represented by the voting securities
of the Company or such surviving entity outstanding immediately after such
merger or consolidation, or a sale of all or substantially all of the assets
of the Company, shall be deemed to be a liquidation, dissolution, or winding
up of the Company.
4. CONVERSION. The holders of the Series C-2 Convertible Preferred
Stock shall have conversion rights as follows:
(a) RIGHT TO CONVERT. Each share of Series C-2 Convertible
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the Original Issue Date at the offices of the Company or any
transfer agent for the Series C-2 Convertible Preferred Stock. Each share of
Series C-2 Convertible Preferred Stock shall be converted into that number of
fully-paid and nonassessable shares of Common Stock that is equal to the
Initial Price divided by the Conversion Price (as hereinafter defined). The
initial Conversion Price per share of Series C-2 Convertible Preferred Stock
shall initially be $0.53. (The number of shares of Common Stock into which
each share of Series C-2 Convertible Preferred Stock may be converted is
hereinafter referred to as the "Conversion Rate".) Upon any decrease or
increase in the Conversion Price or the Conversion Rate, as described in this
Section 4, the Conversion Rate or Conversion Price, as the case may be, shall
be appropriately increased or decreased.
(b) AUTOMATIC CONVERSION. All shares of Series C-2 Convertible
Preferred Stock outstanding shall automatically convert into shares of Common
Stock upon 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 immediately prior to such merger or consolidation would hold
less than 50% of the voting securities of the surviving entity immediately
following such merger or consolidation, or (ii) the second anniversary of the
Original Issue Date (the "Mandatory Conversion Date").
(c) MECHANICS OF CONVERSION. No fractional shares of Common Stock
shall be issued upon conversion of Series C-2 Convertible Preferred Stock. In
lieu of any fractional shares to which the holder would otherwise be entitled,
the Company shall pay cash equal to such fraction multiplied by the then fair
market value of such fractional shares as determined by the Board of
<PAGE>
Directors of the Company. Before any holder of Series C-2 Convertible
Preferred Stock shall be entitled to convert the same into full shares of
Common Stock, and to receive certificates therefor, he shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Company or of any transfer agent for the Series C-2 Convertible Preferred
Stock, and shall give written notice to the Company at such office that he
elects to convert the same; provided, however, that in the event of an
automatic conversion pursuant to paragraph 4(b) above, the outstanding shares
of Series C-2 Convertible Preferred Stock shall be converted automatically
without any further action by the holders of such shares and whether or not
the certificates representing such shares are surrendered to the Company or
its transfer agent; PROVIDED FURTHER, HOWEVER, that the Company shall not be
obligated to issue certificates evidencing the shares of Common Stock
issuable upon such automatic conversion unless either the certificates
evidencing such shares of Series C-2 Convertible Preferred Stock are
delivered to the Company or its transfer agent as provided above, or the
holder notifies the Company or its transfer agent that such certificates have
been lost, stolen or destroyed and executes an agreement satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection
with such certificates.
The Company shall, as soon as practicable after such delivery (but
in any event no later than ten (10) days), or after such agreement and
indemnification, issue and deliver at such office to such holder of Series
C-2 Convertible Preferred Stock, a certificate or certificates for the number
of shares of Common Stock to which he shall be entitled as aforesaid and a
check payable to the holder in the amount of any cash amounts payable as the
result of a conversion into fractional shares of Common Stock, plus any
declared and unpaid dividends on the converted Series C-2 Convertible
Preferred Stock. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of
the shares of Series C-2 Convertible Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record holder
or holders of such shares of Common Stock on such date.
(d) REVERSION OF SERIES C-2 CONVERTIBLE PREFERRED STOCK INTO
UNDESIGNATED PREFERRED STOCK. Upon the conversion of any shares of Series
C-2 Convertible Preferred Stock into Common Stock, the shares so converted
shall revert to the status of authorized but undesignated Preferred Stock.
(e) ADJUSTMENTS TO CONVERSION RATE.
i. ADJUSTMENTS FOR SUBDIVISIONS, SPLITS, COMBINATIONS,
CONSOLIDATIONS, REORGANIZATIONS OR RECLASSIFICATIONS OF COMMON STOCK. In the
event that after the date of the first issuance of the Series C-2 Convertible
Preferred Stock the outstanding shares of Common Stock shall be (a)
subdivided or split into a greater number of shares of Common Stock; (b)
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock; or (c) changed into a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise, the holders of the shares of
Series C-2 Convertible Preferred Stock shall receive upon conversion, the
stock and/or securities to which the
<PAGE>
holder would have been entitled had the holder held, at the time of said
split, subdivision, combination, consolidation, reorganization or
reclassification, the same number of shares of Common Stock as the number of
Series C-2 Convertible Preferred Stock converted.
ii. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In
the event the Company at any time after the date of the first issuance of the
Series C-2 Convertible Preferred Stock makes, or fixes a record date for, the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in the securities of the Company, then the holders
of the shares of Series C-2 Convertible Preferred Stock shall receive upon
conversion, in addition to the number of shares of Common Stock receivable
thereupon, the stock or securities to which the holder would have been
entitled had the holder held, at the time of said dividend or other
distribution, the same number of shares of Common Stock as the number of
Series C-2 Convertible Preferred Stock converted, and had they thereafter
during the period from the date of such event to and including the date of
conversion, retained such stock or securities receivable by them as aforesaid
during such period, subject to all other adjustments called for during such
period under this Section 4 with respect to the rights of the holders of the
Series C-2 Convertible Preferred Stock.
(f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price or Conversion Rate of the
Series C-2 Convertible Preferred Stock pursuant to this Section 4, the
Company, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series C-2 Convertible Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based. The Company shall, upon the
written request at any time of any holder of Series C-2 Convertible Preferred
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (1) such adjustment and readjustment, (2) the Conversion Price
or Conversion Rate at the time in effect, and (3) the number of shares of
Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of a share of Series C-2 Convertible
Preferred Stock.
(g) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company
shall at all times reserve and keep available out of its authorized but
unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series C-2 Convertible Preferred Stock such
number of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Series C-2
Convertible Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the
conversion of all outstanding shares of the Series C-2 Convertible Preferred
Stock, in addition to such other remedies as shall be available to the holder
of such Series C-2 Convertible Preferred Stock, the Company will take such
corporate action as may, in the opinion of its counsel, be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes.
<PAGE>
5. NOTICE OF CORPORATE ACTION. In the event of:
(a) any taking by the Company of a record of the holders of its
Common Stock for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a dividend payable solely in
cash or shares of Common Stock) or other distribution, or any right or
warrant to subscribe for, purchase or otherwise acquire any shares of stock
of any class or any other securities or property, or to receive any other
right;
(b) any capital reorganization, reclassification or
recapitalization of the Company (other than a subdivision or combination of
the outstanding shares of its Common Stock), any consolidation or merger
involving the Company and any other person (other than a consolidation or
merger with a wholly-owned subsidiary of the Company, provided that the
Company is the surviving or the continuing corporation and no change occurs
in the Common Stock), or any transfer of all or substantially all the assets
of the Company to any other person; or
(c) any voluntary or involuntary dissolution, liquidation or
winding up of the Company; then, and in each such case, the Company shall
cause to be mailed to the holders of record of the outstanding shares of the
Series C-2 Convertible Preferred Stock, at the address shown on the stock
transfer books of the Company, at least 20 days (or 10 days in case of any
event specified in clause (A) above) prior to the applicable record or
effective date hereinafter specified, a notice stating (i) the date or
expected date on which any such record is to be taken for the purpose of such
dividend, distribution or right and the amount and character of such
dividend, distribution or right or (ii) the date or expected date on which
any such reorganization, reclassification, recapitalization, consolidation,
merger, transfer, dissolution, liquidation or winding up is to take place and
the time, if any such time is to be fixed, as of which the holders of record
of Common Stock shall be entitled to exchange their shares of Common Stock
for the securities or other property deliverable upon such reorganization,
reclassification, recapitalization, consolidation, merger, transfer,
dissolution, liquidation or winding up. The failure to give any notice
required by this Section 5, or any defect therein, shall not affect the
legality or validity of any such action requiring such notice.
6. VOTING RIGHTS. Except as otherwise required by law, the holders of
Series C-2 Convertible Preferred Stock shall not be entitled to notice of any
shareholders' meeting nor to vote with the holders of the Common Stock upon
the election of directors and upon any other matter submitted to shareholders
for a vote.
7. COVENANTS. In addition to any other rights provided by law, the
Company shall not, without first obtaining the affirmative vote or written
consent of the holders of not less than a majority of the outstanding shares
of the Series C-2 Convertible Preferred Stock:
(a) amend or repeal any provision of, or add any provision to, the
Company's Amended and Restated Certificate of Incorporation if such action
would materially and adversely alter or change the preferences, rights,
privileges or powers of, or the restrictions provided for the benefit of, the
Series C-2 Convertible Preferred Stock authorized hereby; or
<PAGE>
(b) redeem or repurchase any outstanding shares of Series C-2
Convertible Preferred Stock.
IN WITNESS WHEREOF, said Socket Communications, Inc. has caused this
Certificate of Designations of Preferences and Rights of the Series C-2
Convertible Preferred Stock to be duly executed by its President and Chief
Executive Officer and attested to by its Secretary this 15th day of May, 1998.
/s/ Charlie Bass
----------------
Charlie Bass
Chief Executive Officer
ATTEST:
/s/ David W. Dunlap
- -------------------
David W. Dunlap
Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SOCKET
COMMUNICATIONS, INC. CONDENSED FINANCIAL STATEMENTS FOR THE INTERIM PERIOD ENDED
JUNE 30, 1998 INCLUDED IN FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 591,641
<SECURITIES> 0
<RECEIVABLES> 1,268,526
<ALLOWANCES> 0
<INVENTORY> 315,943
<CURRENT-ASSETS> 2,183,593
<PP&E> 1,128,620
<DEPRECIATION> 901,301
<TOTAL-ASSETS> 2,477,790
<CURRENT-LIABILITIES> 2,681,610
<BONDS> 0
0
3,280,019
<COMMON> 7,272
<OTHER-SE> (3,503,990)
<TOTAL-LIABILITY-AND-EQUITY> 2,477,790
<SALES> 2,661,932
<TOTAL-REVENUES> 2,661,932
<CGS> 1,084,331
<TOTAL-COSTS> 1,084,331
<OTHER-EXPENSES> 2,052,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,574
<INCOME-PRETAX> (551,249)
<INCOME-TAX> 0
<INCOME-CONTINUING> (551,249)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (551,249)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
