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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 1-13810
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SOCKET COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
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<S> <C>
DELAWARE 94-3155066
(State or other (IRS Employer
jurisdiction of Identification No.)
incorporation or
organization)
</TABLE>
37400 CENTRAL COURT,
NEWARK, CA 94560
(Address of principal executive offices including zip code)
(510) 744-2700
(Registrant's telephone number, including area code)
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Securities registered under Section 12(b) of the Exchange Act:
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NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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Common Stock OTC (Bulletin Board) and Pacific Stock
($0.001 par value) Exchange
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Securities registered under Section 12(g) of the Exchange Act: none
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
_X_ No ____
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Revenue for the fiscal year ended December 31, 1997: $4,779,200
Aggregate market value of Common Stock ($0.001 par value) held by
non-affiliates on March 25, 1998 based on closing price on such date:
$6,000,000. For purposes of this disclosure, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of Common Stock and
shares held by officers and directors of the registrant have been excluded
because such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily conclusive for other purposes.
Number of shares of Common Stock ($0.001 par value) outstanding as of March
25, 1998 is 6,501,275 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
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DOCUMENT PART OF FORM 10-KSB
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Proxy Statement for the Annual Meeting of Stockholders for Part III
fiscal year ended December 31, 1997
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PART I
ITEM 1. BUSINESS
THIS BUSINESS SECTION AND OTHER PARTS OF THIS ANNUAL REPORT ON FORM 10-KSB
CONTAIN FORWARD-LOOKING STATEMENTS (IDENTIFIED WITH AN ASTERISK "*") THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THIS BUSINESS SECTION AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE SUCH FORWARD LOOKING STATEMENTS OR TO UPDATE THE REASONS
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH
FORWARD-LOOKING STATEMENTS.
GENERAL
Socket Communications, Inc. ("Socket" or the "Company") develops and sells
connection solutions for handheld computers that use the Windows CE operating
system from Microsoft Corporation ("Microsoft") and other mobile computers,
including a family of low power PC Card adapters for serial communications,
Ethernet connectivity, mobile data collection, and wireless messaging. Socket is
also developing its family of serial, Ethernet and mobile data collection PC
cards in a CompactFlash-TM- format for use with smaller handheld computers such
as the Windows CE Palm PC, which the Company estimates will begin shipping in
the second half of 1998, and other devices.*
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
that began in 1997 on connection products for devices using the Windows CE
operating system from Microsoft, including handheld computers (H/PCs and Palm
PCs) and embedded devices. Socket believes that it produces the world's leading
family of serial PC Cards. 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 bar code scanner PC card and a low
power Ethernet card for Windows CE handheld computers. The Company's low power
Ethernet PC card is recognized by Version 2.0 of the Windows CE operating
system, which began shipping in December 1997. The Ethernet card is used for
higher speed desktop synchronization, large file transfers, network connections
to the Internet and E-mail. Socket also produced the first multifunction PC card
for Windows CE in its Ethernet/ Serial combination card.
The Company has also developed wireless messaging products including a
PageCard PC Card wireless messaging system introduced in January 1995 that uses
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. During 1997, the Company and Cetronic AB
("Cetronic"), a Swedish company that develops and markets systems for wireless
communications, alarm and control markets, have been jointly developing wireless
receivers in both PC card and CompactFlash formats that use the higher speed
FLEX and ERMES network protocols, and a Mobile Information Server to facilitate
group broadcasting of Internet and intranet information to mobile devices. In
June 1997, the Company and Cetronic completed a combination agreement with the
intention of combining the two companies, however, both Companies decided to not
proceed with the combination and the combination agreement expired in December
1997 in accordance with its terms. In January 1998, Microsoft Corporation
introduced the Palm PC, a Windows CE handheld computer, (see "Industry Overview"
for a description of the Palm PC), and announced its manufacture by several
computer manufacturers, with shipments expected to begin in the second half of
1998.* Microsoft also announced that it would be supporting the development
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* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" including "Risk Factors."
2
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of wireless group broadcasting services, including wireless updating of web
pages, on the Palm PC. The Company expects to further develop its Mobile
Information Server technology to align with group broadcasting standards and
software modules being developed by Microsoft to facilitate the wireless
updating of web pages and other information on Windows CE mobile computers and
other Windows CE devices.* In March 1998, the Company announced a Memorandum of
Understanding with Motorola Corporation ("Motorola") to adapt the Company's FLEX
messaging software, under development during 1997, to work as a software driver
with Motorola's Windows CE 2.0 CompactFlash wireless receiver for use with Palm
PCs, which are expected to begin shipping in the second half of 1998, and
embedded module products under development by Motorola. The Memorandum of
Understanding contemplates that the Company will earn development revenues from
this contract beginning in the second quarter of 1998, a royalty on receivers
sold (with sales expected to commence by the fourth quarter of 1998) and
revenues from expected distribution and sale of the receiver by the Company.*
The Company also earns royalties on wireless messaging services provided by
third party carriers and other revenues from development work performed for
others.
In addition to the relationship with Motorola and with Cetronic, the Company
has developed a number of other strategic relationships that are important to
its product development and marketing programs. The Company has developed with
the National Dispatch Center ("NDC") the 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 a 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 Company's 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.
Although the Company believes that its focus on the Windows CE operating
system for hand held computers and its strategic relationship with Motorola and
other strategic partners position the Company for revenue growth beginning in
1998, the Company has incurred significant quarterly and annual operating losses
in every fiscal period since its inception, and the Company expects to incur
quarterly operating losses at least through the first 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 December 31, 1997, the Company had a net capital
deficiency of $(3,224,944) and a working capital deficit of $(3,573,906).
Although these deficiencies have been subsequently reduced by the investment of
$1.5 million in Series B Preferred Stock during the first quarter of 1998, the
Company will require additional funding in 1998 to meet its working capital
needs as well as to meet the minimum capital requirements to retain its listing
on the Pacific Exchange. The inability to obtain such funding could require the
Company to significantly reduce or suspend operations, sell additional
securities on terms that
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* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" including "Risk Factors."
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are highly dilutive to investors, cause the Company to be delisted from the
Pacific Exchange, or otherwise have a material adverse effect on its financial
condition or operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--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.
INDUSTRY OVERVIEW
The market for mobile computers is entering a phase of accelerated growth.*
The Yankee Group, an independent market research firm, projects that the
installed base of mobile computers, including all varieties of handheld and
notebook computers, will grow from 10.2 million in 1995 to 43.2 million in
2000.* Demand for notebook computers continues to increase due to the ongoing
expansion of their capabilities and their steady reduction in size, weight and
price. Meanwhile, demand for handheld personal computers and palmtops, although
slow to materialize initially, is projected to increase rapidly.* H/PCs using
Microsoft Windows CE operating system Version 1.0 were launched at the end of
1996 from CASIO, Compaq, Hewlett-Packard, Hitachi, LG Electronics, NEC, Philips
and other electronic appliance manufacturers. Second generation H/PCs using
Version 2.0 of the Windows CE operating system began shipping in December 1997.
Palm PC handheld computers using Version 2.0 of the Windows CE operating system
are expected to begin shipping in the second half of 1998.*
H/PCs, manufactured by a dozen computer makers, are designed as companions
to a desktop computer and run scaled down "pocket" versions of popular Microsoft
Personal Information Management programs, spreadsheet programs (Pocket Excel),
word processing programs (Pocket Word), graphics presentation programs (Pocket
PowerPoint), a web browser (Pocket Internet Explorer), remote networking,
Ethernet capabilities and e-mail attachments, and provide for easy file transfer
and synchronization with a companion desktop system. The H/PCs have an
"instant-on" feature that enables the devices to transition immediately from a
powered-off state to the most recently running application. H/PCs support
communications over serial, infrared, Ethernet LAN, network dial-up
remote-access services or direct dial-up modem connections and can synchronize
data files, electronic mail and personal information through any of these means.
Version 2.0 of the Windows CE operating system incorporated into H/PCs such as
the Hewlett-Packard 620LX upgrades the H/PCs to include color, larger memories
(16MB of RAM), a fast processor (the 32-bit Hitachi RISC 75-MHz processor), a
rechargeable battery pack, AC adapter, built-in microphone, speaker and stylus
pen, a PC Card slot and a keyboard, and are generally priced under $1,000.
The Windows CE operating system Version 1.0 was introduced in November 1996
by Microsoft, and its upgrade, Version 2.0, began shipping in December 1997. The
operating system is a 32-bit, Windows-compatible real-time operating system
designed to fill the need for a small, scalable operating system that can be
customized to work with a broad selection of products. Windows CE is built
around an application programming interface (API)--the Win32 API--that is
consistent with other 32-bit Windows-based operating systems, which means that
third-party programming resources including tools, documentation, and
experienced programmers are readily available. According to Microsoft, the
installed base of Windows machines is close to 400 million, representing an
abundance of potential users who are already familiar with the basic Windows CE
interface. Because Windows software development tools can be used to build
Windows CE applications, a large pool of programmers also exists to create the
applications that will be necessary for this new platform to succeed. Microsoft
claims that more than 3,000 independent software vendors are already building
applications for Windows CE. The operating system was designed and built as an
embedded platform to support a number of emerging computer appliances including
handheld
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* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" including "Risk Factors."
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computers ("H/PCs" and "Palm PCs"), voice-activated information systems for
automobiles, game consoles, smart phones, TV set-top boxes and home appliances.
In addition, Windows CE is designed to support embedded applications such as
process monitoring and control, instrumentation data collection, computer
peripherals, office equipment, point-of-sale devices and telecommunications.
Palm PCs will fit in a shirt pocket, purse or briefcase and are expected to
be introduced in the second half of 1998.* Primarily designed as a personal
information manager and web browser, the Palm PC also is a companion device for
a Windows desktop computer and will update contacts, calendar, tasks, electronic
mail (including attachments) and notes. The Palm PC uses a touch screen with an
on-screen keyboard, built-in handwriting recognition, or entry and retention of
actual handwritten notes and drawings. It connects to the desktop, a company
network (through an Ethernet connection), the Internet and other portable PC
devices such as an H/PC through a serial port, a CompactFlash input/output slot
or over infrared. The user can view content selected from Internet and intranet
sites offline with its Internet browser feature Mobile Channels, and Microsoft
has announced that it plans to enable wireless updating of selected Microsoft
websites that can be accessed through its Internet browser so that these web
pages will always remain current. The Palm PCs are generally expected to be
priced under $500. The Palm PC is shaped like the popular Palm Pilot handheld
computer from 3Com Corporation which sold 1.0 million units in its first
eighteen months.
In 1999, according to independent research firm IDC, Windows CE-based H/PCs
and Palm PCs will outsell any other type of PC companion product, including
models from former market leaders Sharp, 3Com (Pilot) and Psion.* IDC projects
that between 1997 and 2001 the cumulative annual growth rate for Windows
CE-based handheld computers will exceed 44%.* See, however, "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors--Dependence on the Market for Mobile Computers; Dependence on Market
Success of Windows CE."
As wearable computers, Windows CE based handheld computers address two
important market needs that bulkier notebook computers do not currently satisfy:
(i) mobile professionals need immediate access to high-value information; and
(ii) mobile workers in certain vertical markets need a flexible, cost-effective
platform for automated data collection. The standard Windows CE software suite
covers the major categories of information that have high-value for mobile
professionals. This includes business contacts, calendar schedules, assigned
tasks, e-mail and, to a growing extent, worldwide web updates. Examples of
vertical markets that can utilize handheld computers for mobile data collection
include retail inventory control, factory floor management, health care, field
service, inspection and transportation.
PRODUCTS
SERIAL COMMUNICATIONS
Socket offers an expanding family of Input/Output (I/O) adapters that the
Company believes are uniquely suited for operation with handheld computers. The
Company believes that competing I/O adapters consume up to 10 times more power
than Socket's. Low power consumption is an attractive feature for I/O adapters
because it allows handheld computers to operate for longer periods on internal
power without requiring the user to change batteries. Changing handheld computer
batteries frequently is inconvenient and expensive and reduces the user's
productivity. Most of Socket's "battery friendly" I/O adapters achieve their low
power consumption by incorporating Socket's proprietary HIS chip. On Windows CE
devices, adding one or more serial ports through either the PC Card or
CompactFlash slot provides higher data transfer rates than the built-in serial
port because of the buffered 16550 UART built into the Company's serial card
products, and can also transfer power from the Windows CE handheld
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* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" including "Risk Factors."
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computer to a peripheral device such as a bar code scanning wand, which cannot
be accomplished through the built-in serial port.
SINGLE-PORT SERIAL I/O ADAPTER
Socket's Serial I/O Card is a PC Card serial I/O adapter that can be used
with all major PC Card computers, including Windows CE-based handheld computers,
Windows 95 and Windows NT notebooks, the HP 100/200 LX palmtop, the Sun Voyager,
the Apple PowerBook, the Newton MessagePad, the Sharp Zaurus and others. The
Socket Serial I/O Card operates as a standard communication port and can work
with conventional serial communications programs. Devices that can attach to
Socket Serial I/O Cards include stenography machines for court reporting,
medical instruments for monitoring or data collection, label printers for
inventory control, high speed fax/modems for web browsing, or global positioning
systems for tracking location and time. Socket's Serial I/O Card was the first
PC Card to receive certification from Microsoft for operation with Windows CE
handheld computers. Socket is developing a CompactFlash-TM- version of its
single-port serial I/O adapter for use with the Palm PC Windows CE handheld
computer which is expected to be available in the second half of 1998.*
RUGGEDIZED SERIAL I/O ADAPTER
In 1996, Socket introduced the Ruggedized Serial I/O Card, a version of the
Serial I/O Card designed for operation in harsh industrial or outdoor
environments. The Ruggedized Serial I/O Card has an integrated fixed cable that
maintains solid contact in high vibration environments such as moving vehicles,
a molded strain relief to protect against lateral stress and seal out dust and
moisture, and a rigid, sonic welded frame to resist torque that could otherwise
crack circuit board traces. Socket is developing a CompactFlash-TM- version of
its ruggedized serial I/O adapter for use with the Palm PC Windows CE handheld
computer which is expected to be available in the second half of 1998.*
DUAL-PORT SERIAL I/O ADAPTER
In 1996, Socket introduced the Dual Serial I/O Card, a version of the Serial
I/O Card that includes two high-speed serial ports. Both serial ports can
operate independently, and the adapter requires only a single system interrupt
to operate, making it well suited for applications such as data collection or
equipment monitoring and control. Separate cables give the user the flexibility
to use only one port without leaving a cable dangling from the unused port. The
Company believes that the Dual Serial I/O Card consumes less power than any
other dual-port PC Card serial adapter on the market. Socket has developed
software drivers to allow the Dual Serial I/O Card to operate on mobile
computers running Windows CE. Socket is also developing a CompactFlash-TM-
version of its dual-port serial I/O adapter for use with the Palm PC Windows CE
handheld computer which is expected to be available in the second half of 1998.*
ETHERNET CONNECTIVITY
LOW POWER ETHERNET CARD
In December 1997, Socket introduced the Low Power Ethernet Card product, an
Ethernet PC Card for Windows CE-based H/PCs. The Company believes that the
Low-power Ethernet Card product consumes less power than any other PC Card
Ethernet adapter on the market and allows data transfers to occur at up to 200
times faster than through the RS232 port on the H/PC. The Low-power Ethernet
card is recognized by Version 2.0 of the Windows CE operating system and is used
for desktop synchronization, higher speed file transfers and connections to
other computers and to the Internet through a network.
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* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" including "Risk Factors."
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Socket is also developing a CompactFlash-TM- version of its low-power Ethernet
card for use with the Palm PC Windows CE handheld computer which is expected to
be available in the second half of 1998.*
ETHERNET EA CARD AND EA+ CARDS
Socket released the first commercially available PC Card Ethernet adapter in
1992. The 16-bit Socket EA and EA+ Cards enable a mobile computer to communicate
with an Ethernet network at speeds comparable to the internal Ethernet Cards
installed in workstations, which can be up to 100 times faster than network
connections based on serial I/O ports. The EA and EA+ Card products are
compatible with the popular NE2000 network controller, allowing them to utilize
the certified network drivers included with the major PC-based network operating
systems. The EA Card runs with 10BaseT Ethernet. The EA+ Card runs with 10BaseT
and 10Base2 Ethernet. The Company believes that the EA Card product consumes
less power than any other PC Card Ethernet adapter on the market.
ETHERNET SERIAL CARD
In 1996, Socket introduced the Ethernet Serial Card product, a PC card that
combines an Ethernet adapter and a serial I/O adapter on a single card. In 1998,
the Company began offering software drivers for the Ethernet Serial Card that
allows the product to operate with Handheld PCs, enabling Windows CE users to
use the serial port for data collection and the Ethernet port to transfer data
at high speed to corporate networks.* Socket is also developing a
CompactFlash-TM- version of its Ethernet serial card for use with the Palm PC
Windows CE handheld computer which is expected to be available in the second
half of 1998.*
MOBILE DATA COLLECTION
The Company believes that a significant opportunity exists for selling its
I/O adapters into vertical markets looking for data collection solutions.*
Socket's Serial I/O Card can be configured to deliver power from a host H/PC to
the attached serial peripheral that the adapter is controlling. The Company
believes that for certain applications this feature gives Socket's PC Card
serial adapters an advantage over the serial ports built into H/PCs, since
built-in serial ports cannot typically deliver a significant amount of power
from the host H/PC. The Company believes that the serial I/O adapter's ability
to transfer power from an H/PC to an attached serial peripheral is attractive to
certain Original Equipment Manufacturers (OEMs) because it allows OEMs to design
wearable data collection systems that have a single power source--the
H/PC--rather than two independent power sources--one for the H/PC and one for
the attached peripheral. Furthermore, there is no standard form factor for the
cable connectors used by various brands of H/PCs for their built-in serial
ports, giving OEMs who use Socket's serial I/O adapters the advantage of a
common cable interface for all H/PCs. The benefits of convenient power delivery
and host independence add to the advantage of low power consumption offered by
Socket's serial adapters.
BAR CODE WAND CARD
Socket jointly developed with Welch Allyn, an industry leader in scanning
technologies, a bar code scanner integrated with the Serial I/O Card. Using
Welch Allyn's SCANTEAM-TM- 6180 bar code wand, the product works with Socket's
keyboard emulation software to copy bar code data directly into any Windows
program. Socket is working with software vendors to integrate Socket's bar code
scanner product into vertical market applications. Socket is also developing a
CompactFlash-TM- version of its bar code wand card for use with the Palm PC
Windows CE handheld computer which is expected to be available in the second
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* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" including "Risk Factors."
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half of 1998.* The Company also expects to further expand its line of bar code
scanning products for Windows CE handheld computers during 1998.*
COLLECTION I/O CARD
The Company has developed for OEM applications a Serial PC Card wired to
supply power from a host computer to any attached scanning device such as a
contact wand, laser scanner or magnetic stripe reader. The card works with
Socket's "keyboard wedge" software and programmable filters which can turn any
handheld PC into a mobile data collection terminal.
WIRELESS MESSAGING
The Company is working with Motorola and with Cetronic to develop PC Card
and CompactFlash-TM- pager receivers using Motorola's FLEX protocols for the
U.S. and selected Asian markets, and the ERMES paging protocol for the European
market, and is working with Cetronic to develop a Mobile Information Server to
create a mobile webcasting system. The Company began selling its PageCard
Wireless Messaging System using the POCSAG paging networks in the U.S. in 1995
and sales have been less than ten percent of revenues in each of the years 1995
through 1997. However, as part of the Wireless Messaging System, the Company
developed a number of the technology building blocks required for wireless
messaging including a data paging receiver built by Mitsubishi Corporation,
PageSoft wireless messaging software, Socket Wireless Messaging Services and a
software developers kit including a number of protocols needed to send and
recombine large amounts of data and to route the data to the applications to
which they were intended. The Company wrote off its POCSAG PageCard inventory in
the fourth quarter of 1997 due to the low volume of sales and the expected
release in 1998 of FLEX receivers. See "Management's Discussion and Analysis of
Financial Condition--Risk Factors--Slowly Emerging Market for Wireless Data
Communications Products."
During 1997, the Company completed the first phase of a development contract
with Microsoft to assist in defining the standards for a CompactFlash
input/output card to be used with Palm PCs. In January 1998, Microsoft and
Motorola announced that they would support the development of wireless messaging
with the Palm PC. Microsoft announced that it would support the wireless
updating of selected web pages downloaded into their Internet Explorer browser
installed on a Palm PC. Additional details regarding this program are expected
to be announced by Microsoft later in 1998.* At the same time, Motorola
announced that it would develop a FLEX-based data paging receiver in a
CompactFlash format for use with the Palm PC, and in March 1998, the Company
announced that it would team with Motorola to adapt its messaging software as a
software driver for the Motorola receiver and to complete a software developers
kit.* Instead of a standalone pager, Motorola is creating a pager that uses the
memory and processing capabilities of the Palm PC handheld computer, reducing
the size requirements and the cost of the receiver. Finally, the Company intends
to adapt its Mobile Information Server software to incorporate Microsoft's
standards for group broadcasting of web page information updates and to simplify
the effort required to send information over the paging networks on a one-to-one
or one-to-many basis.* The Company believes that the alignment of market leaders
behind group broadcasting, including Microsoft and the handheld computer
manufacturers for Windows CE handheld computers, Motorola, and the major
national paging carriers who are expected to support deployment of the FLEX
network paging receivers, the lower costs associated with the CompactFlash
receivers, and the improved tools being developed by Microsoft and by the
Company to simplify the sending of information from web pages or other data
sources will increase the likelihood of the development of applications to
stimulate the growth and development of wireless transfer of time sensitive data
to Palm PC handheld computers. Such applications
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* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" including "Risk Factors."
8
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include group broadcasting of Internet web pages information (mobile webcasting)
and intranet information, in particular for time sensitive information of
benefit to a mobile workforce such as sales force automation, transportation and
dispatch, information alerts and electronic mail messaging.* See Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors-- Dependence on Strategic Alliances and Business Relationships."
EXISTING WIRELESS PRODUCTS
PAGECARD WIRELESS MESSAGING SYSTEM
The PageCard WMS has three components: the PageCard receiver, PageSoft
communications software and Socket's Wireless Messaging Services.
PAGECARD POCSAG RECEIVER
The PageCard receiver is a dual-mode pager that functions as a stand-alone
alphanumeric pager and connects to a mobile computer through a PC Card interface
enabling wireless messages to be delivered directly to a mobile computer. An
easy-to-read LCD display, two control buttons and an audible beeper enable the
PageCard receiver to replace the mobile professional's existing pager. A typical
alphanumeric pager weighs 6 oz., can store up to 40 messages and has a total
memory capacity of 6,000 characters. The PageCard receiver weighs 2.2 oz., holds
up to 370 messages and has a total memory capacity of 128,000 characters.
Developed in partnership with Mitsubishi, the PageCard receiver is compatible
with the POCSAG worldwide paging transmission standard and is available in the
900 MHz range, the primary frequency range in North America, and 466 MHz, the
Euromessage paging frequency. These capabilities enable the PageCard receiver to
take advantage of the extensive wireless data networks already in place.* The
Company believes that the PageCard receiver is the leading commercially
available PC Card pager. The PageCard receiver can be used with any
Windows-based PC, Windows CE-based H/PC, the Hewlett-Packard LX Series, the
Apple PowerBook and the Newton MessagePad. The plug-and-play capability of the
PageCard receiver and the software tools included in Socket's SDK enable mobile
computer users to download wireless data into their mobile computers simply by
inserting the PageCard receiver into a PC Card slot. Such data messages would be
difficult or impossible to read using a conventional alphanumeric pager.
PAGESOFT COMMUNICATIONS SOFTWARE
PageSoft is a suite of applications and utilities designed to make it easy
to transmit relevant information from the office to the PageCard receiver and to
download it from the PageCard receiver into a mobile computer. PageSoft
currently includes send and receive software for Windows 95, Windows NT, Windows
3.x, and Windows for Workgroups. PageSoft also includes receive software for
Windows CE and Newton. The Company's PageSoft software incorporates advanced
messaging features including binary file transfers, compression, encryption, and
the Company's message intercept protocol which facilitates the routing of
multiple types of messages to the applications for which they are intended or to
the e-mail in-boxes of Microsoft Mail, cc:Mail, Windows CE e-mail, Lotus Notes
Mail or a generic e-mail in-box.
MESSAGING SERVICES
Messaging services available for the PageCard WMS include a personal
toll-free number, immediate activation, unified billing, modem-based message
dispatch, operator-assisted dispatch and message reconciliation, an Internet
gateway with a personal PageCard receiver Internet address, fax notification
with on-
- ------------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" including "Risk Factors."
9
<PAGE>
demand forwarding, voice messaging and annotation of faxes with on-demand
playback, message scheduling and a 24-hour bulletin board system that enables a
computer with a modem to send messages to the PageCard receiver. The PageCard
WMS currently uses the nationwide carrier service of PageNet, the largest paging
carrier in the U.S., with over 6.2 million subscribers. Advanced services such
voice messaging are administered by The National Dispatch Center.
Messaging services for the PageCard WMS include:
TELEPHONE: A colleague can call the personal toll-free number of a SWiMS
subscriber and dictate a message to an on-line operator. The message will
then be sent to the subscriber's PageCard receiver. This operator
dispatch service is available 24 hours a day, seven days a week.
FAX: A colleague can send a fax to the personal toll-free number of a
SWiMS subscriber. SWiMS will store the fax and send wireless notification
to the subscriber's PageCard receiver that a fax is waiting. The SWiMS
subscriber can locate the most convenient fax machine (e.g., at a hotel,
a copy center, a customer's site), call the toll-free number, supply a
password and specify the phone number of the fax machine. SWiMS will then
forward the fax to that phone number. A SWiMS operator will also read the
fax message to the subscriber if requested, which facilitates getting the
information if a fax machine is not readily available.
VOICE MAIL: Colleagues can send voice messages of up to five minutes in
conjunction with, or in lieu of, a fax. SWiMS will store the voice
message and immediately send wireless notification to the subscriber's
PageCard receiver. Subscribers can play these voice messages back over
the phone after supplying the correct password.
CALL CONNECT: Colleagues can call the subscriber's toll-free number and
ask to be connected to the subscriber. SWiMS will immediately send
wireless notification to the subscriber's PageCard receiver that a caller
is waiting. The subscriber can call in on the toll-free number and will
be connected. If the subscriber does not call in, the colleague is routed
to voice mail.
PAGER: SWiMS enables colleagues to send messages to the personal
toll-free number of a SWiMS subscriber via telephone dictation or, for
numeric messages, via touch-tone phone input. Colleagues can send
messages via modem to a special toll-free number by using specialized
software, or by logging into the SWiMS BBS with a modem using
conventional communications software. Subscribers can also schedule pages
to be sent to themselves for remembering important information and events
by dictating the message and transmission time to an operator.
E-MAIL: SWiMS offers an Internet e-mail gateway which enables a colleague
to send a wireless message of up to 690 characters to the SWiMS
subscriber's PageCard receiver simply by sending e-mail to the user's
PageCard receiver's Internet address.
MESSAGE RECONCILIATION: SWiMS offers on-demand message reconciliation and
reading or retransmission via operator or the BBS. Messages will be
stored for message reconciliation and retransmission for up to 30 days.
SWiMS sequentially numbers messages sent to a subscriber which assists
the subscriber in determining that all messages sent have been received.
SOFTWARE DEVELOPMENT TOOLS ("SDK")
The Company's SDK facilitates the page enabling of software applications and
allows software developers to work with Microsoft operating systems, both in
real and protected mode, including Windows CE, Windows 95, Windows NT, Windows
for Workgroup, Windows 3.x, and DOS. The SDK also supports receiving
applications for the Newton MessagePad. The SDK includes protocols developed by
the Company to facilitate the disassembly, transmission, reassembly and routing
of information to intended applications including Page Descriptor Footer
("PDF"), a protocol for appending control information to the end of a paged
message in order to support multi-segment messages as well as binary, compressed
and encrypted
10
<PAGE>
messages, Mail Message Format ("MMF"), a protocol for identifying fields of a
paged message by embedding concise field descriptors within the message itself,
and Message Intercept Protocol, a protocol for routing messages to their
intended applications.
WIRELESS PRODUCTS UNDER DEVELOPMENT
FLEX MOBILE INFORMATION RECEIVERS
In March 1998, Socket entered into a Memorandum of Understanding with
Motorola Corporation for Socket to supply Motorola with software that will allow
Motorola's FLEX-TM- Receiver Modules and CompactFlash paging receivers to
operate with Windows CE-based computers.* Under this Memorandum of
Understanding, Socket will distribute the Motorola FLEX-TM- receiver, which is
expected to be available in the second half of 1998, and Socket expects to defer
further development work on its own FLEX-compatible PC Card and CompactFlash-TM-
format pager receivers.* Prior to reaching agreement with Motorola, the Company
had been working with Cetronic to develop a FLEX-compatible PC Card pager
receiver, the FLEX Mobile Information receiver, to operate on the major paging
networks in North America and Asia.* The FLEX receivers include an architecture
for receiving both conventional point-to-point personal pages and
point-to-multipoint broadcast pages. This ability to receive broadcast messages
allows the receivers to be used for mobile webcasting and the receivers can have
a mix of conventional point-to-point addresses as well as addresses for group
broadcasts. These addresses, or channels, can be enabled or disabled via
over-the-air programming (OTAP), simplifying the logistics of enabling users to
subscribe to commercial information services. The receivers will be designed to
be used with the Palm PC Windows CE mobile computers and future smaller
appliances.*
MOBILE INFORMATION SERVER FOR MOBILE WEBCASTING
The Company has been jointly developing with Cetronic to develop a Mobile
Information Server for mobile webcasting. The Server has been designed to send
point-to-point data such as electronic mail and to send point-to-multipoint
broadcasts to PageCard receivers. The Server includes a web search engine which
monitors subscriber-selected web sites for information and then formats and
routes the information to each subscriber's mobile receiver through a paging
carrier. The Server may also receive data from other search engines, corporate
information files or Internet electronic mail for wireless distribution to
subscribers. Output may be formatted to be sent to different wireless receivers
including Socket's PageCards and Mobile Information Cards, GSM telephone pagers
and FM subcarrier receivers and will support major Internet protocols including
Microsoft's Channel Definition Format. Telephony protocols supported by Mobile
Information Server gateways include TAP, UCP, GSM/SMS and minicall. New gateways
may be added as demand warrants. Other features include a statistical database
to record and store information to assist the system administrator in monitoring
system activity and in creating and reconciling billing systems, and an I/O
manager for coordinating system processes, balancing and monitoring the search
engine queue, and dividing output tasks among communication gateways. In the
event the Company decides to commercialize this product, the Company would
integrate software modules and standards for the data paging of web page
information under development by Microsoft Corporation. The System would be used
for mobile webcasting of information from Internet and intranet websites by
paging carriers, content providers, search engine suppliers, corporations with
intranets, independent software vendors and value added resellers.*
- ------------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" including "Risk Factors."
11
<PAGE>
STRATEGIC ALLIANCES AND BUSINESS RELATIONSHIPS
The Company's strategy is to establish strategic alliances in business
relationships with leading participants in various segments of the
communications and mobile computer markets. The Company believes these alliances
enable it to take advantage of the superior financial resources, technological
capabilities, proprietary positions in market presences of these companies in
establishing and maintaining Socket's own position in the wireless data
communications industry. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Risk Factors--Dependence on Strategic
Alliances and Business Relationships."
The Company has established strategic alliances and business relationships
with the following companies:
CETRONIC AB and the Company are jointly developing Mobile Information
receivers that are compatible with the higher speed FLEX paging networks in
North America and with the ERMES networks in Europe and are developing a
Mobile Information Server for mobile webcasting.
COMPAQ COMPUTER CORPORATION, the leading manufacturer of personal
computers in the U.S., has selected Socket's serial PC card to be offered as
an optional part of Compaq's remote server product commencing in the second
quarter of 1998.*
LUCENT TECHNOLOGIES (formerly AT&T Microelectronics), a semiconductor
chip manufacturer, collaborated with the Company on the development of the
Company's proprietary HIS chip and currently serves as the foundry for the
HIS chip.
MICROSOFT CORPORATION, the developer of the Windows CE operating system,
has worked closely with Socket in insuring that the Company's connection
products for Windows CE products work with the Windows CE operating system.
Socket also jointly developed with Microsoft the CompactFlash-TM- form
factor for use with smaller Windows CE handheld computers.
MITSUBISHI CORPORATION, a manufacturer and distributor, supplies the
Company's PageCard receiver.
THE NATIONAL DISPATCH CENTER, a paging gateway service provider,
administers Socket Wireless Messaging Services (SWiMS).
MOTOROLA CORPORATION, the world's largest manufacturer of paging
receivers, has entered into a Memorandum of Understanding to engage Socket
to develop receiver software for a CompactFlash-TM- receiver being developed
for use with small Windows CE handheld computers such as the Palm PC and
with other Windows CE embedded systems devices.
PAGENET, the world's largest paging carrier, is the paging network
provider for the paging frequencies used by the Company's U.S. PageCard.
PageNet's services are provided through the Company's contract with the
National Dispatch Center.
PROPRIETARY TECHNOLOGY
Socket has developed a number of technology building blocks to enhance its
ability to develop new hardware and software products, to offer products which
run on multiple host platforms and to manufacture and package products
efficiently.
- ------------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" including "Risk Factors."
12
<PAGE>
Socket's most important hardware building block is the universal bus
interface, a highly flexible implementation of the PC Card interface whose
features include programmable bus steering, dual mapping of control and data
registers into both memory and I/O space, an extensive Card information
structure which includes function ID and function extension tuples,
shared-memory arbitration circuitry, support for "execute-in-place," the ability
to support both level and edge triggered interrupts from multiple sources, host
synchronization during initialization and complete polarity and masking control
of interrupts. Socket's universal bus interface enables Socket's products to
work with major PC Card hosts. Socket's PageCard receiver and Serial I/O Card
are compatible with Windows CE H/PCs, Windows 95 and Windows NT notebooks, the
Apple PowerBook, the Apple Newton MessagePad and the HP 100/200 LX palmtop.
Socket's universal bus interface has been incorporated into several
application specific integrated circuits, including Socket's HIS chip, a highly
integrated general purpose serial interface used in both the PageCard receiver
and the Serial I/O Card to control signal transmission between these products
and the mobile computer's PC Card slot.
Socket has also developed a library of software drivers and control applets
that allow its products to operate in H/PCs running Windows CE and in notebooks
running Windows 95 and Windows NT.
Socket's PageSoft communications software and SDK form the basis of an
extensive suite of one-way messaging tools and utilities that are designed to
enable Socket to add value to the PageCard WMS and its derivatives, create the
Mobile Information family of server and client software, and establish a family
of proprietary software products.
The Company relies on a combination of copyright, trademark and trade secret
laws and confidentiality procedures to protect its proprietary rights. As part
of its confidentiality procedures, the Company generally enters into
non-disclosure agreements with its employees, distributors and strategic
partners, and limits access to and distribution of its software, documentation
and other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise to obtain and use the Company's products
or technology without authorization, or to develop similar technology
independently. In addition, effective protection of intellectual property rights
may be unavailable or limited in certain foreign countries.
The Company has received correspondence from General Patent Corporation
claiming possible infringement of certain standard PCMCIA PC Card features
incorporated into the Company's PC Cards. General Patent Corporation has brought
suit against IBM Corporation, 3Com, Hayes, Xircom and New Media claiming similar
infringement and seeking royalty payments. No litigation is currently pending
against the Company. There can be no assurance that the Company will not receive
future communications from other third parties asserting that the Company's
products infringe, or may infringe, the proprietary rights of third parties, and
that in connection with such claims or the claims of General Patent Corporation,
that litigation could be brought against the Company which could result in
significant additional expense to the Company or the discontinuation of use or
redesign of infringing products.
SALES AND MARKETING
The Company markets its products through OEMs, paging service providers,
computer platform vendors, vertical market VARs, and a worldwide network of
distributors and resellers. The Company supports its distributors and resellers
through education, training and customer assistance by the Company's sales,
marketing and technical support staff and third party manufacturers'
representatives. During 1997, U.S. distributors Ingram Micro and Tech Data and
international distributor PPCP (U.K.) accounted for 21% ,15% and 21% of the
Company's revenues, respectively. As of December 31, 1997, the Company had 11
people in sales, marketing and technical support. The Company intends to
increase its sales and
13
<PAGE>
marketing effort by adding personnel and increasing promotional activities.*
However, competition for sales and marketing personnel is intense, and the
Company may be unable to recruit qualified sales and marketing personnel as
needed. In addition, the Company currently has a net working capital deficit and
will likely need to obtain additional equity capital to fund any expansion of
its sales and marketing efforts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Liquidity and Capital
Resources--Future Capital Needs; Independent Auditor's Report Contained
Explanatory Paragraph Regarding Going Concern."
Consistent with industry practice, the Company provides its distributors
with stock balancing and price protection rights which permit these distributors
to return slow-moving products to the Company for credit and to receive price
adjustments for inventories of the Company's products held by distributors if
the Company lowers the price of those products. The effect of such returns and
adjustments on the Company's operating results is minimized since the Company
recognizes revenues on products shipped to distributors at the time the
merchandise is sold by the distributor. To date, the Company has not experienced
any significant returns or price protection adjustments.
The Company relies significantly on its OEMs, distributors and resellers for
the marketing and distribution of its products. The Company's agreements with
OEMs, distributors and resellers, in large part, are nonexclusive and may be
terminated on short notice by either party without cause; furthermore, the
Company's OEMs, distributors and resellers are not within the control of the
Company and are not obligated to purchase products from the Company and may
represent other lines of products. A reduction in sales effort or discontinuance
of sales of the Company's products by its OEMs, distributors and resellers could
lead to reduced sales and could materially adversely affect the Company's
operating results. See Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors-- Distribution Risks, Product
Returns and Warranties."
Export sales represented approximately 49%, 40% and 40% of the Company's
revenue for the years ended December 31, 1997, 1996 and 1995, respectively.
Export sales are subject to the complications of complying with laws of various
countries and the risk of import/export restrictions and tariff regulations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Risks Associated with Significant Export Sales."
MANUFACTURING
The Company subcontracts the manufacture of substantially all of its
products to independent, third party contract manufacturers. The Company
subcontracts the manufacture of its PageCard on a sole source basis. The Company
performs final product testing and packages its products at its Newark,
California facility.
Sole source components include the Company's proprietary HIS chip
manufactured by Lucent Technologies that controls the signal transmission
between the Company's PageCard and Mobile Information PC Card receivers and
Serial I/O products and the PC Card slot on the mobile computer; the PageCard
receiver board and RF display, which are purchased from Mitsubishi Corporation
in Japan; and certain cable and connector components. Although to date the
Company has generally been able to obtain adequate supplies of these components,
certain of these components are purchased on a purchase order basis, and the
Company does not have long-term supply contracts for these components. In
particular, the Company purchases HIS chips from Lucent Technologies, Tamarack
chips (Ethernet Card) from Tamarack, Ethernet Cards from Quanta Electro and
Mitsubishi Corporation, and Serial I/O Cards from Quanta Electro and Mitsubishi
Corporation by purchase order under standard commercial terms and conditions in
- ------------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" including "Risk Factors."
14
<PAGE>
the industry. The Company has an agreement with Mitsubishi Corporation for
manufacture of the PageCard with a remaining term ending December 1998, subject
to automatic renewals and termination for material breach and certain other
events. The Mitsubishi agreement covers the development of the current PageCard
POCSAG receiver and subsequent improvement and modifications as determined by
the parties, as well as the mutual provision of engineering and technical
assistance. The agreement also sets forth procedures for orders, purchases,
forecasts and pricing.
Although the Company's suppliers are generally large, well-financed
organizations, in the event that a supplier were to experience financial or
operational difficulties that resulted in a reduction or interruption in supply
to the Company, it would materially adversely affect the Company's results of
operations until the Company established sufficient manufacturing supply through
an alternative source which could take a significant period of time, including
qualifying an alternative subcontractor, redesigning the product as necessary,
and commencing manufacturing.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has made substantial investments in
research and development. The Company believes that its future performance will
depend in large part on its ability to develop significant enhancements to its
existing connection products and to develop successful new products for emerging
and existing markets.* In particular, the Company believes the timely completion
and expected introduction of a CompactFlash-TM- FLEX-TM--compatible Mobile
Information receiver for Windows CE computers in the second half of 1998,
completion of the Mobile Information Server for Mobile Webcasting in the first
half of 1999, and the development and introduction of CompactFlash-TM- format
versions of the Company's family of serial and Ethernet connection products are
important to maintain a technological leadership position in wireless and wired
connection solutions and remain competitive.* As of December 31, 1997, the
Company had seven persons on its product development staff and hires engineering
consultants to perform additional engineering services as required. Research and
development expenditures were $1.1 million for each of the three years in the
period ended December 31, 1997. The Company anticipates that it will continue to
commit substantial resources to research and development in the future and will
be increasing the size of its research and development staff as a result of
contracts with Motorola and others associated with development projects.* See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Dependence on Key Employees; Need to Hire Additional
Sales and Marketing and Product Development Personnel."
COMPETITION
The overall market for communications products is increasingly competitive,
and the Company expects competition in each of its market areas to intensify.*
The Company anticipates intense competition from a number of new and established
wired and wireless computer, communications and network equipment companies.*
Increased competition, direct and indirect, could materially adversely affect
the Company's revenues and ability to achieve profitability through pricing
pressure and loss of market share.
Substantially all of the Company's present and potential competitors have
substantially greater financial, marketing, technical and other resources than
the Company and may succeed in establishing technology standards or strategic
alliances in the data communications market, obtain more rapid market acceptance
for their products or otherwise gain a competitive advantage.
Currently, the Company is not aware of a direct competitor for its current
PageCard WMS or to Motorola Corporation's CompactFlash-TM- receiver for use with
Windows CE devices for which Socket is
- ------------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" including "Risk Factors."
15
<PAGE>
developing the receiving software under contract with Motorola. The Company is
also not aware of any competition for its Mobile Information Server under
development to provide paging carriers and corporate users with webcasting
services for mobile computing devices, however, with approximately 30 companies
offering or developing webcasting services and with Server modules expected to
be commercially available from Microsoft Corporation, future competitors could
emerge. The Company faces indirect competition for short messaging applications
from alphanumeric pagers and GSM cellular phones which are produced by many
companies including Motorola, NEC, Ericsson and others, and from alternative
methods of downloading information into a mobile computer, primarily over
telephone lines or other wireless data networks.
The Company competes with Smart Modular Technologies and Quatech, among
others, in the serial PC Card market, although the Company believes that it is
the world's leading manufacturer of serial card products. The market for the
Company's Ethernet Card is highly competitive. Market leaders for Ethernet Cards
include 3Com and Xircom. However, the Company has established a product
leadership position with its Low-power Ethernet PC card for Windows CE handheld
computers and does not currently face competition from these companies. The
Company expects competitive cards to enter the market during the second half of
1998 from 3Com and Xircom and possibly others. The Company also faces
competition from combination Cards which combine Ethernet and other functions
such as fax/modem. Companies offering combination Cards include 3Com and Xircom.
PERSONNEL
As of December 31, 1997, the Company employed 26 people on a full-time
basis. Of these, eleven were responsible for sales, marketing and customer
technical support, seven were in research and development, four were in finance
and administration and four were involved in operations. The Company's employees
are not represented by a union, and the Company considers its relationship with
its employees to be good. The Company's future success will depend in
significant part upon the continued service of certain key technical and senior
management personnel, and the Company's continuing ability to attract,
assimilate and retain highly qualified technical, managerial and sales and
marketing personnel.* The Company does not have key man life insurance for any
of its employees. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors--Dependence on Key Employees;
Need to Hire Additional Sales and Marketing and Product Development Personnel."
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a 23,000 square foot facility in Newark, California. The
facility is subject to a lease which expires in 2001. The current monthly rent
is approximately $16,325. The Company believes that its current facilities are
sufficient to meet its needs for the foreseeable future.*
Financial information regarding lease commitments is contained in Note 8 of
Notes to Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
The Company has no material legal actions pending.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for vote by security holders during the fourth
quarter of 1997.
- ------------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Business
section, and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" including "Risk Factors."
16
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
From the effective date of the Company's initial public offering (June 6,
1995) through November 26, 1996, the Company's Common Stock and Common Stock
Warrants were listed on the Nasdaq SmallCap Market under the symbol SCKT and
SCKTW, respectively. The Common Stock and Common Stock Warrants were delisted
from such market effective November 27, 1996 because the Company's net capital
was below that required for continued listing, and since then have been traded
on the OTC Bulletin Board under the symbols SCKT and SCKTW, respectively. The
Company's Common Stock is also quoted on the Pacific 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 or net worth
requirements of the Pacific Exchange since December 31, 1996 and has, therefore,
been subject to possible delisting procedures since that time. In March 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 June 1998. As of
December 31, 1997, the Company had a working capital deficit of $(3,573,906),
which was reduced by the Company's sale of an aggregate of $1.5 million in
Series B Convertible Preferred Stock in the first quarter of 1998. Accordingly,
the Company will need to raise additional equity capital and repay or convert
existing convertible notes in the second quarter of 1998 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. On March 27, 1998, the Company extended
an offer to the holders of $1,750,000 of the convertible promissory notes to
convert their notes into common stock or preferred stock of the Company in order
to assist the Company to comply with the Pacific Exchange net tangible asset
requirements. However, the extent to which such holders will accept the
Company's offer is not currently known. In the event the Company is unable to
achieve compliance with the Pacific Exchange requirements, 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.
17
<PAGE>
The quarterly high and low sales prices of the Company's Common Stock since
June 6, 1995, the effective date of its initial public offering, are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1995
June 30, 1995 (from June 6, 1995).......................................... $ 6.75 $ 5.25
September 30, 1995......................................................... $ 6.50 $ 5.25
December 31, 1995.......................................................... $ 6.06 $ 2.63
1996
March 31, 1996............................................................. $ 4.38 $ 3.00
June 30, 1996.............................................................. $ 7.38 $ 2.88
September 30, 1996......................................................... $ 4.38 $ 2.88
December 31, 1996.......................................................... $ 3.62 $ 0.75
1997
March 31, 1997............................................................. $ 1.13 $ 0.63
June 30, 1997.............................................................. $ 1.16 $ 0.50
September 30, 1997......................................................... $ 0.78 $ 0.50
December 31, 1997.......................................................... $ 0.75 $ 0.34
1998
March 31, 1998 (through March 25).......................................... $ 1.03 $ 0.36
</TABLE>
The quarterly high and low sales prices of the Company's Common Stock
Warrants since June 6, 1995, the effective date of its initial public offering,
are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
1995
June 30, 1995 (from June 6, 1995).......................................... $ 1.50 $ 1.06
September 30, 1995......................................................... $ 1.75 $ 1.44
December 31, 1995.......................................................... $ 1.75 $ 1.13
1996
March 31, 1996............................................................. $ 1.50 $ 1.13
June 30, 1996.............................................................. $ 2.38 $ 1.06
September 30, 1996......................................................... $ 1.44 $ 0.75
December 31, 1996.......................................................... $ 1.00 $ 0.25
1997
March 31, 1997............................................................. $ 0.38 $ 0.13
June 30, 1997.............................................................. $ 0.44 $ 0.13
September 30, 1997......................................................... $ 0.44 $ 0.13
December 31, 1997.......................................................... $ 0.25 $ 0.06
1998
March 31, 1998 (through March 23).......................................... $ 0.19 $ 0.06
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions. As of March
25, 1998, there were approximately 800 holders of record of the Company's Common
Stock and Warrants.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently anticipates that it will retain all future earnings
for the expansion and operation of its business and does not anticipate paying
cash dividends in the foreseeable future.
18
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
In December 1997, the Company issued to CivicBank of Commerce a warrant to
purchase 50,000 shares of the Company's Common Stock at a purchase price of
$0.50 per share as consideration for the bank's agreement to waive the Company's
non-compliance with certain covenants under the credit agreement between the
bank and the Company. The warrant has a term of five years.
In January 1998, the Company sold 12,500 shares of its Series B Convertible
Preferred Stock to Explorer Partners, LLC ("Explorer Partners") for an aggregate
purchase price of $500,000. Such shares of Series B Convertible Preferred Stock
are convertible at the option of the holder at any time and will be
automatically converted into Common Stock of the Company two years from the date
of issuance. Such shares of Series B Convertible Preferred Stock convert into an
aggregate of 1,250,000 shares of Common Stock of the Company. In connection with
such sale of Series B Convertible Preferred Stock, the Company issued to
Explorer Fund Management, LLC ("Explorer Fund Management"), an affiliate of
Explorer Partners, a warrant to purchase 187,500 shares of the Company's Common
Stock at a purchase price of $0.40 per share. Such warrant has a term of five
years.
In February 1998, the Company sold 8,850 shares of Series B-1 Convertible
Preferred Stock to Explorer Partners for an aggregate purchase price of
$500,000. Such shares of Series B-1 Convertible Preferred Stock are convertible
into Common Stock at the option of the holder at any time and will be
automatically converted into Common Stock two years from the date of issue. The
Series B-1 Convertible Preferred Stock is convertible into an aggregate of
885,000 shares of the Company's Common Stock. The purchase price of the Series
B-1 Convertible Preferred Stock and its conversion price into Common Stock was
based on 80% of the average closing price of the Common Stock over the ten (10)
trading days prior to its issue date. In connection with the sale of such Series
B-1 Convertible Preferred Stock, the Company issued to Explorer Fund Management
a warrant to purchase 132,750 shares of the Company's Common Stock at a purchase
price of $0.565 per share. Such warrant has a term of five years.
In March 1998, the Company sold 8,715 shares of Series B-2 Convertible
Preferred Stock for an aggregate purchase price of $500,000. Such shares of
Series B-2 Convertible Preferred Stock are convertible at the option of the
holder thereof at any time and will be automatically converted into Common Stock
two years from the date of issue. The shares of Series B-2 Convertible Preferred
Stock are convertible into an aggregate of 871,500 shares of the Company's
Common Stock. The purchase price of the Series B-2 Convertible Preferred Stock
and its conversion price into Common Stock was based on 80% of the average
closing price of the Common Stock over the ten (10) trading days prior to its
issue date. In connection with the sale of such Series B-2 Convertible Preferred
Stock, the Company issued to Explorer Fund Management, a warrant to purchase an
aggregate of 130,725 shares of Common Stock at a purchase price of $0.57375 per
share.
Each issuance of the above referenced securities was deemed to be exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act"), in reliance on Section 4(2) of the Securities Act as a transaction by an
issuer not involving any public offering. In addition, the recipients of the
securities and the transactions represented their intention to acquire the
securities for investment only and not with a view for sale in connection with
any distribution thereof and appropriate legends were affixed to the securities
issued in such transactions.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS CONTAINS FORWARD-LOOKING STATEMENTS (IDENTIFIED WITH AN ASTERISK
"*") THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY
DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS SECTION AND IN "BUSINESS". THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS OR TO
UPDATE THE REASONS ACTUAL RESULTS COULD DIFFER MATERIALLY FOR THOSE ANTICIPATED
IN SUCH FORWARD-LOOKING STATEMENTS.
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
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 January 1998, the
Company announced that its family of serial, Ethernet and data collection
products will begin shipping in the second quarter of 1998 in a CompactFlash-TM-
format for use with smaller Windows CE handheld computers, such as the Palm PC,
expected to be launched in the second half of 1998.* The Company also earns
royalties from time to time from sale of certain of the Company's products by
the third-party manufacturers of those products.
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 sold in 1995 and the first half
of 1996 a GPS card which was subsequently discontinued. The Company also earns
royalties on wireless messaging services provided by third party carriers and
other revenues 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 anticipated release 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 March 1998, the
Company announced a Memorandum of Understanding 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, which are expected to begin shipping
in the second half of 1998. The Company will earn development revenues from this
contract beginning in the second quarter of 1998 and a royalty on all receivers
sold after the product begins volume shipments, expected in the fourth quarter
of 1998. 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 entered into Joint Development Contracts with
Cetronic in October 1996 to develop a FLEX and ERMES PC Card version of the
PageCard, and in 1997 to develop a CompactFlash version of the FLEX and ERMES
PageCards for use with smaller Windows CE computers,
- ------------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Management's
Discussion and Analysis section, and in "Business".
20
<PAGE>
and also to develop a mobile information server to facilitate group broadcasting
of internet and intranet information to mobile devices. These products and their
derivative works are being developed to facilitate the wireless updating of web
pages and other information on Windows CE computers and other Windows CE
devices. 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.
Although the Company believes that its focus on the Windows CE operating
system for hand held computers and its strategic relationship with Motorola and
other strategic partners position the Company for revenue growth beginning in
1998, the Company has incurred significant quarterly and annual operating losses
in every fiscal period since its inception, and the Company expects to incur
quarterly operating losses at least through the first 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.
The Company was incorporated in March 1992 and has incurred significant
quarterly operating losses in every fiscal period since its inception, and the
Company expects to incur quarterly operating losses at least through the first
half of 1998 and possibly longer. The Company's ability to achieve profitability
will be highly dependent upon: revenue growth from increases in the market
acceptance of the Company's serial, Ethernet, data collection and wireless
connection cards including recently introduced products; 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 December 31, 1997, the Company had a net capital
deficiency of $(3,224,944) and a working capital deficit of $(3,573,906).
Although these deficiencies have been subsequently reduced by the investment of
$1.5 million in Series B Preferred Stock during the first quarter of 1998, 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 results will meet the
Company's current expectations due to factors described in this Management's
Discussion and Analysis section, and in "Business".
21
<PAGE>
ANNUAL RESULTS OF OPERATIONS
REVENUE
In 1997, revenue was $4,779,200, an increase of 5% from 1996 revenue of
$4,570,438. 1996 revenue was flat compared to 1995 revenue of $4,530,479. The
substantial majority of revenue in all three years was derived from sales of
serial and Ethernet cards. In 1997, the Company experienced volume growth in
sales of both serial and Ethernet card products. Factors resulting in serial
card sales growth in 1997 included new products released at the end of 1996 as
the Company expanded its serial card line to add a ruggedized serial PC card and
a dual port serial PC card and, in the fourth quarter of 1997, a bar code
scanner PC card for Windows CE handheld computers. Factors influencing Ethernet
PC card growth related to a major order received from an international customer,
and new products consisting of an Ethernet/serial multifunction card released at
the end of 1996 and a low-power Ethernet card for Windows CE 2.0 computers
released in the fourth quarter of 1997. This growth was partially offset by
lower sales of the Company's PageCard wireless messaging system and the
discontinuation of sales of its GPS PC card which was selling through the first
half of 1996. Royalty and other revenue in 1997 included revenue from the
development and sale of prototype CompactFlash connection products which will
begin commercial shipments in the second quarter of 1998. In 1996, sales growth
of the Company's serial card and, to a lesser extent, PageCard, was offset by
declines in Ethernet card sales volumes and, to a lesser extent, GPS card sales,
which were discontinued in the second half of 1996. Royalty and service revenue
was primarily related to sales by third party manufacturers of the Company's GPS
and Ethernet cards.
The Company markets its products primarily through distributors and OEMs.
Recognition of revenue on shipments to distributors and the related cost of
sales are deferred until such distributors resell the products to their
customers. Recognition of revenue on shipments to customers other than
distributors occurs generally at the time of shipment. Export sales constituted
49%, 40% and 40% of revenue in 1997, 1996, and 1995, respectively.
PRODUCT GROSS PROFIT
Product gross profit, excluding royalty and other revenue, is equal to
product revenue less the cost of revenue, because the costs of royalty and other
revenue generally are negligible. The Company's product gross profit for 1997
was $1,869,865, or 40% of product revenue, compared to $1,889,223, or 43% of
product revenue in 1996 and to $1,478,306, or 34% of product revenue, in 1995.
Product gross profit in 1997 included a write-off of inventory (primarily POCSAG
PageCards) of $588,572, or 12.6% of product revenue. Product gross profit before
inventory write-off in 1997 increased over 1996 due to favorable product mix
from a higher percentage of higher margin serial card sales, higher product
gross profit margins on new products, and lower product manufacturing costs. The
product gross margin in 1996 increased over 1995 due to product mix, with a
higher percentage of revenues attributable to the higher margin serial card, and
to lower cost of products sold due to engineered cost decreases and vendor
volume price discounts.
RESEARCH AND DEVELOPMENT
Research and development expense in 1997 was $1,050,411, essentially flat
with 1996 research and development expense of $1,067,399, reflecting similar
levels of staffing and research and development activities in both years.
Research and development expense in 1996 decreased 3% from 1995 research and
development expense of $1,098,766. The decrease in 1996 reflected a decrease in
costs of development tooling partially offset by an increase in personnel
expenses, including employees, engineering contractors
22
<PAGE>
and consultants. To date, the Company has not capitalized any software
development costs. The Company expects to increase its research and development
expense in 1998.*
SALES AND MARKETING
Sales and marketing expense in 1997 was $2,719,050, an increase of 2% over
1996 sales and marketing expense of $2,666,933. The moderate increase reflected
higher sales and marketing staffing levels in the first half of 1997 and higher
costs associated with marketing studies for new products, offset in the second
half of the year with staffing reductions relating to reduced selling activities
for the Company's PageCard wireless messaging system. Sales and marketing
expense in 1996 represented an increase of 19% over 1995 expense of $2,232,276.
The increase primarily reflected higher staffing levels, increased advertising
activity and increased levels of travel. The Company expects to increase its
sales and marketing activities from the second half levels of 1997, but with an
overall decrease in total sales and marketing expense in 1998 compared to 1997.*
GENERAL AND ADMINISTRATIVE
General and administrative expense in 1997 was $1,613,492, substantially
unchanged from 1996 expense of $1,647,335 and from 1995 expense of $1,630,668.
The 1997 general and administrative expenses reflected lower staffing levels and
lower occupancy costs from a move in the fourth quarter of 1996, offset by
approximately $450,000 of expense increase associated with discontinued merger
and financing activities charged to operations during 1997. General and
administrative expense in 1996 compared to 1995 reflected higher recruiting and
relocation fees, insurance costs and professional fees partially offset by
reduced staffing levels, lower rent in November and December 1996 resulting from
a relocation into new facilities, and by a two-month vacancy in the Chief
Executive Officer position which was filled March 1, 1996. The Company expects
its general and administrative expenses to moderately increase from second half
of 1997 levels but with an overall decrease in total general and administrative
expense for 1998.*
INTEREST INCOME, INTEREST EXPENSE, NET
Interest income reflects interest earned on cash balances. Interest expense
reflects interest expense on convertible notes issued and outstanding during
1997 and portions of 1995 (1995 convertible notes converted into common stock in
June 1995 on completion of the Company's initial public offering), and interest
expense relating to bank lines (see Note 6 to Notes to Financial Statements) and
equipment lease financing obligations.
INCOME TAXES
There was no provision for federal or state income taxes for the years ended
December 31, 1997, 1996 and 1995, as the Company incurred net operating losses.
As of December 31, 1997, the Company had federal and state net operating loss
carryforwards of approximately $12,000,000 and $6,000,000, respectively. The
Company also has federal and state tax credit carryforwards of approximately
$180,000 and $150,000, respectively. The net operating losses and credit
carryforwards will expire at various dates beginning in 1998 through 2012, if
not utilized. The utilization of approximately $5,200,000 of the federal net
operating loss included in the above amounts will be subject to a cumulative
annual limitation of approximately $600,000 per year pursuant to the stock
ownership change provision of the Tax Reform Act of 1986. Future changes in
ownership, including stock offerings, may result in additional limitations.
For financial reporting purposes, a valuation allowance of $6,310,000 has
been recorded to offset deferred tax assets recognized under Financial
Accounting Standards No. 109, "Accounting for Income
- ------------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Management's
Discussion and Analysis section, and in "Business".
23
<PAGE>
Taxes," primarily related to net operating losses and capitalized research and
development costs. See Note 13 of Notes to Financial Statements.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income (FAS 130) and Statement No. 131, Disclosures
About Segments of An Enterprise and Related Information (FAS 131). FAS 130
establishes rules for reporting and displaying comprehensive income. FAS 131
will require the Company to use the "management approach" in disclosing segment
information. Both statements are effective for the Company during 1998.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Although the Company believes that its hardware and
software products are not dependent upon or affected by the use of dates for
their operation, the Company believes that purchasing patterns of customers and
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct or patch their current software systems for
Year 2000 compliance. The Company is not aware of any its major customers or
suppliers whose operations are not Year 2000 compliant, however, the Company has
not yet obtained specific confirmation from its major customers and suppliers
and intends to do so by the end of 1998.* The Company's general accounting
software has been upgraded by the software developer to continue to operate
correctly in the Year 2000 and beyond. The Company has not yet installed or
tested this upgrade and intends to do so during 1998.* The Company does not
believe that the cost of such upgrade will be significant.
- ------------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Management's
Discussion and Analysis section, and in "Business".
24
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth summary quarterly statements of operations
for each of the quarters in 1997 and 1996. This unaudited quarterly information
has been prepared on the same basis as the annual information presented
elsewhere herein, and, in the Company's opinion, includes all adjustments
(consisting only of normal recurring entries) necessary for a fair presentation
of the information for the quarters presented. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30,
1996 1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY QUARTERLY DATA:
Revenue:
Product.............................. $ 1,217 $ 908 $ 1,117 $ 1,143 $ 1,068 $ 1,117 $ 1,243
Royalty and other.................... 77 60 35 13 3 6 107
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total revenue.......................... 1,294 968 1,152 1,156 1,071 1,123 1,350
Gross profit........................... 576 399 554 545 531 577 669
OPERATING EXPENSES:
Research and development............. 271 244 260 292 272 273 260
Sales and marketing.................. 631 697 698 641 757 796 652
General and administrative........... 367 408 436 436 329 537 495
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses............... 1,269 1,349 1,394 1,369 1,358 1,606 1,407
Net loss............................... $ (685) $ (955) $ (853) $ (835) $ (852) $ (1,065) $ (784)
Net loss applicable to common
stockholders......................... $ (685) $ (955) $ (853) $ (1,378) $ (883) $ (1,073) $ (789)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
DEC 31,
1997
-----------
<S> <C>
SUMMARY QUARTERLY DATA:
Revenue:
Product.............................. $ 1,230
Royalty and other.................... 5
-----------
Total revenue.......................... 1,235
Gross profit........................... 214
OPERATING EXPENSES:
Research and development............. 245
Sales and marketing.................. 514
General and administrative........... 253
-----------
Total operating expenses............... 1,012
Net loss............................... $ (854)
Net loss applicable to common
stockholders......................... $ (855)
-----------
</TABLE>
The Company's gross profit for the quarter ended December 31, 1997 reflected
a write-off of the Company's POCSAG PageCard inventories in the amount of
approximately $500,000 due to low demand and the anticipated release in 1998 of
wireless receivers that utilize the higher speed FLEX protocols. Operating
expenses in the second half of fiscal 1997 declined as a result of the
implementation of cost-control measures, including a reduction in head count, in
all areas including research and development, sales and marketing and general
and administrative and the completion of financing and discontinued merger
activities.
The Company has experienced significant quarterly fluctuations in operating
results and anticipates such fluctuations in the future. The Company generally
ships orders as received and as a result typically has little or no backlog.
Quarterly revenues and operating results therefore depend on the volume and
timing of orders received during the quarter, which are difficult to forecast.
Historically, the Company has often recognized a substantial portion of its
revenues in the last month of the quarter, typically in the last week. Operating
results may continue to fluctuate in the future due to factors such as the
demand for the Company's products, the size and timing of customer orders, the
introduction of new products and product enhancements by the Company or its
competitors, changes in the proportion of revenues attributable to royalties and
service, product mix, timing of software enhancements, changes in the level of
operating expenses, and competitive conditions in the industry. Because the
Company's staffing and other operating expenses are based on anticipated
revenue, a substantial portion of which is not typically generated until the end
of each quarter, delays in the receipt of orders can cause significant
variations in operating results from quarter to quarter.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities was $2,173,687 for 1997, resulting
primarily from the net loss, partially offset by increases in accounts payable
and accrued liabilities. Net cash used for operating activities was $3,050,835
in 1996, resulting primarily from the net loss.
25
<PAGE>
Net cash used for investing activities was $183,178 in 1997 and $296,048 in
1996, used for the purchase of furniture, computing, test and manufacturing
equipment.
Net cash provided by financing activities was $2,015,421 in 1997, resulting
primarily from proceeds from the issuance of subordinated convertible notes of
$1,950,000 (see Note 5 to Notes to Financial Statements) and an increase in
borrowings under the bank line of credit (see Note 6 to Notes to Financial
Statements), partially offset by payments of capital and equipment financing
notes leases (see Note 7 to Notes to Financial Statements) and payment of
dividends to Series A preferred stockholders (see Note 4 to Notes to Financial
Statements). Net cash provided by financing activities was $1,558,572 in 1996,
primarily reflected the sale of Series A Convertible Preferred Stock, increases
in borrowings under a revolving credit line with a bank and proceeds from the
leasing of certain furniture and equipment, partially offset by payments of
capital leases and equipment financing notes.
FUTURE CAPITAL NEEDS; INDEPENDENT AUDITORS' REPORT CONTAINED EXPLANATORY
PARAGRAPH REGARDING GOING CONCERN.
As of December 31, 1997, the Company had cash and cash equivalents of
$276,900 and a working capital deficit of $(3,573,906). 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, including, if not previously converted, the repayment of convertible
subordinated notes and accrued interest on their due dates (see Note 5 to Notes
to Financial Statements). 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, and to finance the possible
repayment of the outstanding convertible subordinated notes, 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.*
On March 27, 1998, the Company extended an offer to the holders of $1,750,000 of
the convertible promissory notes to convert their notes into common stock or
preferred stock of the Company in order to assist the Company to comply with the
Pacific Exchange net tangible asset requirements. However, the extent to which
such holders will accept the Company's offer is not currently known. 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
- ------------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual results will meet the
Company's current expectations due to factors described in this Management's
Discussion and Analysis section, and in "Business".
26
<PAGE>
From the effective date of Socket's initial public offering (June 6, 1995)
through November 26, 1996, Socket's Common Stock was listed on the Nasdaq
SmallCap Market. However, the Common Stock was de-listed from such market
effective November 27, 1996 and since then has traded on the OTC Bulletin Board.
The Nasdaq SmallCap Market has recently adopted new, more stringent listing
criteria. In order for the Company to become listed in the Nasdaq SmallCap
Market under the new listing criteria, it must (i) either have net tangible
assets of $4 million, a market capitalization of $50 million or net income in
two of the past three years of $750,000; (ii) 1 million shares of public float;
(iii) a market capitalization of public float of $5 million; (iv) a bid price of
$4.00 per share; (v) three market makers; and (vi) 300 stockholders. The Company
currently does not meet these requirements, and there can be no assurance that
the Company will meet these requirements in any future period. Socket's Common
Stock is also quoted on the Pacific Exchange. 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 or net worth requirements of
the Pacific Exchange since December 31, 1996 and has, therefore, been subject to
possible delisting procedures since that time. In March 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 June 1998. As of December 31,
1997, the Company had a working capital deficit of $(3,573,906), which was
reduced by the Company's sale of an aggregate of $1.5 million in Series B
Convertible Preferred Stock in the first quarter of 1998. Accordingly, the
Company will need to raise additional equity capital and repay or convert
existing convertible notes in the second quarter of 1998 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. On March 27, 1998, the Company extended
an offer to the holders of $1,750,000 of the convertible promissory notes to
convert their notes into common stock or preferred stock of the Company in order
to assist the Company to comply with the Pacific Exchange net tangible asset
requirements. However, the extent to which such holders will accept the
Company's offer is not currently known. In the event the Company is unable to
achieve compliance with the Pacific Exchange requirements, 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.
27
<PAGE>
SIGNIFICANT DILUTIVE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON MARKET PRICE
OF THE COMMON STOCK
As of December 31, 1997, there were 918,508 shares of Common Stock issuable
upon the exercise of options under Socket's 1995 and 1993 Stock Plans, as
amended, and 807,590 shares of Socket Common Stock issuable upon exercise of
warrants. The warrants issued by the Company in connection with its IPO in June
1995 are subject to 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. Such
issues include the Company's Series A Preferred Stock and its Convertible
Subordinated Notes. After giving effect to these dilution adjustments, a total
of 2,078,609 shares were issuable as of December 31, 1997 in connection with the
exercise of warrants. In addition, an aggregate of 3,779,267 shares of Common
Stock may be issued upon conversion of convertible promissory notes and accrued
interest (See Notes 5 and 11 to Notes to Financial Statements). On March 27,
1998, the Company extended an offer to the holders of $1,750,000 of the
convertible promissory notes to convert their notes into common stock or
preferred stock of the Company in order to assist the Company to comply with the
Pacific Exchange net tangible asset requirements. However, the extent to which
such holders will accept the Company's offer is not currently known. In
addition, the Company issued 30,065 shares of Series B Preferred Stock in the
first quarter of 1998, which shares are convertible into an aggregate of
3,065,000 shares of Common Stock at the option of the holder at any time and
will be automatically converted into Common Stock within two years and which
earn an 8% dividend payable in shares of Common Stock on a quarterly basis. In
connection with the sale of Series B Preferred Stock, the Company issued
warrants to purchase an aggregate of 450,975 shares of Common Stock (see Note 17
to Notes to 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 will 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. In addition, to the extent the Company issues common
or preferred equity at a discount to the then current market price, the Company
will be required to record accretion of such stock in the Financial Statements
which will adversely affect the Company's operating results for the period in
which such stock is issued. For example, in the first quarter of 1998, the
Company will be required to record accretion of Preferred Stock as a result of
the discount on conversion to common stock related to the issuance of the Series
B Convertible Preferred Stock (see note 17 of Notes to Financial Statements). In
addition, the holders of the Series B Convertible Preferred Stock and related
warrants and the holders of the outstanding convertible promissory notes are
entitled to registration rights with respect to the shares of Common Stock
underlying their respective securities. To the extent that such holders convert
their existing securities into Common Stock, following the effective date of the
Registration Statement related thereto, such shares will be 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.
28
<PAGE>
HISTORY OF OPERATING LOSSES; NO ASSURANCE OF PROFITABILITY
Socket was incorporated in March 1992 and has incurred significant operating
losses in every fiscal period since inception. Socket expects to incur quarterly
operating losses at least through the first 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 consummation of Socket's Memorandum
of Understanding with Motorola and the ability of Motorola and the Company to
sell FLEX-based data paging receivers in a CompactFlash format for use with
Microsoft's Palm PC beginning in the second half of 1998, 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. If the wireless data communications
market fails to grow, or continues to grow more slowly than anticipated, the
Company's business, operating results and financial condition will be materially
adversely affected. Although the Company intends to conform its products to meet
emerging standards in the wireless data communications market, there can be no
assurance that industry standards will emerge or, if they become established,
that the Company will be able to conform to these new standards in a timely
fashion. Even if the market for wireless data communications products does
develop, there can be no assurance that the Company's products will achieve
commercial success within such market. Furthermore, the Company believes that
its products enable third parties to develop and deliver wireless data solutions
for the specific needs of business in a number of vertical market segments such
as field sales, field service, finance, real estate, health care, and
transportation on either a point to point or a group broadcasting basis. The
Company's software developers kit enables third parties to address such needs by
page-enabling existing applications to allow the transfer of data from an
application through the paging network to the PageCard receiver where it can be
downloaded into a mobile computer. The Company's software developer's kit is
designed to provide program interfaces for software developers to page-enable
their applications and to work with major Microsoft operating systems including
Windows 95 and Windows CE. The Company is also developing a mobile information
server that will extract information from a web page, prepare the information
for transmission over the paging networks, and send the data to designated
subscribers. The server is expected to simplify the sending of data over the
paging networks by allowing data to be prepared for transmission by the server
from a web page instead of within the application program. However, there can be
no assurance that the Company will successfully complete or commercialize its
mobile information server, that there will be market acceptance for such a
product, and that products will not be developed by others that effectively
compete in this market. And although a limited number of page-enabled
applications are now available, there can be no assurance that any additional
such applications will become available. Further, there can be no assurance that
such page-enabled applications will be developed, or if developed, gain
widespread commercial acceptance or that adoption of such applications will
drive increased purchases of PageCard receivers. Finally, due to the unique
nature of the PageCard receiver and PageCard WMS, which combine certain
technologies and features of paging and mobile computing, the Company believes
it will be required to incur significant expenses for sales and marketing,
including advertising, to educate
29
<PAGE>
potential customers.* Broad commercialization of the Company's products will
require the Company to overcome significant technological and market development
hurdles, many of which may not be currently foreseen.
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 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. In addition, Microsoft has announced that it expects volume
shipments of Palm PCs using Windows CE to begin in the second half of 1998. Any
significant delay in the introduction and shipment of Palm PCs, which is
entirely out of the Company's control, would delay potential revenues for the
Company and would likely have a material adverse effect on the Company's future
operating results and financial condition.
- ------------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that that the Company's actual results will meet the
Company's current expectations due to factors described in this Management's
Discussion and Analysis section, and in "Business".
30
<PAGE>
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON PRODUCT DEVELOPMENT; PRODUCT DEFECTS
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and short product life cycles.
Accordingly, the Company's success will be substantially dependent on a number
of factors, including its ability to identify emerging standards in the wireless
data communications field, enhance its products by adding additional features to
provide a more complete solution and differentiate its products from those of
its competitors, maintain superior or competitive performance in its products
and bring products to market quickly. Given the emerging nature of the wireless
data communications market, there can be no assurance that the Company's
products or technology will not be rendered obsolete by alternative
technologies. Further, short product life cycles expose the Company's products
to the risk of obsolescence and require frequent new product introductions. If
the Company is unable to develop or obtain access to advanced one-way and
emerging two-way wireless data communications technologies as they become
available, or is unable to design, develop, contract for the manufacturing of
and introduce competitive new products on a timely basis, its future operating
results will be materially adversely affected. Any significant delays in the
design, development, manufacture or shipment of new or enhanced products would
also materially adversely affect the Company's results of operations.
The markets for mobile computers and their peripherals and for wireless data
communications are extremely competitive and characterized by rapidly advancing
technology, frequent changes in user preferences and frequent product
introductions. The future success of the Company will depend in large part on
its ability, and that of its strategic partners, to keep pace with advances in
software and hardware technologies for mobile computing and wireless data
communications. There can be no assurance that the Company will be able to
respond effectively to these technological changes or to new product
introductions by others. The Company is jointly developing with Cetronic AB a
FLEX and ERMES version of the PageCard, however, there is no assurance that the
Company will be able to successfully complete future products based upon these
new technologies or that there will be market acceptance of these products if
completed.
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, typically in the last week. Operating
results may continue to fluctuate in the future 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 service, 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,
31
<PAGE>
delays in the receipt of orders can cause 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.
The Company generally does not operate with a significant order backlog, and
a substantial portion of the Company's revenue in any quarter is derived from
orders booked in that quarter. Accordingly, the Company's sales expectations are
based almost entirely on its internal estimates of future demand and not on firm
customer orders and they cannot be predicted with any degree of certainty. The
Company makes significant investments in sales and marketing and in research and
development based on such internal estimates, and if orders and sales do not
meet expectations, the adverse effect may be magnified by the Company's
inability to adjust spending in a timely manner to compensate for revenue
shortfall.
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 collaborative design projects or to sell
the 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 Memorandum of Understanding 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 collaborating with the Company on the design of the Company's
current and
- ------------------------
* This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that that the Company's actual results will meet the
Company's current expectations due to factors described in this Management's
Discussion and Analysis section, and in "Business".
32
<PAGE>
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.
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,
33
<PAGE>
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.
RISKS ASSOCIATED WITH EXPORT SALES
Export sales (sales to customers outside the United States) accounted for
approximately 49% of the Company's revenue in 1997 and export sales continue to
account in 1998 for a significant portion of revenue. 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 results
will meet the Company's current expectations due to factors described in
this Management's Discussion and Analysis section, and in "Business".
34
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Socket Communications, Inc.
We have audited the accompanying balance sheets of Socket Communications,
Inc. as of December 31, 1997 and 1996, and the related statements of operations,
stockholders' equity (deficit) and redeemable convertible preferred stock, and
cash flows for each of the three years in the period ended December 31, 1997.
Our audits also included the financial statement schedule listed in the index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Socket Communications, Inc.
at December 31, 1997 and 1996 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
The accompanying financial statements have been prepared assuming Socket
Communications, Inc. will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company's recurring operating losses, net capital
deficiency and working capital deficit raise substantial doubt about its ability
to continue as a going concern. Management's plans as to these matters are also
discussed in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
ERNST & YOUNG LLP
San Jose, California
February 17, 1998, except for
Note 17 for which the date is
March 25, 1998
35
<PAGE>
SOCKET COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 276,900 $ 618,344
Accounts receivable, net of allowance for doubtful accounts of $44,691 in 1997
and $35,330 in 1996........................................................... 855,925 833,259
Accounts receivable from related party.......................................... 43,371 --
Inventories..................................................................... 195,127 738,808
Prepaid expenses................................................................ 9,048 20,523
-------------- --------------
Total current assets.......................................................... 1,380,371 2,210,934
Property and equipment:
Machinery and office equipment.................................................. 600,851 495,199
Computer equipment.............................................................. 530,239 452,713
-------------- --------------
1,131,090 947,912
Accumulated depreciation........................................................ (807,502) (535,387)
-------------- --------------
323,588 412,525
Other assets...................................................................... 66,305 48,235
-------------- --------------
Total assets.................................................................. $ 1,770,264 $ 2,671,694
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit............................................................. $ 523,941 $ 322,743
Convertible subordinated notes.................................................. 1,950,000 --
Accounts payable................................................................ 1,581,008 1,062,250
Accounts payable to related parties............................................. 66,966 18,654
Accrued expenses................................................................ 314,380 215,009
Accrued payroll and related expenses............................................ 277,553 230,758
Deferred revenue................................................................ 178,625 238,776
Current portion of capital leases and equipment financing notes................. 61,804 109,236
-------------- --------------
Total current liabilities..................................................... 4,954,277 2,197,426
Long-term portion of capital leases and equipment financing notes................. 40,931 102,735
Stockholders' equity (deficit):
Preferred stock, $0.001 par value:
Authorized shares--3,000,000 Series A Convertible Preferred Stock:
Designated shares--1,000,000
Issued and outstanding shares--none in 1997, 15,500 in 1996................. -- 1,793,813
Common stock, $0.001 par value:
Authorized shares--15,000,000
Issued and outstanding shares--6,501,275 in 1997, 3,028,976 in 1996........... 6,501 3,029
Additional paid-in capital...................................................... 13,208,038 11,413,920
Accumulated deficit............................................................. (16,439,483) (12,839,229)
-------------- --------------
Total stockholders' equity (deficit).......................................... (3,224,944) 371,533
-------------- --------------
Total liabilities and stockholders' equity (deficit)........................ $ 1,770,264 $ 2,671,694
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
36
<PAGE>
SOCKET COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Product............................................................ $ 4,657,973 $ 4,385,251 $ 4,352,368
Royalty and other.................................................. 121,227 185,187 178,111
------------- ------------- -------------
Total revenue.................................................... 4,779,200 4,570,438 4,530,479
Cost of revenue...................................................... 2,788,108 2,496,028 2,874,062
------------- ------------- -------------
Gross profit......................................................... 1,991,092 2,074,410 1,656,417
Operating expenses:
Research and development........................................... 1,050,411 1,067,399 1,098,766
Sales and marketing................................................ 2,719,050 2,666,933 2,232,276
General and administrative......................................... 1,613,492 1,647,335 1,630,668
------------- ------------- -------------
Total operating expenses......................................... 5,382,953 5,381,667 4,961,710
------------- ------------- -------------
Operating loss....................................................... (3,391,861) (3,307,257) (3,305,293)
Interest income...................................................... 2,544 29,496 101,203
Interest expense..................................................... (165,472) (50,609) (111,435)
------------- ------------- -------------
Net loss............................................................. (3,554,789) (3,328,370) $ (3,315,525)
-------------
-------------
Preferred stock dividend............................................. (45,465)
Accretion of preferred stock......................................... (542,500)
------------- -------------
Net loss applicable to common stockholders........................... $ (3,600,254) $ (3,870,870)
------------- -------------
------------- -------------
Basic and diluted net loss per share applicable to common
stockholders (pro forma in 1995)................................... $ (0.70) $ (1.28) $ (1.38)
------------- ------------- -------------
------------- ------------- -------------
Weighted average shares outstanding.................................. 5,149,000 3,015,000 2,396,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes.
37
<PAGE>
SOCKET COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND REDEEMABLE
CONVERTIBLE PREFERRED STOCK
<TABLE>
<CAPTION>
REDEEMABLE SERIES A
CONVERTIBLE PREFERRED CONVERTIBLE TOTAL
STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL STOCKHOLDERS'
--------------------- --------------------- ---------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
--------- ---------- --------- ---------- --------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1994.......... 769,393 $4,179,679 -- $ -- 266,714 $ 267 $ 12,753 $(5,652,834) $(5,639,814)
Issuance of Initial
Public Offering
common stock for
$6.00 per share in
June 1995, net of
issuance costs of
$1,805,924........ -- -- -- -- 1,100,550 1,100 4,796,276 -- 4,797,376
Conversion of all
redeemable
convertible
preferred stock to
common stock in
June 1995......... (769,393) (4,179,679) -- -- 953,053 953 4,178,726 -- 4,179,679
Conversion of
convertible notes
and accrued
interest to common
stock in June
1995.............. -- -- -- -- 597,291 597 2,388,635 -- 2,389,232
Exercise of common
stock options..... -- -- -- -- 23,596 24 12,058 -- 12,082
Exercise of
warrants.......... -- -- -- -- 49,666 50 5,215 -- 5,265
Net loss............ -- -- -- -- -- (3,315,525) (3,315,525)
--------- ---------- --------- ---------- --------- ----------- ---------- ------------ ------------
Balance at December
31, 1995.......... -- -- -- -- 2,990,870 2,991 11,393,663 (8,968,359) 2,428,295
Issuance of Series A
Convertible
Preferred Stock... -- -- 15,500 1,251,313 -- -- -- -- 1,251,313
Exercise of common
stock options..... -- -- -- -- 38,106 38 20,257 -- 20,295
Accretion of
preferred stock... -- -- -- 542,500 -- -- -- (542,500) --
Net loss............ -- -- -- -- -- -- -- (3,328,370) (3,328,370)
--------- ---------- --------- ---------- --------- ----------- ---------- ------------ ------------
Balance at December
31, 1996.......... -- -- 15,500 1,793,813 3,028,976 3,029 11,413,920 (12,839,229) 371,533
Conversion of Series
A Convertible
Preferred Stock to
common stock...... -- -- (15,500) (1,793,813) 3,466,649 3,466 1,790,347 -- --
Dividends on Series
A Convertible
Preferred Stock... -- -- -- -- -- -- -- (45,465) (45,465)
Exercise of common
stock options..... -- -- -- -- 5,650 6 3,771 -- 3,777
Net loss............ -- -- -- -- -- -- -- (3,554,789) (3,554,789)
--------- ---------- --------- ---------- --------- ----------- ---------- ------------ ------------
Balance at December
31, 1997.......... -- $ -- -- $ -- 6,501,275 $ 6,501 $13,208,038 ($16,439,483) $(3,224,944)
--------- ---------- --------- ---------- --------- ----------- ---------- ------------ ------------
--------- ---------- --------- ---------- --------- ----------- ---------- ------------ ------------
</TABLE>
38
<PAGE>
SOCKET COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss........................................................... $ (3,554,789) $ (3,328,370) $ (3,315,525)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation....................................................... 108,280 79,095 160,929
Amortization....................................................... 163,835 150,634 95,847
Accrued interest on converted notes................................ -- -- 110,232
Loss on disposal of property and equipment......................... -- 7,173 --
Changes in operating assets and liabilities:
Accounts receivable.............................................. (22,666) 67,458 36,101
Accounts receivable from related party........................... (43,371) -- --
Inventories...................................................... 543,681 (228,477) (300,270)
Prepaid expenses................................................. 11,475 11,357 6,708
Other assets..................................................... (18,070) 24,201 (26,426)
Accounts payable................................................. 503,611 99,579 (125,596)
Accounts payable to related parties.............................. 48,312 (25,109) (41,695)
Accrued expenses................................................. 99,371 92,004 22,688
Accrued payroll and related expenses............................. 46,795 (127,013) 156,953
Deferred revenue................................................. (60,151) 126,633 (9,267)
------------- ------------- -------------
Net cash used in operating activities.......................... (2,173,687) (3,050,835) (3,229,321)
INVESTING ACTIVITIES
Purchase of equipment.............................................. (183,178) (296,048) (146,799)
------------- ------------- -------------
Net cash used in investing activities.......................... (183,178) (296,048) (146,799)
FINANCING ACTIVITIES
Payments on capital leases and equipment financing notes........... (109,236) (121,640) (79,043)
Proceeds from equipment financing.................................. -- 85,861 125,493
Net advances on revolving line of credit........................... 201,198 322,743 --
Proceeds from issuance of convertible subordinated notes........... 1,950,000 -- 1,469,000
Repayment of convertible notes..................................... -- -- (955,000)
Preferred stock dividends paid..................................... (30,318) -- --
Stock options exercised............................................ 3,777 20,295 12,082
Stock warrants exercised........................................... -- -- 5,265
Net proceeds from sale of preferred stock.......................... -- 1,251,313 --
Net proceeds from sale of common stock............................. -- -- 4,797,376
------------- ------------- -------------
Net cash provided by financing activities...................... 2,015,421 1,558,572 5,375,173
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents................. (341,444) (1,788,311) 1,999,053
Cash and cash equivalents at beginning of year....................... 618,344 2,406,655 407,602
------------- ------------- -------------
Cash and cash equivalents at end of year............................. $ 276,900 $ 618,344 $ 2,406,655
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest............................................... $ 63,061 $ 50,609 $ 25,599
Dividends accrued but unpaid......................................... $ 15,147 $ -- $ --
Notes payable and accrued interest converted to common stock......... $ -- $ -- $ 2,389,232
Accretion of preferred stock......................................... $ -- $ 542,500 $ --
Conversion of preferred stock to common stock........................ $ 1,793,813 $ -- $ --
</TABLE>
See accompanying notes.
39
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
Socket Communications, Inc. ("Socket" or "the Company") develops and sells
connection solutions for Windows CE based handheld computers and other mobile
computers, including a family of low power PC Card adapters for serial
communications, Ethernet connectivity, mobile data collection, and wireless
messaging. Socket's PageCard-Registered Trademark- receives and downloads
wireless data to a notebook or Windows CE mobile computer. During 1997, the
Company wrote off excess inventory, primarily POCSAG PageCards, of approximately
$590,000. Socket also is developing its family of serial, Ethernet and mobile
data collection PC cards in a CompactFlash-TM- format for use with smaller
handheld computers and other devices, and is working with Motorola Corporation
to develop, during 1998, the software for a FLEX CompactFlash format wireless
receiver for use with Windows CE mobile computers and embedded devices, which
the Company plans to sell. Socket's products utilize the company's low power
chip technology, making them ideal for battery-operated mobile computers. The
PageSoft-Registered Trademark- library of wireless messaging software includes
development tools and send and receive applications. Socket Wireless Messaging
Services include operator dispatch, Internet and Worldwide Web gateways for
wireless messages, plus voice mail and fax forwarding services with automatic
wireless notification. In 1995, the Company was reincorporated in the state of
Delaware.
BASIS OF PRESENTATION
As of December 31, 1997, the Company had cash and cash equivalents of
$276,900. During the first quarter of 1998, the Company sold $1,500,000 of
Series B Convertible Preferred Stock (see Note 17). The Company believes its
existing capital resources will be insufficient to satisfy its working capital
requirements through the end of 1998, including, if not previously converted,
the repayment of convertible subordinated notes and accrued interest on their
due dates (see Note 5). The Company will need to raise additional capital to
fund operations during 1998 and beyond, and to finance the possible repayment of
its convertible subordinated notes, 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 Company will also
encourage the holders of the Company's convertible subordinated notes to convert
their principal and interest into equity on or prior to the due dates of the
notes. The Report of Independent Auditors on the Company's financial statements
for the year ended December 31, 1997 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 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.
40
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
Cash equivalents consist mainly of money market funds which are, highly
liquid financial instruments that are readily convertible to cash. The Company
has not incurred losses related to these instruments. As of December 31, 1997
and December 31, 1996, the Company had no material investments in debt or equity
securities.
INVENTORIES
Inventories consist principally of raw materials and sub-assemblies, which
are stated at the lower of cost (first-in, first-out) or market.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
Raw materials and sub-assemblies...................................... $ 179,267 $ 712,106
Finished goods........................................................ 15,860 26,702
---------- ----------
$ 195,127 $ 738,808
---------- ----------
---------- ----------
</TABLE>
During 1997, the Company wrote off excess inventory, primarily POCSAG
PageCards, of approximately $590,000.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method, over the estimated useful lives of the
assets which range from one to five years. Assets under capital leases are
amortized over the shorter of the asset life or the remaining lease term.
CONCENTRATION OF CREDIT RISK
The Company uses financial instruments that potentially subject it to
concentrations of credit risk. Such instruments include cash equivalents and
accounts receivable. The Company invests its cash in cash deposits and money
market funds. The Company places its investments with high-credit-quality
financial institutions and limits the credit exposure to any one financial
institution or instrument. To date, the Company has not experienced losses on
these investments. The Company sells primarily to distributors and original
equipment manufacturers. The Company performs ongoing credit evaluations of its
customers' financial condition but generally requires no collateral. Reserves
are maintained for potential credit losses, and such losses have been within
management's expectations.
41
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Product revenue to customers other than distributors is recognized at the
time of shipment. Revenue on shipments to distributors, which are subject to
certain rights of return and price protection, is deferred until the merchandise
is sold by the distributors. Certain royalty agreements provide for per unit
royalties to be paid to the Company based on the sale of certain of the
Company's products by third party manufacturers. Revenue under such agreements
is recognized at the time of shipment by the third party manufacturer. The cost
of such royalty revenue is immaterial.
SALES RETURNS AND WARRANTIES
The Company accrues for estimated sales returns/exchanges for end user sales
and warranty costs upon recognition of sales. The Company has not experienced
significant warranty claims to date.
RESEARCH AND DEVELOPMENT
Research and development expenditures are generally charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
requires the capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on the Company's product
development process, technological feasibility is established upon the
completion of a working model. Costs incurred by the Company between the
completion of the working model and the point at which the product is ready for
general release have been insignificant. Accordingly, the Company has charged
all such costs to research and development expenses in the accompanying
statements of operations.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred
$343,910, $370,945 and $340,086 in advertising costs during 1997, 1996, and
1995, respectively.
NET LOSS PER SHARE
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),
and from convertible notes (using the if-converted method). As the Company has
experienced losses since inception, no potential common shares from stock
options or convertible preferred stock or notes have been included in the net
loss per share calculation as they are antidilutive. In addition, in February
1998, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 98, EARNINGS PER SHARE. Staff Accounting Bulletin No. 98 effected the
treatment of certain stock and warrants ("cheap stock") issued within a one-year
period prior to an initial public offering. Upon the adoption of Statement 128,
the staff generally does not continue to believe that such stock and warrants
should be treated as outstanding for all reported periods. Loss per share
amounts presented have been restated to conform to the Statement 128 and Staff
Accounting Bulletin No. 98 requirements.
42
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and pro forma basic
net loss per share (amounts in thousands except per share):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Numerator for basic:
Net loss........................................................................ $ (3,555) $ (3,328) $ (3,316)
---------
---------
Preferred stock dividends....................................................... (45) --
Accretion of preferred stock.................................................... -- (543)
--------- ---------
Net loss applicable to common shareholders........................................ $ (3,600) $ (3,871)
--------- ---------
--------- ---------
Denominator:
Weighted average common shares outstanding...................................... 5,149 3,015 1,757
Convertible preferred stock (pro forma 1995).................................... -- -- 425
Convertible notes payable (pro forma 1995)...................................... -- -- 214
--------- --------- ---------
Shares used in computing basic net loss per share................................. 5,149 3,015 2,396
--------- --------- ---------
--------- --------- ---------
Basic net loss per share applicable to common stockholders
(pro forma for 1995)............................................................ $ (0.70) $ (1.28) $ (1.38)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The diluted net loss per share is equivalent to the basic net loss per share
because the Company has experienced losses since inception and thus no potential
common shares from stock options, convertible preferred stock or convertible
notes have been included in the net loss per share calculation.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income (FAS 130) and Statement No. 131, Disclosures
About Segments of An Enterprise and Related Information (FAS 131). FAS 130
establishes rules for reporting and displaying comprehensive income. FAS 131
will require the Company to use the "management approach" in disclosing segment
information. Both statements are effective for the Company during 1998.
NOTE 3--CONVERTIBLE NOTES AND WARRANTS ISSUED PRIOR TO THE IPO
During August through December 1994 and January through April 1995, the
Company issued $1,765,000 and $1,469,000, respectively, of convertible notes
(collectively the "Pre-IPO Debt Financing"). In June 1995, on completion of the
IPO, $955,000 in convertible note principle was repaid and the balance of
$2,279,000 plus accrued interest of $110,232 (total $2,389,232) was converted to
597,291 shares of common stock. In addition, 769,393 originally issued preferred
shares, constituting all of the preferred shares outstanding at the time of the
IPO, were converted in June 1995 into 953,053 common shares.
NOTE 4--SERIES A CONVERTIBLE PREFERRED STOCK
The Board of Directors may issue 3,000,000 shares of preferred stock in one
or more series and may fix the rights, privileges and restrictions granted to or
imposed upon any wholly unissued series of preferred stock, as well as to fix
the number of shares constituting any series and designations of such
43
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--SERIES A CONVERTIBLE PREFERRED STOCK (CONTINUED)
series, without any further vote or action by the stockholders. In October 1996,
the Company designated 1,000,000 shares of the 3,000,000 Preferred Stock as
Series A Convertible Preferred Stock.
On November 1, 1996 (the "Closing"), the Company sold 15,500 shares of its
Series A Convertible Preferred Stock, $0.001 par value, at $100 per share
pursuant to Regulation D of the Securities Act of 1933, as amended (the "Series
A Transaction"). The Series A Transaction was effected pursuant to a Private
Offering Memorandum. Each share of Series A Convertible Preferred Stock was
convertible at the option of the holder, in whole or in part, at any time on or
after the 60th day following the Closing, into shares of Common Stock of the
Company equal to $100 divided by the lower of: (i) the closing bid price of the
Company's Common Stock, as reported on the Nasdaq OTC Bulletin Board Market, on
the date of Closing; and (ii) 65% of the average bid price of the Company's
Common Stock, as reported on the OTC bulletin board, for the five business days
prior to the business day on which notice of conversion is transmitted by the
holder of such share of Series A Convertible Preferred Stock, subject to
adjustment in certain events. Each share of Series A Convertible Preferred Stock
converted automatically into shares of Common Stock on the first anniversary of
the Closing. In connection with the Series A Transaction, the placement agent
received a warrant to purchase 43,539 shares of common stock at an exercise
price of $3.56 per share. The warrant is immediately exercisable and has a 5
year term. No shares were converted as of December 31, 1996. During 1997, all
Series A Convertible Preferred shares converted into 3,466,649 shares of common
stock. The Company recorded accretion of $542,500 for the 35% discount given to
the Series A convertible preferred stockholders in the fourth quarter of 1996.
The holders of the Series A Convertible Preferred Stock are entitled to
receive dividends at an annual rate of 6% (adjusted ratably if a holder converts
Series A Convertible Preferred Stock into Common Stock prior to a Dividend
Payment date, as defined hereafter), payable on April 1, 1997 and November 1,
1997 (each a "Dividend Payment Date"), and otherwise when, and as and if
declared by the Board of Directors at the same rate as to which any dividend is
declared and paid on shares of Common Stock. No dividends shall be declared or
paid on any shares of Common Stock unless an equal or greater dividend is paid
on the Series A Convertible Preferred Stock in the same year. During 1997, the
Company accrued dividends of $45,565 ($0.01 per share).
NOTE 5--CONVERTIBLE SUBORDINATED NOTES
On various dates during 1997, the Company issued convertible subordinated
promissory notes to Cetronic AB, certain Cetronic shareholders, and to the
Company's directors. The interest rate on the notes is 8% and all or part of the
principal and accrued interest are convertible into common shares of the Company
at the option of the holder anytime prior to their due date. No shares had been
converted as of December 31, 1997. The Company may also prepay the notes in
whole or in part at any time upon prior written notice to the holder. A note to
Cetronic for $500,000 due December 12, 1998 is secured by certain marketing and
manufacturing rights for the FLEX (a high speed paging protocol) and
ERMES/POCSAG (a worldwide standard for transmitting alphanumeric messages to
paging receivers) products being developed jointly by Socket and Cetronic. All
other notes are unsecured. The notes are subordinated to the bank financing
arrangements described in Note 6. The due dates on certain notes were extended
and the conversion rates repriced during or at the end of their original note
terms.
44
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--CONVERTIBLE SUBORDINATED NOTES (CONTINUED)
Notes outstanding, due dates, and conversion rates for conversion of
principal and accrued interest into common stock as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
NOTE
ORIGINAL ISSUE DATE CURRENT DUE DATE CONVERSION RATE/SHARE PRINCIPAL
- ------------------------- ------------------------- ------------------------- -------------
<S> <C> <C> <C>
January 29, 1997 December 12, 1998 $1.00 $ 500,000
February 14, 1997 August 14, 1998 $0.50 500,000
June 12, 1997 December 12, 1998 $0.53 100,000
June 12, 1997 December 12, 1998 $0.50 500,000
November 7, 1997 December 12, 1998 $0.53 100,000
November 7, 1997 November 7, 1998 $0.50 150,000
November 24, 1997 December 12, 1998 $0.50 100,000
-------------
$ 1,950,000
-------------
-------------
</TABLE>
Conversion of note principal would result in the issuance of 3,377,359
common shares. In addition, conversion of accrued interest, assuming the notes
were held to maturity, would result in the issuance of an additional 401,908
common shares.
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 ("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 an interest rate of the lenders index rate, which is
based on prime, plus 1.5% (10% at December 31, 1997). The Original Agreement
contains covenants that required the Company to maintain certain financial
ratios. As of December 31, 1997 and 1996, the Company was not in compliance with
the covenants and had obtained a waiver from the bank. The New Agreement
contains covenants that require the Company to maintain certain financial ratios
including current ratio and tangible net worth. As of December 31, 1997 and
1996, outstanding borrowings under the Agreement were $268,908 and $322,743,
respectively, which were the amounts available under the line.
In 1997, the Company entered into an international credit agreement (the
International Agreement) with a commercial lending institution which expires on
August 15, 1998. The International Agreement is secured by the Company's
international receivables and by the Company's current and future assets. The
credit facility under the International Agreement allows the Company to borrow
up to $500,000 based on the level of qualified international receivables. As of
December 31, 1997, outstanding borrowings under the International Agreement were
$255,033, which is the amount available under the line.
NOTE 7--CAPITAL LEASE OBLIGATIONS AND EQUIPMENT FINANCINGS
The Company leases certain of its equipment under capital leases. At
December 31, 1997 and 1996, property and equipment with a cost of $233,757 and
$478,165, respectively, were subject to such financing arrangements. Related
accumulated amortization at December 31, 1997 and 1996, amounted to $165,996
45
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--CAPITAL LEASE OBLIGATIONS AND EQUIPMENT FINANCINGS (CONTINUED)
and $271,569, respectively. Future minimum payments under capital lease and
equipment financing arrangements as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 75,871
1999.............................................................. 43,110
---------
Total minimum payments.......................................... 118,981
Less amount representing interest................................. (16,246)
---------
Present value of net minimum payments............................. 102,735
Less current portion.............................................. (61,804)
---------
Long-term portion............................................... $ 40,931
---------
---------
</TABLE>
NOTE 8--COMMITMENTS
In November 1996, the Company moved into new facilities under a five-year
noncancelable operating lease which expires in October 2001. Future minimum
lease payments under operating leases are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 195,905
1999.............................................................. 195,905
2000.............................................................. 195,905
2001.............................................................. 163,254
---------
$ 750,969
---------
---------
</TABLE>
Rental expense under all operating leases was $194,122, $330,097 and
$413,616 for the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 9--STOCK OPTION/STOCK ISSUANCE PLAN
The Company's 1993 Stock Option/Stock Issuance Plan (the 1993 Plan) provides
for the grant of incentive stock options and nonstatutory stock options or the
immediate issuance of the Company's common stock to employees, directors, and
consultants of the Company at prices not less than 85% of the fair market value
of the common stock on the date of grant, as determined by the Board of
Directors. The vesting and exercise provisions are determined by the Board of
Directors, with a maximum term of ten years. Options granted and shares issued
under the 1993 Plan generally vest over a four-year period, with 25% vesting
after one year and 2.08% each month afterwards. Unvested shares which have been
purchased are subject to repurchase by the Company.
46
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCK OPTION/STOCK ISSUANCE PLAN (CONTINUED)
Information with respect to the 1993 Plan is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING
OPTIONS
-------------
WEIGHTED
AVAILABLE NUMBER OF AVERAGE PRICE
FOR GRANT SHARES PER SHARE
----------- ---------- -------------
<S> <C> <C> <C>
Balance at December 31, 1994................................................. 13,855 213,625 $ 0.60
Increase in shares authorized.............................................. 23,380 -- --
Granted.................................................................... (16,617) 16,617 $ 0.59
Canceled................................................................... 62,887 (62,887) $ 0.60
Exercised.................................................................. -- (23,596) $ 0.51
----------- ----------
Balance at December 31, 1995................................................. 83,505 143,759 $ 0.61
Canceled................................................................... 13,386 (13,386) $ 0.62
Exercised.................................................................. -- (38,106) $ 0.56
----------- ----------
Balance at December 31, 1996................................................. 96,891 92,267 $ 0.63
Canceled................................................................... 8,846 (8,846) $ 0.65
Exercised.................................................................. -- (5,650) $ 0.67
----------- ----------
Balance at December 31, 1997................................................. 105,737 77,771 $ 0.63
----------- ----------
----------- ----------
</TABLE>
As of December 31, 1997, 1996 and 1995, 68,474, 67,286 and 78,878 options
were exercisable at a weighted average exercise price of $0.63, $0.64 and $0.60,
respectively. The exercise price of the options at December 31, 1997 ranged from
$0.59 to $0.67. The Company has not granted options from the 1993 Plan since
February 1995 and does not intend to make any future grants from the 1993 Plan.
The weighted average contractual life for options outstanding under the 1993
Plan at December 31, 1997 is approximately 6.5 years.
The Company's 1995 Stock Plan (the 1995 Plan) provides for the grant of
incentive stock options and nonstatutory stock options to employees, directors,
and consultants of the Company. The exercise price per share of all incentive
stock options granted must be at least equal to the fair market value per share
of Common Stock on the date of grant. The exercise price per share of all
nonstatutory stock options shall be not less than 85% of the fair market value
of the common stock on the date of grant. The vesting and exercise provisions
are determined by the Board of Directors, with a maximum term of ten years.
47
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCK OPTION/STOCK ISSUANCE PLAN (CONTINUED)
Information with respect to the 1995 Plan is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
AVAILABLE NUMBER OF WEIGHTED AVERAGE
FOR GRANT SHARES PRICE PER SHARE
---------- ---------- ---------------------
<S> <C> <C> <C>
Shares authorized.............................. 285,000 --
Granted........................................ (175,749) 175,749 $ 5.00
Canceled....................................... 48,047 (48,047) 5.00
---------- ----------
Balance at December 31, 1995..................... 157,298 127,702 5.00
Increase in shares authorized.................. 150,000 --
Granted........................................ (360,650) 360,650 2.98
Canceled....................................... 91,254 (91,254) 4.60
Repriced options canceled........................ 260,192 (260,192) 4.12
Repriced options granted......................... (260,192) 260,192 1.55
---------- ----------
Balance at December 31, 1996..................... 37,902 397,098 1.57
Increase in shares authorized.................... 300,000 --
Granted........................................ (381,620) 381,620 0.61
Canceled....................................... 285,189 (285,189) 1.40
---------- ----------
Balance at December 31, 1997..................... 241,471 493,529 $ 0.93
---------- ----------
---------- ----------
</TABLE>
In December 1996, the Company granted employees, including executives, the
option to exchange 260,192 options with an aggregate exercise price of
$1,073,260 for new options with an exercise price of $1.55 per share. All vested
options that were repriced vested monthly over an additional one year period and
the unvested repriced options will vest under the original terms of the option
grant. As of December 31, 1997, 1996 and 1995, 223,891, zero and 2,244 options
were exercisable at a weighted average exercise price of $1.28, zero and $5.00,
respectively. At December 31, 1997, options to purchase 161,701 and 62,190
shares of common stock were exercisable at an exercise price of $1.55 and $0.56,
respectively. The weighted average contractual life for options outstanding
under the 1995 Plan at December 31, 1997 is approximately 9.1 years.
The Company has elected to follow Accounting Principle Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net loss and loss per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. For
options granted prior to the initial public offering in 1995, the fair value for
these options was estimated at the date of grant using the Minimum Value option
pricing method. For options granted subsequent to the initial public offering,
the fair value for these options was estimated at
48
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCK OPTION/STOCK ISSUANCE PLAN (CONTINUED)
the date of grant using the Black-Scholes option pricing model. The following
weighted average assumptions were used for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Rick-free interest rate (%).......................................... 6.28% 8.00% 8.00%
Dividend yield....................................................... -- -- --
Volatility factor.................................................... .808 .600 .600
Expected option life (years)......................................... 5.5 5.5 5.5
</TABLE>
The Minimum Value option valuation method may be used by nonpublic companies
to value an award. The Black-Scholes option valuation model was developed for
use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility and expected option life. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of Statement 123, the Company's net loss per
share would have increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Pro forma net loss............................... $ (3,703,075) $ (3,921,363) $ (3,381,295)
Pro forma net loss per share..................... $ (0.72) $ (1.30) $ (1.41)
</TABLE>
The weighted average fair value of options granted in 1997, 1996, and 1995
was $0.42, $0.99, and $1.65 per share, respectively. Because Statement 123 is
applicable only to options granted subsequent to December 31, 1994, its pro
forma effect will not be fully reflected until the year ending December 31,
1999.
NOTE 10--WARRANTS
The Company issued warrants to purchase common stock in connection with its
initial public offering and periodically granted warrants in connection with
certain financing agreements and certain lease
49
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--WARRANTS (CONTINUED)
agreements. The Company has the following warrants outstanding to purchase
common stock at December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
REASON SHARES SHARE ISSUE DATE EXPIRATION DATE
- ---------------------------------------------------- ----------- --------- ----------- ---------------
<S> <C> <C> <C> <C>
Equipment leasing................................... 4,985 $ 5.26 Feb 1994 Jun 1998
Initial public offering............................. 550,275 $ 8.40* Jun 1995 Jun 2000
IPO underwriting.................................... 150,000 $ 8.40* Jun 1995 Jun 2000
Series A Pfd underwriting........................... 43,539 $ 3.56 Nov 1996 Nov 2001
Equipment leasing................................... 8,791 $ 5.6875 Dec 1996 Dec 2001
Bank line financing................................. 50,000 $ 0.50 Dec 1997 Dec 2002
</TABLE>
- ------------------------
* The common warrants expiring in June 2000 are subject to 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. At December 31, 1997, the
effects of dilution adjustments relating to these warrants were to increase
the number of shares exercisable from 550,275 shares to 1,549,040 shares and
from 150,000 to 422,254, and to correspondingly reduce the exercise price of
these warrants from $8.40 per share to $2.98 per share.
NOTE 11--SHARES RESERVED
Common stock reserved for future issuance was as follows at December 31,
1997:
<TABLE>
<S> <C>
Stock option plans outstanding (see Note 9)...................... 571,300
Reserved for future stock option grants (see Note 9)............. 347,208
Common stock warrants (see Note 10).............................. 2,078,609
Convertible Subordinated Notes and maximum accrued interest
(see Note 5)................................................... 3,779,267
---------
Total common stock reserved for future issuance.................. 6,776,384
---------
---------
</TABLE>
See also Note 17 relating to shares reserved for conversion of Series B
convertible preferred stock issued in 1998.
NOTE 12--RETIREMENT PLAN
During fiscal year 1996, the Company adopted a tax-deferred savings plan,
the Socket Communications, Inc. 401(k) Plan, for the benefit of qualified
employees. The plan is designed to provide employees with an accumulation of
funds at retirement. Qualified employees may elect to make contributions to the
plan on a quarterly basis. No contributions are made by the Company.
Administrative expenses relating to the Plan are not significant.
NOTE 13--INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes
for the years ended December 31, 1997, 1996, and 1995.
50
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--INCOME TAXES (CONTINUED)
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $12,000,000 and $6,000,000, respectively.
The Company also had federal and state tax credit carryforwards of approximately
$180,000 and $150,000, respectively. The net operating loss and credit
carryforwards will expire at various dates beginning in 1998 through 2012, if
not utilized.
The utilization of approximately $5,200,000 of the federal net operating
included in the above amounts will be subject to a cumulative annual limitation
of approximately $600,000 per year pursuant to the stock ownership change
provision of the Tax Reform Act of 1986. Future changes in ownership, including
stock offerings, may result in additional limitations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Significant components of
deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Net operating loss carryforwards................................ $ 4,407,000 $ 3,370,000
Credits......................................................... 283,000 213,000
Capitalized research and development costs...................... 837,000 854,000
Reserves........................................................ 371,000 158,000
Other........................................................... 412,000 282,000
------------- -------------
Total deferred tax assets..................................... 6,310,000 4,877,000
Valuation allowance for deferred tax assets..................... (6,310,000) (4,877,000)
------------- -------------
Net deferred tax assets....................................... $ -- $ --
------------- -------------
------------- -------------
</TABLE>
NOTE 14--INDUSTRY AND GEOGRAPHIC INFORMATION
The Company conducts its business within one industry segment. Export
revenues, predominately representing sales to European countries, accounted for
approximately $2.3 million, $1.8 million and $1.8 million of revenue for the
years ended December 31, 1997, 1996 and 1995, respectively. The Company had no
significant operations outside the United States through December 31, 1997.
NOTE 15--MAJOR CUSTOMERS
Customers who accounted for at least 10% of total revenues were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Ingram Micro............................................................. 21% 17% 11%
PPCP Ltd (UK)............................................................ 21% -- --
Tech Data................................................................ 15% 12% 12%
Mitsubishi (UK).......................................................... -- -- 20%
</TABLE>
51
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--RELATED PARTIES
The Company had outstanding accounts payable to the Impact Zone of $9,100,
$18,654 and $39,763 at December 31, 1997, 1996, and 1995 respectively, and
incurred expenses during the years ended December 31, 1997, 1996, and 1995 of
$96,844, $211,329 and $130,340 respectively. The former Vice President of
Engineering in 1995, currently a technical consultant to the Company, is a
principal stockholder of The Impact Zone. The Impact Zone provides consulting
services, rents office space, and rents equipment on a month-to-month basis to
the Company.
The Company incurred expenses during the years ended December 31, 1997,
1996, and 1995 of $10,017, $zero and $11,314, respectively, to a director and
stockholder of the Company for consulting services.
The Company is jointly developing products with Cetronic AB, a Swedish
company that holds $1.1 million in convertible subordinated notes due December
12, 1998. In connection with this product development, the Company incurred
expenses of $46,324 for work done by Cetronic in 1997 and billed Cetronic
$55,171 for work done by the Company in 1997. The Company had an outstanding
accounts payable balance to Cetronic of $45,681 and an outstanding accounts
receivable balance from Cetronic of $43,371 at December 31, 1997. The Company
completed most of its development obligations during 1997 and remaining
development commitments are not significant.
NOTE 17--SUBSEQUENT EVENT
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 Convertible 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 Company sold 8,850 shares of Series B Convertible
Preferred Stock 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
52
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 17--SUBSEQUENT EVENT (CONTINUED)
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 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 will record 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 18, 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 $57.375 per share. The
Company will record Accretion of Preferred Stock of $125,000 in the first
quarter of 1998 for the 20% discount given to the Series B-2 holders.
53
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
The information required in Items 9-12 is hereby incorporated by reference
from the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on June 10, 1998.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. All financial statements.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS PAGE
---------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................ 34
Balance Sheets........................................................... 35
Statements of Operations................................................. 36
Statements of Stockholders' Equity (Deficit) and Redeemable Convertible
Preferred Stock........................................................ 37
Statements of Cash Flows................................................. 38
Notes to Financial Statements............................................ 39-52
2. Financial statement schedules.
II. Valuation and Qualifying Accounts.................................... S-1
3. Exhibits.
</TABLE>
<TABLE>
<CAPTION>
<C> <C> <S>
3.1 (1) Certificate of Incorporation.
3.2 (1) Bylaws.
3.3 Certificate of Designations of Preferences and Rights of Series B Convertible Preferred
Stock.
3.4 Certificate of Designations of Preferences and Rights of Series B-1 Convertible Preferred
Stock.
3.5 Certificate of Designations of Preferences and Rights of Series B-2 Convertible Preferred
Stock.
10.1 (1) Form of Indemnification Agreement entered into between the Company and its directors and
officers.
10.2 (1) 1993 Stock Option/Stock Issuance Plan and forms of agreement thereunder.
10.3 (1) 1995 Stock Plan and forms of agreement thereunder.
10.4 (2) Standard Lease Agreement by and between Central Court, LLC and the Company dated
September 15, 1996.
10.5 (3) Form of Employment Agreement dated October 15, 1997 with: Micheal Gifford, Executive Vice
President Business Development and General Manager, Wireless Products Division; Kevin
Mills, Vice President of Engineering and Operations and General Manager, Wired Products
Division,; and David Dunlap, Vice President Finance and Administration, Chief Financial
Officer and Corporate Secretary.
10.6 Form of Amended and Restated Subordinated Convertible Promissory Note originally dated
June 12, 1997 and subsequently amended November 7, 1997 for Directors of the Company and
their related entities.
</TABLE>
54
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (CONTINUED)
<TABLE>
<CAPTION>
10.7 Form of Amended and Restated Subordinated Convertible Promissory Note originally dated
February 14, 1997 and subsequently amended August 14, 1997 for ForetagsByggarna BV and
Telenor Venture AS.
<C> <C> <S>
10.8 Amended and Restated Subordinated Secured Convertible Promissory Note originally dated
January 29, 1997 and subsequently amended July 29, 1997, September 15, 1997 and November
24, 1997 for Cetronic Aktiebolag [Publ].
10.9 Amended and Restated Subordinated Convertible Promissory Note originally dated June 12,
1997 and subsequently amended September 15, 1997 and November 24, 1997 for Cetronic
Aktiebolag [Publ].
10.10 Subordinated Convertible Promissory Note dated November 24, 1997 for Cetronic Aktiebolag
[Publ].
10.11 Form of Subordinated Convertible Promissory Note dated November 7, 1997 for
ForetagsByggarna BV, Telenor Venture AS and other investors.
10.12 Form of Subordinated Convertible Promissory Note dated November 7, 1997 for The Bass
Trust.
10.13 Series B Preferred Stock Purchase Agreement dated January 21, 1998 by and between the
Company and Explorer Partners, L.L.C., a Delaware limited liability company and Explorer
Fund Management, L.L.C., an Illinois limited liability company and Amendment No. 1
thereto dated March 18, 1998.
10.14 Bonus Plan dated February 18, 1998 between the Company and certain eligible participants.
10.15 Form of Amendment No.1 to Stock Option Agreement between the Company and certain Option
Holders under the 1995 Stock Option Plan.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Incorporated by reference to exhibits filed with Company's Registration
Statement on Form SB-2 (File No. 33-91210-LA) filed on June 2, 1995 and
declared effective on June 6, 1995.
(2) Incorporated by reference to Exhibit 10.5 of the Company's Registration
Statement on Form SB-2 (File No. 333-22273) filed on February 24, 1997.
(3) Incorporated by reference to exhibits filed with the Company's Form 10-Q
(File No. 001-13810) filed on November 14, 1997.
b. Reports on Form 8-K
On November 20, 1997, the Company filed a report on Form 8-K with respect to
the issuance of convertible promissory notes pursuant to the Securities Act of
1933, as amended.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, hereunto duly authorized.
<TABLE>
<S> <C> <C>
SOCKET COMMUNICATIONS, INC.
REGISTRANT
Date: March 30, 1998 By: /s/ CHARLIE BASS
-----------------------------------------
Charlie Bass
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Charlie Bass and David
Dunlap as his attorneys-in-fact, each with the power of substitution, for him in
any and all capacities, to sign any and all amendments to this Report on Form
10-KSB and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ CHARLIE BASS
- ------------------------------ Chairman and Chief March 30, 1998
Charlie Bass Executive Officer
/s/ DAVID W. DUNLAP Vice President of Finance
- ------------------------------ and Administration and March 30, 1998
David W. Dunlap Chief Financial Officer
/s/ MICHEAL L. GIFFORD
- ------------------------------ Executive Vice President March 30, 1998
Micheal L. Gifford and Director
/s/ JACK C. CARSTEN
- ------------------------------ Director March 30, 1998
Jack C. Carsten
/s/ GARY W. KALBACH
- ------------------------------ Director March 30, 1998
Gary W. Kalbach
56
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
SOCKET COMMUNICATIONS, INC.
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT ---------------------------------
BEGINNING CHARGED TO COSTS CHARGED TO AMOUNTS BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES OTHER WRITTEN OFF END OF PERIOD
- ------------------------------------------ ----------- ---------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Accounts Receivable Allowance for Doubtful
Accounts:
1997.................................... $ 35,330 $ 11,106 -- $ 1,745 $ 44,691
1996.................................... $ 47,790 $ 4,830 -- $ 17,290 $ 35,330
1995.................................... $ 24,899 $ 38,774 -- $ 15,883 $ 47,790
</TABLE>
S-1
<PAGE>
CERTIFICATE OF DESIGNATIONS
OF PREFERENCES AND RIGHTS OF SERIES B 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 B 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 B Convertible Preferred Stock:
1. DESIGNATION. The new series of Preferred Stock shall be designated
"Series B Convertible Preferred Stock." The number of shares constituting the
Series B Convertible Preferred Stock shall be 37,500. 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 B Convertible Preferred
Stock to a number equal to or greater than the number of shares of Series B
Convertible Preferred Stock issued and outstanding at the time of the amendment.
The "Initial Sales Price" of shares of the Series B Convertible Preferred Stock
shall be the price per share at which such shares are first sold to investors
and the "Original Issue Date" shall mean the date on which shares of Series B
Convertible Preferred Stock are first sold to investors. The relative rights,
<PAGE>
preferences, privileges and restrictions granted to or imposed upon the Series B
Convertible Preferred Stock or the holders thereof are specified below.
2. DIVIDEND RIGHTS OF SERIES B CONVERTIBLE PREFERRED STOCK. The holders
of the Series B 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 Sales Price for each share of the Series B 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 shall be paid quarterly within 10 days of
Quarter End (the "Dividend Payment Date") and 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 B Convertible Preferred Stock. If a holder of Series B
Convertible Preferred Stock converts shares of Series B Convertible Preferred
Stock into Common Stock prior to a Dividend Payment Date, then the amount of
dividends paid on such converted shares shall be (a) prorated for the amount of
time such Series B Convertible Preferred Stock was issued and outstanding and
(b) paid on the next Dividend Payment Date.
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 in an amount equal to the number
of shares of Series B Convertible Preferred Stock multiplied by the Initial
Sales Price, plus all accrued but unpaid dividends (if any) thereon (the "Stated
Value"). If upon occurrence of such event, the assets and property thus
distributed among the holders of the Series B Convertible 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 Convertible Preferred Stock such that the same percentage of the
preferential amount to which each series of Series B Convertible Preferred Stock
is entitled is paid on each share of Series B Convertible Preferred Stock. If
upon occurrence of such event, the assets and property thus distributed among
the holders of the Series B Convertible 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 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 Series B Convertible 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 Series B Convertible Preferred Stock are entitled
to share pro rata in all remaining assets of the Company available for
distribution, with the number of shares held by each holder of Series B
Convertible Preferred Stock deemed to be the number of shares of Common Stock
into which the Series B
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Convertible Preferred Stock 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 B Convertible Preferred Stock
shall have conversion rights as follows:
(a) RIGHT TO CONVERT. Each share of Series B Convertible Preferred
Stock shall be convertible, at the option of the holder thereof, at any time on
or after the 60th day after the Original Issue Date at the office of the Company
or any transfer agent for the Series B Convertible Preferred Stock. Each share
of Series B Convertible Preferred Stock shall be converted into that number of
fully-paid and nonassessable shares of Common Stock that is equal to the Initial
Sales Price divided by the Conversion Price (as hereinafter defined). The
initial Conversion Price per share of Series B Convertible Preferred Stock shall
initially be the Initial Sales Price divided by 100. (The number of shares of
Common Stock into which each share of Series B 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 B 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 B 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 Directors
of the Company. Before any holder of Series B 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 B 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 B 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
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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 B 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 B
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 B 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 B 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 B CONVERTIBLE PREFERRED STOCK INTO
UNDESIGNATED PREFERRED STOCK. Upon the conversion of any shares of Series B
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 PRICE FOR DILUTING ISSUES.
i. SPECIAL DEFINITION. For purposes of this paragraph 4(e),
"Additional Shares of Common" shall mean all shares of Common Stock issued (or,
pursuant to paragraph 4(e)(iii), deemed to be issued) by the Company after the
Original Issue Date, other than shares of Common Stock issued or issuable:
(1) upon conversion of shares of Preferred Stock;
(2) to the Corporation's employees, officers, directors and
consultants as may be determined by the Corporation's
Board of Directors from time to time;
(3) as a dividend or distribution on Preferred Stock or
pursuant to any event for which adjustment is made
pursuant to paragraph 4(e)(vi)(1) or (2) hereof; or
(4) upon exercise of any options or warrants to purchase
the Company's Common Stock or Preferred Stock
outstanding as
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of the Original Issue Date or granted subsequent to the
Original Issue Date pursuant to any stock plan approved
by the Company's Board of Directors.
ii. NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the
Conversion Price of a particular share of Series B Convertible Preferred Stock
shall be made in respect of the issuance of Additional Shares of Common unless
the consideration per share for an Additional Share of Common issued or deemed
to be issued by the Company is less than the Conversion Price in effect on the
date of, and immediately prior to such issue, for such share of Series B
Convertible Preferred Stock.
iii. DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON. In the event
the Company at any time or from time to time after the Original Issue Date shall
issue any options, warrants or convertible securities or shall fix a record date
for the determination of holders of any class of securities entitled to receive
any such options, warrants or convertible securities, then the maximum number of
shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number) of
Common Stock issuable upon the exercise of such options or warrants or, in the
case of convertible securities and options or warrants therefor, the conversion
or exchange of such convertible securities or exercise of such options or
warrants, shall be deemed to be Additional Shares of Common issued as of the
time of such issue or, in case such a record date shall have been fixed, as of
the close of business on such record date, provided that Additional Shares of
Common shall not be deemed to have been issued unless the consideration per
share (determined pursuant to paragraph 4(e)(v) hereof) of such Additional
Shares of Common would be less than the Conversion Price in effect on the date
of and immediately prior to such issue, or such record date, as the case may be,
and provided further that in any such case in which Additional Shares of Common
are deemed to be issued:
(1) no further adjustment in the Conversion Price shall be
made upon the subsequent issue of convertible
securities or shares of Common Stock upon the exercise
of such options or warrants or conversion or exchange
of such convertible securities;
(2) if such options, warrants or convertible securities by
their terms provide, with the passage of time or
otherwise, for any increase or decrease in the
consideration payable to the Company, or increase or
decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price computed upon the
original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed
to reflect such increase or decrease insofar as it
affects such options or warrants or the rights of
conversion or exchange under such convertible
securities;
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(3) no readjustment pursuant to clause (2) above shall have
the effect of increasing the Conversion Price to an
amount which exceeds the lower of (i) the Conversion
Price on the original adjustment date, or (ii) the
Conversion Price that would have resulted from any
issuance of Additional Shares of Common between the
original adjustment date and such readjustment date;
(4) upon the expiration of any such options or warrants or
any rights of conversion or exchange under such
convertible securities which shall not have been
exercised, the Conversion Price computed upon the
original issue thereof (or upon the occurrence of a
record date with respect thereto) and any subsequent
adjustments based thereon shall, upon such expiration,
be recomputed as if:
(a) in the case of convertible securities or options
or warrants for Common Stock, the only Additional
Shares of Common issued were the shares of Common
Stock, if any, actually issued upon the exercise
of such options or warrants or the conversion or
exchange of such convertible securities and the
consideration received therefor was the
consideration actually received by the Company for
the issue of such exercised options or warrants
plus the consideration actually received by the
Company upon such exercise or for the issue of all
such convertible securities which were actually
converted or exchanged, plus the additional
consideration, if any, actually received by the
Company upon such conversion or exchange, and
(b) in the case of options or warrants for convertible
securities, only the convertible securities, if
any, actually issued upon the exercise thereof
were issued at the time of issue of such options
or warrants, and the consideration received by the
Company for the Additional Shares of Common deemed
to have been then issued was the consideration
actually received by the Company for the issue of
such exercised options or warrants, plus the
consideration deemed to have been received by the
Company (determined pursuant to paragraph 4(e)(v))
upon the issue of the convertible securities with
respect to which such options or warrants were
actually exercised; and
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(5) if such record date shall have been fixed and such
options, warrants or convertible securities are not
issued on the date fixed therefor, the adjustment
previously made in the Conversion Price which became
effective on such record date shall be canceled as of
the close of business on such record date, and
thereafter the Conversion Price shall be adjusted
pursuant to this paragraph 4(e)(iii) as of the actual
date of their issuance.
iv. ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON. In the event the Company issues Additional Shares of Common
(including Additional Shares of Common deemed to be issued pursuant to
paragraph 4(e)(iii)) without consideration or for a consideration per share less
than the Conversion Price for the Series B Convertible Preferred Stock in effect
on the date of and immediately prior to such issue, then and in such event such
Conversion Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying such Conversion Price
by a fraction, the numerator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue plus the number of shares of
Common Stock which the aggregate consideration received by the Company for the
total number of Additional Shares of Common so issued would purchase at such
Conversion Price; and the denominator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of such
Additional Shares of Common so issued; and provided further that, for the
purposes of this paragraph 4(e)(iv), all shares of Common Stock issuable upon
exercise, conversion or exchange of outstanding options, warrants, Preferred
Stock and convertible securities, as the case may be, shall be deemed to be
outstanding, and immediately after any Additional Shares of Common are deemed
issued pursuant to paragraph 4(e)(iii), such Additional Shares of Common shall
be deemed to be outstanding.
v. DETERMINATION OF CONSIDERATION. For purposes of this
subsection 4(e), the consideration received by the Company for the issue of any
Additional Shares of Common shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration shall:
(a) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Company
excluding amounts paid or payable for accrued
interest or accrued dividends;
(b) insofar as it consists of property other than
cash, be computed at the fair value thereof at the
time of such issue, as determined in good faith by
the Board of Directors; and
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<PAGE>
(c) in the event Additional Shares of Common are
issued together with other shares or securities or
other assets of the Company for consideration
which covers both, be the proportion of such
consideration so received, computed as provided in
clauses (a) and (b) above, as determined in good
faith by the Board of Directors.
(2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration
per share received by the Company for Additional Shares
of Common deemed to have been issued pursuant to
paragraph 4(e)(iii), relating to options, warrants and
convertible securities, shall be determined by dividing
(a) the total amount, if any, received or receivable
by the Company as consideration for the issue of
such options, warrants or convertible securities,
plus the minimum aggregate amount of additional
consideration (as set forth in the instruments
relating thereto, without regard to any provision
contained therein for a subsequent adjustment of
such consideration) payable to the Company upon
the exercise of such options or warrants or the
conversion or exchange of such convertible
securities, or in the case of options or warrants
for convertible securities, the exercise of such
options for convertible securities and the
conversion or exchange of such convertible
securities by
(b) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto,
without regard to any provision contained therein
for a subsequent adjustment of such number)
issuable upon the exercise of such options or
warrants or the conversion or exchange of such
convertible securities.
vi. ADJUSTMENTS TO CONVERSION RATE.
(1) 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 B 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 B Convertible Preferred Stock
shall receive upon conversion, the stock and/or securities to
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<PAGE>
which the 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 B Convertible Preferred Stock converted.
(2) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In
the event the Company at any time after the date of the first issuance of the
Series B 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 B 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 B 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 B Convertible Preferred
Stock.
vii. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price or Conversion Rate of the
Series B 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 B 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 B 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 B Convertible Preferred Stock.
viii. 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 B 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 B
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 B Convertible Preferred
Stock, in addition to such other remedies as shall be available to the holder
of such Series B 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.
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<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 B 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 8, 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 B Preferred Stock shall be entitled to notice of any shareholders'
meeting in accordance with the Bylaws of the Corporation and to vote together as
a single class with the holders of the Common Stock (except that holders of the
Series B Preferred shall be entitled to vote separately on (i) any alteration of
the rights of the Series B Preferred; (ii) any change in the authorized numbers
of shares of the Series B Preferred; (iii) the redemption or repurchase of
shares of Series B Preferred; or (iv) with respect to those matters required by
law to be submitted to a separate class or series vote) upon the election of
directors and upon any other matter submitted to shareholders for a vote, on the
following basis:
(a) SERIES B PREFERRED STOCK VOTE. Each share of Series B Preferred
Stock issued and outstanding shall have the number of votes equal to the number
of shares of Common Stock into
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which it is convertible, as adjusted from time to time under Section 4
hereof. Fractional votes shall not, however, be permitted and any fractional
voting rights resulting from the above formula (after aggregating all shares
into which shares of Series B Preferred Stock held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
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 B 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 B
Convertible Preferred Stock authorized hereby;
(b) authorize or issue shares of any class of stock having any
preference or priority as to dividends or assets superior to any such preference
or priority of the Series B Convertible Preferred Stock;
(c) reclassify any shares of Common Stock into shares having any
preference or priority as to dividends or assets superior to any such preference
or priority of the Series B Convertible Preferred Stock; or
(d) increase the number of authorized shares of Series B Convertible
Preferred Stock, or
(e) redeem or repurchase any outstanding shares of Series B
Convertible Preferred Stock.
[This space left blank intentionally.]
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IN WITNESS WHEREOF, said Socket Communications, Inc. has caused this
Certificate of Designations of Preferences and Rights of the Series B
Convertible Preferred Stock to be duly executed by its President and Chief
Executive Officer and attested to by its Secretary this 21st day of January,
1998.
/s/ Charlie Bass
-------------------------
Charlie Bass
Acting Chief Executive Officer
ATTEST:
/s/ David W. Dunlap
- ----------------------
David W. Dunlap
Secretary
<PAGE>
CERTIFICATE OF DESIGNATIONS
OF PREFERENCES AND RIGHTS OF SERIES B-1 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 B-1 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 B-1 Convertible Preferred Stock:
1. DESIGNATION. The new series of Preferred Stock shall be designated
"Series B-1 Convertible Preferred Stock." The number of shares constituting the
Series B-1 Convertible Preferred Stock shall be 8,850. 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 B-1 Convertible Preferred
Stock to a number equal to or greater than the number of shares of Series B
Convertible Preferred Stock issued and outstanding at the time of the amendment.
The "Initial Sales Price" of shares of the Series B-1 Convertible Preferred
Stock shall be $56.50 per share and the "Original Issue Date" shall mean the
date on which shares of Series B-1 Convertible Preferred Stock are first sold to
investors. The relative rights, preferences, privileges and restrictions
granted to or imposed upon the Series B-1 Convertible Preferred Stock or the
holders thereof are specified below.
<PAGE>
2. DIVIDEND RIGHTS OF SERIES B-1 CONVERTIBLE PREFERRED STOCK. The
holders of the Series B-1 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 Sales Price for each share of the Series B-1
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 shall be paid quarterly within
10 days of Quarter End (the "Dividend Payment Date") and 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 B-1 Convertible Preferred Stock. If a holder of
Series B-1 Convertible Preferred Stock converts shares of Series B-1 Convertible
Preferred Stock into Common Stock prior to a Dividend Payment Date, then the
amount of dividends paid on such converted shares shall be (a) prorated for the
amount of time such Series B-1 Convertible Preferred Stock was issued and
outstanding and (b) paid on the next Dividend Payment Date.
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 and Series B-1 Convertible
Preferred Stock in an amount equal to the number of shares of Series B
Convertible Preferred Stock and Series B-1 Convertible Preferred Stock, as the
case may be, multiplied by the Initial Sales Price with respect to such series
of Preferred Stock, plus all accrued but unpaid dividends (if any) thereon (the
"Stated Value"). The Series B Convertible Preferred Stock and the Series B-1
Convertible 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 Convertible Preferred Stock and Series B-1 Convertible 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 Convertible Preferred Stock and Series B-1
Convertible 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 Convertible Preferred Stock
and Series B-1 Convertible 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 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
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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 Convertible Preferred Stock and the Series B-1 Convertible 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 B-1 Convertible Preferred Stock
shall have conversion rights as follows:
(a) RIGHT TO CONVERT. Each share of Series B-1 Convertible Preferred
Stock shall be convertible, at the option of the holder thereof, at any time on
or after the 60th day after the Original Issue Date at the office of the Company
or any transfer agent for the Series B-1 Convertible Preferred Stock. Each
share of Series B-1 Convertible Preferred Stock shall be converted into that
number of fully-paid and nonassessable shares of Common Stock that is equal to
the Initial Sales Price divided by the Conversion Price (as hereinafter
defined). The initial Conversion Price per share of Series B-1 Convertible
Preferred Stock shall initially be the Initial Sales Price divided by 100. (The
number of shares of Common Stock into which each share of Series B-1 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 B-1 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 B-1 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 Directors
of the Company. Before any holder of Series B-1 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 B-1 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
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an automatic conversion pursuant to paragraph 4(b) above, the outstanding
shares of Series B-1 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 B-1 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 B-1
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 B-1 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 B-1 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 B-1 CONVERTIBLE PREFERRED STOCK INTO
UNDESIGNATED PREFERRED STOCK. Upon the conversion of any shares of Series B-1
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 PRICE FOR DILUTING ISSUES.
i. SPECIAL DEFINITION. For purposes of this paragraph 4(e),
"Additional Shares of Common" shall mean all shares of Common Stock issued (or,
pursuant to paragraph 4(e)(iii), deemed to be issued) by the Company after the
Original Issue Date, other than shares of Common Stock issued or issuable:
(1) upon conversion of shares of Preferred Stock;
(2) to the Corporation's employees, officers, directors and
consultants as may be determined by the Corporation's
Board of Directors from time to time;
(3) as a dividend or distribution on Preferred Stock or
pursuant to any event for which adjustment is made
pursuant to paragraph 4(e)(vi)(1) or (2) hereof; or
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(4) upon exercise of any options or warrants to purchase
the Company's Common Stock or Preferred Stock
outstanding as of the Original Issue Date or granted
subsequent to the Original Issue Date pursuant to any
stock plan approved by the Company's Board of
Directors.
ii. NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the
Conversion Price of a particular share of Series B-1 Convertible Preferred Stock
shall be made in respect of the issuance of Additional Shares of Common unless
the consideration per share for an Additional Share of Common issued or deemed
to be issued by the Company is less than the Conversion Price in effect on the
date of, and immediately prior to such issue, for such share of Series B-1
Convertible Preferred Stock.
iii. DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON. In the event
the Company at any time or from time to time after the Original Issue Date shall
issue any options, warrants or convertible securities or shall fix a record date
for the determination of holders of any class of securities entitled to receive
any such options, warrants or convertible securities, then the maximum number of
shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number) of
Common Stock issuable upon the exercise of such options or warrants or, in the
case of convertible securities and options or warrants therefor, the conversion
or exchange of such convertible securities or exercise of such options or
warrants, shall be deemed to be Additional Shares of Common issued as of the
time of such issue or, in case such a record date shall have been fixed, as of
the close of business on such record date, provided that Additional Shares of
Common shall not be deemed to have been issued unless the consideration per
share (determined pursuant to paragraph 4(e)(v) hereof) of such Additional
Shares of Common would be less than the Conversion Price in effect on the date
of and immediately prior to such issue, or such record date, as the case may be,
and provided further that in any such case in which Additional Shares of Common
are deemed to be issued:
(1) no further adjustment in the Conversion Price shall be
made upon the subsequent issue of convertible
securities or shares of Common Stock upon the exercise
of such options or warrants or conversion or exchange
of such convertible securities;
(2) if such options, warrants or convertible securities by
their terms provide, with the passage of time or
otherwise, for any increase or decrease in the
consideration payable to the Company, or increase or
decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price computed upon the
original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed
to reflect such increase or decrease insofar as it
affects such
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<PAGE>
options or warrants or the rights of conversion or
exchange under such convertible securities;
(3) no readjustment pursuant to clause (2) above shall have
the effect of increasing the Conversion Price to an
amount which exceeds the lower of (i) the Conversion
Price on the original adjustment date, or (ii) the
Conversion Price that would have resulted from any
issuance of Additional Shares of Common between the
original adjustment date and such readjustment date;
(4) upon the expiration of any such options or warrants or
any rights of conversion or exchange under such
convertible securities which shall not have been
exercised, the Conversion Price computed upon the
original issue thereof (or upon the occurrence of a
record date with respect thereto) and any subsequent
adjustments based thereon shall, upon such expiration,
be recomputed as if:
(a) in the case of convertible securities or options
or warrants for Common Stock, the only Additional
Shares of Common issued were the shares of Common
Stock, if any, actually issued upon the exercise
of such options or warrants or the conversion or
exchange of such convertible securities and the
consideration received therefor was the
consideration actually received by the Company for
the issue of such exercised options or warrants
plus the consideration actually received by the
Company upon such exercise or for the issue of all
such convertible securities which were actually
converted or exchanged, plus the additional
consideration, if any, actually received by the
Company upon such conversion or exchange, and
(b) in the case of options or warrants for convertible
securities, only the convertible securities, if
any, actually issued upon the exercise thereof
were issued at the time of issue of such options
or warrants, and the consideration received by the
Company for the Additional Shares of Common deemed
to have been then issued was the consideration
actually received by the Company for the issue of
such exercised options or warrants, plus the
consideration deemed to have been received by the
Company (determined pursuant to
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<PAGE>
paragraph 4(e)(v)) upon the issue of the
convertible securities with respect to which
such options or warrants were actually
exercised; and
(5) if such record date shall have been fixed and such
options, warrants or convertible securities are not
issued on the date fixed therefor, the adjustment
previously made in the Conversion Price which became
effective on such record date shall be canceled as of
the close of business on such record date, and
thereafter the Conversion Price shall be adjusted
pursuant to this paragraph 4(e)(iii) as of the actual
date of their issuance.
iv. ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON. In the event the Company issues Additional Shares of Common
(including Additional Shares of Common deemed to be issued pursuant to
paragraph 4(e)(iii)) without consideration or for a consideration per share less
than the Conversion Price for the Series B-1 Convertible Preferred Stock in
effect on the date of and immediately prior to such issue, then and in such
event such Conversion Price shall be reduced, concurrently with such issue, to a
price (calculated to the nearest cent) determined by multiplying such Conversion
Price by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of
shares of Common Stock which the aggregate consideration received by the Company
for the total number of Additional Shares of Common so issued would purchase at
such Conversion Price; and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common so issued; and provided further that,
for the purposes of this paragraph 4(e)(iv), all shares of Common Stock issuable
upon exercise, conversion or exchange of outstanding options, warrants,
Preferred Stock and convertible securities, as the case may be, shall be deemed
to be outstanding, and immediately after any Additional Shares of Common are
deemed issued pursuant to paragraph 4(e)(iii), such Additional Shares of Common
shall be deemed to be outstanding.
v. DETERMINATION OF CONSIDERATION. For purposes of this
subsection 4(e), the consideration received by the Company for the issue of any
Additional Shares of Common shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration shall:
(a) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Company
excluding amounts paid or payable for accrued
interest or accrued dividends;
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(b) insofar as it consists of property other than
cash, be computed at the fair value thereof at the
time of such issue, as determined in good faith by
the Board of Directors; and
(c) in the event Additional Shares of Common are
issued together with other shares or securities or
other assets of the Company for consideration
which covers both, be the proportion of such
consideration so received, computed as provided in
clauses (a) and (b) above, as determined in good
faith by the Board of Directors.
(2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration
per share received by the Company for Additional Shares
of Common deemed to have been issued pursuant to
paragraph 4(e)(iii), relating to options, warrants and
convertible securities, shall be determined by dividing
(a) the total amount, if any, received or receivable
by the Company as consideration for the issue of
such options, warrants or convertible securities,
plus the minimum aggregate amount of additional
consideration (as set forth in the instruments
relating thereto, without regard to any provision
contained therein for a subsequent adjustment of
such consideration) payable to the Company upon
the exercise of such options or warrants or the
conversion or exchange of such convertible
securities, or in the case of options or warrants
for convertible securities, the exercise of such
options for convertible securities and the
conversion or exchange of such convertible
securities by
(b) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto,
without regard to any provision contained therein
for a subsequent adjustment of such number)
issuable upon the exercise of such options or
warrants or the conversion or exchange of such
convertible securities.
vi. ADJUSTMENTS TO CONVERSION RATE.
(1) 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 B-1 Convertible
Preferred Stock the outstanding shares of
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<PAGE>
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 B-1 Convertible Preferred Stock shall receive upon
conversion, the stock and/or securities to which the 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 B-1 Convertible
Preferred Stock converted.
(2) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In
the event the Company at any time after the date of the first issuance of the
Series B-1 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 B-1 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 B-1 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 B-1 Convertible Preferred
Stock.
vii. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price or Conversion Rate of the
Series B-1 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 B-1 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 B-1 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 B-1 Convertible Preferred Stock.
viii. 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 B-1 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 B-1 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 B-1 Convertible Preferred Stock, in addition to
such other remedies as shall be available to the holder of such Series B-1
Convertible Preferred Stock, the Company will take such corporate action as may,
in the opinion of its counsel,
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<PAGE>
be necessary to increase its authorized but unissued shares of Common Stock
to such number of shares as shall be sufficient for such purposes.
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 B-1 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 B-1 Convertible Preferred Stock shall be entitled to notice of any
shareholders' meeting in accordance with the Bylaws of the Corporation and to
vote together as a single class with the holders of the Common Stock (except
that holders of the Series B-1 Convertible Preferred Stock shall be entitled to
vote separately on (i) any alteration of the rights of the Series B-1
Convertible Preferred Stock; (ii) any change in the authorized numbers of shares
of the Series B-1 Convertible Preferred Stock; (iii) the redemption or
repurchase of shares of Series B-1 Convertible Preferred Stock; or (iv) with
respect to those matters required by law to be submitted to a separate class or
series vote) upon the
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election of directors and upon any other matter submitted to shareholders for
a vote, on the following basis:
(a) SERIES B-1 PREFERRED STOCK VOTE. Each share of Series B-1
Convertible Preferred Stock issued and outstanding shall have the number of
votes equal to the number of shares of Common Stock into which it is
convertible, as adjusted from time to time under Section 4 hereof. Fractional
votes shall not, however, be permitted and any fractional voting rights
resulting from the above formula (after aggregating all shares into which shares
of Series B-1 Convertible Preferred Stock held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
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 B-1 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 B-1
Convertible Preferred Stock authorized hereby;
(b) authorize or issue shares of any class of stock having any
preference or priority as to dividends or assets superior to any such preference
or priority of the Series B-1 Convertible Preferred Stock;
(c) reclassify any shares of Common Stock into shares having any
preference or priority as to dividends or assets superior to any such preference
or priority of the Series B-1 Convertible Preferred Stock; or
(d) increase the number of authorized shares of Series B-1
Convertible Preferred Stock, or
(e) redeem or repurchase any outstanding shares of Series B-1
Convertible Preferred Stock.
[This space left blank intentionally.]
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IN WITNESS WHEREOF, said Socket Communications, Inc. has caused this
Certificate of Designations of Preferences and Rights of the Series B-1
Convertible Preferred Stock to be duly executed by its President and Chief
Executive Officer and attested to by its Secretary this 18th day of March,
1998.
/s/ Charlie Bass
--------------------------------
Charlie Bass
Chief Executive Officer
ATTEST:
/s/ David W. Dunlap
- ----------------------------
David W. Dunlap
Secretary
<PAGE>
CERTIFICATE OF DESIGNATIONS
OF PREFERENCES AND RIGHTS OF SERIES B-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 B-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 B-2 Convertible Preferred Stock:
1. DESIGNATION. The new series of Preferred Stock shall be designated
"Series B-2 Convertible Preferred Stock." The number of shares constituting the
Series B-2 Convertible Preferred Stock shall be 8,715. 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 B-1 Convertible Preferred
Stock to a number equal to or greater than the number of shares of Series B
Convertible Preferred Stock issued and outstanding at the time of the amendment.
The "Initial Sales Price" of shares of the Series B-2 Convertible Preferred
Stock shall be $57.375 per share and the "Original Issue Date" shall mean the
date on which shares of Series B-2 Convertible Preferred Stock are first sold to
investors. The relative rights, preferences, privileges and restrictions
granted to or imposed upon the Series B-2 Convertible Preferred Stock or the
holders thereof are specified below.
<PAGE>
2. DIVIDEND RIGHTS OF SERIES B-2 CONVERTIBLE PREFERRED STOCK. The
holders of the Series B-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 Sales Price for each share of the Series B-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 shall be paid quarterly within
10 days of Quarter End (the "Dividend Payment Date") and 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 B-2 Convertible Preferred Stock. If a holder of
Series B-2 Convertible Preferred Stock converts shares of Series B-2 Convertible
Preferred Stock into Common Stock prior to a Dividend Payment Date, then the
amount of dividends paid on such converted shares shall be (a) prorated for the
amount of time such Series B-2 Convertible Preferred Stock was issued and
outstanding and (b) paid on the next Dividend Payment Date.
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 and Series B-2 Convertible Preferred Stock in an amount equal to
the number of shares of Series B Convertible Preferred Stock, Series B-1
Convertible Preferred Stock and Series B-2 Convertible Preferred Stock, as the
case may be, multiplied by the Initial Sales Price with respect to such series
of Preferred Stock, plus all accrued but unpaid dividends (if any) thereon (the
"Stated Value"). The Series B Convertible Preferred Stock, the Series B-1
Convertible Preferred Stock and Series B-2 Convertible 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 Convertible
Preferred Stock, Series B-1 Convertible Preferred Stock and Series B-2
Convertible 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 Convertible Preferred
Stock, Series B-1 Convertible Preferred Stock and Series B-2 Convertible
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 Convertible Preferred Stock,
Series B-1 Convertible Preferred Stock and Series B-2 Convertible 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 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
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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 Convertible Preferred Stock,
the Series B-1 Convertible Preferred Stock and the Series B-2 Convertible
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 B-2 Convertible Preferred Stock
shall have conversion rights as follows:
(a) RIGHT TO CONVERT. Each share of Series B-2 Convertible Preferred
Stock shall be convertible, at the option of the holder thereof, at any time on
or after the 60th day after the Original Issue Date at the office of the Company
or any transfer agent for the Series B-2 Convertible Preferred Stock. Each
share of Series B-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 Sales Price divided by the Conversion Price (as hereinafter
defined). The initial Conversion Price per share of Series B-2 Convertible
Preferred Stock shall initially be the Initial Sales Price divided by 100. (The
number of shares of Common Stock into which each share of Series B-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 B-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 B-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 Directors
of the Company. Before any holder of Series B-2 Convertible Preferred Stock
shall be
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<PAGE>
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 B-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 B-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 B-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 B-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 B-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 B-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 B-2 CONVERTIBLE PREFERRED STOCK INTO
UNDESIGNATED PREFERRED STOCK. Upon the conversion of any shares of Series B-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 PRICE FOR DILUTING ISSUES.
i. SPECIAL DEFINITION. For purposes of this paragraph 4(e),
"Additional Shares of Common" shall mean all shares of Common Stock issued (or,
pursuant to paragraph 4(e)(iii), deemed to be issued) by the Company after the
Original Issue Date, other than shares of Common Stock issued or issuable:
(1) upon conversion of shares of Preferred Stock;
(2) to the Corporation's employees, officers, directors and
consultants as may be determined by the Corporation's
Board of Directors from time to time;
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<PAGE>
(3) as a dividend or distribution on Preferred Stock or
pursuant to any event for which adjustment is made
pursuant to paragraph 4(e)(vi)(1) or (2) hereof; or
(4) upon exercise of any options or warrants to purchase
the Company's Common Stock or Preferred Stock
outstanding as of the Original Issue Date or granted
subsequent to the Original Issue Date pursuant to any
stock plan approved by the Company's Board of
Directors.
ii. NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the
Conversion Price of a particular share of Series B-2 Convertible Preferred Stock
shall be made in respect of the issuance of Additional Shares of Common unless
the consideration per share for an Additional Share of Common issued or deemed
to be issued by the Company is less than the Conversion Price in effect on the
date of, and immediately prior to such issue, for such share of Series B-2
Convertible Preferred Stock.
iii. DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON. In the event
the Company at any time or from time to time after the Original Issue Date shall
issue any options, warrants or convertible securities or shall fix a record date
for the determination of holders of any class of securities entitled to receive
any such options, warrants or convertible securities, then the maximum number of
shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number) of
Common Stock issuable upon the exercise of such options or warrants or, in the
case of convertible securities and options or warrants therefor, the conversion
or exchange of such convertible securities or exercise of such options or
warrants, shall be deemed to be Additional Shares of Common issued as of the
time of such issue or, in case such a record date shall have been fixed, as of
the close of business on such record date, provided that Additional Shares of
Common shall not be deemed to have been issued unless the consideration per
share (determined pursuant to paragraph 4(e)(v) hereof) of such Additional
Shares of Common would be less than the Conversion Price in effect on the date
of and immediately prior to such issue, or such record date, as the case may be,
and provided further that in any such case in which Additional Shares of Common
are deemed to be issued:
(1) no further adjustment in the Conversion Price shall be
made upon the subsequent issue of convertible
securities or shares of Common Stock upon the exercise
of such options or warrants or conversion or exchange
of such convertible securities;
(2) if such options, warrants or convertible securities by
their terms provide, with the passage of time or
otherwise, for any increase or decrease in the
consideration payable to the Company, or increase or
decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price computed upon the
original issue thereof (or
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<PAGE>
upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon,
shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or
decrease insofar as it affects such options or warrants
or the rights of conversion or exchange under such
convertible securities;
(3) no readjustment pursuant to clause (2) above shall have
the effect of increasing the Conversion Price to an
amount which exceeds the lower of (i) the Conversion
Price on the original adjustment date, or (ii) the
Conversion Price that would have resulted from any
issuance of Additional Shares of Common between the
original adjustment date and such readjustment date;
(4) upon the expiration of any such options or warrants or
any rights of conversion or exchange under such
convertible securities which shall not have been
exercised, the Conversion Price computed upon the
original issue thereof (or upon the occurrence of a
record date with respect thereto) and any subsequent
adjustments based thereon shall, upon such expiration,
be recomputed as if:
(a) in the case of convertible securities or options
or warrants for Common Stock, the only Additional
Shares of Common issued were the shares of Common
Stock, if any, actually issued upon the exercise
of such options or warrants or the conversion or
exchange of such convertible securities and the
consideration received therefor was the
consideration actually received by the Company for
the issue of such exercised options or warrants
plus the consideration actually received by the
Company upon such exercise or for the issue of all
such convertible securities which were actually
converted or exchanged, plus the additional
consideration, if any, actually received by the
Company upon such conversion or exchange, and
(b) in the case of options or warrants for convertible
securities, only the convertible securities, if
any, actually issued upon the exercise thereof
were issued at the time of issue of such options
or warrants, and the consideration received by the
Company for the Additional Shares of Common deemed
to have been
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<PAGE>
then issued was the consideration actually
received by the Company for the issue of such
exercised options or warrants, plus the
consideration deemed to have been received by the
Company (determined pursuant to paragraph 4(e)(v))
upon the issue of the convertible securities with
respect to which such options or warrants were
actually exercised; and
(5) if such record date shall have been fixed and such
options, warrants or convertible securities are not
issued on the date fixed therefor, the adjustment
previously made in the Conversion Price which became
effective on such record date shall be canceled as of
the close of business on such record date, and
thereafter the Conversion Price shall be adjusted
pursuant to this paragraph 4(e)(iii) as of the actual
date of their issuance.
iv. ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON. In the event the Company issues Additional Shares of Common
(including Additional Shares of Common deemed to be issued pursuant to
paragraph 4(e)(iii)) without consideration or for a consideration per share less
than the Conversion Price for the Series B-2 Convertible Preferred Stock in
effect on the date of and immediately prior to such issue, then and in such
event such Conversion Price shall be reduced, concurrently with such issue, to a
price (calculated to the nearest cent) determined by multiplying such Conversion
Price by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such issue plus the number of
shares of Common Stock which the aggregate consideration received by the Company
for the total number of Additional Shares of Common so issued would purchase at
such Conversion Price; and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue plus the
number of such Additional Shares of Common so issued; and provided further that,
for the purposes of this paragraph 4(e)(iv), all shares of Common Stock issuable
upon exercise, conversion or exchange of outstanding options, warrants,
Preferred Stock and convertible securities, as the case may be, shall be deemed
to be outstanding, and immediately after any Additional Shares of Common are
deemed issued pursuant to paragraph 4(e)(iii), such Additional Shares of Common
shall be deemed to be outstanding.
v. DETERMINATION OF CONSIDERATION. For purposes of this
subsection 4(e), the consideration received by the Company for the issue of any
Additional Shares of Common shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration shall:
(a) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Company
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<PAGE>
excluding amounts paid or payable for accrued
interest or accrued dividends;
(b) insofar as it consists of property other than
cash, be computed at the fair value thereof at the
time of such issue, as determined in good faith by
the Board of Directors; and
(c) in the event Additional Shares of Common are
issued together with other shares or securities or
other assets of the Company for consideration
which covers both, be the proportion of such
consideration so received, computed as provided in
clauses (a) and (b) above, as determined in good
faith by the Board of Directors.
(2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration
per share received by the Company for Additional Shares
of Common deemed to have been issued pursuant to
paragraph 4(e)(iii), relating to options, warrants and
convertible securities, shall be determined by dividing
(a) the total amount, if any, received or receivable
by the Company as consideration for the issue of
such options, warrants or convertible securities,
plus the minimum aggregate amount of additional
consideration (as set forth in the instruments
relating thereto, without regard to any provision
contained therein for a subsequent adjustment of
such consideration) payable to the Company upon
the exercise of such options or warrants or the
conversion or exchange of such convertible
securities, or in the case of options or warrants
for convertible securities, the exercise of such
options for convertible securities and the
conversion or exchange of such convertible
securities by
(b) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto,
without regard to any provision contained therein
for a subsequent adjustment of such number)
issuable upon the exercise of such options or
warrants or the conversion or exchange of such
convertible securities.
vi. ADJUSTMENTS TO CONVERSION RATE.
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<PAGE>
(1) 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 B-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 B-2 Convertible Preferred
Stock shall receive upon conversion, the stock and/or securities to which the
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 B-2 Convertible
Preferred Stock converted.
(2) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In
the event the Company at any time after the date of the first issuance of the
Series B-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 B-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 B-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 B-2 Convertible Preferred
Stock.
vii. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price or Conversion Rate of the
Series B-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 B-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 B-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 B-2 Convertible Preferred Stock.
viii. 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 B-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 B-2 Convertible
Preferred Stock; and if at any time the number of authorized but unissued shares
of Common Stock shall not be sufficient
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<PAGE>
to effect the conversion of all outstanding shares of the Series B-2
Convertible Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Series B-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.
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 B-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 B-2 Convertible Preferred Stock shall be entitled to notice of any
shareholders' meeting in accordance with the Bylaws of the Corporation and to
vote together as a single class with the holders of the Common Stock (except
that holders of the Series B-2 Convertible Preferred Stock shall be entitled to
vote separately on (i) any alteration of the rights of the Series B-2
Convertible Preferred Stock; (ii) any change in the authorized numbers of shares
of the Series B-2 Convertible Preferred Stock;
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<PAGE>
(iii) the redemption or repurchase of shares of Series B-2 Convertible
Preferred Stock; or (iv) with respect to those matters required by law to be
submitted to a separate class or series vote) upon the election of directors
and upon any other matter submitted to shareholders for a vote, on the
following basis:
(a) SERIES B-2 PREFERRED STOCK VOTE. Each share of Series B-2
Convertible Preferred Stock issued and outstanding shall have the number of
votes equal to the number of shares of Common Stock into which it is
convertible, as adjusted from time to time under Section 4 hereof. Fractional
votes shall not, however, be permitted and any fractional voting rights
resulting from the above formula (after aggregating all shares into which shares
of Series B-2 Convertible Preferred Stock held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
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 B-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 B-2
Convertible Preferred Stock authorized hereby;
(b) authorize or issue shares of any class of stock having any
preference or priority as to dividends or assets superior to any such preference
or priority of the Series B-2 Convertible Preferred Stock;
(c) reclassify any shares of Common Stock into shares having any
preference or priority as to dividends or assets superior to any such preference
or priority of the Series B-2 Convertible Preferred Stock; or
(d) increase the number of authorized shares of Series B-2
Convertible Preferred Stock, or
(e) redeem or repurchase any outstanding shares of Series B-2
Convertible Preferred Stock.
[This space left blank intentionally.]
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<PAGE>
IN WITNESS WHEREOF, said Socket Communications, Inc. has caused this
Certificate of Designations of Preferences and Rights of the Series B-2
Convertible Preferred Stock to be duly executed by its President and Chief
Executive Officer and attested to by its Secretary this 18th day of March,
1998.
/s/ Charlie Bass
--------------------------------
Charlie Bass
Chief Executive Officer
ATTEST:
/s/ David W. Dunlap
- ----------------------------
David W. Dunlap
Secretary
<PAGE>
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A
VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE SECURITIES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND
QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES, AN
OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL FOR THE COMPANY, THAT
SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
SOCKET COMMUNICATIONS, INC.
AMENDED AND RESTATED
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
Newark, California
$__________ June 12, 1997
SOCKET COMMUNICATIONS, INC., a Delaware corporation (the "Company"), for
value received, hereby promises to pay to the order of _______________ or holder
("Holder") in lawful money of the United States at the address of Holder set
forth below, the principal amount of ______________________________ Dollars
($____________), together with simple interest at the rate of eight percent (8%)
per annum (calculated on the basis of actual days elapsed and a year of 365
days). Subject to the following sentence, accrued interest shall be payable in
cash only at the time the Company pays any portion of the principal amount of
this Note. If this Note is converted pursuant to Section 4 hereof, accrued
interest may be converted as set forth therein; any accrued interest that is not
so converted shall be payable in cash.
This Note was originally executed on June 12, 1997 in connection with a
Combination Agreement dated as of June 12, 1997 (the "Combination Agreement") by
and between the Company and Cetronic Aktiebolag [Publ], a Swedish corporation
("Cetronic"), pursuant to which the Company will acquire all of the outstanding
shares of Cetronic and Cetronic will become a wholly-owned subsidiary of the
Company. This Note was amended and restated as of November 7, 1997 to, among
other things, extend the Maturity Date (as defined in Section 1(a) hereof),
expand the definition of Senior Indebtedness (as defined in Section 2(a)
hereof), and restate the Conversion Price (as defined in Section 4(a) hereof).
The following is a statement of the rights of Holder and the conditions to
which this Note is subject, and to which the Holder hereof, by the acceptance of
this Note, agrees.
<PAGE>
1. PAYMENTS; PREPAYMENTS.
(a) All principal, interest and other amounts due hereunder shall be due
and payable on the earlier of (i) December 12, 1998 (the "Maturity Date") and
(ii) the day on which this Note becomes immediately due and payable pursuant to
Section 9 hereof.
(b) This Note may be prepaid, in whole or in part, from time to time ten
(10) business days after Holder receives written notice of such prepayment from
the Company; Holder shall then have until the end of such ten (10) business day
period to notify the Company in writing that it wishes to convert all or part of
the outstanding principal and accrued interest under this Note into Common Stock
pursuant to Section 4 below. Prepayments shall be (i) reduced by any amounts
that Holder desires to so convert into Common Stock and then (ii) applied first
to outstanding interest, and then to principal.
(c) Upon payment in full of all principal and interest payable hereunder,
this Note shall be surrendered to Company for cancellation.
2. SUBORDINATION.
(a) "Senior Indebtedness" means (A) the principal of and premium, if any,
and interest on indebtedness of the Company incurred pursuant to the Promissory
Note and Loan Agreement, each dated as of July 5, 1995, between the Company and
CivicBank of Commerce; and (B) all present and future indebtedness, obligations,
liabilities, claims, rights and demands of any kind which may be now or
hereafter owing from the Company to World Trade in connection with that certain
Note in the amount of $500,000 (or such lesser amount as the Company and World
Trade may finally agree) issued by the Company in favor of World Trade and a
related Commercial Security Agreement and Commercial Pledge Agreement between
the Company and World Trade, including, without limitation, all principal, all
interest, all costs and attorneys' fees, all sums paid for the purpose of
protecting World Trade's rights in security (such as paying for insurance on
collateral if the owner fails to do so), and all other obligations of the
Company to World Trade, secured or unsecured, of any nature whatsoever. The
Company agrees and the holder of this Note, by acceptance thereof, agrees,
expressly for the benefit of the holder of the Senior Indebtedness, that, except
as otherwise provided herein, upon (i) an event of default under the Senior
Indebtedness, or (ii) any dissolution, winding up, or liquidation of the
Company, whether or not in bankruptcy, insolvency or receivership proceedings,
the Company shall not pay, and the holder of such Note shall not be entitled to
receive, any amount in respect of the principal and interest of such Note unless
and until the Senior Indebtedness shall have been paid or otherwise discharged.
Upon (1) an event of default under the Senior Indebtedness, or (2) any
dissolution, winding up or liquidation of the Company, any payment or
distribution of assets of the Company, which the holder of this Note would be
entitled to receive but for the provisions hereof, shall be paid by the
liquidating trustee or agent or other person making such payment or distribution
directly to the holders of the Senior Indebtedness ratably according to the
aggregate amounts remaining unpaid on the Senior Indebtedness after giving
effect to any concurrent payment or distribution to the holders of the Senior
Indebtedness. Subject to the payment in full of the Senior Indebtedness and
until this Note is paid in full, the holder of this Note shall be subrogated to
the rights of the holders of the Senior Indebtedness (to the extent of payments
or distributions previously made to the holders of the Senior Indebtedness
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<PAGE>
pursuant to this Section 2(a)) to receive payments or distributions of assets of
the Company applicable to the Senior Indebtedness.
(b) This Section 2 is not intended to impair, as between the Company, its
creditors (other than the holders of the Senior Indebtedness) and the holder of
this Note, the unconditional and absolute obligation of the Company to pay the
principal of and interest on the Note or affect the relative rights of the
holder of this Note and the other creditors of the Company, other than the
holders of the Senior Indebtedness. Nothing in this Note shall prevent the
holder of this Note from exercising all remedies otherwise permitted by
applicable law upon default under the Note, subject to the rights, if any, of
the holders of the Senior Indebtedness in respect to cash, property or
securities of the Company received upon the exercise of any such remedy.
3. EVENTS OF DEFAULT. The Company's failure to pay (i) when due any principal
payment on the due date hereunder or (ii) any interest or other payment required
under the terms of this Note on the date due, and failure to make such payment
within five (5) business days of Company's receipt of Holder's written notice to
Company of such failure to pay, shall constitute an "Event of Default" under
this Note.
4. CONVERSION.
(a) In lieu of receiving cash payment for principal amounts and accrued
interest due under this Note, Holder shall have the right to convert outstanding
principal and accrued interest under this Note into Common Stock of the Company
at a conversion price per share equal to $0.53 (the "Conversion Price") at any
time on or prior to the Maturity Date.
(b) In addition to the conversion right provided in Section 4(a) above,
upon an Event of Default, in lieu of receiving cash payment for principal
amounts and accrued interest due under this Note, Holder shall have the right to
convert outstanding principal and accrued interest under this Note into Common
Stock of the Company at a conversion price per share equal to the lower of (i)
the Conversion Price or (ii) 65% of the average closing price of the Company's
Common Stock on the OTC Bulletin Board or Nasdaq SmallCap Market, as applicable,
for the five (5) business days prior to the date of the Event of Default.
(c) Holder may exercise its conversion right by providing written notice
to the Company of Holder's intention to exercise its conversion right and the
amount of principal and accrued interest that it wishes to convert (the
"Conversion Amount") at least ten (10) days prior to the date on which it wishes
to convert (the "Conversion Date") (unless such notice is given pursuant to the
terms of Section 1(b) above, in which event notice shall comply with the terms
thereof). No fractional shares of Common Stock shall be issued upon conversion
of this Note. Promptly after the conversion of this Note, the Holder shall
surrender this Note, duly endorsed, at the principal office of Company. At its
expense, Company shall, as soon as practicable thereafter (or as otherwise noted
in the provisions above), issue and deliver to such Holder at such principal
office a certificate or certificates for the number of shares of such Common
Stock to which the Holder shall be entitled upon such conversion (bearing such
legends as are required by applicable state and federal securities laws in the
opinion of counsel to Company). In addition, unless this Note has been fully
converted, a new Note representing the principal
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<PAGE>
amount that shall not have been converted into Common Stock shall also be
issued to Holder as soon as possible thereafter. Upon conversion of this
Note in full, Company shall be forever released from all its obligations and
liabilities under this Note including principal, interest and any other
amounts due and owing pursuant hereto. Any notice from the Holder of an
election to convert by the Company shall be irrevocable.
(d) If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of the entire outstanding
principal amount and accrued interest under this Note, Company will use its best
efforts to take such corporate action as may be necessary, in the opinion of its
counsel, to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes.
5. REGISTRATION RIGHT.
(a) Following the Maturity Date, and within a reasonable amount of time
following the conversion by Holder of any outstanding principal and accrued
interest under this Note into Common Stock of the Company, the Company will use
reasonable efforts to (i) file a registration statement under the Securities Act
of 1933, as amended (the "Securities Act") registering such shares for resale to
the public, (ii) have such registration statement declared effective by the
Securities and Exchange Commission, (iii) register and qualify the securities
covered by such registration statement under the Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holder (provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions, unless the Company is already subject to
service in such jurisdiction and except as may be required by the Securities
Act), (iv) cause all securities registered pursuant hereunder to be listed on
each securities exchange on which similar securities issued by the Company are
then listed, and (v) file updates to such registration statement as necessary to
keep it effective until the date that all remaining such shares may be sold to
the public without registration within a period of 90 days; PROVIDED THAT, the
Company may suspend such registration for up to two periods of not more than 90
days each in any 12-month period if necessary (x) to enable the Company to
update the registration statement or (y) to undertake another sale of
securities.
(b) All Registration Expenses (as hereafter defined) incurred in
connection with any registration pursuant to this Section 5 shall be borne by
the Company. "Registration Expenses" shall mean all expenses incurred by the
Company in complying with this Section 5, including, without limitation, all
registration, qualification and filing fees, printing expenses, fees and
disbursements of counsel for the Company, the reasonable cost of one special
legal counsel to represent Holder in any such registration, and blue sky fees
and expenses. "Registration Expenses" shall not include (if applicable) any
underwriting discounts or selling commissions.
(c) INDEMNIFICATION.
(i) The Company will indemnify the Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this
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<PAGE>
Section 5, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or
based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, preliminary
prospectus, offering circular or other document, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading, or any violation or any alleged violation by the Company of
any rule or regulation promulgated under the Securities Act or the Exchange
Act or any state securities law applicable to the Company in connection with
any such registration, qualification or compliance, and the Company will
reimburse each such Holder, each of its officers and directors, and each
person controlling such Holder, for any legal and any other expenses
reasonably incurred in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, as such expenses are
incurred, provided that the Company will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder or controlling person and stated to be specifically for use therein.
(ii) The Holder will indemnify the Company, each of its directors and
officers, and each person who controls the Company within the meaning of
Section 15 of the Securities Act against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such directors, officers or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, as such expenses are incurred, in each case to the extent, but only to
the extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by an instrument duly executed by
such Holder and stated to be specifically for use therein.
6. REPRESENTATIONS AND WARRANTIES OF HOLDER. By its acceptance hereof, Holder
represents and warrants to Company that:
(a) Holder has been advised that this Note and the Common Stock of the
Company issuable upon conversion of the Note (with the Note and such Common
Stock being hereinafter collectively referred to as the "Securities") have not
been registered under the Securities Act, or any state securities laws and,
therefore, cannot be resold unless such Securities are registered under the
Securities Act and applicable state securities laws or unless an exemption from
such registration requirements is available. Holder has not been formed solely
for the purpose of making this investment and is acquiring the Securities for
its own account for investment, not as a nominee or agent, and not with a view
to, or for resale in connection with, the distribution thereof. Holder has such
knowledge and experience in
-5-
<PAGE>
financial and business matters that such Holder is capable of evaluating the
merits and risks of such investment, is able to incur a complete loss of such
investment and is able to bear the economic risk of such investment for an
indefinite period of time.
(b) Holder acknowledges that Company has given Holder access to all
documents and other information required for Holder to make an informed decision
with respect to the acceptance of the Securities. In this regard, Holder
acknowledges that it has received and reviewed, among other things, the
following documents filed by the Company with the Securities and Exchange
Commission: (i) the Company's Quarterly Report on Form 10-QSB for the quarters
ended March 31, 1997 and June 30, 1997, (ii) the Company's Annual Report on Form
10-KSB for the year ended December 31, 1996, and (iii) the Proxy Statement
relating to the Company's 1997 Annual Meeting of Stockholders.
(c) At the time of both the offer and execution of the Note, the holder
was neither a United States citizen nor a person in the United States.
(d) During the term of the Note, the Holder does not intend to sell any
of the Company Common Stock issuable upon conversion of the Note to any
United States citizen or person in the United States.
7. ATTORNEYS' FEES. If the indebtedness represented by this Note or any part
thereof is collected in bankruptcy, receivership or other judicial proceedings
or if this Note is placed in the hands of attorneys for collection after
default, Company agrees to pay, in addition to the principal and interest
payable hereunder, reasonable attorneys' fees and costs incurred by Holder.
8. NOTICES. Except as otherwise provided herein, all notices, requests,
demands, consents, instructions or other communications to or upon the Company
or Holder hereunder shall be by telecopy or in writing and telecopied, mailed or
delivered to each party at telecopier number or its address set forth below (or
to such other telecopy number or address as the recipient of any notice shall
have notified the other in writing). All such notices and communications shall
be effective (a) when sent by Federal Express or other overnight service of
recognized standing, on the business day following the deposit with such service
(if sent to an address in the same country as the sender) or on the third
business day following the deposit with such service (if sent to an address in a
different country from the sender); (b) when mailed, by registered or certified
mail, first class postage prepaid and addressed as aforesaid through the United
States Postal Service, upon receipt; (c) when delivered by hand, upon delivery;
and (d) when telecopied, upon confirmation of receipt.
HOLDER: _________________________________
_________________________________
_________________________________
COMPANY: Socket Communications, Inc.
37400 Central Court
Newark, CA 94560
Attention: Chief Financial Officer
(415) 744-2700 (telephone)
(415) 744-2727 (telecopy)
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<PAGE>
9. ACCELERATION. This Note shall become immediately due and payable (a) upon
an Event of Default, (b) if the Company commences any proceeding in bankruptcy
or for dissolution, liquidation, winding-up, composition or other relief under
state or federal bankruptcy laws, or (c) if such proceedings are commenced
against the Company, or a receiver or trustee is appointed for the Company or a
substantial part of its property, and such proceeding or appointment is not
dismissed or discharged within 60 days after its commencement.
10. WAIVERS. Company hereby waives presentment, demand for performance, notice
of non-performance, protest, notice of protest and notice of dishonor. No delay
on the part of Holder in exercising any right hereunder shall operate as a
waiver of such right or any other right.
11. PAYMENT. Payment shall be made in lawful tender of the United States.
12. USURY. In the event any interest is paid on this Note which is deemed
to be in excess of the then legal maximum rate, then that portion of the
interest payment representing an amount in excess of the then legal maximum rate
shall be deemed a payment of principal and applied against the principal of this
Note.
13. GOVERNING LAW. This Note and all actions arising out of or in connection
with this Note shall be governed by and construed in accordance with the laws of
the State of California, without regard to the conflicts of law provisions of
the State of California or of any other state or country.
14. SUCCESSORS AND ASSIGNS.
(a) The rights and obligations of the Company and the Holder of this Note
shall be binding upon and benefit the successors, assigns, heirs, administrators
and transferees of the parties.
(b) Holder shall not transfer this Note without the prior written consent
of Company, except that Holder may transfer the Note without such prior written
consent to a collection agency following an Event of Default.
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<PAGE>
(c) Neither this Note nor any of the rights, interests or obligations
hereunder may be assigned, by operation of law or otherwise, in whole or in
part, by Company without the prior written consent of the Holder except in
connection with an assignment in whole to a successor corporation to Company,
provided that such successor corporation acquires all or substantially all of
Company's property and assets and Holder's rights hereunder are not impaired.
SOCKET COMMUNICATIONS, INC.
Signature:
----------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
Agreed and accepted:
HOLDER
Signature:
-----------------------------
Name:
----------------------------------
Title:
---------------------------------
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<PAGE>
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A
VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE SECURITIES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND
QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES, AN
OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL FOR THE COMPANY, THAT
SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
SOCKET COMMUNICATIONS, INC.
AMENDED AND RESTATED
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
Newark, California
$______ February 14, 1997
SOCKET COMMUNICATIONS, INC., a Delaware corporation (the "Company"), for
value received, hereby promises to pay to the order of ______ or holder
("Holder") in lawful money of the United States at the address of Holder set
forth below, the principal amount of $______, together with simple interest
at the rate of eight percent (8%) per annum (calculated on the basis of
actual days elapsed and a year of 365 days). Accrued interest shall be
payable in cash only at the time the Company pays any portion of the
principal amount of this Note. If this Note is converted pursuant to Section
4 hereof, accrued interest may be converted as set forth therein; any accrued
interest that is not so converted shall be payable in cash.
This Note was originally executed on February 14, 1997. This Note was
amended and restated as of August 14, 1997 to, among other things, extend the
Maturity Date (as defined in Section 1(a) hereof) (which amendment and
restatement shall not be effective until the execution of that certain Agreement
and Option to Invest by and between the Company and Holder). The following is a
statement of the rights of Holder and the conditions to which this Note is
subject, and to which the Holder hereof, by the acceptance of this Note, agrees.
1. PAYMENTS; PREPAYMENTS.
(a) All principal, interest and other amounts due hereunder shall be
due and payable on the earlier of (i) August 14, 1998 (the "Maturity Date") and
(ii) the day on which this Note becomes immediately due and payable pursuant to
Section 10 hereof.
(b) This Note may be prepaid, in whole or in part, from time to time
ten (10) business days after Holder receives written notice of such prepayment
from the Company; Holder shall then have
<PAGE>
until the end of such ten (10) business day period to notify the Company in
writing that it wishes to convert all or part of the outstanding principal
and accrued interest under this Note into Common Stock pursuant to Section 4
below. Prepayments shall be (i) reduced by any amounts that Holder desires
to so convert into Common Stock and then (ii) applied first to outstanding
interest, and then to principal.
(c) Upon payment in full of all principal and interest payable
hereunder, this Note shall be surrendered to Company for cancellation.
2. SUBORDINATION
(a) "Senior Indebtedness" means (A) the principal of and premium, if
any, and interest on indebtedness of the Company incurred pursuant to the
Promissory Note and Loan Agreement, each dated as of July 5, 1995, between the
Company and CivicBank of Commerce; and (B) all present and future indebtedness,
obligations, liabilities, claims, rights and demands of any kind which may be
now or hereafter owing from the Company to World Trade in connection with that
certain Note in the amount of $500,000 (or such lesser amount as the Company and
World Trade may finally agree) issued by the Company in favor of World Trade and
a related Commercial Security Agreement and Commercial Pledge Agreement between
the Company and World Trade, including, without limitation, all principal, all
interest, all costs and attorneys' fees, all sums paid for the purpose of
protecting World Trade's rights in security (such as paying for insurance on
collateral if the owner fails to do so), and all other obligations of the
Company to World Trade, secured or unsecured, of any nature whatsoever. The
Company agrees and the holder of this Note, by acceptance thereof, agrees,
expressly for the benefit of the holder of the Senior Indebtedness, that, except
as otherwise provided herein, upon (i) an event of default under the Senior
Indebtedness, or (ii) any dissolution, winding up, or liquidation of the
Company, whether or not in bankruptcy, insolvency or receivership proceedings,
the Company shall not pay, and the holder of such Note shall not be entitled to
receive, any amount in respect of the principal and interest of such Note unless
and until the Senior Indebtedness shall have been paid or otherwise discharged.
Upon (1) an event of default under the Senior Indebtedness, or (2) any
dissolution, winding up or liquidation of the Company, any payment or
distribution of assets of the Company, which the holder of this Note would be
entitled to receive but for the provisions hereof, shall be paid by the
liquidating trustee or agent or other person making such payment or distribution
directly to the holders of the Senior Indebtedness ratably according to the
aggregate amounts remaining unpaid on the Senior Indebtedness after giving
effect to any concurrent payment or distribution to the holders of the Senior
Indebtedness. Subject to the payment in full of the Senior Indebtedness and
until this Note is paid in full, the holder of this Note shall be subrogated to
the rights of the holders of the Senior Indebtedness (to the extent of payments
or distributions previously made to the holders of the Senior Indebtedness
pursuant to this Section 2(a)) to receive payments or distributions of assets of
the Company applicable to the Senior Indebtedness.
(b) This Section 2 is not intended to impair, as between the Company,
its creditors (other than the holders of the Senior Indebtedness) and the holder
of this Note, the unconditional and absolute obligation of the Company to pay
the principal of and interest on the Note or affect the relative rights of the
holder of this Note and the other creditors of the Company, other than the
holders of the Senior Indebtedness. Nothing in this Note shall prevent the
holder of this Note from exercising all
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<PAGE>
remedies otherwise permitted by applicable law upon default under the Note,
subject to the rights, if any, of the holders of the Senior Indebtedness in
respect to cash, property or securities of the Company received upon the
exercise of any such remedy.
(b) This Section 2 is not intended to impair, as between the Company,
its creditors (other than the holder of the Senior Indebtedness) and the holder
of this Note, the unconditional and absolute obligation of the Company to pay
the principal of and interest on the Note or affect the relative rights of the
holder of this Note and the other creditors of the Company, other than the
holder of the Senior Indebtedness. Nothing in this Note shall prevent the
holder of this Note from exercising all remedies otherwise permitted by
applicable law upon default under the Note, subject to the rights, if any, of
the holder of the Senior Indebtedness in respect to cash, property or securities
of the Company received upon the exercise of any such remedy.
3. EVENTS OF DEFAULT. The Company's failure to pay (i) when due any
principal payment on the due date hereunder or (ii) any interest or other
payment required under the terms of this Note on the date due, and failure to
make such payment within five (5) business days of Company's receipt of Holder's
written notice to Company of such failure to pay, shall constitute an Event of
Default.
4. CONVERSION.
(a) In lieu of receiving cash payment for principal amounts and
accrued interest due under this Note, Holder shall have the right to convert
outstanding principal and accrued interest under this Note into Common Stock of
the Company at a conversion price per share equal to $0.50 (the "Conversion
Price") at any time on or prior to the Maturity Date, subject to the provisions
of Section 2 of that certain Agreement and Option to Invest of even date
herewith between the Company and Holder.
(b) In addition to the conversion right provided in Section 4(a)
above, upon an Event of Default, in lieu of receiving cash payment for principal
amounts and accrued interest due under this Note, Holder shall have the right to
convert outstanding principal and accrued interest under this Note into Common
Stock of the Company at a conversion price per share equal to the lower of (i)
the Conversion Price or (ii) 75% of the average closing price of the Company's
Common Stock on the OTC Bulletin Board or Nasdaq SmallCap Market, as applicable,
for the five (5) business days prior to the date of the Event of Default.
(c) Holder may exercise its conversion right by providing written
notice to the Company of Holder's intention to exercise its conversion right and
the amount of principal and accrued interest that it wishes to convert (the
"Conversion Amount") at least ten (10) days prior to the date on which it wishes
to convert (the "Conversion Date") (unless such notice is given pursuant to the
terms of Section 1(b) above, in which event notice shall comply with the terms
thereof). No fractional shares of Common Stock shall be issued upon conversion
of this Note. Promptly after the conversion of this Note, the Holder shall
surrender this Note, duly endorsed, at the principal office of Company. At its
expense, Company shall, as soon as practicable thereafter (or as otherwise noted
in the provisions above), issue and deliver to such Holder at such principal
office a certificate or certificates for the number of shares of such Common
Stock to which the Holder shall be entitled upon such conversion
-3-
<PAGE>
(bearing such legends as are required by applicable state and federal
securities laws in the opinion of counsel to Company). In addition, unless
this Note has been fully converted, a new Note representing the principal
amount that shall not have been converted into Common Stock shall also be
issued to Holder as soon as possible thereafter. Upon conversion of this
Note in full, Company shall be forever released from all its obligations and
liabilities under this Note including principal, interest and any other
amounts due and owing pursuant hereto. Any notice from the Holder of an
election to convert by the Company shall be irrevocable.
(d) If at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of the entire
outstanding principal amount and accrued interest under this Note, Company will
use its best efforts to take such corporate action as may be necessary, in the
opinion of its counsel, to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes.
5. REGISTRATION RIGHT.
(a) Following the Maturity Date, and within a reasonable amount of
time following the conversion by Holder of any outstanding principal and accrued
interest under this Note into Common Stock of the Company, the Company will use
reasonable efforts to (i) file a registration statement under the Securities Act
of 1933, as amended (the "Securities Act") registering such shares for resale to
the public, (ii) have such registration statement declared effective by the
Securities and Exchange Commission, (iii) register and qualify the securities
covered by such registration statement under the Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holder (provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions, unless the Company is already subject to
service in such jurisdiction and except as may be required by the Securities
Act), (iv) cause all securities registered pursuant hereunder to be listed on
each securities exchange on which similar securities issued by the Company are
then listed, and (v) file updates to such registration statement as necessary to
keep it effective until the date that all remaining such shares may be sold to
the public without registration within a period of 90 days; PROVIDED THAT, the
Company may suspend such registration for up to two periods of not more than 90
days each in any 12-month period if necessary (x) to enable the Company to
update the registration statement or (y) to undertake another sale of
securities.
(b) All Registration Expenses (as hereafter defined) incurred in
connection with any registration pursuant to this Section 5 shall be borne by
the Company. "Registration Expenses" shall mean all expenses incurred by the
Company in complying with this Section 5, including, without limitation, all
registration, qualification and filing fees, printing expenses, fees and
disbursements of counsel for the Company, the reasonable cost of one special
legal counsel to represent Holder in any such registration, and blue sky fees
and expenses. "Registration Expenses" shall not include (if applicable) any
underwriting discounts or selling commissions.
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<PAGE>
(c) INDEMNIFICATION.
(i) The Company will indemnify the Holder, each of its
officers and directors and partners, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 5, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, preliminary prospectus,
offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance, or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or any violation or any
alleged violation by the Company of any rule or regulation promulgated under the
Securities Act or the Exchange Act or any state securities law applicable to the
Company in connection with any such registration, qualification or compliance,
and the Company will reimburse each such Holder, each of its officers and
directors, and each person controlling such Holder, for any legal and any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, as such expenses
are incurred, provided that the Company will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out of
or is based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder or
controlling person and stated to be specifically for use therein.
(ii) The Holder will indemnify the Company, each of its
directors and officers, and each person who controls the Company within the
meaning of Section 15 of the Securities Act against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such directors, officers or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, as such expenses are incurred, in each case to the extent, but only to
the extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by an instrument duly executed by
such Holder and stated to be specifically for use therein.
6. RIGHT OF PARTICIPATION. Upon the first (and only the first) offering
(or series of related offerings in any 90-day period) by the Company subsequent
to the date hereof of any shares of, or securities convertible into or
exercisable for any shares of, any class of its capital stock ("Securities"),
the Company shall offer to the Holder and each of its affiliates that holds a
Subordinated Convertible Promissory Note issued by the Company (collectively,
the "Affiliated Holders") the option to purchase
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<PAGE>
up to an aggregate of $2,000,000 worth of the offered Securities not to
exceed 50% of the offering (the "Affiliated Holder Maximum"), in accordance
with the following provisions:
(a) The Company shall deliver a notice to the Holder stating (i) its
bona fide intention to offer such Securities, (ii) the number of such Securities
to be offered, (iii) the price, if any, for which it proposes to offer such
Securities, and (iv) the terms of such offer. The Holder will distribute this
notice to the other Affiliated Holders, and the Affiliated Holders will
apportion the Affiliated Holder Maximum amongst themselves as they see fit.
(b) Within fifteen (15) calendar days after receipt of the Notice,
the Holder will notify the Company of the portion of the Affiliated Holder
Maximum that the Affiliated Holders wish to purchase, along with a detailed list
of the apportionment of such Affiliated Holder Maximum amongst the Affiliated
Holders.
(c) The right of participation in this Section 6 shall not be
applicable (i) to the issuance or sale of shares of capital stock (or options
therefor) to employees, officers, directors or consultants for the primary
purpose of soliciting or retaining their services, (ii) to the issuance or sale
of the Company's securities to leasing entities or financial institutions in
connection with commercial leasing or borrowing transactions, or (iii) to
conversions of convertible securities.
7. REPRESENTATIONS AND WARRANTIES OF HOLDER. By its acceptance hereof,
Holder represents and warrants to Company that:
(a) Holder has been advised and acknowledges: (i) that this Note and
the Common Stock of the Company issuable upon conversion of the Note (with the
Note and such Common Stock being hereinafter referred to as the "Securities")
have not been, and when issued, will not be registered under the Securities Act,
the securities laws of any state of the United States or the securities laws of
any other country; (ii) that in issuing and selling the Securities to Holder
pursuant hereto, the Company is relying upon the "safe harbor" provided by
Regulation S and/or on Section 4(2) under the Securities Act; (iii) that it is a
condition to the availability of the Regulation S safe harbor that the
Securities not be offered or sold in the United States or to a U.S. Person until
the expiration of a period of 40 days following the issuance of such Securities;
(iv) that, notwithstanding the foregoing, prior to the expiration of 40 days
after the issuance of such Securities (the "Restricted Period"), the Securities
may be offered and sold by the holder thereof solely either: (A) if the offer
or sale is within the United States or to or for the account of a U.S. Person
(as such terms are defined in Regulation S), the securities are offered and sold
pursuant to an effective registration statement or pursuant to Rule 144 under
the Securities Act or pursuant to an exemption from the registration
requirements of the Securities Act; or (B) the offer and sale is outside the
United States and to other than a U.S. Person. The foregoing restrictions are
binding upon subsequent transferees of the Securities, except for transferees
pursuant to an effective registration statement. After the Restricted Period,
the Securities may be offered or sold within the United States or to or for the
account of a U.S. Person only pursuant to applicable securities laws.
(b) As used herein, the term "United States" means and includes the
United States of America, its territories and possessions, any State of the
United States, and the District of Columbia,
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<PAGE>
and the term "U.S. Person" (as defined in Regulation S) means: (i) a natural
person (regardless of citizenship) resident in the United States; (ii) any
partnership or corporation organized or incorporated under the laws of the
United States; (iii) any estate or trust of which any executor, administrator
or trustee is a U.S. Person; (iv) any agency or branch of a foreign entity
located in the United States; (v) any nondiscretionary account or similar
account (other than an estate or trust) held by a dealer or other fiduciary
for the benefit or account of a U.S. Person (whether or not the dealer or
other fiduciary is a U.S. Person); (vi) any discretionary account or similar
account (other than an estate or trust) held by a dealer or other fiduciary
organized, incorporated and (if an individual) resident in the United States;
and (vii) a corporation or partnership organized under the laws of any
jurisdiction other than the United States by a U.S. Person principally for
the purpose of investing in securities that have not been registered under
the Securities Act, unless organized or incorporated and owned entirely by
accredited investors (as defined in Rule 501(a) under the Securities Act) who
are not natural persons, estates or trusts.
(c) Holder agrees that with respect to the Securities until the
expiration of the Restricted Period: (i) Holder, its agents or representatives
have not and will not solicit offers to buy, offer for sale or sell any of the
Securities, or any beneficial interest therein in the United States or to or for
the account of a U.S. Person during the Restricted Period; and (ii) that,
notwithstanding the foregoing, prior to the expiration of the Restricted Period,
the Securities may be offered and sold by the holder thereof either: (A) if the
offer or sale is within the United States or to or for the account of a U.S.
Person (as such terms are defined in Regulation S), the securities are offered
and sold pursuant to an effective registration statement or pursuant to Rule 144
under the Securities Act or pursuant to an exemption from the registration
requirements of the Securities Act; or (B) the offer and sale is outside the
United States and to other than a U.S. Person. The foregoing restrictions are
binding upon subsequent transferees of the Securities, except for transferees
pursuant to an effective registration statement. Holder agrees that after the
Restricted Period, the Securities may be offered or sold within the United
States or to or for the account of a U.S. Person only pursuant to applicable
securities laws.
(d) Holder has not engaged, nor is it aware that any party has
engaged, and Holder will not engage or cause any third party to engage in any
directed selling efforts (as such term is defined in Regulation S) in the United
States with respect to the Securities.
(e) Holder (i) is domiciled and has its principal place of business
outside the United States, (ii) certifies it is not a U.S. Person and is not
acquiring the securities for the account or benefit of any U.S. Person, and
(iii) any persons acting on Holder's behalf in connection therewith will be
located outside the United States.
(f) Holder is acquiring the Securities either: (i) for its own
account; or (ii) for the account and benefit of clients of whom none is a U.S.
Person and for whom Holder has, and for the entire Restricted Period will
continue to have, full investment discretion with respect to the purchase,
holding and disposition of the Securities.
(g) Holder is not a "distributor" (as defined in Regulation S) or a
"dealer" (as defined in the Securities Act).
-7-
<PAGE>
(h) By reason of Holder's business or financial experience, or that
of the Holder's professional advisor, Holder has the capacity to protect
Holder's own interests in connection with the acquisition of the Securities and
has the ability to bear the economic risk (including the risk of total loss) of
Holder's investment.
(i) Holder further covenants that Holder will not make any sale,
transfer or other disposition of the Securities in violation of the Securities
Act, the Securities and Exchange Act of 1934, as amended (the "Exchange Act"),
or the rules of the Securities and Exchange Commission promulgated under the
Securities Act or the Exchange Act.
(j) Holder covenants that Holder will sell, transfer or otherwise
dispose of the Securities only in a manner consistent with such Holder's
representations and covenants set forth in this Section 7. In connection
therewith, Holder acknowledges that, upon issuance of the shares of Common Stock
of the Company upon conversion of this Note, the Company shall make a notation
in its stock books regarding the restrictions on transfer set forth in this
Section 7 and shall transfer such shares on the books of the Company only to the
extent not inconsistent therewith.
(k) Holder acknowledges that Company has given Holder access to all
documents and other information required for Holder to make an informed decision
with respect to the acceptance of the Securities. In this regard, Holder
acknowledges that it has received and reviewed, among other things, the
following documents filed by the Company with the Securities and Exchange
Commission: (i) the Company's Quarterly Report on Form 10-QSB for the quarters
ended March 31, 1997 and June 30, 1997 and (ii) the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996.
8. ATTORNEYS' FEES. If the indebtedness represented by this Note or any
part thereof is collected in bankruptcy, receivership or other judicial
proceedings or if this Note is placed in the hands of attorneys for collection
after default, Company agrees to pay, in addition to the principal and interest
payable hereunder, reasonable attorneys' fees and costs incurred by Holder.
9. NOTICES. Except as otherwise provided herein, all notices, requests,
demands, consents, instructions or other communications to or upon the Company
or Holder hereunder shall be by telecopy or in writing and telecopied, mailed or
delivered to each party at telecopier number or its address set forth below (or
to such other telecopy number or address as the recipient of any notice shall
have notified the other in writing). All such notices and communications shall
be effective (a) when sent by Federal Express or other overnight service of
recognized standing, on the business day following the deposit with such service
(if sent to an address in the same country as the sender) or on the third
business day following the deposit with such service (if sent to an address in a
different country from the sender); (b) when mailed, by registered or certified
mail, first class postage prepaid and addressed as aforesaid through the United
States Postal Service, upon receipt; (c) when delivered by hand, upon delivery;
and (d) when telecopied, upon confirmation of receipt.
-8-
<PAGE>
HOLDER: __________________________
__________________________
__________________________
__________________________
COMPANY: Socket Communications, Inc.
37400 Central Court
Newark, CA 94560
Attention: Chief Financial Officer
(415) 744-2700 (telephone)
(415) 744-2727 (telecopy)
10. ACCELERATION. This Note shall become immediately due and payable (a)
upon an Event of Default, (b) if the Company commences any proceeding in
bankruptcy or for dissolution, liquidation, winding-up, composition or other
relief under state or federal bankruptcy laws, or (c) if such proceedings are
commenced against the Company, or a receiver or trustee is appointed for the
Company or a substantial part of its property, and such proceeding or
appointment is not dismissed or discharged within 60 days after its
commencement.
11. WAIVERS. Company hereby waives presentment, demand for performance,
notice of non-performance, protest, notice of protest and notice of dishonor.
No delay on the part of Holder in exercising any right hereunder shall operate
as a waiver of such right or any other right.
12. PAYMENT. Payment shall be made in lawful tender of the United States.
13. USURY. In the event any interest is paid on this Note which is deemed
to be in excess of the then legal maximum rate, then that portion of the
interest payment representing an amount in excess of the then legal maximum rate
shall be deemed a payment of principal and applied against the principal of this
Note.
14. GOVERNING LAW. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state or country.
15. SUCCESSORS AND ASSIGNS.
(a) The rights and obligations of the Company and the Holder of this
Note shall be binding upon and benefit the successors, assigns, heirs,
administrators and transferees of the parties.
(b) Holder shall not transfer this Note without the prior written
consent of Company, except that Holder may transfer the Note without such prior
written consent to a collection agency following an Event of Default.
-9-
<PAGE>
(c) Neither this Note nor any of the rights, interests or obligations
hereunder may be assigned, by operation of law or otherwise, in whole or in
part, by Company without the prior written consent of the Holder except in
connection with an assignment in whole to a successor corporation to Company,
provided that such successor corporation acquires all or substantially all of
Company's property and assets and Holder's rights hereunder are not impaired.
SOCKET COMMUNICATIONS, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Agreed and Accepted:
HOLDER
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
-10-
<PAGE>
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH
A VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE
SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRA-TION AND QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC
LIMITED CIRCUMSTANCES, AN OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY
COUNSEL FOR THE COMPANY, THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT
REQUIRED.
SOCKET COMMUNICATIONS, INC.
AMENDED AND RESTATED
SUBORDINATED SECURED CONVERTIBLE PROMISSORY NOTE
Newark, California
$500,000 January 29, 1997
SOCKET COMMUNICATIONS, INC., a Delaware corporation (the "Company"), for
value received, hereby promises to pay to the order of Cetronic Aktiebolag
[Publ] or holder ("Holder") in lawful money of the United States at the
address of Holder set forth below, the principal amount of Five Hundred
Thousand Dollars ($500,000), together with simple interest at the rate of
eight percent (8%) per annum (calculated on the basis of actual days elapsed
and a year of 365 days). Subject to the following sentence, accrued interest
shall be payable in cash only at the time the Company pays any portion of the
principal amount of this Note. If this Note is converted pursuant to Section
4 hereof, accrued interest may be converted as set forth therein; any accrued
interest that is not so converted shall be payable in cash.
This Note was originally executed on January 29, 1997. Subsequently,
this Note was amended by that certain First Amendment hereto dated as of July
29, 1997 to extend the maturity date of this Note to December 12, 1997, and
this Note was further amended by that certain Second Amendment hereto dated
as of September 15, 1997 to subordinate the indebtedness of the Company to
Holder under this Note to the indebtedness of the Company to World Trade
Finance, Inc. This Note is now further amended on November 24, 1997 to amend
the Maturity Date (as defined in Section 1(a) hereof) to December 12, 1998
and to restate this Note so that it reads in full as set forth herein.
The following is a statement of the rights of Holder and the conditions
to which this Note is subject, and to which the Holder hereof, by the
acceptance of this Note, agrees. THE OBLIGATIONS DUE UNDER THIS NOTE ARE
SECURED BY A SECURITY AGREEMENT (THE "SECURITY AGREEMENT") DATED AS OF
JANUARY 29, 1997 AND EXECUTED BY COMPANY IN FAVOR OF HOLDER. ADDITIONAL
RIGHTS OF HOLDER ARE SET FORTH IN THE SECURITY AGREEMENT.
<PAGE>
1. PAYMENTS; PREPAYMENTS.
(a) All principal, interest and other amounts due hereunder shall be
due and payable on the earlier of (i) December 12, 1998 (the "Maturity Date")
and (ii) the day on which this Note becomes immediately due and payable
pursuant to Section 10 hereof.
(b) This Note may be prepaid, in whole or in part, from time to time
ten (10) business days after Holder receives written notice of such
prepayment from the Company; Holder shall then have until the end of such ten
(10) business day period to notify the Company in writing that it wishes to
convert all or part of the outstanding principal and accrued interest under
this Note into Common Stock pursuant to Section 4 below. Prepayments shall
be (i) reduced by any amounts that Holder desires to so convert into Common
Stock and then (ii) applied first to outstanding interest, and then to
principal.
(c) Upon payment in full of all principal and interest payable
hereunder, this Note shall be surrendered to Company for cancellation.
2. SUBORDINATION
(a) "Senior Indebtedness" means (A) the principal of and premium, if
any, and interest on indebtedness of the Company incurred pursuant to the
Promissory Note and Loan Agreement, each dated as of July 5, 1995, between
the Company and CivicBank of Commerce; and (B) all present and future
indebtedness, obligations, liabilities, claims, rights and demands of any
kind which may be now or hereafter owing from the Company to World Trade in
connection with that certain Note in the amount of $500,000 (or such lesser
amount as the Company and World Trade may finally agree) issued by the
Company in favor of World Trade and a related Commercial Security Agreement
and Commercial Pledge Agreement between the Company and World Trade,
including, without limitation, all principal, all interest, all costs and
attorneys' fees, all sums paid for the purpose of protecting World Trade's
rights in security (such as paying for insurance on collateral if the owner
fails to do so), and all other obligations of the Company to World Trade,
secured or unsecured, of any nature whatsoever. The Company agrees and the
holder of this Note, by acceptance thereof, agrees, expressly for the benefit
of the holder of the Senior Indebtedness, that, except as otherwise provided
herein, upon (i) an event of default under the Senior Indebtedness, or (ii)
any dissolution, winding up, or liquidation of the Company, whether or not in
bankruptcy, insolvency or receivership proceedings, the Company shall not
pay, and the holder of such Note shall not be entitled to receive, any amount
in respect of the principal and interest of such Note unless and until the
Senior Indebtedness shall have been paid or otherwise discharged. Upon (1)
an event of default under the Senior Indebtedness, or (2) any dissolution,
winding up or liquidation of the Company, any payment or distribution of
assets of the Company, which the holder of this Note would be entitled to
receive but for the pro-visions hereof, shall be paid by the liquidating
trustee or agent or other person making such payment or distribution directly
to the holders of the Senior Indebtedness ratably according to the aggregate
amounts remaining unpaid on the Senior Indebtedness after giving effect to
any concurrent payment or distribution to the holders of the Senior
Indebtedness. Subject to the payment in full of the Senior Indebtedness and
until this Note is paid in full, the holder of this Note shall be subrogated
to the rights of the holders of the Senior Indebtedness (to the extent of
payments or distributions previously made to the holders of the Senior
Indebtedness
-2-
<PAGE>
pursuant to this Section 2(a)) to receive payments or distributions of assets
of the Company applicable to the Senior Indebtedness.
(b) This Section 2 is not intended to impair, as between the Company,
its creditors (other than the holders of the Senior Indebtedness) and the
holder of this Note, the unconditional and absolute obligation of the Company
to pay the principal of and interest on the Note or affect the relative
rights of the holder of this Note and the other creditors of the Company,
other than the holders of the Senior Indebtedness. Nothing in this Note
shall prevent the holder of this Note from exercising all remedies otherwise
permitted by applicable law upon default under the Note, subject to the
rights, if any, of the holders of the Senior Indebtedness in respect to cash,
property or securities of the Company received upon the exercise of any such
remedy.
3. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Note:
(a) The Company's failure to pay (i) when due any principal payment on
the due date hereunder or (ii) any interest or other payment required under
the terms of this Note on the date due, and failure to make such payment
within five (5) business days of Company's receipt of Holder's written notice
to Company of such failure to pay;
(b) Any representation or warranty made by the Company in Section 3 of
the Security Agreement shall be false, incorrect or misleading in any
material respect when made; or
(c) The Company shall fail to perform any covenant set forth in Section
4 of the Security Agreement.
4. CONVERSION.
(a) In lieu of receiving cash payment for principal amounts and accrued
interest due under this Note, Holder shall have the right to convert
outstanding principal and accrued interest under this Note into Common Stock
of the Company at a conversion price per share equal to $1.00 (the
"Conversion Price") at any time on or prior to the Maturity Date.
(b) In addition to the conversion right provided in Section 4(a) above,
upon an Event of Default, in lieu of receiving cash payment for principal
amounts and accrued interest due under this Note, Holder shall have the right
to convert outstanding principal and accrued interest under this Note into
Common Stock of the Company at a conversion price per share equal to the
lower of (i) the Conversion Price or (ii) 65% of the average closing price of
the Company's Common Stock on the OTC Bulletin Board or Nasdaq SmallCap
Market, as applicable, for the five (5) business days prior to the date of
the Event of Default.
(c) Holder may exercise its conversion right by providing written
notice to the Company of Holder's intention to exercise its conversion right
and the amount of principal and accrued interest that it wishes to convert
(the "Conversion Amount") at least ten (10) days prior to the date on which
it wishes
-3-
<PAGE>
to convert (the "Conversion Date") (unless such notice is given pursuant to
the terms of Section 1(b) above, in which event notice shall comply with the
terms thereof). No fractional shares of Common Stock shall be issued upon
conversion of this Note. Promptly after the conversion of this Note, the
Holder shall surrender this Note, duly endorsed, at the principal office of
Company. At its expense, Company shall, as soon as practicable thereafter
(or as otherwise noted in the provisions above), issue and deliver to such
Holder at such principal office a certificate or certificates for the number
of shares of such Common Stock to which the Holder shall be entitled upon
such conversion (bearing such legends as are required by applicable state and
federal securities laws in the opinion of counsel to Company). In addition,
unless this Note has been fully converted, a new Note representing the
principal amount that shall not have been converted into Common Stock shall
also be issued to Holder as soon as possible thereafter. Upon conversion of
this Note in full, Company shall be forever released from all its obligations
and liabilities under this Note including principal, interest and any other
amounts due and owing pursuant hereto. Any notice from the Holder of an
election to convert by the Company shall be irrevocable.
(d) If at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of the entire
outstanding principal amount and accrued interest under this Note, Company
will use its best efforts to take such corporate action as may be necessary,
in the opinion of its counsel, to increase its authorized but unissued shares
of Common Stock to such number of shares as shall be sufficient for such
purposes.
5. REGISTRATION RIGHT.
(a) Following the Maturity Date, and within a reasonable amount of time
following the conversion by Holder of any outstanding principal and accrued
interest under this Note into Common Stock of the Company, the Company will
use reasonable efforts to (i) file a registration statement under the
Securities Act of 1933, as amended (the "Securities Act") registering such
shares for resale to the public, (ii) have such registration statement
declared effective by the Securities and Exchange Commission, (iii) register
and qualify the securities covered by such registration statement under the
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holder (provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions,
unless the Company is already subject to service in such jurisdiction and
except as may be required by the Securities Act), (iv) cause all securities
registered pursuant hereunder to be listed on each securities exchange on
which similar securities issued by the Company are then listed, and (v) file
updates to such registration statement as necessary to keep it effective
until the date that all remaining such shares may be sold to the public
without registration within a period of 90 days; PROVIDED THAT, the Company
may suspend such registration for up to two periods of not more than 90 days
each in any 12-month period if necessary (x) to enable the Company to update
the registration statement or (y) to undertake another sale of securities.
(b) All Registration Expenses (as hereafter defined) incurred in
connection with any registration pursuant to this Section 5 shall be borne by
the Company. "Registration Expenses" shall mean all expenses incurred by the
Company in complying with this Section 5, including, without limitation, all
registration, qualification and filing fees, printing expenses, fees and
disbursements of
-4-
<PAGE>
counsel for the Company, the reasonable cost of one special legal counsel to
represent Holder in any such registration, and blue sky fees and expenses.
"Registration Expenses" shall not include (if applicable) any underwriting
discounts or selling commissions.
(c) INDEMNIFICATION.
(i) The Company will indemnify the Holder, each of its officers
and directors and partners, and each person controlling such Holder within
the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 5, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or
based on any untrue statement (or alleged untrue statement) of a material
fact contained in any registration statement, prospectus, preliminary
prospectus, offering circular or other document, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading, or any violation or any alleged viola-tion by the Company of
any rule or regulation promulgated under the Securities Act or the Exchange
Act or any state securities law applicable to the Company in connection with
any such registration, qualification or compliance, and the Company will
reimburse each such Holder, each of its officers and directors, and each
person con-trolling such Holder, for any legal and any other expenses
reasonably incurred in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, as such expenses are
incurred, provided that the Company will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder or controlling person and stated to be specifically for use therein.
(ii) The Holder will indemnify the Company, each of its directors
and officers, and each person who controls the Company within the meaning of
Section 15 of the Securities Act against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained
in any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company, such directors,
officers or control persons for any legal or any other expenses reasonably
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, as such expenses are incurred, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Holder and stated to be
specifically for use therein.
6. RIGHT OF PARTICIPATION. Upon the first (and only the first) offering
(or series of related offerings in any 90-day period) by the Company
subsequent to the date hereof of any shares of, or securities
-5-
<PAGE>
convertible into or exercisable for any shares of, any class of its capital
stock ("Securities"), the Company shall offer to the Holder and each of its
affiliates that holds a Subordinated Convertible Promissory Note issued by
the Company (collectively, the "Affiliated Holders") the option to purchase
up to an aggregate of $2,000,000 worth of the offered Securities not to
exceed 50% of the offering (the "Affiliated Holder Maximum"), in accordance
with the following provisions:
(a) The Company shall deliver a notice to the Holder stating (i)
its bona fide intention to offer such Securities, (ii) the number of such
Securities to be offered, (iii) the price, if any, for which it proposes to
offer such Securities, and (iv) the terms of such offer. The Holder will
distribute this notice to the other Affiliated Holders, and the Affiliated
Holders will apportion the Affiliated Holder Maximum amongst themselves as
they see fit.
(b) Within fifteen (15) calendar days after receipt of the Notice,
the Holder will notify the Company of the portion of the Affiliated Holder
Maximum that the Affiliated Holders wish to purchase, along with a detailed
list of the apportionment of such Affiliated Holder Maximum amongst the
Affiliated Holders.
(c) The right of participation in this Section 6 shall not be
applicable (i) to the issuance or sale of shares of capital stock (or options
therefor) to employees, officers, directors or consultants for the primary
purpose of soliciting or retaining their services, (ii) to the issuance or
sale of the Company's securities to leasing entities or financial
institutions in connection with commercial leasing or borrowing transactions,
or (iii) to conversions of convertible securities.
7. REPRESENTATIONS AND WARRANTIES OF HOLDER. By its acceptance hereof,
Holder represents and warrants to Company that:
(a) Holder has been advised that this Note and the Common Stock of the
Company issuable upon conversion of the Note (with the Note and such Common
Stock being hereinafter collectively referred to as the "Securities") have
not been registered under the Securities Act, or any state securities laws
and, therefore, cannot be resold unless such Securities are registered under
the Securities Act and applicable state securities laws or unless an
exemption from such registration requirements is available. Holder has not
been formed solely for the purpose of making this investment and is acquiring
the Securities for its own account for investment, not as a nominee or agent,
and not with a view to, or for resale in connection with, the distribution
thereof. Holder has such knowledge and experience in financial and business
matters that such Holder is capable of evaluating the merits and risks of
such investment, is able to incur a complete loss of such investment and is
able to bear the economic risk of such investment for an indefinite period of
time.
(b) Holder acknowledges that Company has given Holder access to all
documents and other information required for Holder to make an informed
decision with respect to the acceptance of the Securities. In this regard,
Holder acknowledges that it has received and reviewed, among other things,
the following documents filed by the Company with the Securities and Exchange
Commission: (i) the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1996 and (ii) the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
-6-
<PAGE>
(c) At the time of both the offer and execution of the Note, the Holder
was neither a United States citizen nor a person in the United States.
(d) During the term of the Note, the Holder does not intend to sell any
of the Company Common Stock issuable upon conversion of the Note to any
United States citizen or person in the United States.
8. ATTORNEYS' FEES. If the indebtedness represented by this Note or any
part thereof is collected in bankruptcy, receivership or other judicial
proceedings or if this Note is placed in the hands of attorneys for
collection after default, Company agrees to pay, in addition to the principal
and interest payable hereunder, reasonable attorneys' fees and costs incurred
by Holder.
9. NOTICES. Except as otherwise provided herein, all notices, requests,
demands, consents, instructions or other communications to or upon the
Company or Holder hereunder shall be by telecopy or in writing and
telecopied, mailed or delivered to each party at telecopier number or its
address set forth below (or to such other telecopy number or address as the
recipient of any notice shall have notified the other in writing). All such
notices and communications shall be effective (a) when sent by Federal
Express or other overnight service of recognized standing, on the business
day following the deposit with such service (if sent to an address in the
same country as the sender) or on the third business day following the
deposit with such service (if sent to an address in a different country from
the sender); (b) when mailed, by registered or certified mail, first class
postage prepaid and addressed as aforesaid through the United States Postal
Service, upon receipt; (c) when delivered by hand, upon delivery; and (d)
when telecopied, upon confirmation of receipt.
HOLDER: Cetronic Aktiebolag [Publ]
Box 153, S-864
22 Matfors
SWEDEN
Attention: President
011-46-6067-1300 (telephone)
011-46-6067-1309 (telecopy)
COMPANY: Socket Communications, Inc.
37400 Central Court
Newark, CA 94560
Attention: Chief Financial Officer
(415) 744-2700 (telephone)
(415) 744-2727 (telecopy)
10. ACCELERATION. This Note shall become immediately due and payable (a)
upon an Event of Default, (b) if the Company commences any proceeding in
bankruptcy or for dissolution, liquidation, winding-up, composition or other
relief under state or federal bankruptcy laws, or (c) if such proceedings are
commenced against the Company, or a receiver or trustee is appointed for the
Company or a
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<PAGE>
substantial part of its property, and such proceeding or appointment is not
dismissed or discharged within 60 days after its commencement.
11. WAIVERS. Company hereby waives presentment, demand for performance,
notice of non-performance, protest, notice of protest and notice of dishonor.
No delay on the part of Holder in exercising any right hereunder shall
operate as a waiver of such right or any other right.
12. PAYMENT. Payment shall be made in lawful tender of the United States.
13. USURY. In the event any interest is paid on this Note which is
deemed to be in excess of the then legal maximum rate, then that portion of
the interest payment representing an amount in excess of the then legal
maximum rate shall be deemed a payment of principal and applied against the
principal of this Note.
14. GOVERNING LAW. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance
with the laws of the State of California, without regard to the conflicts of
law provisions of the State of California or of any other state or country.
15. SUCCESSORS AND ASSIGNS.
(a) The rights and obligations of the Company and the Holder of this
Note shall be binding upon and benefit the successors, assigns, heirs,
administrators and transferees of the parties.
(b) Holder shall not transfer this Note without the prior written
consent of Company, except that Holder may transfer the Note without such
prior written consent to a collection agency following an Event of Default.
[This space intentionally left blank.]
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<PAGE>
(c) Neither this Note nor any of the rights, interests or obligations
hereunder may be assigned, by operation of law or otherwise, in whole or in
part, by Company without the prior written consent of the Holder except in
connection with an assignment in whole to a successor corporation to Company,
provided that such successor corporation acquires all or substantially all of
Company's property and assets and Holder's rights hereunder and under the
Security Agreement are not impaired.
SOCKET COMMUNICATIONS, INC.
Signature: /s/ David W. Dunlap
--------------------------
Name: David W. Dunlap
-------------------------------
Title: Chief Financial Officer
------------------------------
Agreed and Accepted:
CETRONIC AKTIEBOLAG [PUBL]
Signature: /s/ Kurt Sjoblom
----------------------------
Name: Kurt Sjoblom
---------------------------------
Title: Director
--------------------------------
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<PAGE>
SECURITY AGREEMENT
This Security Agreement, dated as of January 29, 1997, is executed
by Socket Communications, Inc., a Delaware corporation ("DEBTOR"), in favor
of Cetronic AB ("SECURED PARTY").
RECITALS
A. Debtor and Secured Party have entered into a Subordinated Secured
Convertible Promissory Note (the "NOTE") dated the date hereof in favor of
Secured Party.
B. In order to induce Secured Party to extend the credit evidenced by
the Note, Debtor has agreed to enter into this Security Agreement and to
grant the security interest in the Collateral described below.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Debtor hereby agrees with Secured Party as follows:
1. DEFINITIONS AND INTERPRETATION. When used in this Security Agreement,
the following terms shall have the following respective meanings:
"COLLATERAL" shall have the meaning given to that term in Section 2
hereof.
"OBLIGATIONS" shall mean and include all loans, advances, debts,
liabilities and obligations, howsoever arising, owed by Debtor to
Secured Party of every kind and description (whether or not evidenced by
any note or instrument and whether or not for the payment of money), now
existing or hereafter arising under or pursuant to the terms of the Note
or this Security Agreement, including all interest, fees, charges,
expenses, attorneys' fees and costs chargeable to and payable by Debtor
hereunder and thereunder, in each case, whether direct or indirect,
absolute or contingent, due or to become due, and whether or not arising
after the commencement of a proceeding under Title 11 of the United
States Code (11 U.S.C. Section 101 ET SEQ.), as amended from time to
time (including post-petition interest) and whether or not allowed or
allowable as a claim in any such proceeding.
"UCC" shall mean the Uniform Commercial Code as in effect in the
State of California from time to time.
All capitalized terms not otherwise defined herein shall have the respective
meanings given in the Note. Unless otherwise defined herein, all terms
defined in the UCC shall have the respective meanings given to those terms in
the UCC.
<PAGE>
2. GRANT OF SECURITY INTEREST. As security for the Obligations,
Debtor hereby pledges and assigns to Secured Party and grants to Secured
Party security interest in all right, title and interests of Debtor in and to
the property described in EXHIBIT A hereto (collectively and severally, the
"COLLATERAL"), which EXHIBIT A is incorporated herein by this reference.
3. REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants to
Secured Party that (a) Debtor is the owner of the Collateral (or, in the case
of after-acquired Collateral, at the time Debtor acquires rights in the
Collateral, will be the owner thereof) and that no other Person has (or, in
the case of after-acquired Collateral, at the time Debtor acquires rights
therein, will have) any right, title, claim or interest (by way of Lien or
otherwise) in, against or to the Collateral superior to that of Secured
Party; (b) Secured Party has (or in the case of after-acquired Collateral, at
the time Debtor acquires rights therein, will have) a first priority
perfected security interest in the Collateral; and (c) all corporate action
on the part of the Company, its officers, directors and stockholders
necessary for the authorization, execution and delivery of this Security
Agreement and the Note and the performance of all obligations of the Company
hereunder and thereunder, and this Security Agreement and the Note constitute
valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, subject to: (i) judicial principles
limiting the availability of specific performance, injunctive relief, and
other equitable remedies; (ii) bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect generally
relating to or affecting creditors' rights; and (iii) limitations on the
enforceability of the indemnification provisions of the registration right
granted under the Note.
4. COVENANTS RELATING TO COLLATERAL. Debtor hereby agrees (a) to
perform all acts that may be necessary to maintain, preserve, protect and
perfect the Collateral; (b) not to change Debtor's name or place of business
or principal executive office without providing Secured Party with prior
written notice; and (c) to procure, execute and deliver from time to time any
endorsements, assignments, financing statements and other writings reasonably
deemed necessary or appropriate by Secured Party to perfect, maintain and
protect its Lien hereunder.
5. AUTHORIZED ACTION BY AGENT. Debtor hereby irrevocably appoints
Secured Party as its attorney-in-fact and agrees that, upon the occurrence
and during the continuance of an Event of Default (as defined in the Note),
Secured Party may perform any act which Debtor is obligated by this Security
Agreement to perform, and to exercise such rights and powers as Debtor might
exercise with respect to the Collateral.
6. DEFAULT AND REMEDIES. Debtor shall be deemed in default under this
Security Agreement upon the occurrence and during the continuance of an Event
of Default (as defined in the Note). Upon the occurrence and during the
continuance of any such Event of Default, Secured Party shall have (i) the
rights of a secured creditor under the UCC and applicable federal law, all
rights granted by this Security Agreement and by law and (ii) the option to
convert all outstanding principal and accrued interest under the Note into
Common Stock of the Debtor pursuant to Section 3 of the Note.
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<PAGE>
7. MISCELLANEOUS.
(a) NOTICES. Except as otherwise provided herein, all notices,
requests, demands, consents, instructions or other communications to or upon
Debtor or Secured Party under this Security Agreement shall be by telecopy or
in writing and telecopied, mailed or delivered to each party at telecopier
number or its address set forth below (or to such other telecopy number or
address as the recipient of any notice shall have notified the other in
writing). All such notices and communications shall be effective (a) when
sent by Federal Express or other overnight service of recognized standing, on
the business day following the deposit with such service (if sent to an
address in the same country as the sender) or on the third business day
following the deposit with such service (if sent to an address in a different
country from the sender); (b) when mailed, by registered or certified mail,
first class postage prepaid and addressed as aforesaid through the United
States Postal Service, upon receipt; (c) when delivered by hand, upon
delivery; and (d) when telecopied, upon confirmation of receipt.
SECURED PARTY: Cetronic AB
Box 153, S-864
22 Matfors
SWEDEN
Attention: President
011-46-6067-1300 (telephone)
011-46-6067-1309 (telecopy)
DEBTOR: Socket Communications, Inc.
37400 Central Court
Newark, CA 94560
Attention: Chief Financial Officer
(415) 744-2700 (telephone)
(415) 744-2727 (telecopy)
(b) NONWAIVER. No failure or delay on Secured Party's part in
exercising any right hereunder shall operate as a waiver thereof or of any
other right nor shall any single or partial exercise of any such right
preclude any other further exercise thereof or of any other right.
(c) AMENDMENTS AND WAIVERS. This Security Agreement may not be
amended or modified, nor may any of its terms be waived, except by written
instruments signed by Debtor and Secured Party. Each waiver or consent under
any provision hereof shall be effective only in the specific instances for
the purpose for which given.
(d) EXPENSES. Debtor shall pay on demand all reasonable fees and
expenses, including reasonable attorneys' fees and expenses, incurred by
Secured Party in connection with custody, preservation or sale of, or other
realization on, any of the Collateral or the enforcement or attempt to
enforce any of the Obligations which is not performed as and when required by
this Security Agreement.
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<PAGE>
(e) GOVERNING LAW. This Security Agreement shall be governed by and
construed in accordance with the laws of the State of California without
reference to conflicts of law rules (except to the extent governed by the UCC).
[This space left blank intentionally.]
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Security Agreement to
be executed as of the day and year first above written.
SOCKET COMMUNICATIONS, INC.,
as Debtor
Signature: /s/ David W. Dunlap
--------------------------
Name: David W. Dunlap
-------------------------------
Title: Chief Financial Officer
------------------------------
AGREED:
CETRONIC AB
as Secured Party
Signature: /s/ Kurt Sjoblom
----------------------------
Name: Kurt Sjoblom
---------------------------------
Title: Director
--------------------------------
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<PAGE>
EXHIBIT A
The following rights of Debtor set forth in the Radiocard Development,
Manufacturing and Distribution Agreement, dated October 1, 1996, between
Debtor and Cetronic AB (the "Radiocard Agreement)":
1. The Flex Receiver board design, as set forth in Section 2 of the
Radiocard Agreement.
2. One-half interest in the tooling used to manufacture Products to be used
by both Socket and Cetronic, as set forth in Section 3 of the Radiocard
Agreement.
3. The marketing and distribution rights (a) to the POCSAG/ERMES Product in
North America and (b) to the FLEX Product worldwide (except in Europe),
as set forth in Section 3 of the Radiocard Agreement.
4. All proceeds resulting from the sale or disposition of any of the
foregoing.
<PAGE>
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH A
VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE SECURITIES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND
QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED CIRCUMSTANCES, AN
OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL FOR THE COMPANY, THAT
SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
SOCKET COMMUNICATIONS, INC.
AMENDED AND RESTATED
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
Newark, California
$500,000 June 12, 1997
SOCKET COMMUNICATIONS, INC., a Delaware corporation (the "Company"), for
value received, hereby promises to pay to the order of Cetronic Aktiebolag
[Publ] or holder ("Holder") in lawful money of the United States at the address
of Holder set forth below, the principal amount of Five Hundred Thousand Dollars
($500,000), together with simple interest at the rate of eight percent (8%) per
annum (calculated on the basis of actual days elapsed and a year of 365 days).
Subject to the following sentence, accrued interest shall be payable in cash
only at the time the Company pays any portion of the principal amount of this
Note. If this Note is converted pursuant to Section 4 hereof, accrued interest
may be converted as set forth therein; any accrued interest that is not so
converted shall be payable in cash.
This Note was originally executed in connection with a Combination
Agreement dated as of June 12, 1997 by and between the Company and the Holder.
Subsequently, this Note was amended on September 15, 1997 to subordinate the
indebtedness of the Company to Holder under this Note to the indebtedness of the
Company to World Trade Finance, Inc. This Note is now further amended to extend
the Maturity Date and to reduce the Conversion Price (as defined in Section 4(a)
hereof) and is now restated and integrated in full as set forth herein.
The following is a statement of the rights of Holder and the conditions to
which this Note is subject, and to which the Holder hereof, by the acceptance of
this Note, agrees.
<PAGE>
1. PAYMENTS; PREPAYMENTS.
(a) Subject to the provisions of Section 1(c) hereof, all principal,
interest and other amounts due hereunder shall be due and payable on the earlier
of (i) December 12, 1998 (the "Maturity Date") and (ii) the day on which this
Note becomes immediately due and payable pursuant to Section 10 hereof.
(b) This Note may be prepaid, in whole or in part, from time to time ten
(10) business days after Holder receives written notice of such prepayment from
the Company; Holder shall then have until the end of such ten (10) business day
period to notify the Company in writing that it wishes to convert all or part of
the outstanding principal and accrued interest under this Note into Common Stock
pursuant to Section 4 below. Prepayments shall be (i) reduced by any amounts
that Holder desires to so convert into Common Stock and then (ii) applied first
to outstanding interest, and then to principal.
(c) Upon payment in full of all principal and interest payable hereunder,
this Note shall be surrendered to Company for cancellation.
(d) In the event that the Combination Agreement is terminated and Sections
7.05(c) thereof is applicable, Cetronic shall convert outstanding principal and
accrued interest under this Note into Common Stock of the Company in accordance
with the terms hereof and the Combination Agreement.
2. SUBORDINATION
(a) "Senior Indebtedness" means (A) the principal of and premium, if
any, and interest on indebtedness of the Company incurred pursuant to the
Promissory Note and Loan Agreement, each dated as of July 5, 1995, between
the Company and CivicBank of Commerce; and (B) all present and future
indebtedness, obligations, liabilities, claims, rights and demands of any
kind which may be now or hereafter owing from the Company to World Trade in
connection with that certain Note in the amount of $500,000 (or such lesser
amount as the Company and World Trade may finally agree) issued by the
Company in favor of World Trade and a related Commercial Security Agreement
and Commercial Pledge Agreement between the Company and World Trade,
including, without limitation, all principal, all interest, all costs and
attorneys' fees, all sums paid for the purpose of protecting World Trade's
rights in security (such as paying for insurance on collateral if the owner
fails to do so), and all other obligations of the Company to World Trade,
secured or unsecured, of any nature whatsoever. The Company agrees and the
holder of this Note, by acceptance thereof, agrees, expressly for the benefit
of the holder of the Senior Indebtedness, that, except as otherwise provided
herein, upon (i) an event of default under the Senior Indebtedness, or (ii)
any dissolution, winding up, or liquidation of the Company, whether or not in
bankruptcy, insolvency or receivership proceedings, the Company shall not
pay, and the holder of such Note shall not be entitled to receive, any amount
in respect of the principal and interest of such Note unless and until the
Senior Indebtedness shall have been paid or otherwise discharged. Upon (1) an
event of default under the Senior Indebtedness, or (2) any dissolution,
winding up or liquidation of the Company, any payment or distribution of
assets of the Company, which the holder of this Note would be entitled to
receive but for the provisions hereof, shall be paid by the liquidating
trustee or agent or other person making such payment or distribution directly
to the holder of the Senior Indebtedness ratably according to the aggregate
amounts remaining unpaid on the Senior
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<PAGE>
Indebtedness after giving effect to any concurrent payment or distribution to
the holder of the Senior Indebtedness. Subject to the payment in full of the
Senior Indebtedness and until this Note is paid in full, the holder of this
Note shall be subrogated to the rights of the holder of the Senior
Indebtedness (to the extent of payments or distributions previously made to
the holder of the Senior Indebtedness pursuant to this Section 2(a)) to
receive payments or distributions of assets of the Company applicable to the
Senior Indebtedness.
(b) This Section 2 is not intended to impair, as between the Company,
its creditors (other than the holder of the Senior Indebtedness) and the holder
of this Note, the unconditional and absolute obligation of the Company to pay
the principal of and interest on the Note or affect the relative rights of the
holder of this Note and the other creditors of the Company, other than the
holder of the Senior Indebtedness. Nothing in this Note shall prevent the
holder of this Note from exercising all remedies otherwise permitted by
applicable law upon default under the Note, subject to the rights, if any, of
the holder of the Senior Indebtedness in respect to cash, property or securities
of the Company received upon the exercise of any such remedy.
3. EVENTS OF DEFAULT. The Company's failure to pay (i) when due any principal
payment on the due date hereunder or (ii) any interest or other payment required
under the terms of this Note on the date due, and failure to make such payment
within five (5) business days of Company's receipt of Holder's written notice to
Company of such failure to pay, shall constitute an "Event of Default" under
this Note:
4. CONVERSION.
(a) In lieu of receiving cash payment for principal amounts and accrued
interest due under this Note, Holder shall have the right to convert outstanding
principal and accrued interest under this Note into Common Stock of the Company
at a conversion price per share equal to $0.50 (the "Conversion Price") at any
time on or prior to the Maturity Date.
(b) In addition to the conversion right provided in Section 4(a) above,
upon an Event of Default, in lieu of receiving cash payment for principal
amounts and accrued interest due under this Note, Holder shall have the right to
convert outstanding principal and accrued interest under this Note into Common
Stock of the Company at a conversion price per share equal to the lower of (i)
the Conversion Price or (ii) 65% of the average closing price of the Company's
Common Stock on the OTC Bulletin Board or Nasdaq SmallCap Market, as applicable,
for the five (5) business days prior to the date of the Event of Default.
(c) Holder may exercise its conversion right by providing written notice
to the Company of Holder's intention to exercise its conversion right and the
amount of principal and accrued interest that it wishes to convert (the
"Conversion Amount") at least ten (10) days prior to the date on which it wishes
to convert (the "Conversion Date") (unless such notice is given pursuant to the
terms of Section 1(b) above, in which event notice shall comply with the terms
thereof). No fractional shares of Common Stock shall be issued upon conversion
of this Note. Promptly after the conversion of this Note, the Holder shall
surrender this Note, duly endorsed, at the principal office of Company. At its
expense, Company shall, as soon as practicable thereafter (or as otherwise noted
in the provisions above), issue
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<PAGE>
and deliver to such Holder at such principal office a certificate or
certificates for the number of shares of such Common Stock to which the
Holder shall be entitled upon such conversion (bearing such legends as are
required by applicable state and federal securities laws in the opinion of
counsel to Company). In addition, unless this Note has been fully converted,
a new Note representing the principal amount that shall not have been
converted into Common Stock shall also be issued to Holder as soon as
possible thereafter. Upon conversion of this Note in full, Company shall be
forever released from all its obligations and liabilities under this Note
including principal, interest and any other amounts due and owing pursuant
hereto. Any notice from the Holder of an election to convert by the Company
shall be irrevocable.
(d) If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of the entire outstanding
principal amount and accrued interest under this Note, Company will use its best
efforts to take such corporate action as may be necessary, in the opinion of its
counsel, to increase its authorized but unissued shares of Common Stock to such
number of shares as shall be sufficient for such purposes.
(e) In the event that the Combination Agreement is terminated and Section
7.05(c) thereof is applicable, Cetronic shall convert outstanding principal and
accrued interest under this Note into Common Stock of the Company in accordance
with the terms hereof and the Combination Agreement.
5. REGISTRATION RIGHT.
(a) Following the Maturity Date, and within a reasonable amount of time
following the conversion by Holder of any outstanding principal and accrued
interest under this Note into Common Stock of the Company, the Company will use
reasonable efforts to (i) file a registration statement under the Securities Act
of 1933, as amended (the "Securities Act") registering such shares for resale to
the public, (ii) have such registration statement declared effective by the
Securities and Exchange Commission, (iii) register and qualify the securities
covered by such registration statement under the Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holder (provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions, unless the Company is already subject to
service in such jurisdiction and except as may be required by the Securities
Act), (iv) cause all securities registered pursuant hereunder to be listed on
each securities exchange on which similar securities issued by the Company are
then listed, and (v) file updates to such registration statement as necessary to
keep it effective until the date that all remaining such shares may be sold to
the public without registration within a period of 90 days; PROVIDED THAT, the
Company may suspend such registration for up to two periods of not more than 90
days each in any 12-month period if necessary (x) to enable the Company to
update the registration statement or (y) to undertake another sale of
securities.
(b) All Registration Expenses (as hereafter defined) incurred in
connection with any registration pursuant to this Section 5 shall be borne by
the Company. "Registration Expenses" shall mean all expenses incurred by the
Company in complying with this Section 5, including, without limitation, all
registration, qualification and filing fees, printing expenses, fees and
disbursements of counsel for the Company, the reasonable cost of one special
legal counsel to represent Holder in any
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<PAGE>
such registration, and blue sky fees and expenses. "Registration Expenses"
shall not include (if applicable) any underwriting discounts or selling
commissions.
(c) INDEMNIFICATION.
(i) The Company will indemnify the Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 5,
against all expenses, claims, losses, damages or liabilities (or actions in
respect thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, preliminary prospectus, offering circular or
other document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation or any alleged violation by the
Company of any rule or regulation promulgated under the Securities Act or the
Exchange Act or any state securities law applicable to the Company in connection
with any such registration, qualification or compliance, and the Company will
reimburse each such Holder, each of its officers and directors, and each person
controlling such Holder, for any legal and any other expenses reasonably
incurred in connection with investigating, preparing or defending any such
claim, loss, damage, liability or action, as such expenses are incurred,
provided that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is based on
any untrue statement or omission or alleged untrue statement or omission, made
in reliance upon and in conformity with written information furnished to the
Company by an instrument duly executed by such Holder or controlling person and
stated to be specifically for use therein.
(ii) The Holder will indemnify the Company, each of its directors and
officers, and each person who controls the Company within the meaning of
Section 15 of the Securities Act against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such directors, officers or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, as such expenses are incurred, in each case to the extent, but only to
the extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by an instrument duly executed by
such Holder and stated to be specifically for use therein.
6. RIGHT OF PARTICIPATION. Upon the first (and only the first) offering (or
series of related offerings in any 90-day period) by the Company subsequent to
the date hereof of any shares of, or securities convertible into or exercisable
for any shares of, any class of its capital stock ("Securities"), the
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<PAGE>
Company shall offer to the Holder and each of its affiliates that holds a
Subordinated Convertible Promissory Note issued by the Company (collectively,
the "Affiliated Holders") the option to purchase up to an aggregate of
$2,000,000 worth of the offered Securities not to exceed 50% of the offering
(the "Affiliated Holder Maximum"), in accordance with the following
provisions:
(a) The Company shall deliver a notice to the Holder stating (i) its
bona fide intention to offer such Securities, (ii) the number of such Securities
to be offered, (iii) the price, if any, for which it proposes to offer such
Securities, and (iv) the terms of such offer. The Holder will distribute this
notice to the other Affiliated Holders, and the Affiliated Holders will
apportion the Affiliated Holder Maximum amongst themselves as they see fit.
(b) Within fifteen (15) calendar days after receipt of the Notice,
the Holder will notify the Company of the portion of the Affiliated Holder
Maximum that the Affiliated Holders wish to purchase, along with a detailed list
of the apportionment of such Affiliated Holder Maximum amongst the Affiliated
Holders.
(c) The right of participation in this Section 6 shall not be
applicable (i) to the issuance or sale of shares of capital stock (or options
therefor) to employees, officers, directors or consultants for the primary
purpose of soliciting or retaining their services, (ii) to the issuance or sale
of the Company's securities to leasing entities or financial institutions in
connection with commercial leasing or borrowing transactions, or (iii) to
conversions of convertible securities.
7. REPRESENTATIONS AND WARRANTIES OF HOLDER. By its acceptance hereof,
Holder represents and warrants to Company that:
(a) Holder has been advised that this Note and the Common Stock of the
Company issuable upon conversion of the Note (with the Note and such Common
Stock being hereinafter collectively referred to as the "Securities") have not
been registered under the Securities Act, or any state securities laws and,
therefore, cannot be resold unless such Securities are registered under the
Securities Act and applicable state securities laws or unless an exemption from
such registration requirements is available. Holder has not been formed solely
for the purpose of making this investment and is acquiring the Securities for
its own account for investment, not as a nominee or agent, and not with a view
to, or for resale in connection with, the distribution thereof. Holder has such
knowledge and experience in financial and business matters that such Holder is
capable of evaluating the merits and risks of such investment, is able to incur
a complete loss of such investment and is able to bear the economic risk of such
investment for an indefinite period of time.
(b) Holder acknowledges that Company has given Holder access to all
documents and other information required for Holder to make an informed decision
with respect to the acceptance of the Securities. In this regard, Holder
acknowledges that it has received and reviewed, among other things, the
following documents filed by the Company with the Securities and Exchange
Commission: (i) the Company's Quarterly Report on Form 10-QSB for the quarter
ended March 31, 1997; (ii) the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1996; and (iii) the Company's Proxy Statement relating
to its 1997 Annual Meeting of Stockholders.
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<PAGE>
(c) At the time of both the offer and execution of the Note, the Holder
was neither a United States citizen nor a person in the United States.
(d) During the term of the Note, the Holder does not intend to sell any of
the Company Common Stock issuable upon conversion of the Note to any United
States citizen or person in the United States.
8. ATTORNEYS' FEES. If the indebtedness represented by this Note or any part
thereof is collected in bankruptcy, receivership or other judicial proceedings
or if this Note is placed in the hands of attorneys for collection after
default, Company agrees to pay, in addition to the principal and interest
payable hereunder, reasonable attorneys' fees and costs incurred by Holder.
9. NOTICES. Except as otherwise provided herein, all notices, requests,
demands, consents, instructions or other communications to or upon the Company
or Holder hereunder shall be by telecopy or in writing and telecopied, mailed or
delivered to each party at telecopier number or its address set forth below (or
to such other telecopy number or address as the recipient of any notice shall
have notified the other in writing). All such notices and communications shall
be effective (a) when sent by Federal Express or other overnight service of
recognized standing, on the business day following the deposit with such service
(if sent to an address in the same country as the sender) or on the third
business day following the deposit with such service (if sent to an address in a
different country from the sender); (b) when mailed, by registered or certified
mail, first class postage prepaid and addressed as aforesaid through the United
States Postal Service, upon receipt; (c) when delivered by hand, upon delivery;
and (d) when telecopied, upon confirmation of receipt.
HOLDER: Cetronic Aktiebolag [Publ]
Box 153, S-864
22 Matfors
SWEDEN
Attention: President
011-46-6067-1300 (telephone)
011-46-6067-1309 (telecopy)
COMPANY: Socket Communications, Inc.
37400 Central Court
Newark, CA 94560
Attention: Chief Financial Officer
(415) 744-2700 (telephone)
(415) 744-2727 (telecopy)
10. ACCELERATION. This Note shall become immediately due and payable (a) upon
an Event of Default, (b) if the Company commences any proceeding in bankruptcy
or for dissolution, liquidation, winding-up, composition or other relief under
state or federal bankruptcy laws, or (c) if such proceedings are commenced
against the Company, or a receiver or trustee is appointed for the Company or a
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<PAGE>
substantial part of its property, and such proceeding or appointment is not
dismissed or discharged within 60 days after its commencement.
11. WAIVERS. Company hereby waives presentment, demand for performance, notice
of non-performance, protest, notice of protest and notice of dishonor. No delay
on the part of Holder in exercising any right hereunder shall operate as a
waiver of such right or any other right.
12. PAYMENT. Payment shall be made in lawful tender of the United States.
13. USURY. In the event any interest is paid on this Note which is deemed
to be in excess of the then legal maximum rate, then that portion of the
interest payment representing an amount in excess of the then legal maximum rate
shall be deemed a payment of principal and applied against the principal of this
Note.
14. GOVERNING LAW. This Note and all actions arising out of or in connection
with this Note shall be governed by and construed in accordance with the laws of
the State of California, without regard to the conflicts of law provisions of
the State of California or of any other state or country.
15. SUCCESSORS AND ASSIGNS.
(a) The rights and obligations of the Company and the Holder of this Note
shall be binding upon and benefit the successors, assigns, heirs, administrators
and transferees of the parties.
(b) Holder shall not transfer this Note without the prior written consent
of Company, except that Holder may transfer the Note without such prior written
consent to a collection agency following an Event of Default.
-8-
<PAGE>
(c) Neither this Note nor any of the rights, interests or obligations
hereunder may be assigned, by operation of law or otherwise, in whole or in
part, by Company without the prior written consent of the Holder except in
connection with an assignment in whole to a successor corporation to Company,
provided that such successor corporation acquires all or substantially all of
Company's property and assets and Holder's rights hereunder and under the
Security Agreement are not impaired.
SOCKET COMMUNICATIONS, INC.
Signature: /s/ David W. Dunlap
--------------------------
Name: David W. Dunlap
-------------------------------
Title: Chief Financial Officer
------------------------------
Date: 11/24/97
------------------------------
Agreed and Accepted:
CETRONIC AKTIEBOLAG [PUBL]
Signature: /s/ Kurt Sjoblom
----------------------------
Name: Kurt Sjoblom
---------------------------------
Title: Director
--------------------------------
Date: 12/8/97
--------------------------------
-9-
<PAGE>
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH
A VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE
SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION AND QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED
CIRCUMSTANCES, AN OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL
FOR THE COMPANY, THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
SOCKET COMMUNICATIONS, INC.
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
Newark, California
$100,000 November 24, 1997
SOCKET COMMUNICATIONS, INC., a Delaware corporation (the "Company"), for
value received, hereby promises to pay to the order of Cetronic Aktiebolag
[Publ] or holder ("Holder") in lawful money of the United States at the address
of Holder set forth below, the principal amount of One Hundred Thousand Dollars
($100,000), together with simple interest at the rate of eight percent (8%) per
annum (calculated on the basis of actual days elapsed and a year of 365 days).
Accrued interest shall be payable in cash only at the time the Company pays any
portion of the principal amount of this Note. If this Note is converted
pursuant to Section 4 hereof, accrued interest may be converted as set forth
therein; any accrued interest that is not so converted shall be payable in cash.
The following is a statement of the rights of Holder and the conditions to
which this Note is subject, and to which the Holder hereof, by the acceptance of
this Note, agrees.
1. PAYMENTS; PREPAYMENTS.
(a) All principal, interest and other amounts due hereunder shall be
due and payable on the earlier of (i) December 12, 1998 (the "Maturity Date")
and (ii) the day on which this Note becomes immediately due and payable pursuant
to Section 10 hereof.
(b) This Note may be prepaid, in whole or in part, from time to time
ten (10) business days after Holder receives written notice of such prepayment
from the Company; Holder shall then have until the end of such ten (10) business
day period to notify the Company in writing that it wishes to convert all or
part of the outstanding principal and accrued interest under this Note into
Common Stock pursuant to Section 4 below. Prepayments shall be (i) reduced by
any amounts that Holder desires to so convert into Common Stock and then (ii)
applied first to outstanding interest, and then to principal.
<PAGE>
(c) Upon payment in full of all principal and interest payable
hereunder, this Note shall be surrendered to Company for cancellation.
2. SUBORDINATION
(a) "Senior Indebtedness" means (A) the principal of and premium, if
any, and interest on indebtedness of the Company incurred pursuant to the
Promissory Note and Loan Agreement, each dated as of July 5, 1995, between the
Company and CivicBank of Commerce; and (B) all present and future indebtedness,
obligations, liabilities, claims, rights and demands of any kind which may be
now or hereafter owing from the Company to World Trade in connection with that
certain Note in the amount of $500,000 (or such lesser amount as the Company and
World Trade may finally agree) issued by the Company in favor of World Trade and
a related Commercial Security Agreement and Commercial Pledge Agreement between
the Company and World Trade, including, without limitation, all principal, all
interest, all costs and attorneys' fees, all sums paid for the purpose of
protecting World Trade's rights in security (such as paying for insurance on
collateral if the owner fails to do so), and all other obligations of the
Company to World Trade, secured or unsecured, of any nature whatsoever. The
Company agrees and the holder of this Note, by acceptance thereof, agrees,
expressly for the benefit of the holder of the Senior Indebtedness, that, except
as otherwise provided herein, upon (i) an event of default under the Senior
Indebtedness, or (ii) any dissolution, winding up, or liquidation of the
Company, whether or not in bankruptcy, insolvency or receivership proceedings,
the Company shall not pay, and the holder of such Note shall not be entitled to
receive, any amount in respect of the principal and interest of such Note unless
and until the Senior Indebtedness shall have been paid or otherwise discharged.
Upon (1) an event of default under the Senior Indebtedness, or (2) any
dissolution, winding up or liquidation of the Company, any payment or
distribution of assets of the Company, which the holder of this Note would be
entitled to receive but for the provisions hereof, shall be paid by the
liquidating trustee or agent or other person making such payment or distribution
directly to the holders of the Senior Indebtedness ratably according to the
aggregate amounts remaining unpaid on the Senior Indebtedness after giving
effect to any concurrent payment or distribution to the holders of the Senior
Indebtedness. Subject to the payment in full of the Senior Indebtedness and
until this Note is paid in full, the holder of this Note shall be subrogated to
the rights of the holders of the Senior Indebtedness (to the extent of payments
or distributions previously made to the holders of the Senior Indebtedness
pursuant to this Section 2(a)) to receive payments or distributions of assets of
the Company applicable to the Senior Indebtedness.
(b) This Section 2 is not intended to impair, as between the Company,
its creditors (other than the holders of the Senior Indebtedness) and the holder
of this Note, the unconditional and absolute obligation of the Company to pay
the principal of and interest on the Note or affect the relative rights of the
holder of this Note and the other creditors of the Company, other than the
holders of the Senior Indebtedness. Nothing in this Note shall prevent the
holder of this Note from exercising all remedies otherwise permitted by
applicable law upon default under the Note, subject to the rights, if any, of
the holders of the Senior Indebtedness in respect to cash, property or
securities of the Company received upon the exercise of any such remedy.
<PAGE>
3. EVENTS OF DEFAULT. The Company's failure to pay (i) when due any
principal payment on the due date hereunder or (ii) any interest or other
payment required under the terms of this Note on the date due, and failure to
make such payment within five (5) business days of Company's receipt of Holder's
written notice to Company of such failure to pay, shall constitute an Event of
Default.
4. CONVERSION.
(a) In lieu of receiving cash payment for principal amounts and
accrued interest due under this Note, Holder shall have the right to convert
outstanding principal and accrued interest under this Note into Common Stock of
the Company at a conversion price per share equal to $0.50 (the "Conversion
Price") at any time on or prior to the Maturity Date, subject to the provisions
of Section 2 of that certain Agreement and Option to Invest of even date
herewith between the Company and Holder.
(b) In addition to the conversion right provided in Section 4(a)
above, upon an Event of Default, in lieu of receiving cash payment for principal
amounts and accrued interest due under this Note, Holder shall have the right to
convert outstanding principal and accrued interest under this Note into Common
Stock of the Company at a conversion price per share equal to the lower of (i)
the Conversion Price or (ii) 75% of the average closing price of the Company's
Common Stock on the OTC Bulletin Board or Nasdaq SmallCap Market, as applicable,
for the five (5) business days prior to the date of the Event of Default.
(c) Holder may exercise its conversion right by providing written
notice to the Company of Holder's intention to exercise its conversion right and
the amount of principal and accrued interest that it wishes to convert (the
"Conversion Amount") at least ten (10) days prior to the date on which it wishes
to convert (the "Conversion Date") (unless such notice is given pursuant to the
terms of Section 1(b) above, in which event notice shall comply with the terms
thereof). No fractional shares of Common Stock shall be issued upon conversion
of this Note. Promptly after the conversion of this Note, the Holder shall
surrender this Note, duly endorsed, at the principal office of Company. At its
expense, Company shall, as soon as practicable thereafter (or as otherwise noted
in the provisions above), issue and deliver to such Holder at such principal
office a certificate or certificates for the number of shares of such Common
Stock to which the Holder shall be entitled upon such conversion (bearing such
legends as are required by applicable state and federal securities laws in the
opinion of counsel to Company). In addition, unless this Note has been fully
converted, a new Note representing the principal amount that shall not have been
converted into Common Stock shall also be issued to Holder as soon as possible
thereafter. Upon conversion of this Note in full, Company shall be forever
released from all its obligations and liabilities under this Note including
principal, interest and any other amounts due and owing pursuant hereto. Any
notice from the Holder of an election to convert by the Company shall be
irrevocable.
<PAGE>
(d) If at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of the entire
outstanding principal amount and accrued interest under this Note, Company will
use its best efforts to take such corporate action as may be necessary, in the
opinion of its counsel, to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes.
5. REGISTRATION RIGHT.
(a) Following the Maturity Date, and within a reasonable amount of
time following the conversion by Holder of any outstanding principal and accrued
interest under this Note into Common Stock of the Company, the Company will use
reasonable efforts to (i) file a registration statement under the Securities Act
of 1933, as amended (the "Securities Act") registering such shares for resale to
the public, (ii) have such registration statement declared effective by the
Securities and Exchange Commission, (iii) register and qualify the securities
covered by such registration statement under the Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holder (provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions, unless the Company is already subject to
service in such jurisdiction and except as may be required by the Securities
Act), (iv) cause all securities registered pursuant hereunder to be listed on
each securities exchange on which similar securities issued by the Company are
then listed, and (v) file updates to such registration statement as necessary to
keep it effective until the date that all remaining such shares may be sold to
the public without registration within a period of 90 days; PROVIDED THAT, the
Company may suspend such registration for up to two periods of not more than 90
days each in any 12-month period if necessary (x) to enable the Company to
update the registration statement or (y) to undertake another sale of
securities.
(b) All Registration Expenses (as hereafter defined) incurred in
connection with any registration pursuant to this Section 5 shall be borne by
the Company. "Registration Expenses" shall mean all expenses incurred by the
Company in complying with this Section 5, including, without limitation, all
registration, qualification and filing fees, printing expenses, fees and
disbursements of counsel for the Company, the reasonable cost of one special
legal counsel to represent Holder in any such registration, and blue sky fees
and expenses. "Registration Expenses" shall not include (if applicable) any
underwriting discounts or selling commissions.
(c) INDEMNIFICATION.
(i) The Company will indemnify the Holder, each of its
officers and directors and partners, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 5, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, preliminary prospectus,
offering circular or other document, or any amendment or supplement thereto,
incident to any such
<PAGE>
registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or any violation or
any alleged violation by the Company of any rule or regulation promulgated
under the Securities Act or the Exchange Act or any state securities law
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse each such Holder,
each of its officers and directors, and each person controlling such Holder,
for any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability
or action, as such expenses are incurred, provided that the Company will not
be liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an
instrument duly executed by such Holder or controlling person and stated to
be specifically for use therein.
(ii) The Holder will indemnify the Company, each of its
directors and officers, and each person who controls the Company within the
meaning of Section 15 of the Securities Act against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such directors, officers or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, as such expenses are incurred, in each case to the extent, but only to
the extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by an instrument duly executed by
such Holder and stated to be specifically for use therein.
6. RIGHT OF PARTICIPATION. Upon the first (and only the first) offering
(or series of related offerings in any 90-day period) by the Company subsequent
to the date hereof of any shares of, or securities convertible into or
exercisable for any shares of, any class of its capital stock ("Securities"),
the Company shall offer to the Holder and each of its affiliates that holds a
Subordinated Convertible Promissory Note issued by the Company (collectively,
the "Affiliated Holders") the option to purchase up to an aggregate of
$2,000,000 worth of the offered Securities not to exceed 50% of the offering
(the "Affiliated Holder Maximum"), in accordance with the following provisions:
(a) The Company shall deliver a notice to the Holder stating (i) its
bona fide intention to offer such Securities, (ii) the number of such Securities
to be offered, (iii) the price, if any, for which it proposes to offer such
Securities, and (iv) the terms of such offer. The Holder will distribute this
notice to the other Affiliated Holders, and the Affiliated Holders will
apportion the Affiliated Holder Maximum amongst themselves as they see fit.
<PAGE>
(b) Within fifteen (15) calendar days after receipt of the Notice,
the Holder will notify the Company of the portion of the Affiliated Holder
Maximum that the Affiliated Holders wish to purchase, along with a detailed list
of the apportionment of such Affiliated Holder Maximum amongst the Affiliated
Holders.
(c) The right of participation in this Section 6 shall not be
applicable (i) to the issuance or sale of shares of capital stock (or options
therefor) to employees, officers, directors or consultants for the primary
purpose of soliciting or retaining their services, (ii) to the issuance or sale
of the Company's securities to leasing entities or financial institutions in
connection with commercial leasing or borrowing transactions, or (iii) to
conversions of convertible securities.
7. REPRESENTATIONS AND WARRANTIES OF HOLDER. By its acceptance hereof,
Holder represents and warrants to Company that:
(a) Holder has been advised and acknowledges: (i) that this Note and
the Common Stock of the Company issuable upon conversion of the Note (with the
Note and such Common Stock being hereinafter referred to as the "Securities")
have not been, and when issued, will not be registered under the Securities Act,
the securities laws of any state of the United States or the securities laws of
any other country; (ii) that in issuing and selling the Securities to Holder
pursuant hereto, the Company is relying upon the "safe harbor" provided by
Regulation S and/or on Section 4(2) under the Securities Act; (iii) that it is a
condition to the availability of the Regulation S safe harbor that the
Securities not be offered or sold in the United States or to a U.S. Person until
the expiration of a period of 40 days following the issuance of such Securities;
(iv) that, notwithstanding the foregoing, prior to the expiration of 40 days
after the issuance of such Securities (the "Restricted Period"), the Securities
may be offered and sold by the holder thereof solely either: (A) if the offer
or sale is within the United States or to or for the account of a U.S. Person
(as such terms are defined in Regulation S), the securities are offered and sold
pursuant to an effective registration statement or pursuant to Rule 144 under
the Securities Act or pursuant to an exemption from the registration
requirements of the Securities Act; or (B) the offer and sale is outside the
United States and to other than a U.S. Person. The foregoing restrictions are
binding upon subsequent transferees of the Securities, except for transferees
pursuant to an effective registration statement. After the Restricted Period,
the Securities may be offered or sold within the United States or to or for the
account of a U.S. Person only pursuant to applicable securities laws.
(b) As used herein, the term "United States" means and includes the
United States of America, its territories and possessions, any State of the
United States, and the District of Columbia, and the term "U.S. Person" (as
defined in Regulation S) means: (i) a natural person (regardless of
citizenship) resident in the United States; (ii) any partnership or corporation
organized or incorporated under the laws of the United States; (iii) any estate
or trust of which any executor, administrator or trustee is a U.S. Person;
(iv) any agency or branch of a foreign entity located in the United States;
(v) any nondiscretionary account or similar account (other than an estate or
trust) held by a dealer or other fiduciary for the benefit or account of a U.S.
Person (whether or not the dealer or other fiduciary is a U.S. Person); (vi) any
discretionary account or similar account (other than an estate or trust) held by
a dealer or other fiduciary organized, incorporated and (if an individual)
<PAGE>
resident in the United States; and (vii) a corporation or partnership organized
under the laws of any jurisdiction other than the United States by a U.S. Person
principally for the purpose of investing in securities that have not been
registered under the Securities Act, unless organized or incorporated and owned
entirely by accredited investors (as defined in Rule 501(a) under the Securities
Act) who are not natural persons, estates or trusts.
(c) Holder agrees that with respect to the Securities until the
expiration of the Restricted Period: (i) Holder, its agents or representatives
have not and will not solicit offers to buy, offer for sale or sell any of the
Securities, or any beneficial interest therein in the United States or to or for
the account of a U.S. Person during the Restricted Period; and (ii) that,
notwithstanding the foregoing, prior to the expiration of the Restricted Period,
the Securities may be offered and sold by the holder thereof either: (A) if the
offer or sale is within the United States or to or for the account of a U.S.
Person (as such terms are defined in Regulation S), the securities are offered
and sold pursuant to an effective registration statement or pursuant to Rule 144
under the Securities Act or pursuant to an exemption from the registration
requirements of the Securities Act; or (B) the offer and sale is outside the
United States and to other than a U.S. Person. The foregoing restrictions are
binding upon subsequent transferees of the Securities, except for transferees
pursuant to an effective registration statement. Holder agrees that after the
Restricted Period, the Securities may be offered or sold within the United
States or to or for the account of a U.S. Person only pursuant to applicable
securities laws.
(d) Holder has not engaged, nor is it aware that any party has
engaged, and Holder will not engage or cause any third party to engage in any
directed selling efforts (as such term is defined in Regulation S) in the United
States with respect to the Securities.
(e) Holder (i) is domiciled and has its principal place of business
outside the United States, (ii) certifies it is not a U.S. Person and is not
acquiring the securities for the account or benefit of any U.S. Person, and
(iii) any persons acting on Holder's behalf in connection therewith will be
located outside the United States.
(f) Holder is acquiring the Securities either: (i) for its own
account; or (ii) for the account and benefit of clients of whom none is a U.S.
Person and for whom Holder has, and for the entire Restricted Period will
continue to have, full investment discretion with respect to the purchase,
holding and disposition of the Securities.
(g) Holder is not a "distributor" (as defined in Regulation S) or a
"dealer" (as defined in the Securities Act).
(h) By reason of Holder's business or financial experience, or that
of the Holder's professional advisor, Holder has the capacity to protect
Holder's own interests in connection with the acquisition of the Securities and
has the ability to bear the economic risk (including the risk of total loss) of
Holder's investment.
<PAGE>
(i) Holder further covenants that Holder will not make any sale,
transfer or other disposition of the Securities in violation of the Securities
Act, the Securities and Exchange Act of 1934, as amended (the "Exchange Act"),
or the rules of the Securities and Exchange Commission promulgated under the
Securities Act or the Exchange Act.
(j) Holder covenants that Holder will sell, transfer or otherwise
dispose of the Securities only in a manner consistent with such Holder's
representations and covenants set forth in this Section 7. In connection
therewith, Holder acknowledges that, upon issuance of the shares of Common Stock
of the Company upon conversion of this Note, the Company shall make a notation
in its stock books regarding the restrictions on transfer set forth in this
Section 7 and shall transfer such shares on the books of the Company only to the
extent not inconsistent therewith.
(k) Holder acknowledges that Company has given Holder access to all
documents and other information required for Holder to make an informed decision
with respect to the acceptance of the Securities. In this regard, Holder
acknowledges that it has received and reviewed, among other things, the
following documents filed by the Company with the Securities and Exchange
Commission: (i) the Company's Quarterly Report on Form 10-QSB for the quarters
ended March 31, 1997 and June 30, 1997 and (ii) the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996.
8. ATTORNEYS' FEES. If the indebtedness represented by this Note or any
part thereof is collected in bankruptcy, receivership or other judicial
proceedings or if this Note is placed in the hands of attorneys for collection
after default, Company agrees to pay, in addition to the principal and interest
payable hereunder, reasonable attorneys' fees and costs incurred by Holder.
9. NOTICES. Except as otherwise provided herein, all notices, requests,
demands, consents, instructions or other communications to or upon the Company
or Holder hereunder shall be by telecopy or in writing and telecopied, mailed or
delivered to each party at telecopier number or its address set forth below (or
to such other telecopy number or address as the recipient of any notice shall
have notified the other in writing). All such notices and communications shall
be effective (a) when sent by Federal Express or other overnight service of
recognized standing, on the business day following the deposit with such service
(if sent to an address in the same country as the sender) or on the third
business day following the deposit with such service (if sent to an address in a
different country from the sender); (b) when mailed, by registered or certified
mail, first class postage prepaid and addressed as aforesaid through the United
States Postal Service, upon receipt; (c) when delivered by hand, upon delivery;
and (d) when telecopied, upon confirmation of receipt.
<PAGE>
HOLDER: Cetronic Aktiebolag [Publ]
Box 153, S-864
22 Matfors
SWEDEN
Attention: President
011-46-6067-1300 (telephone)
011-46-6067-1309 (telecopy)
COMPANY: Socket Communications, Inc.
37400 Central Court
Newark, CA 94560
Attention: Chief Financial Officer
(415) 744-2700 (telephone)
(415) 744-2727 (telecopy)
10. ACCELERATION. This Note shall become immediately due and payable (a)
upon an Event of Default, (b) if the Company commences any proceeding in
bankruptcy or for dissolution, liquidation, winding-up, composition or other
relief under state or federal bankruptcy laws, or (c) if such proceedings are
commenced against the Company, or a receiver or trustee is appointed for the
Company or a substantial part of its property, and such proceeding or
appointment is not dismissed or discharged within 60 days after its
commencement.
11. WAIVERS. Company hereby waives presentment, demand for performance,
notice of non-performance, protest, notice of protest and notice of dishonor.
No delay on the part of Holder in exercising any right hereunder shall operate
as a waiver of such right or any other right.
12. PAYMENT. Payment shall be made in lawful tender of the United States.
13. USURY. In the event any interest is paid on this Note which is deemed
to be in excess of the then legal maximum rate, then that portion of the
interest payment representing an amount in excess of the then legal maximum rate
shall be deemed a payment of principal and applied against the principal of this
Note.
14. GOVERNING LAW. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state or country.
15. SUCCESSORS AND ASSIGNS.
(a) The rights and obligations of the Company and the Holder of this
Note shall be binding upon and benefit the successors, assigns, heirs,
administrators and transferees of the parties.
<PAGE>
(b) Holder shall not transfer this Note without the prior written
consent of Company, except that Holder may transfer the Note without such prior
written consent to a collection agency following an Event of Default.
(c) Neither this Note nor any of the rights, interests or obligations
hereunder may be assigned, by operation of law or otherwise, in whole or in
part, by Company without the prior written consent of the Holder except in
connection with an assignment in whole to a successor corporation to Company,
provided that such successor corporation acquires all or substantially all of
Company's property and assets and Holder's rights hereunder are not impaired.
SOCKET COMMUNICATIONS, INC.
By: /s/ David W. Dunlap
--------------------------------
Name: David W. Dunlap
-------------------------------
Title: Chief Financial Officer
------------------------------
Agreed and Accepted:
CETRONIC AKTIEBOLAG [PUBL]
By: /s/ Kurt Sjoblom
----------------------------------
Name: Kurt Sjoblom
---------------------------------
Title: Director
--------------------------------
<PAGE>
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH
A VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE
SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION AND QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED
CIRCUMSTANCES, AN OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL
FOR THE COMPANY, THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
SOCKET COMMUNICATIONS, INC.
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
Newark, California
$___________ November 7, 1997
SOCKET COMMUNICATIONS, INC., a Delaware corporation (the "Company"), for
value received, hereby promises to pay to the order of __________(Holder) or
holder ("Holder") in lawful money of the United States at the address of
Holder set forth below, the principal amount of $ _________, together with
simple interest at the rate of eight percent (8%) per annum (calculated on
the basis of actual days elapsed and a year of 365 days). Accrued interest
shall be payable in cash only at the time the Company pays any portion of the
principal amount of this Note. If this Note is converted pursuant to Section
4 hereof, accrued interest may be converted as set forth therein; any accrued
interest that is not so converted shall be payable in cash.
The following is a statement of the rights of Holder and the conditions to
which this Note is subject, and to which the Holder hereof, by the acceptance of
this Note, agrees.
1. PAYMENTS; PREPAYMENTS.
(a) All principal, interest and other amounts due hereunder shall be
due and payable on the earlier of (i) November 7, 1998 (the "Maturity Date") and
(ii) the day on which this Note becomes immediately due and payable pursuant to
Section 10 hereof.
(b) This Note may be prepaid, in whole or in part, from time to time
ten (10) business days after Holder receives written notice of such prepayment
from the Company; Holder shall then have until the end of such ten (10) business
day period to notify the Company in writing that it wishes to convert all or
part of the outstanding principal and accrued interest under this Note into
Common Stock pursuant to Section 4 below. Prepayments shall be (i) reduced by
any amounts that Holder desires to so convert into Common Stock and then (ii)
applied first to outstanding interest, and then to principal.
<PAGE>
(c) Upon payment in full of all principal and interest payable
hereunder, this Note shall be surrendered to Company for cancellation.
2. SUBORDINATION
(a) "Senior Indebtedness" means (A) the principal of and premium, if
any, and interest on indebtedness of the Company incurred pursuant to the
Promissory Note and Loan Agreement, each dated as of July 5, 1995, between the
Company and CivicBank of Commerce; and (B) all present and future indebtedness,
obligations, liabilities, claims, rights and demands of any kind which may be
now or hereafter owing from the Company to World Trade in connection with that
certain Note in the amount of $500,000 (or such lesser amount as the Company and
World Trade may finally agree) issued by the Company in favor of World Trade and
a related Commercial Security Agreement and Commercial Pledge Agreement between
the Company and World Trade, including, without limitation, all principal, all
interest, all costs and attorneys' fees, all sums paid for the purpose of
protecting World Trade's rights in security (such as paying for insurance on
collateral if the owner fails to do so), and all other obligations of the
Company to World Trade, secured or unsecured, of any nature whatsoever. The
Company agrees and the holder of this Note, by acceptance thereof, agrees,
expressly for the benefit of the holder of the Senior Indebtedness, that, except
as otherwise provided herein, upon (i) an event of default under the Senior
Indebtedness, or (ii) any dissolution, winding up, or liquidation of the
Company, whether or not in bankruptcy, insolvency or receivership proceedings,
the Company shall not pay, and the holder of such Note shall not be entitled to
receive, any amount in respect of the principal and interest of such Note unless
and until the Senior Indebtedness shall have been paid or otherwise discharged.
Upon (1) an event of default under the Senior Indebtedness, or (2) any
dissolution, winding up or liquidation of the Company, any payment or
distribution of assets of the Company, which the holder of this Note would be
entitled to receive but for the provisions hereof, shall be paid by the
liquidating trustee or agent or other person making such payment or distribution
directly to the holders of the Senior Indebtedness ratably according to the
aggregate amounts remaining unpaid on the Senior Indebtedness after giving
effect to any concurrent payment or distribution to the holders of the Senior
Indebtedness. Subject to the payment in full of the Senior Indebtedness and
until this Note is paid in full, the holder of this Note shall be subrogated to
the rights of the holders of the Senior Indebtedness (to the extent of payments
or distributions previously made to the holders of the Senior Indebtedness
pursuant to this Section 2(a)) to receive payments or distributions of assets of
the Company applicable to the Senior Indebtedness.
(b) This Section 2 is not intended to impair, as between the Company,
its creditors (other than the holders of the Senior Indebtedness) and the holder
of this Note, the unconditional and absolute obligation of the Company to pay
the principal of and interest on the Note or affect the relative rights of the
holder of this Note and the other creditors of the Company, other than the
holders of the Senior Indebtedness. Nothing in this Note shall prevent the
holder of this Note from exercising all remedies otherwise permitted by
applicable law upon default under the Note, subject to the rights, if any, of
the holders of the Senior Indebtedness in respect to cash, property or
securities of the Company received upon the exercise of any such remedy.
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<PAGE>
(b) This Section 2 is not intended to impair, as between the Company,
its creditors (other than the holder of the Senior Indebtedness) and the holder
of this Note, the unconditional and absolute obligation of the Company to pay
the principal of and interest on the Note or affect the relative rights of the
holder of this Note and the other creditors of the Company, other than the
holder of the Senior Indebtedness. Nothing in this Note shall prevent the
holder of this Note from exercising all remedies otherwise permitted by
applicable law upon default under the Note, subject to the rights, if any, of
the holder of the Senior Indebtedness in respect to cash, property or securities
of the Company received upon the exercise of any such remedy.
3. EVENTS OF DEFAULT. The Company's failure to pay (i) when due any
principal payment on the due date hereunder or (ii) any interest or other
payment required under the terms of this Note on the date due, and failure to
make such payment within five (5) business days of Company's receipt of Holder's
written notice to Company of such failure to pay, shall constitute an Event of
Default.
4. CONVERSION.
(a) In lieu of receiving cash payment for principal amounts and
accrued interest due under this Note, Holder shall have the right to convert
outstanding principal and accrued interest under this Note into Common Stock of
the Company at a conversion price per share equal to $0.50 (the "Conversion
Price") at any time on or prior to the Maturity Date, subject to the provisions
of Section 2 of that certain Agreement and Option to Invest of even date
herewith between the Company and Holder.
(b) In addition to the conversion right provided in Section 4(a)
above, upon an Event of Default, in lieu of receiving cash payment for principal
amounts and accrued interest due under this Note, Holder shall have the right to
convert outstanding principal and accrued interest under this Note into Common
Stock of the Company at a conversion price per share equal to the lower of (i)
the Conversion Price or (ii) 75% of the average closing price of the Company's
Common Stock on the OTC Bulletin Board or Nasdaq SmallCap Market, as applicable,
for the five (5) business days prior to the date of the Event of Default.
(c) Holder may exercise its conversion right by providing written
notice to the Company of Holder's intention to exercise its conversion right and
the amount of principal and accrued interest that it wishes to convert (the
"Conversion Amount") at least ten (10) days prior to the date on which it wishes
to convert (the "Conversion Date") (unless such notice is given pursuant to the
terms of Section 1(b) above, in which event notice shall comply with the terms
thereof). No fractional shares of Common Stock shall be issued upon conversion
of this Note. Promptly after the conversion of this Note, the Holder shall
surrender this Note, duly endorsed, at the principal office of Company. At its
expense, Company shall, as soon as practicable thereafter (or as otherwise noted
in the provisions above), issue and deliver to such Holder at such principal
office a certificate or certificates for the number of shares of such Common
Stock to which the Holder shall be entitled upon such conversion (bearing such
legends as are required by applicable state and federal securities laws in the
opinion of counsel to Company). In addition, unless this Note has been fully
converted, a new Note representing the principal amount that shall not have been
converted into Common Stock shall also be issued to Holder as soon as possible
thereafter. Upon conversion of this Note in full, Company shall be forever
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<PAGE>
released from all its obligations and liabilities under this Note including
principal, interest and any other amounts due and owing pursuant hereto. Any
notice from the Holder of an election to convert by the Company shall be
irrevocable.
(d) If at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of the entire
outstanding principal amount and accrued interest under this Note, Company will
use its best efforts to take such corporate action as may be necessary, in the
opinion of its counsel, to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes.
5. REGISTRATION RIGHT.
(a) Following the Maturity Date, and within a reasonable amount of
time following the conversion by Holder of any outstanding principal and accrued
interest under this Note into Common Stock of the Company, the Company will use
reasonable efforts to (i) file a registration statement under the Securities Act
of 1933, as amended (the "Securities Act") registering such shares for resale to
the public, (ii) have such registration statement declared effective by the
Securities and Exchange Commission, (iii) register and qualify the securities
covered by such registration statement under the Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holder (provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions, unless the Company is already subject to
service in such jurisdiction and except as may be required by the Securities
Act), (iv) cause all securities registered pursuant hereunder to be listed on
each securities exchange on which similar securities issued by the Company are
then listed, and (v) file updates to such registration statement as necessary to
keep it effective until the date that all remaining such shares may be sold to
the public without registration within a period of 90 days; PROVIDED THAT, the
Company may suspend such registration for up to two periods of not more than 90
days each in any 12-month period if necessary (x) to enable the Company to
update the registration statement or (y) to undertake another sale of
securities.
(b) All Registration Expenses (as hereafter defined) incurred in
connection with any registration pursuant to this Section 5 shall be borne by
the Company. "Registration Expenses" shall mean all expenses incurred by the
Company in complying with this Section 5, including, without limitation, all
registration, qualification and filing fees, printing expenses, fees and
disbursements of counsel for the Company, the reasonable cost of one special
legal counsel to represent Holder in any such registration, and blue sky fees
and expenses. "Registration Expenses" shall not include (if applicable) any
underwriting discounts or selling commissions.
(c) INDEMNIFICATION.
(i) The Company will indemnify the Holder, each of its
officers and directors and partners, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration, qualification or compliance has been effected pursuant to this
Section 5, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising
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<PAGE>
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any registration statement, prospectus,
preliminary prospectus, offering circular or other document, or any amendment
or supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading, or any violation or any alleged violation by the Company of
any rule or regulation promulgated under the Securities Act or the Exchange
Act or any state securities law applicable to the Company in connection with
any such registration, qualification or compliance, and the Company will
reimburse each such Holder, each of its officers and directors, and each
person controlling such Holder, for any legal and any other expenses
reasonably incurred in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, as such expenses are
incurred, provided that the Company will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder or controlling person and stated to be specifically for use therein.
(ii) The Holder will indemnify the Company, each of its
directors and officers, and each person who controls the Company within the
meaning of Section 15 of the Securities Act against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such directors, officers or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, as such expenses are incurred, in each case to the extent, but only to
the extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by an instrument duly executed by
such Holder and stated to be specifically for use therein.
6. RIGHT OF PARTICIPATION. Upon the first (and only the first) offering
(or series of related offerings in any 90-day period) by the Company subsequent
to the date hereof of any shares of, or securities convertible into or
exercisable for any shares of, any class of its capital stock ("Securities"),
the Company shall offer to the Holder and each of its affiliates that holds a
Subordinated Convertible Promissory Note issued by the Company (collectively,
the "Affiliated Holders") the option to purchase up to an aggregate of
$2,000,000 worth of the offered Securities not to exceed 50% of the offering
(the "Affiliated Holder Maximum"), in accordance with the following provisions:
(a) The Company shall deliver a notice to the Holder stating (i) its
bona fide intention to offer such Securities, (ii) the number of such Securities
to be offered, (iii) the price, if any, for which it proposes to offer such
Securities, and (iv) the terms of such offer. The Holder will distribute this
notice to the other Affiliated Holders, and the Affiliated Holders will
apportion the Affiliated Holder Maximum amongst themselves as they see fit.
-5-
<PAGE>
(b) Within fifteen (15) calendar days after receipt of the Notice,
the Holder will notify the Company of the portion of the Affiliated Holder
Maximum that the Affiliated Holders wish to purchase, along with a detailed list
of the apportionment of such Affiliated Holder Maximum amongst the Affiliated
Holders.
(c) The right of participation in this Section 6 shall not be
applicable (i) to the issuance or sale of shares of capital stock (or options
therefor) to employees, officers, directors or consultants for the primary
purpose of soliciting or retaining their services, (ii) to the issuance or sale
of the Company's securities to leasing entities or financial institutions in
connection with commercial leasing or borrowing transactions, or (iii) to
conversions of convertible securities.
7. REPRESENTATIONS AND WARRANTIES OF HOLDER. By its acceptance hereof,
Holder represents and warrants to Company that:
(a) Holder has been advised and acknowledges: (i) that this Note and
the Common Stock of the Company issuable upon conversion of the Note (with the
Note and such Common Stock being hereinafter referred to as the "Securities")
have not been, and when issued, will not be registered under the Securities Act,
the securities laws of any state of the United States or the securities laws of
any other country; (ii) that in issuing and selling the Securities to Holder
pursuant hereto, the Company is relying upon the "safe harbor" provided by
Regulation S and/or on Section 4(2) under the Securities Act; (iii) that it is a
condition to the availability of the Regulation S safe harbor that the
Securities not be offered or sold in the United States or to a U.S. Person until
the expiration of a period of 40 days following the issuance of such Securities;
(iv) that, notwithstanding the foregoing, prior to the expiration of 40 days
after the issuance of such Securities (the "Restricted Period"), the Securities
may be offered and sold by the holder thereof solely either: (A) if the offer
or sale is within the United States or to or for the account of a U.S. Person
(as such terms are defined in Regulation S), the securities are offered and sold
pursuant to an effective registration statement or pursuant to Rule 144 under
the Securities Act or pursuant to an exemption from the registration
requirements of the Securities Act; or (B) the offer and sale is outside the
United States and to other than a U.S. Person. The foregoing restrictions are
binding upon subsequent transferees of the Securities, except for transferees
pursuant to an effective registration statement. After the Restricted Period,
the Securities may be offered or sold within the United States or to or for the
account of a U.S. Person only pursuant to applicable securities laws.
(b) As used herein, the term "United States" means and includes the
United States of America, its territories and possessions, any State of the
United States, and the District of Columbia, and the term "U.S. Person" (as
defined in Regulation S) means: (i) a natural person (regardless of
citizenship) resident in the United States; (ii) any partnership or corporation
organized or incorporated under the laws of the United States; (iii) any estate
or trust of which any executor, administrator or trustee is a U.S. Person;
(iv) any agency or branch of a foreign entity located in the United States;
(v) any nondiscretionary account or similar account (other than an estate or
trust) held by a dealer or other fiduciary for the benefit or account of a U.S.
Person (whether or not the dealer or other fiduciary is a U.S. Person); (vi) any
discretionary account or similar account (other than an estate or trust) held by
a dealer or other fiduciary organized, incorporated and (if an individual)
resident in the United States; and (vii) a corporation or partnership organized
under the laws of any jurisdiction other than the United States by
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<PAGE>
a U.S. Person principally for the purpose of investing in securities that
have not been registered under the Securities Act, unless organized or
incorporated and owned entirely by accredited investors (as defined in Rule
501(a) under the Securities Act) who are not natural persons, estates or
trusts.
(c) Holder agrees that with respect to the Securities until the
expiration of the Restricted Period: (i) Holder, its agents or representatives
have not and will not solicit offers to buy, offer for sale or sell any of the
Securities, or any beneficial interest therein in the United States or to or for
the account of a U.S. Person during the Restricted Period; and (ii) that,
notwithstanding the foregoing, prior to the expiration of the Restricted Period,
the Securities may be offered and sold by the holder thereof either: (A) if the
offer or sale is within the United States or to or for the account of a U.S.
Person (as such terms are defined in Regulation S), the securities are offered
and sold pursuant to an effective registration statement or pursuant to Rule 144
under the Securities Act or pursuant to an exemption from the registration
requirements of the Securities Act; or (B) the offer and sale is outside the
United States and to other than a U.S. Person. The foregoing restrictions are
binding upon subsequent transferees of the Securities, except for transferees
pursuant to an effective registration statement. Holder agrees that after the
Restricted Period, the Securities may be offered or sold within the United
States or to or for the account of a U.S. Person only pursuant to applicable
securities laws.
(d) Holder has not engaged, nor is it aware that any party has
engaged, and Holder will not engage or cause any third party to engage in any
directed selling efforts (as such term is defined in Regulation S) in the United
States with respect to the Securities.
(e) Holder (i) is domiciled and has its principal place of business
outside the United States, (ii) certifies it is not a U.S. Person and is not
acquiring the securities for the account or benefit of any U.S. Person, and
(iii) any persons acting on Holder's behalf in connection therewith will be
located outside the United States.
(f) Holder is acquiring the Securities either: (i) for its own
account; or (ii) for the account and benefit of clients of whom none is a U.S.
Person and for whom Holder has, and for the entire Restricted Period will
continue to have, full investment discretion with respect to the purchase,
holding and disposition of the Securities.
(g) Holder is not a "distributor" (as defined in Regulation S) or a
"dealer" (as defined in the Securities Act).
(h) By reason of Holder's business or financial experience, or that
of the Holder's professional advisor, Holder has the capacity to protect
Holder's own interests in connection with the acquisition of the Securities and
has the ability to bear the economic risk (including the risk of total loss) of
Holder's investment.
(i) Holder further covenants that Holder will not make any sale,
transfer or other disposition of the Securities in violation of the Securities
Act, the Securities and Exchange Act of 1934, as amended (the "Exchange Act"),
or the rules of the Securities and Exchange Commission promulgated under the
Securities Act or the Exchange Act.
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<PAGE>
(j) Holder covenants that Holder will sell, transfer or otherwise
dispose of the Securities only in a manner consistent with such Holder's
representations and covenants set forth in this Section 7. In connection
therewith, Holder acknowledges that, upon issuance of the shares of Common Stock
of the Company upon conversion of this Note, the Company shall make a notation
in its stock books regarding the restrictions on transfer set forth in this
Section 7 and shall transfer such shares on the books of the Company only to the
extent not inconsistent therewith.
(k) Holder acknowledges that Company has given Holder access to all
documents and other information required for Holder to make an informed decision
with respect to the acceptance of the Securities. In this regard, Holder
acknowledges that it has received and reviewed, among other things, the
following documents filed by the Company with the Securities and Exchange
Commission: (i) the Company's Quarterly Report on Form 10-QSB for the quarters
ended March 31, 1997 and June 30, 1997 and (ii) the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996.
8. ATTORNEYS' FEES. If the indebtedness represented by this Note or any
part thereof is collected in bankruptcy, receivership or other judicial
proceedings or if this Note is placed in the hands of attorneys for collection
after default, Company agrees to pay, in addition to the principal and interest
payable hereunder, reasonable attorneys' fees and costs incurred by Holder.
9. NOTICES. Except as otherwise provided herein, all notices, requests,
demands, consents, instructions or other communications to or upon the Company
or Holder hereunder shall be by telecopy or in writing and telecopied, mailed or
delivered to each party at telecopier number or its address set forth below (or
to such other telecopy number or address as the recipient of any notice shall
have notified the other in writing). All such notices and communications shall
be effective (a) when sent by Federal Express or other overnight service of
recognized standing, on the business day following the deposit with such service
(if sent to an address in the same country as the sender) or on the third
business day following the deposit with such service (if sent to an address in a
different country from the sender); (b) when mailed, by registered or certified
mail, first class postage prepaid and addressed as aforesaid through the United
States Postal Service, upon receipt; (c) when delivered by hand, upon delivery;
and (d) when telecopied, upon confirmation of receipt.
HOLDER: _____________________________
_____________________________
_____________________________
_____________________________
COMPANY: Socket Communications, Inc.
37400 Central Court
Newark, CA 94560
Attention: Chief Financial Officer
(415) 744-2700 (telephone)
(415) 744-2727 (telecopy)
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<PAGE>
10. ACCELERATION. This Note shall become immediately due and payable (a)
upon an Event of Default, (b) if the Company commences any proceeding in
bankruptcy or for dissolution, liquidation, winding-up, composition or other
relief under state or federal bankruptcy laws, or (c) if such proceedings are
commenced against the Company, or a receiver or trustee is appointed for the
Company or a substantial part of its property, and such proceeding or
appointment is not dismissed or discharged within 60 days after its
commencement.
11. WAIVERS. Company hereby waives presentment, demand for performance,
notice of non-performance, protest, notice of protest and notice of dishonor.
No delay on the part of Holder in exercising any right hereunder shall operate
as a waiver of such right or any other right.
12. PAYMENT. Payment shall be made in lawful tender of the United States.
13. USURY. In the event any interest is paid on this Note which is deemed
to be in excess of the then legal maximum rate, then that portion of the
interest payment representing an amount in excess of the then legal maximum rate
shall be deemed a payment of principal and applied against the principal of this
Note.
14. GOVERNING LAW. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state or country.
15. SUCCESSORS AND ASSIGNS.
(a) The rights and obligations of the Company and the Holder of this
Note shall be binding upon and benefit the successors, assigns, heirs,
administrators and transferees of the parties.
(b) Holder shall not transfer this Note without the prior written
consent of Company, except that Holder may transfer the Note without such prior
written consent to a collection agency following an Event of Default.
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<PAGE>
(c) Neither this Note nor any of the rights, interests or obligations
hereunder may be assigned, by operation of law or otherwise, in whole or in
part, by Company without the prior written consent of the Holder except in
connection with an assignment in whole to a successor corporation to Company,
provided that such successor corporation acquires all or substantially all of
Company's property and assets and Holder's rights hereunder are not impaired.
SOCKET COMMUNICATIONS, INC.
By:______________________________
Name:____________________________
Title:____________________________
Agreed and Accepted:
HOLDER
By:______________________________
Name:____________________________
Title:____________________________
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<PAGE>
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER APPLICABLE STATE
SECURITIES LAWS AND HAVE BEEN TAKEN FOR INVESTMENT PURPOSES ONLY AND NOT WITH
A VIEW TO OR FOR SALE IN CONNECTION WITH ANY DISTRIBUTION THEREOF. THE
SECURITIES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION AND QUALIFICATION WITHOUT, EXCEPT UNDER CERTAIN SPECIFIC LIMITED
CIRCUMSTANCES, AN OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL
FOR THE COMPANY, THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
SOCKET COMMUNICATIONS, INC.
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
Newark, California
$100,000 November 7, 1997
SOCKET COMMUNICATIONS, INC., a Delaware corporation (the "Company"), for
value received, hereby promises to pay to the order of Bass Trust or holder
("Holder") in lawful money of the United States at the address of Holder set
forth below, the principal amount of One Hundred Thousand Dollars ($100,000),
together with simple interest at the rate of eight percent (8%) per annum
(calculated on the basis of actual days elapsed and a year of 365 days).
Accrued interest shall be payable in cash only at the time the Company pays
any portion of the principal amount of this Note. If this Note is converted
pursuant to Section 4 hereof, accrued interest may be converted as set forth
therein; any accrued interest that is not so converted shall be payable in
cash.
The following is a statement of the rights of Holder and the conditions to
which this Note is subject, and to which the Holder hereof, by the acceptance of
this Note, agrees.
1. PAYMENTS; PREPAYMENTS.
(a) All principal, interest and other amounts due hereunder shall be
due and payable on the earlier of (i) December 12, 1998 (the "Maturity Date")
and (ii) the day on which this Note becomes immediately due and payable pursuant
to Section 10 hereof.
(b) This Note may be prepaid, in whole or in part, from time to time
ten (10) business days after Holder receives written notice of such prepayment
from the Company; Holder shall then have until the end of such ten (10) business
day period to notify the Company in writing that it wishes to convert all or
part of the outstanding principal and accrued interest under this Note into
Common Stock pursuant to Section 4 below. Prepayments shall be (i) reduced by
any amounts
<PAGE>
that Holder desires to so convert into Common Stock and then (ii) applied
first to outstanding interest, and then to principal.
(c) Upon payment in full of all principal and interest payable
hereunder, this Note shall be surrendered to Company for cancellation.
2. SUBORDINATION
(a) "Senior Indebtedness" means (A) the principal of and premium, if
any, and interest on indebtedness of the Company incurred pursuant to the
Promissory Note and Loan Agreement, each dated as of July 5, 1995, between the
Company and CivicBank of Commerce; and (B) all present and future indebtedness,
obligations, liabilities, claims, rights and demands of any kind which may be
now or hereafter owing from the Company to World Trade in connection with that
certain Note in the amount of $500,000 (or such lesser amount as the Company and
World Trade may finally agree) issued by the Company in favor of World Trade and
a related Commercial Security Agreement and Commercial Pledge Agreement between
the Company and World Trade, including, without limitation, all principal, all
interest, all costs and attorneys' fees, all sums paid for the purpose of
protecting World Trade's rights in security (such as paying for insurance on
collateral if the owner fails to do so), and all other obligations of the
Company to World Trade, secured or unsecured, of any nature whatsoever. The
Company agrees and the holder of this Note, by acceptance thereof, agrees,
expressly for the benefit of the holder of the Senior Indebtedness, that, except
as otherwise provided herein, upon (i) an event of default under the Senior
Indebtedness, or (ii) any dissolution, winding up, or liquidation of the
Company, whether or not in bankruptcy, insolvency or receivership proceedings,
the Company shall not pay, and the holder of such Note shall not be entitled to
receive, any amount in respect of the principal and interest of such Note unless
and until the Senior Indebtedness shall have been paid or otherwise discharged.
Upon (1) an event of default under the Senior Indebtedness, or (2) any
dissolution, winding up or liquidation of the Company, any payment or
distribution of assets of the Company, which the holder of this Note would be
entitled to receive but for the provisions hereof, shall be paid by the
liquidating trustee or agent or other person making such payment or distribution
directly to the holders of the Senior Indebtedness ratably according to the
aggregate amounts remaining unpaid on the Senior Indebtedness after giving
effect to any concurrent payment or distribution to the holders of the Senior
Indebtedness. Subject to the payment in full of the Senior Indebtedness and
until this Note is paid in full, the holder of this Note shall be subrogated to
the rights of the holders of the Senior Indebtedness (to the extent of payments
or distributions previously made to the holders of the Senior Indebtedness
pursuant to this Section 2(a)) to receive payments or distributions of assets of
the Company applicable to the Senior Indebtedness.
(b) This Section 2 is not intended to impair, as between the Company,
its creditors (other than the holders of the Senior Indebtedness) and the holder
of this Note, the unconditional and absolute obligation of the Company to pay
the principal of and interest on the Note or affect the relative rights of the
holder of this Note and the other creditors of the Company,
<PAGE>
other than the holders of the Senior Indebtedness. Nothing in this Note
shall prevent the holder of this Note from exercising all remedies otherwise
permitted by applicable law upon default under the Note, subject to the
rights, if any, of the holders of the Senior Indebtedness in respect to cash,
property or securities of the Company received upon the exercise of any such
remedy.
3. EVENTS OF DEFAULT. The Company's failure to pay (i) when due any
principal payment on the due date hereunder or (ii) any interest or other
payment required under the terms of this Note on the date due, and failure to
make such payment within five (5) business days of Company's receipt of Holder's
written notice to Company of such failure to pay, shall constitute an Event of
Default.
4. CONVERSION.
(a) In lieu of receiving cash payment for principal amounts and
accrued interest due under this Note, Holder shall have the right to convert
outstanding principal and accrued interest under this Note into Common Stock of
the Company at a conversion price per share equal to $0.53 (the "Conversion
Price") at any time on or prior to the Maturity Date, subject to the provisions
of Section 2 of that certain Agreement and Option to Invest of even date
herewith between the Company and Holder.
(b) In addition to the conversion right provided in Section 4(a)
above, upon an Event of Default, in lieu of receiving cash payment for principal
amounts and accrued interest due under this Note, Holder shall have the right to
convert outstanding principal and accrued interest under this Note into Common
Stock of the Company at a conversion price per share equal to the lower of (i)
the Conversion Price or (ii) 75% of the average closing price of the Company's
Common Stock on the OTC Bulletin Board or Nasdaq SmallCap Market, as applicable,
for the five (5) business days prior to the date of the Event of Default.
(c) Holder may exercise its conversion right by providing written
notice to the Company of Holder's intention to exercise its conversion right and
the amount of principal and accrued interest that it wishes to convert (the
"Conversion Amount") at least ten (10) days prior to the date on which it wishes
to convert (the "Conversion Date") (unless such notice is given pursuant to the
terms of Section 1(b) above, in which event notice shall comply with the terms
thereof). No fractional shares of Common Stock shall be issued upon conversion
of this Note. Promptly after the conversion of this Note, the Holder shall
surrender this Note, duly endorsed, at the principal office of Company. At its
expense, Company shall, as soon as practicable thereafter (or as otherwise noted
in the provisions above), issue and deliver to such Holder at such principal
office a certificate or certificates for the number of shares of such Common
Stock to which the Holder shall be entitled upon such conversion (bearing such
legends as are required by applicable state and federal securities laws in the
opinion of counsel to Company). In addition, unless this Note has been fully
converted, a new Note representing the principal amount that shall not have been
converted into Common Stock shall also be issued to Holder as soon as possible
thereafter. Upon conversion of this Note in full,
<PAGE>
Company shall be forever released from all its obligations and liabilities
under this Note including principal, interest and any other amounts due and
owing pursuant hereto. Any notice from the Holder of an election to convert
by the Company shall be irrevocable.
(d) If at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of the entire
outstanding principal amount and accrued interest under this Note, Company will
use its best efforts to take such corporate action as may be necessary, in the
opinion of its counsel, to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes.
5. REGISTRATION RIGHT.
(a) Following the Maturity Date, and within a reasonable amount of
time following the conversion by Holder of any outstanding principal and accrued
interest under this Note into Common Stock of the Company, the Company will use
reasonable efforts to (i) file a registration statement under the Securities Act
of 1933, as amended (the "Securities Act") registering such shares for resale to
the public, (ii) have such registration statement declared effective by the
Securities and Exchange Commission, (iii) register and qualify the securities
covered by such registration statement under the Blue Sky laws of such
jurisdictions as shall be reasonably requested by the Holder (provided that the
Company shall not be required in connection therewith or as a condition thereto
to qualify to do business or to file a general consent to service of process in
any such states or jurisdictions, unless the Company is already subject to
service in such jurisdiction and except as may be required by the Securities
Act), (iv) cause all securities registered pursuant hereunder to be listed on
each securities exchange on which similar securities issued by the Company are
then listed, and (v) file updates to such registration statement as necessary to
keep it effective until the date that all remaining such shares may be sold to
the public without registration within a period of 90 days; PROVIDED THAT, the
Company may suspend such registration for up to two periods of not more than 90
days each in any 12-month period if necessary (x) to enable the Company to
update the registration statement or (y) to undertake another sale of
securities.
(b) All Registration Expenses (as hereafter defined) incurred in
connection with any registration pursuant to this Section 5 shall be borne by
the Company. "Registration Expenses" shall mean all expenses incurred by the
Company in complying with this Section 5, including, without limitation, all
registration, qualification and filing fees, printing expenses, fees and
disbursements of counsel for the Company, the reasonable cost of one special
legal counsel to represent Holder in any such registration, and blue sky fees
and expenses. "Registration Expenses" shall not include (if applicable) any
underwriting discounts or selling commissions.
(c) INDEMNIFICATION.
(i) The Company will indemnify the Holder, each of its
officers and directors and partners, and each person controlling such Holder
within the meaning of Section 15 of
<PAGE>
the Securities Act, with respect to which registration, qualification or
compliance has been effected pursuant to this Section 5, against all
expenses, claims, losses, damages or liabilities (or actions in respect
thereof), including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
registration statement, prospectus, preliminary prospectus, offering circular
or other document, or any amendment or supplement thereto, incident to any
such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, or any violation or
any alleged violation by the Company of any rule or regulation promulgated
under the Securities Act or the Exchange Act or any state securities law
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse each such Holder,
each of its officers and directors, and each person controlling such Holder,
for any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability
or action, as such expenses are incurred, provided that the Company will not
be liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and
in conformity with written information furnished to the Company by an
instrument duly executed by such Holder or controlling person and stated to
be specifically for use therein.
(ii) The Holder will indemnify the Company, each of its
directors and officers, and each person who controls the Company within the
meaning of Section 15 of the Securities Act against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such directors, officers or control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, as such expenses are incurred, in each case to the extent, but only to
the extent, that such untrue statement (or alleged untrue statement) or omission
(or alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by an instrument duly executed by
such Holder and stated to be specifically for use therein.
6. REPRESENTATIONS AND WARRANTIES OF HOLDER. By its acceptance hereof,
Holder represents and warrants to Company that:
(a) Holder has been advised and acknowledges: (i) that this Note and
the Common Stock of the Company issuable upon conversion of the Note (with the
Note and such
<PAGE>
Common Stock being hereinafter referred to as the "Securities") have not
been, and when issued, will not be registered under the Securities Act, the
securities laws of any state of the United States or the securities laws of
any other country; (ii) that in issuing and selling the Securities to Holder
pursuant hereto, the Company is relying upon the "safe harbor" provided by
Regulation S and/or on Section 4(2) under the Securities Act; (iii) that it
is a condition to the availability of the Regulation S safe harbor that the
Securities not be offered or sold in the United States or to a U.S. Person
until the expiration of a period of 40 days following the issuance of such
Securities; (iv) that, notwithstanding the foregoing, prior to the expiration
of 40 days after the issuance of such Securities (the "Restricted Period"),
the Securities may be offered and sold by the holder thereof solely either:
(A) if the offer or sale is within the United States or to or for the account
of a U.S. Person (as such terms are defined in Regulation S), the securities
are offered and sold pursuant to an effective registration statement or
pursuant to Rule 144 under the Securities Act or pursuant to an exemption
from the registration requirements of the Securities Act; or (B) the offer
and sale is outside the United States and to other than a U.S. Person. The
foregoing restrictions are binding upon subsequent transferees of the
Securities, except for transferees pursuant to an effective registration
statement. After the Restricted Period, the Securities may be offered or
sold within the United States or to or for the account of a U.S. Person only
pursuant to applicable securities laws.
(b) As used herein, the term "United States" means and includes the
United States of America, its territories and possessions, any State of the
United States, and the District of Columbia, and the term "U.S. Person" (as
defined in Regulation S) means: (i) a natural person (regardless of
citizenship) resident in the United States; (ii) any partnership or corporation
organized or incorporated under the laws of the United States; (iii) any estate
or trust of which any executor, administrator or trustee is a U.S. Person;
(iv) any agency or branch of a foreign entity located in the United States;
(v) any nondiscretionary account or similar account (other than an estate or
trust) held by a dealer or other fiduciary for the benefit or account of a U.S.
Person (whether or not the dealer or other fiduciary is a U.S. Person); (vi) any
discretionary account or similar account (other than an estate or trust) held by
a dealer or other fiduciary organized, incorporated and (if an individual)
resident in the United States; and (vii) a corporation or partnership organized
under the laws of any jurisdiction other than the United States by a U.S. Person
principally for the purpose of investing in securities that have not been
registered under the Securities Act, unless organized or incorporated and owned
entirely by accredited investors (as defined in Rule 501(a) under the Securities
Act) who are not natural persons, estates or trusts.
(c) Holder agrees that with respect to the Securities until the
expiration of the Restricted Period: (i) Holder, its agents or representatives
have not and will not solicit offers to buy, offer for sale or sell any of the
Securities, or any beneficial interest therein in the United States or to or for
the account of a U.S. Person during the Restricted Period; and (ii) that,
notwithstanding the foregoing, prior to the expiration of the Restricted Period,
the Securities may be offered and sold by the holder thereof either: (A) if the
offer or sale is within the United States or to or for the account of a U.S.
Person (as such terms are defined in Regulation S), the securities are offered
and sold pursuant to an effective registration statement or pursuant to Rule 144
under the Securities Act or
<PAGE>
pursuant to an exemption from the registration requirements of the Securities
Act; or (B) the offer and sale is outside the United States and to other than
a U.S. Person. The foregoing restrictions are binding upon subsequent
transferees of the Securities, except for transferees pursuant to an
effective registration statement. Holder agrees that after the Restricted
Period, the Securities may be offered or sold within the United States or to
or for the account of a U.S. Person only pursuant to applicable securities
laws.
(d) Holder has not engaged, nor is it aware that any party has
engaged, and Holder will not engage or cause any third party to engage in any
directed selling efforts (as such term is defined in Regulation S) in the United
States with respect to the Securities.
(e) Holder (i) is domiciled and has its principal place of business
outside the United States, (ii) certifies it is not a U.S. Person and is not
acquiring the securities for the account or benefit of any U.S. Person, and
(iii) any persons acting on Holder's behalf in connection therewith will be
located outside the United States.
(f) Holder is acquiring the Securities either: (i) for its own
account; or (ii) for the account and benefit of clients of whom none is a U.S.
Person and for whom Holder has, and for the entire Restricted Period will
continue to have, full investment discretion with respect to the purchase,
holding and disposition of the Securities.
(g) Holder is not a "distributor" (as defined in Regulation S) or a
"dealer" (as defined in the Securities Act).
(h) By reason of Holder's business or financial experience, or that
of the Holder's professional advisor, Holder has the capacity to protect
Holder's own interests in connection with the acquisition of the Securities and
has the ability to bear the economic risk (including the risk of total loss) of
Holder's investment.
(i) Holder further covenants that Holder will not make any sale,
transfer or other disposition of the Securities in violation of the Securities
Act, the Securities and Exchange Act of 1934, as amended (the "Exchange Act"),
or the rules of the Securities and Exchange Commission promulgated under the
Securities Act or the Exchange Act.
(j) Holder covenants that Holder will sell, transfer or otherwise
dispose of the Securities only in a manner consistent with such Holder's
representations and covenants set forth in this Section 7. In connection
therewith, Holder acknowledges that, upon issuance of the shares of Common Stock
of the Company upon conversion of this Note, the Company shall make a notation
in its stock books regarding the restrictions on transfer set forth in this
Section 7 and shall transfer such shares on the books of the Company only to the
extent not inconsistent therewith.
<PAGE>
(k) Holder acknowledges that Company has given Holder access to all
documents and other information required for Holder to make an informed decision
with respect to the acceptance of the Securities. In this regard, Holder
acknowledges that it has received and reviewed, among other things, the
following documents filed by the Company with the Securities and Exchange
Commission: (i) the Company's Quarterly Report on Form 10-QSB for the quarters
ended March 31, 1997 and June 30, 1997 and (ii) the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1996.
7. ATTORNEYS' FEES. If the indebtedness represented by this Note or any
part thereof is collected in bankruptcy, receivership or other judicial
proceedings or if this Note is placed in the hands of attorneys for collection
after default, Company agrees to pay, in addition to the principal and interest
payable hereunder, reasonable attorneys' fees and costs incurred by Holder.
8. NOTICES. Except as otherwise provided herein, all notices, requests,
demands, consents, instructions or other communications to or upon the Company
or Holder hereunder shall be by telecopy or in writing and telecopied, mailed or
delivered to each party at telecopier number or its address set forth below (or
to such other telecopy number or address as the recipient of any notice shall
have notified the other in writing). All such notices and communications shall
be effective (a) when sent by Federal Express or other overnight service of
recognized standing, on the business day following the deposit with such service
(if sent to an address in the same country as the sender) or on the third
business day following the deposit with such service (if sent to an address in a
different country from the sender); (b) when mailed, by registered or certified
mail, first class postage prepaid and addressed as aforesaid through the United
States Postal Service, upon receipt; (c) when delivered by hand, upon delivery;
and (d) when telecopied, upon confirmation of receipt.
HOLDER: Bass Trust
435 Tasso Street, Suite 325
Palo Alto, CA 94301
(415) 323-3655 (telephone)
(415) 323-3657 (telecopy)
COMPANY: Socket Communications, Inc.
37400 Central Court
Newark, CA 94560
Attention: Chief Financial Officer
(415) 744-2700 (telephone)
(415) 744-2727 (telecopy)
9. ACCELERATION. This Note shall become immediately due and payable (a)
upon an Event of Default, (b) if the Company commences any proceeding in
bankruptcy or for dissolution, liquidation, winding-up, composition or other
relief under state or federal bankruptcy laws, or (c) if such proceedings are
commenced against the Company, or a receiver or trustee is appointed for the
<PAGE>
Company or a substantial part of its property, and such proceeding or
appointment is not dismissed or discharged within 60 days after its
commencement.
10. WAIVERS. Company hereby waives presentment, demand for performance,
notice of non-performance, protest, notice of protest and notice of dishonor.
No delay on the part of Holder in exercising any right hereunder shall operate
as a waiver of such right or any other right.
11. PAYMENT. Payment shall be made in lawful tender of the United States.
12. USURY. In the event any interest is paid on this Note which is deemed
to be in excess of the then legal maximum rate, then that portion of the
interest payment representing an amount in excess of the then legal maximum rate
shall be deemed a payment of principal and applied against the principal of this
Note.
13. GOVERNING LAW. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state or country.
14. SUCCESSORS AND ASSIGNS.
(a) The rights and obligations of the Company and the Holder of this
Note shall be binding upon and benefit the successors, assigns, heirs,
administrators and transferees of the parties.
(b) Holder shall not transfer this Note without the prior written
consent of Company, except that Holder may transfer the Note without such prior
written consent to a collection agency following an Event of Default.
(c) Neither this Note nor any of the rights, interests or obligations
hereunder may be assigned, by operation of law or otherwise, in whole or in
part, by Company without the prior written consent of the Holder except in
connection with an assignment in whole to a successor corporation to Company,
provided that such successor corporation acquires all or substantially all of
Company's property and assets and Holder's rights hereunder are not impaired.
SOCKET COMMUNICATIONS, INC.
By:
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
<PAGE>
Agreed and accepted:
BASS TRUST
Signature:
----------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE>
SOCKET COMMUNICATIONS, INC.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
JANUARY 21, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
1. Purchase and Sale of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Sale and Issuance of Series B Preferred Stock . . . . . . . . . . . . . . 1
1.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Option to Invest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Representations and Warranties of the Company. . . . . . . . . . . . . . . . . 2
2.1 Organization, Good Standing and Qualification . . . . . . . . . . . . . . 2
2.2 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.3 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.4 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.5 Valid Issuance of Preferred and Common Stock. . . . . . . . . . . . . . . 3
2.6 Governmental Consents . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.7 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.8 Patents and Trademarks. . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.9 Compliance with Other Instruments . . . . . . . . . . . . . . . . . . . . 4
2.10 Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.11 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.12 Title to Property and Assets. . . . . . . . . . . . . . . . . . . . . . . 5
2.13 Tax Returns and Audits. . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.14 Brokers or Finders. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3. Representations and Warranties of the Investor . . . . . . . . . . . . . . . . 5
3.1 Experience. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.3 Rule 144. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.4 Access to Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.5 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.6 Accredited Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.7 High Degree of Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.8 Restriction on Transfers. . . . . . . . . . . . . . . . . . . . . . . . . 7
4. Conditions of Investor's Obligations at Closing. . . . . . . . . . . . . . . . 7
4.1 Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . 7
4.2 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.3 Compliance Certificate. . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.4 Blue Sky. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.5 Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5. Conditions of the Company's Obligations at Closing . . . . . . . . . . . . . . 8
5.1 Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . 8
5.2 Payment of Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . 8
-i-
<PAGE>
<CAPTION>
TABLE OF CONTENTS
(CONTINUED)
Page
<S> <C> <C>
5.3 Blue Sky. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5.4 Proceedings and Documents . . . . . . . . . . . . . . . . . . . . . . . . 8
5.5 Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6. Restrictions on Transferability; Registration Rights . . . . . . . . . . . . . 8
6.1 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.2 Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.3 Restrictive Legend. . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.4 Notice of Proposed Transfers. . . . . . . . . . . . . . . . . . . . . . . 10
6.5 Registration on Form S-3. . . . . . . . . . . . . . . . . . . . . . . . . 11
6.6 Expenses of Registration. . . . . . . . . . . . . . . . . . . . . . . . . 11
6.7 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.8 Information by Holder . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.9 Transfer of Registration Rights . . . . . . . . . . . . . . . . . . . . . 13
6.10 Standoff Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.1 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.2 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.3 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.4 Entire Agreement; Amendment . . . . . . . . . . . . . . . . . . . . . . . 14
7.5 Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.6 Delays or Omissions . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.7 California Corporate Securities Law . . . . . . . . . . . . . . . . . . . 15
7.8 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.9 Finder's Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.10 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.11 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Exhibit A Certificate of Designations, Preferences and Rights of Series B Preferred Stock
Exhibit B Warrant
Exhibit C Schedule of Exceptions
Exhibit D Distribution Agreement
Exhibit E Consulting Agreement
</TABLE>
-ii-
<PAGE>
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES B PREFERRED STOCK PURCHASE AGREEMENT is made as of the 21st
day of January, 1998, by and between SOCKET COMMUNICATIONS, INC., a Delaware
corporation (the "Company"), and EXPLORER PARTNERS, L.L.C., a Delaware
limited liability company (the "Investor") and EXPLORER FUND MANAGEMENT,
L.L.C., an Illinois limited liability company ("EFM").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF SERIES B PREFERRED STOCK.
(a) The Board of Directors of the Company shall adopt and
file with the Secretary of State of Delaware on or before the Closing (as
defined below) the Certificate of Designations of Preferences and Rights of
Series B Preferred Stock (the "Certificate of Designations"), in the form
attached hereto as EXHIBIT A.
(b) Subject to the terms and conditions of this Agreement,
the Investor agrees to purchase at the Closing, and the Company agrees to
sell and issue to the Investor at the Closing (as defined below), an
aggregate of up to that number of shares (the "Shares") of the Company's
Series B Preferred Stock (the "Series B Preferred") equal to $500,000 divided
by the Purchase Price (as defined below) at Closing. The purchase price per
Share shall be $40.00 (the "Purchase Price").
(c) (i) In the event that the Company fails to file the
registration statement by March 31, 1998 pursuant to Section 6.5 hereto, the
Company shall issue to the Investor that number of shares of Series B
Preferred equal to two percent (2%) of the total number of shares of Series B
Preferred purchased by the Investor under Section 1.1(a) above (the "Two
Percent Default Shares") for the first 30-day period after March 31, 1998;
and for each successive 30-day period during which the Company shall fail to
file the registration statement, the Company shall issue to the Investor an
additional three percent (3%) of the total number of shares of Series B
Preferred purchased by the Investor under Section 1.1(a) above (the "Three
Percent Default Shares").
(ii) In the event that the Company fails to cause the
registration statement to become effective by June 19, 1998 pursuant to
Section 6.5 (along with the failure to file the registration statement by May
31, 1998 in Section 1.1(c)(i), each a "Default"), the Company shall issue the
Two Percent Default Shares for the first 30-day period after June 19, 1998;
and for each successive 30-day period during which the Company shall fail to
cause the registration statement to become effective, the Company shall issue
the Three Percent Default Shares; provided, however, that the Company shall
not be obligated to issue any Default Shares following the failure of the
Company to cause the Registration Statement to become effective if such
failure was due to the
<PAGE>
Company's failure to file the registration statement in accordance with
Section 6.5 and such failure resulted in the issuance of Default Shares at
that time.
(iii) The Company shall issue Default Shares PRO RATA for
Defaults under this Section 1.1(c) which are cured in intervals which are not
divisible by 30 (e.g. if the Company files the registration statement fifteen
(15) days after the March 31, 1998 deadline under Section 1.1(c)(i) above,
the Company shall issue one-half of the Two Percent Default Shares, or one
percent (1%) of the total number of shares of Series B Preferred purchased by
the Investor under Section 1.1(a) above).
1.2 CLOSING. The purchase and sale of the Shares shall take place
at the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, California, at 10:00 a.m., Pacific time, on January 21, 1998, or at
such times or on such dates on or before January 23, 1998 as the Company and
the Investor agree upon orally or in writing (the "Closing"). At the Closing
the Company shall deliver to the Investor a certificate representing the
Series B Preferred that the Investor is purchasing against payment of the
aggregate purchase price therefor by check, wire transfer or any combination
thereof.
1.3 OPTION TO INVEST. Investor shall have an option to purchase
additional shares of Series B Preferred in two $500,000 tranches (each an
"Additional Tranche" and collectively, the "Additional Tranches"). The
Additional Tranches shall have expiration dates of February 15, 1998 and
March 15, 1998, respectively, and shall have a purchase price equal to the
product of (a) one hundred (100) and (b) 80% of the average of the high and
low sale prices of the Company's Common Stock over the ten trading days
immediately prior to the closing date of such Additional Tranche; PROVIDED,
HOWEVER, that the purchase price for each Additional Tranche shall not exceed
$60.00 per share and shall not be less than $40.00 per share.
1.4 ISSUANCE OF WARRANT. At the Closing, the Company shall
deliver to EFM a warrant certificate in the form as attached hereto as
EXHIBIT B (the "Warrant") to purchase 187,500 shares of the Company's Common
Stock (as defined below).
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth
in (i) the forms, reports and documents, including the exhibits thereto,
filed by the Company with the Securities and Exchange Commission or (ii) the
Schedule of Exceptions attached hereto as EXHIBIT C, the Company hereby
represents and warrants as follows:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as currently conducted. The Company is
duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties. True and accurate copies of the
Company's Amended and Restated Certificate of
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Incorporation and Bylaws, each as amended and in effect at the Closing, have
been delivered to the Investor.
2.2 CAPITALIZATION. The authorized capital stock of the Company
consists of 15,000,000 shares of Common Stock, $0.001 par value ("Common
Stock"), of which 6,501,275 shares are issued and outstanding as of December
31, 1997, and 3,000,000 shares of Preferred Stock ("Preferred Stock"), of
which 37,500 shares are designated Series B Preferred Stock, none of which is
issued and outstanding. All such issued and outstanding shares have been
duly authorized and validly issued and are fully paid and nonassessable. The
Company has reserved an aggregate of 37,500 shares of Series B Preferred for
issuance hereunder. The Company has reserved 3,750,000 shares of Common
Stock for issuance upon conversion of the Series B Preferred. An aggregate
of 812,771 shares of Common Stock are reserved for issuance under the
Company's 1993 Stock Option Plan/Stock Issuance Plan and 1995 Stock Plan.
Except as set forth on Schedule 2.2 of EXHIBIT C, there are no outstanding
rights, options, warrants, preemptive rights, rights of first refusal or
similar rights for the purchase or acquisition from the Company of any
securities of the Company. All outstanding shares have been issued in
compliance with state and federal securities laws.
2.3 SUBSIDIARIES. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association,
or other business entity. The Company is not a participant in any joint
venture, partnership, or similar arrangement.
2.4 AUTHORIZATION. Except as set forth in Schedule 2.5 of EXHIBIT
C all corporate action on the part of the Company, its officers, directors
and shareholders necessary for the authorization, execution and delivery of
this Agreement, the performance of all obligations of the Company hereunder
and thereunder, and the authorization, issuance (or reservation for
issuance), sale and delivery of the Shares being sold hereunder and the
Common Stock issuable upon conversion of the Shares has been taken or will be
taken prior to the Closing, and this Agreement constitutes a valid and
legally binding obligation of the Company, enforceable in accordance with its
terms, subject to: (i) judicial principles limiting the availability of
specific performance, injunctive relief, and other equitable remedies; and
(ii) bankruptcy, insolvency, reorganization, moratorium or other similar laws
now or hereafter in effect generally relating to or affecting creditors'
rights.
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. The shares of
Series B Preferred that are being purchased by the Investor hereunder, when
issued, sold and delivered in accordance with the terms of this Agreement for
the consideration expressed herein, will be duly and validly issued, fully
paid, and nonassessable, and will be free of restrictions on transfer other
than restrictions on transfer under this Agreement and under applicable state
and federal securities laws. Except as set forth in Schedule 2.5 of EXHIBIT
C, the Common Stock issuable upon conversion of the Series B Preferred or
upon exercise of the Warrants purchased under this Agreement has been duly
and validly reserved for issuance and, upon issuance in accordance with the
terms of the Certificate of Designations and the Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation") or upon
issuance in accordance with the terms of the Warrants, as the case may be,
will be duly and validly issued, fully paid, and nonassessable and will be
free of restrictions on
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<PAGE>
transfer other than restrictions on transfer under this Agreement and under
applicable state and federal securities laws.
2.6 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part
of the Company is required in connection with the offer, sale or issuance of
the Shares (and the Common Stock issuable upon conversion of the Shares) or
the Warrants (and the Common Stock issuable upon exercise of the Warrants)
(together with the Shares and the Common Stock issuable upon conversion
thereof, the "Securities") or the consummation of any other transaction
contemplated hereby, except for the following: (i) the filing of the
Certificate of Designations in the office of the Secretary of State of the
State of Delaware, which shall be filed by the Company on or prior to the
Closing; (ii) the filing of such notices as may be required under the
Securities Act of 1933, as amended (the "Securities Act"); and (iii) the
filing of any notices required under applicable state securities laws (the
"Applicable Blue Sky Law"), which shall be filed by the Company promptly
following the Closing. Based in part on the representations of the Investor
set forth in Section 3 below, the offer, sale and issuance of the Shares or
the Warrants in conformity with the terms of this Agreement are exempt from
the registration requirements of Section 5 of the Securities Act and from the
qualification requirements of Applicable Blue Sky Law.
2.7 LITIGATION. There is no action, suit, proceeding or
investigation pending or, to the best of the Company's knowledge, currently
threatened before any court, administrative agency or other governmental body
against the Company which questions the validity of this Agreement or the
right of the Company to enter into it, or to consummate the transactions
contemplated hereby, or which could result, either individually or in the
aggregate, in any material adverse change in the condition (financial or
otherwise), business, property, assets or liabilities of the Company. The
foregoing includes, without limitation, actions, suits, proceedings or
investigations pending or threatened (or any basis therefor known to the
Company) involving the prior employment of any of the Company's employees,
their use in connection with the Company's business of any information or
techniques allegedly proprietary to any of their former employers, or their
obligations under any agreements with prior employers. The Company is not a
party or subject to, and none of its assets is bound by, the provisions of
any order, writ, injunction, judgment or decree of any court or government
agency or instrumentality.
2.8 PATENTS AND TRADEMARKS. The Company has sufficient title and
ownership of all patents, trademarks, service marks, trade names, copyrights,
trade secrets, information, proprietary rights and processes (collectively,
"Intellectual Property") necessary for its business as now conducted without
any conflict with or infringement of the rights of others. There are no
outstanding options, licenses, or agreements of any kind relating to the
foregoing, nor is the Company bound by or a party to any options, licenses or
agreements of any kind with respect to the Intellectual Property of any other
person or entity. Except as set forth in Schedule 2.8 of EXHIBIT C, the
Company has not received any communications alleging that any material
Intellectual Property of the Company has violated or would violate any of the
Intellectual Property of any other person or entity.
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<PAGE>
2.9 COMPLIANCE WITH OTHER INSTRUMENTS. Except as set forth in
Schedule 2.9 of EXHIBIT C, the Company is not in violation or default of any
provision of its Certificate of Incorporation or Bylaws, each as amended and
in effect on and as of the Closing. The Company is not in violation or
default of any material provision of any instrument, mortgage, deed of trust,
loan, contract, commitment, judgment, decree, order or obligation to which it
is a party or by which it or any of its properties or assets are bound which
would materially adversely affect the condition (financial or otherwise),
business, property, assets or liabilities of the Company or, to the best of
its knowledge, of any provision of any federal, state or local statute, rule
or governmental regulation which would materially adversely affect the
condition (financial or otherwise), business, property, assets or liabilities
of the Company. The execution, delivery and performance of and compliance
with this Agreement, and the issuance and sale of the Shares and the
Warrants, will not result in any such violation, be in conflict with or
constitute, with or without the passage of time or giving of notice, a
default under any such provision, require any consent or waiver under any
such provision (other than any consents or waivers that have been obtained),
or result in the creation of any mortgage, pledge, lien, encumbrance or
charge upon any of the properties or assets of the Company pursuant to any
such provision.
2.10 PERMITS. The Company has all franchises, permits, licenses,
and any similar authority necessary for the conduct of its business as now
being conducted by it, the lack of which could materially and adversely
affect the business, properties, prospects, or financial condition of the
Company, and the Company believes it can obtain, without undue burden or
expense, any similar authority for the conduct of its business as planned to
be conducted. The Company is not in default in any material respect under
any of such franchises, permits, licenses, or other similar authority.
2.11 DISCLOSURE. No representation, warranty or statement by the
Company in this Agreement, or in any written statement or certificate
furnished to the Investor pursuant to this Agreement or the transactions
contemplated hereby, contains any untrue statement of a material fact or,
when taken together, omits to state a material fact necessary to make the
statements made herein or therein, in light of the circumstances under which
they were made, not misleading.
2.12 TITLE TO PROPERTY AND ASSETS. The Company has good and
marketable title to all of its properties and assets free and clear of all
mortgages, liens and encumbrances, except liens for current taxes and
assessments not yet due and possible minor liens and encumbrances which do
not, in any case, in the aggregate, materially detract from the value of the
property subject thereto or materially impair the operations of the Company.
With respect to the property and assets it leases, the Company is in
compliance with such leases and, to the best of its knowledge, holds a valid
leasehold interest free of all liens, claims or encumbrances. The Company's
properties and assets are in good condition and repair in all material
respects.
2.13 TAX RETURNS AND AUDITS. The Company has accurately prepared
all United States income tax returns and all state and municipal tax returns
required to be filed by it, if any, has paid all taxes, assessments, fees and
charges when and as due under such returns and has made adequate provision
for the payment of all other taxes, assessments, fees and charges shown on
such
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<PAGE>
returns or on assessments received by the Company. To the best of the
Company's knowledge, no deficiency assessment or proposed adjustment of the
Company's United States income tax or state or municipal taxes is pending.
2.14 BROKERS OR FINDERS. The Company has not agreed to incur,
directly or indirectly, any liability for brokerage or finders' fees, agents'
commissions or other similar charges in connection with this Agreement or any
of the transactions contemplated hereby.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR AND EFM. Each the
Investor and EFM (for purposes of this Section 3, each an "Investor") hereby
represent and warrant that:
3.1 EXPERIENCE. Such Investor is experienced in evaluating
companies such as the Company, is able to fend for itself in transactions
such as the one contemplated by this Agreement, has such knowledge and
experience in financial and business matters that Investor is capable of
evaluating the merits and risks of Investor's prospective investment in the
Company, and has the ability to bear the economic risks of the investment.
3.2 INVESTMENT. Such Investor is acquiring the Securities for
investment for such Investor's own account and not with the view to, or for
resale in connection with, any distribution thereof. Such Investor
understands that the Securities have not been registered under the Securities
Act by reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the BONA FIDE nature
of the investment intent as expressed herein. Such Investor further
represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participation to any
third person with respect to any of the Securities. Such Investor
understands and acknowledges that the offering of the Securities pursuant to
this Agreement will not, and any issuance of Common Stock on conversion may
not, be registered under the Securities Act on the ground that the sale
provided for in this Agreement and the issuance of securities hereunder is
exempt from the registration requirements of the Securities Act.
3.3 RULE 144. Such Investor acknowledges that the Securities must
be held indefinitely unless subsequently registered under the Securities Act
or an exemption from such registration is available. Such Investor is aware
of the provisions of Rule 144 promulgated under the Securities Act which
permit limited resale of shares purchased in a private placement subject to
the satisfaction of certain conditions. Such Investor covenants that, in the
absence of an effective registration statement covering the stock in
question, such Investor will sell, transfer, or otherwise dispose of the
Securities only in a manner consistent with such Investor's representations
and covenants set forth in this Section 3. In connection therewith, such
Investor acknowledges that the Company will make a notation on its stock
books regarding the restrictions on transfers set forth in this Section 3 and
will transfer securities on the books of the Company only to the extent not
inconsistent therewith.
3.4 ACCESS TO DATA. Such Investor has received and reviewed
information about the Company and has had an opportunity to discuss the
Company's business, management and
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<PAGE>
financial affairs with its management and to review the Company's facilities.
Such Investor understands that such discussions, as well as any written
information issued by the Company, were intended to describe the aspects of
the Company's business and prospects which the Company believes to be
material, but were not necessarily a thorough or exhaustive description. The
foregoing, however, does not limit or modify the representations and
warranties of the Company in Section 2 of this Agreement or the right of the
Investor to rely thereon.
3.5 AUTHORIZATION. This Agreement when executed and delivered by
such Investor will constitute a valid and legally binding obligation of such
Investor, enforceable in accordance with its terms, subject to: (i) judicial
principles respecting election of remedies or limiting the availability of
specific performance, injunctive relief, and other equitable remedies; and
(ii) bankruptcy, insolvency, reorganization, moratorium or other similar laws
now or hereafter in effect generally relating to or affecting creditors'
rights.
3.6 ACCREDITED INVESTOR. Such Investor acknowledges that it is an
"accredited investor" as defined in Rule 501 of Regulation D as promulgated
by the Securities and Exchange Commission under the Securities Act and shall
submit to the Company such further assurances of such status as may be
reasonably requested by the Company. For state securities law purposes, the
principal address of such Investor and EFM is 444 N. Michigan Avenue, Suite
2910, Chicago, Illinois 60611.
3.7 HIGH DEGREE OF RISK. Such Investor is aware that the
securities offered hereby involve a high degree of risk and that Investor may
suffer a total loss of its investment. The Investor has been provided with
the Company's periodic reports filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, including
the Company's most recently filed Annual Report on Form 10-K and Quarterly
Report on Form 10-Q. Such Investor has read the information in such reports,
including the information under the caption "Risk Factors" included in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section. Such Investor is further aware that following the
investment contemplated herein, the Company will need to raise additional
capital to maintain continued listing of its Common Stock on the Pacific
Exchange. Should the Company's Common Stock be delisted from the Pacific
Exchange, such Investor would find it more difficult to dispose of, or obtain
accurate quotations as to the price of, the Company's securities, and that
the ability or willingness of broker-dealers to sell or make a market in the
Company's Common Stock, and therefore such Investor's ability to sell the
Company's Common Stock in the secondary market, would be materially and
adversely affected.
3.8 RESTRICTION ON TRANSFERS. Such Investor or any subsequent
holder of the Shares (and the Common Stock issuable upon conversion of the
Shares or the Warrants) hereby agrees that he, she or it shall not sell,
assign, give, bequeath, transfer, distribute, pledge, hypothecate or
otherwise encumber, convey or dispose of (collectively, "Transfer") any
securities of the Company owned by it (whether now owned or hereafter
acquired) until after the closing date of the second Additional Tranche. Any
attempted or purported Transfer of any securities of the Company
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<PAGE>
by Investor or any subsequent holder of the Shares or the Warrants (and the
Common stock issuable upon conversion of the Shares or the Warrants) in
violation or contravention of the terms of this Agreement shall be void. In
addition to any other remedies available to the parties to this Agreement
either at law, in equity or pursuant to this Agreement, no dividends nor
payments of any sort shall be paid on, nor any distribution made on, any
securities of the Company that are Transferred in violation or breach of this
Agreement. Such Investor consents to the Company making a notation on its
records and giving instructions to any transfer agent of the Shares or the
Warrants in order to implement the restrictions on transfer established in
this Section 3.8.
4. CONDITIONS OF INVESTOR'S OBLIGATIONS AT CLOSING. The obligations
of the Investor under subsection 1.1(b) of this Agreement are subject to the
fulfillment on or before each Closing of each of the following conditions,
the waiver of which shall not be effective against any Investor who does not
consent in writing thereto:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company contained in Section 2 shall be true on and as of
the Closing with the same effect as though such representations and
warranties had been made on and as of the date of such Closing.
4.2 PERFORMANCE. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement
that are required to be performed or complied with by it on or before the
Closing.
4.3 COMPLIANCE CERTIFICATE. The President of the Company shall
deliver to the Investor at the Closing a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 BLUE SKY. The Company shall have obtained all necessary
permits and qualifications, if any, or secured an exemption therefrom,
required by any state or country prior to the offer and sale of the Shares.
4.5 OTHER AGREEMENTS. The Company shall execute and deliver to
the Investor at the Closing (i) the Distribution Agreement in the form
attached hereto as EXHIBIT D (the "Distribution Agreement") and (ii) the
Consulting Agreement, in the form attached hereto as EXHIBIT E (the
"Consulting Agreement").
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The
obligations of the Company to the Investor under this Agreement are subject
to the fulfillment on or before each Closing of each of the following
conditions by that Investor:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Investor contained in Section 3 shall be true on and as of
the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.
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5.2 PAYMENT OF PURCHASE PRICE. The Investor shall have delivered the
purchase price specified in Section 1.1 against delivery of the Shares.
5.3 BLUE SKY. The Company shall have obtained all necessary permits
and qualifications, if any, or secured an exemption therefrom, required by any
state or country for the offer and sale of the Shares.
5.4 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
in connection with the transactions contemplated at the Closing hereby, and all
documents and instruments incident to these transactions, shall be reasonably
satisfactory in substance to the Company and its counsel.
5.5 OTHER AGREEMENTS. The Investor shall execute and deliver to the
Company at or before the Closing (i) the Distribution Agreement and (ii) the
Consulting Agreement.
6. RESTRICTIONS ON TRANSFERABILITY; REGISTRATION RIGHTS.
6.1 CERTAIN DEFINITIONS. As used in this Section 6, the following
terms shall have the following respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"CONVERSION SHARES" means the Common Stock issued or issuable upon
conversion of the Shares or exercise of the Warrants.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"HOLDER" shall mean the Investor and EFM, if it still holds
Registrable Securities, and any person holding Registrable Securities to whom
the rights under this Agreement have been transferred in accordance with
Section 6.8 hereof.
The terms "REGISTER", "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all expenses incurred by the
Company in complying with Section 6.5 hereof, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and the expense of any special audits incident to or required by any such
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registration (but excluding the compensation of regular employees of the Company
which shall be paid in any event by the Company).
"REGISTRABLE SECURITIES" means any Common Stock of the Company issued
or issuable in respect of the Shares or Conversion Shares or other securities
issued or issuable with respect to the Shares or the Warrants or Conversion
Shares upon any stock split, stock dividend, recapitalization, or similar event,
or any Common Stock otherwise issued or issuable with respect to the Shares or
the Warrants or Conversion Shares; PROVIDED, HOWEVER, that shares of Common
Stock or other securities shall only be treated as Registrable Securities if and
so long as they have not been (A) sold to or through a broker or dealer or
underwriter in a public distribution or a public securities transaction, or
(B) sold in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act under Section 4(1) thereof so that all
transfer restrictions and restrictive legends with respect thereto are removed
upon the consummation of such sale.
"RESTRICTED SECURITIES" shall mean the securities of the Company
required to bear the legend set forth in Section 6.3 hereof.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Holders and all fees and disbursements of counsel for the Holders (as
limited by Section 6.5).
6.2 RESTRICTIONS. The Shares and the Conversion Shares shall not be
sold, assigned, transferred or pledged except upon the conditions specified in
this Section 6, which conditions are intended to ensure compliance with the
provisions of the Securities Act. The Investor and EFM will cause any proposed
purchaser, assignee, transferee or pledgee of the Restricted Securities to agree
to take and hold such securities subject to the provisions and upon the
conditions specified in this Section 6.
6.3 RESTRICTIVE LEGEND. Each certificate representing (i) the
Shares, (ii) the Warrants, (iii) the Conversion Shares, and (iv) any other
securities issued in respect of the securities referenced in clauses (i),
(ii) and (iii) upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted by the
provisions of Section 6.4 below) be stamped or otherwise imprinted with a legend
in the following form (in addition to any legend required under applicable state
securities laws):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED
IN THE ABSENCE OF SUCH
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REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL
(WHICH MAY BE COUNSEL FOR THE COMPANY) REASONABLY ACCEPTABLE TO IT
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT."
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED
ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE
COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY."
The Investor and EFM each consent to the Company making a notation on
its records and giving instructions to any transfer agent of the Restricted
Securities in order to implement the restrictions on transfer established in
this Section 6.
6.4 NOTICE OF PROPOSED TRANSFERS. The holder of each certificate
representing Restricted Securities, by acceptance thereof, agrees to comply in
all respects with the provisions of this Section 6. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities, unless there is in
effect a registration statement under the Securities Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the manner and circumstances of the proposed
transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied at such holder's expense by either (i) a written opinion of legal
counsel who shall, and whose legal opinion shall be, reasonably satisfactory to
the Company, addressed to the Company, to the effect that the proposed transfer
of the Restricted Securities may be effected without registration under the
Securities Act, or (ii) a "no action" letter from the Commission to the effect
that the transfer of such securities without registration will not result in a
recommendation by the staff of the Commission that action be taken with respect
thereto, or (iii) any other evidence reasonably satisfactory to counsel to the
Company, whereupon the holder of such Restricted Securities shall be entitled to
transfer such Restricted Securities in accordance with the terms of the notice
delivered by the holder to the Company. The Company will not require such a
legal opinion or "no action" letter (a) in any transaction in compliance with
Rule 144, (b) in any transaction in which an Investor which is a corporation
distributes Restricted Securities after six (6) months after the purchase
thereof solely to its majority owned subsidiaries or affiliates for no
consideration, or (c) in any transaction in which an Investor which is a
partnership distributes Restricted Securities after six (6) months after the
purchase thereof solely to partners thereof for no consideration; PROVIDED that
each transferee agrees in writing to be subject to the terms of this
Section 6.4. Each certificate evidencing the Restricted Securities transferred
as above provided shall bear, except if such transfer is made pursuant to
Rule 144, the appropriate restrictive legend set forth in Section 6.3 above,
except that such certificate shall not bear such restrictive legend if, in the
opinion of counsel for such holder and the Company, such legend is not required
in order to establish compliance with any provisions of the Securities Act.
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6.5 REGISTRATION ON FORM S-3.
(a) The Company shall file a Registration Statement on Form S-3
(or other appropriate form) with the Commission for such Registrable Securities
to be registered by March 31, 1998, and shall use its best efforts to cause such
Registration Statement to become effective as soon as practicable thereafter
(but in no event later than June 19, 1998).
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 6.5: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act; (ii) during the period
starting with the date thirty (30) days prior to the Company's estimated date of
filing of, and ending on the date three (3) months immediately following the
effective date of, a registration statement (other than with respect to a
registration statement relating to a Rule 145 transaction, an offering solely to
employees or any other registration which is not appropriate for the
registration of Registrable Securities), provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective; or (iii) if the Company shall furnish to such
Holder a certificate signed by the President of the Company stating that, in the
good faith judgment of the Board of Directors, it would be seriously detrimental
to the Company or its shareholders for registration statements to be filed in
the near future, then the Company's obligation to use its best efforts to file a
registration statement shall be deferred for a period not to exceed ninety (90)
days from the receipt of the request to file such registration by such Holder or
Holders; provided, however, that the Company may not utilize this right more
than once in any twelve (12) month period.
6.6 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration pursuant to this Section 6.5 and the reasonable
cost of one special legal counsel to represent all of the Holders together in
any such registration shall be borne by the Company. Unless otherwise stated,
all other Selling Expenses relating to securities registered on behalf of the
Holders shall be borne by the Holders of the registered securities included in
such registration PRO RATA on the basis of the number of shares so registered.
6.7 INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its officers
and directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 6, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, preliminary
prospectus, offering circular or other document, or any amendment or
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<PAGE>
supplement thereto, incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading, or any violation or any alleged violation by the Company of
any rule or regulation promulgated under the Securities Act or the Exchange
Act or any state securities law applicable to the Company in connection with
any such registration, qualification or compliance, and the Company will
reimburse each such Holder, each of its officers and directors, and each
person controlling such Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses as
reasonably incurred in connection with investigating, preparing or defending
any such claim, loss, damage, liability or action, as such expenses are
incurred, provided that the Company will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue
statement or omission, made in reliance upon and in conformity with written
information furnished to the Company by an instrument duly executed by such
Holder, controlling person or underwriter and stated to be specifically for
use therein.
(b) Each Holder will, if Registrable Securities held by such
Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each of
its directors and officers, each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers and directors
and each person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses as reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, as such expenses are incurred, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein.
(c) Each party entitled to indemnification under this
Section 6.9 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party
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<PAGE>
may participate in such defense at such party's expense; provided, however,
that an Indemnified Party (together with all other Indemnified Parties which
may be represented without conflict by one counsel) shall have the right to
retain one separate counsel, with the fees and expenses to be paid by the
Indemnifying Party, if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due to
actual or potential differing interests between such Indemnified Party and
any other party represented by such counsel in such proceeding. The failure
of any Indemnified Party to give notice as provided herein shall not relieve
the Indemnifying Party of its obligations under this Section 6 unless the
failure to give such notice is materially prejudicial to an Indemnifying
Party's ability to defend such action. No Indemnifying Party, in the defense
of any such claim or litigation, shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation.
6.8 INFORMATION BY HOLDER. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
request in writing and as shall be required in connection with any registration,
qualification or compliance referred to in this Section 6.
6.9 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company
to register securities granted to any party hereto under Section 6.5 may be
assigned to a transferee or assignee reasonably acceptable to the Company in
connection with any transfer or assignment of Registrable Securities by such
party (together with any affiliate); PROVIDED that (a) such transfer may
otherwise be effected in accordance with applicable securities laws, (b) notice
of such assignment is given to the Company, and (c) such transferee or assignee
(i) is a wholly-owned subsidiary or constituent partner (including limited
partners, retired partners, spouses and ancestors, lineal descendants and
siblings of such partners or spouses who acquire Registrable Securities by gift,
will or intestate succession) of such party, or (ii) acquires from such party at
least 50,000 shares of Restricted Securities (as appropriately adjusted for
stock splits and the like).
6.10 STANDOFF AGREEMENT. Each Holder agrees in connection with any
registration of the Company's securities (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan), upon request of the Company or the underwriters managing any underwritten
offering of the Company's securities, not to sell, make any short sale of, loan,
pledge (or otherwise encumber or hypothecate), grant any option for the purchase
of, or otherwise directly or indirectly dispose of any Registrable Securities
(other than those included in the registration) without the prior written
consent of the Company and such managing underwriters for such period of time,
not to exceed ninety (90) days, as the Board of Directors establishes pursuant
to its good faith negotiations with such managing underwriters; PROVIDED,
HOWEVER, that such Holder shall not be subject to such lockup unless the
officers and directors of the Company who own stock of the Company shall also be
bound by such restrictions.
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<PAGE>
7. MISCELLANEOUS.
7.1 GOVERNING LAW. This Agreement shall be governed in all respects
by the laws of the State of California, without regard to any provisions thereof
relating to conflicts of laws among different jurisdictions.
7.2 SURVIVAL. The representations, warranties, covenants and
agreements made herein shall survive any investigation made by the Investor and
the closing of the transactions contemplated hereby. All statements as to
factual matters contained in any certificate or exhibit delivered by or on
behalf of the Company pursuant hereto shall be deemed to be the representations
and warranties of the Company hereunder as of such date of such certificate or
exhibit.
7.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto;
provided, however, that the rights of an Investor to purchase Shares shall not
be assignable without the consent of the Company.
7.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement among the parties with regard to the subjects hereof and thereof.
Neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought;
PROVIDED, HOWEVER, that holders of fifty-one percent (51%) of the outstanding
Shares (whether or not converted) may waive or amend, on behalf of the Investor
and other holders of Shares, any provisions hereof benefitting the Investor so
long as the effect thereof will be that the Investor and other holders of Shares
will be treated equally.
7.5 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, return receipt requested, or otherwise
delivered by hand or by messenger, addressed (a) if to the Investor, at the
Investor's principal offices at 444 N. Michigan Avenue, Suite 2910, Chicago,
Illinois 60611 or at such other address as the Investor shall have furnished to
the Company in writing, with a copy to Timothy J. Keating, 11300 U.S. Highway
One, Suite 400, North Palm Beach, Florida 33408, or (b) if to any other holder
of any Shares, at such address as such holder shall have furnished the Company
in writing, or, until any such holder so furnishes an address to the Company,
then to and at the address of the last holder of such Shares who has so
furnished an address to the Company, or (c) if to the Company, at its principal
offices at 37400 Central Court, Newark, California 94560 addressed to the
attention of the Corporate Secretary, or at such other address as the Company
shall have furnished to the Investor. If notice is provided by mail, notice
shall be deemed to be given three (3) business days after proper deposit in the
U.S. Mail.
7.6 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any holder of any Shares upon any breach or default
of the Company under this
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<PAGE>
Agreement shall impair any such right, power or remedy of such holder, nor
shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default theretofore or thereafter occurring.
Any waiver, permit, consent or approval of any kind or character on the part
of any holder of any breach or default under this Agreement, or any waiver on
the part of any holder of any provisions or conditions of this Agreement,
must be in writing and shall be effective only to the extent specifically set
forth in such writing or as provided in this Agreement. All remedies, either
under this Agreement or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
7.7 CALIFORNIA CORPORATE SECURITIES LAW. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH
SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
7.8 EXPENSES. The Company and the Investor shall bear their own
expenses and legal fees incurred on its behalf with respect to this Agreement
and the transactions contemplated hereby.
7.9 FINDER'S FEE. The Company and the Investor shall each indemnify
and hold the other harmless from any liability for any commission or
compensation in the nature of a finder's fee (including the costs, expenses and
legal fees of defending against such liability) for which the Company or the
Investor, or any of their respective partners, employees, or representatives, as
the case may be, is responsible.
7.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
7.11 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
SOCKET COMMUNICATIONS, INC. EXPLORER PARTNERS, L.L.C.
By: /s/ David W. Dunlap By: /s/ Timothy J. Keating
-------------------------- ------------------------
Name: David Dunlap, Name: Timothy J. Keating
Title: Vice President, Finance and Administration, Title: Manager
and Chief Financial Officer
EXPLORER FUND MANAGEMENT, L.L.C.
By: /s/ Robert L. Holz
--------------------------
Name: Robert L. Holz
Title: Managing Director
<PAGE>
EXHIBIT A
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF SERIES B PREFERRED STOCK
<PAGE>
EXHIBIT B
WARRANT
-2-
<PAGE>
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED UPON THE
EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
SALE, OFFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT AND OF ANY APPLICABLE STATE
SECURITIES LAWS UNLESS SOLD PURSUANT TO RULE 144 OF THE ACT.
SOCKET COMMUNICATIONS, INC. JANUARY 21, 1998
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, EXPLORER FUND MANAGEMENT,
L.L.C., an Illinois limited liability company (together with any registered
assignee(s), the "Holder") is entitled, upon the terms and subject to the
conditions hereinafter set forth, at such times after the date hereof as are
set forth below, to acquire from Socket Communications, Inc., a Delaware
corporation (the "Company"), in whole or from time to time in part, up to
187,500 fully paid and nonassessable shares of Common Stock, $.001 par value,
of the Company ("Warrant Stock") at a purchase price per share (the "Exercise
Price") of $0.40. Such number of shares, type of security and Exercise Price
are subject to adjustment as provided herein, and all references to "Warrant
Stock" and "Exercise Price" herein shall be deemed to include any such
adjustment or series of adjustments. This Warrant is granted by the Company
to the Holder pursuant to that certain Series B Preferred Stock Purchase
Agreement of even date herewith by and among the Company, Explorer Management
Fund, L.L.C., a Delaware limited liability company, and the Holder (the
"Stock Purchase Agreement").
1. TERM
(a) COMMENCEMENT OF EXERCISABILITY. The Warrant is exercisable as
of the date hereof.
(b) TERMINATION AND EXPIRATION. If not earlier exercised, the
Warrant shall expire on the fifth anniversary of the date hereof (the
"Expiration Date").
2. METHOD OF EXERCISE; PAYMENT; ISSUANCE OF NEW WARRANT. This Warrant
may be exercised by the Holder hereof at any time following the date hereof
and prior to the Expiration Date. Exercise shall be made, in whole or in
part, by the surrender of this Warrant (with the notice of exercise form
attached hereto as EXHIBIT A duly executed) at the principal office of the
Company and by the payment to the Company of an amount equal to the Exercise
Price multiplied by the number of Warrant Stock being purchased, which amount
may be paid in cash or by check. In the event of
<PAGE>
any exercise of the rights represented by this Warrant, certificates for the
Warrant Stock so purchased shall be delivered to the Holder hereof within a
reasonable time and, unless this Warrant has been fully exercised or expired,
a new Warrant representing that portion of the Warrant Stock, if any, with
respect to which this Warrant shall not then have been exercised, shall also
be issued to the Holder within such reasonable time.
3. STOCK FULLY PAID; RESERVATION OF WARRANT STOCK. All of the Warrant
Stock issuable upon the exercise of the rights represented by this Warrant
will, upon issuance and receipt of the Exercise Price therefor, be fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. During the period within which the rights represented by
this Warrant may be exercised, the Company shall at all times have authorized
and reserved for issuance sufficient Warrant Stock to provide for the
exercise of the rights represented by this Warrant.
4. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES OF WARRANT STOCK.
Subject to the provisions of Section 2 hereof, the number and kind of
securities purchasable upon the exercise of this Warrant and the Exercise
Price therefor shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) In the event the Company shall at any time following the date
hereof subdivide the outstanding shares of Common Stock, or shall issue a
stock dividend on its outstanding Common Stock, the number of shares of
Warrant Stock issuable upon exercise of this Warrant immediately prior to
such subdivision or to the issuance of such stock dividend shall be
proportionately increased, and the Exercise Price shall be proportionately
decreased; and in the event the Company shall at any time following the date
hereof combine the outstanding shares of Common Stock, the number of shares
of Warrant Stock issuable upon exercise of this Warrant immediately prior to
such combination shall be proportionately decreased, and the Exercise Price
shall be propor tionately increased, effective at the close of business on
the date of such subdivision, stock dividend or combination, as the case may
be.
(b) If the Company is, following the date hereof, recapitalized
through the subdivision or combination of its outstanding shares of Common
Stock into a larger or smaller number of shares, the number of shares of
Warrant Stock for which this Warrant may be exercised shall be increased or
reduced in the same proportion as the increase or decrease in the outstanding
shares of Common Stock and the then applicable Exercise Price shall be
adjusted by multiplying by a fraction with a numerator equal to the number of
shares of Warrant Stock purchasable upon exercise hereof immediately prior to
such subdivision or combination and the denominator of which shall be the
number of shares of Warrant Stock purchasable immediately following such
subdivision or combination.
(c) Subject to Sections 1 and 2 hereof, in the event of any
reorganization or reclassification of the outstanding Warrant Stock (other
than a change in par value, or from no par value to par value, or par value
to no par value, or as a result of a subdivision or combination) or in the
event of any consolidation or merger of the Company with another entity in a
BONA FIDE transaction (I.E., not a mere recapitalization, reincorporation for
the purpose of changing corporate
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<PAGE>
domicile, or similar transaction), at any time prior to the Expiration Date,
the Holder shall have the right, but not the obligation, upon exercise of
this Warrant, to receive the same kind and number of shares of Warrant Stock
and other securities, cash or other property as would have been distributed
to the Holder had the Holder exercised this Warrant immediately prior to such
reorganization, reclassification, consolidation or merger.
5. FRACTIONAL SHARES. No fractional shares of Warrant Stock will be
issued in connection with any exercise hereunder; any rights to purchase
fractional shares hereunder shall be disregarded.
6. TRANSFER, EXCHANGE, ASSIGNMENT OR LOSS OF WARRANT AND WARRANT
STOCK.
(a) This Warrant and the Warrant Stock to be issued or issuable
upon exercise of this Warrant, may not be assigned or transferred except as
provided in this Section 7 and in accordance with and subject to the
provisions of the Securities Act of 1933, as amended, and the Rules and
Regulations promulgated thereunder (said Act and such Rules and Regulations
being hereinafter collectively referred to as the "Act"). Any purported
transfer or assignment made other than in accordance with this Section 7
shall be null and void and of no force and effect.
(b) Prior to any transfer of this Warrant or any Warrant Stock to
be issued or issuable upon exercise of this Warrant, other than in an
offering registered under the Act, the Holder shall notify the Company of its
intention to effect such transfer, indicating the circum stances of the
proposed transfer and upon request furnish the Company with an opinion of
counsel, in form and substance reasonably satisfactory to counsel for the
Company, to the effect that the proposed transfer may be made without
registration under the Act or qualification under any applicable state
securities laws.
(c) Each certificate for Warrant Stock or for any Warrant Stock
issued or issuable upon exercise of this Warrant shall contain a legend
substantially to the effect as set forth in Section 6.3 of the Stock Purchase
Agreement.
(d) Any assignment permitted hereunder shall be made by surrender
of this Warrant to the Company at its principal office with the Assignment
Form attached hereto as EXHIBIT B duly executed. In such event the Company
shall, upon payment by the Holder of any issuance or transfer tax or other
cost incurred or to be incurred by the Company with respect to such transfer,
execute and deliver a new Warrant in the name of the assignee named in such
instrument of assignment and this Warrant shall promptly be canceled. This
Warrant may be divided or combined with other warrants which carry the same
rights upon presentation thereof at the principal office of the Company
together with a written notice signed by the Holder thereof, specifying the
names and denominations in which new warrants are to be issued.
(e) Upon receipt by the Company of evidence satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant (provided that an
affidavit of the Holder shall be satisfactory for such purpose), and of
indemnity satisfactory to it (provided that if the Holder is the original
Holder of this Warrant, its own indemnification agreement shall under all
circumstances be
-3-
<PAGE>
satisfactory, and no bond shall be required), and upon surrender and
cancellation of this Warrant, if mutilated, the Company will execute and
deliver a new Warrant of like tenor and date and any such lost, stolen, or
destroyed Warrant shall thereupon become void.
7. REPRESENTATIONS OF THE COMPANY. The Company represents that all
corporate actions on the part of the Company, its officers, directors and
stockholders necessary for the sale and issuance of the Warrant Stock
pursuant hereto and the performance of the Company's obligations hereunder
were taken prior to and are effective as of the effective date of this
Warrant.
8. REPRESENTATIONS AND COVENANTS OF THE HOLDER. The Holder represents
that this Warrant and any Warrant Stock issued or issuable upon exercise of
this Warrant, to be received will be acquired for investment for its own
account, not as a nominee or agent, and not with a view to the sale or
distribution of any part thereof, and that it has no present intention of
selling, granting any participation in or otherwise distributing the same.
Such Holder understands and acknowledges that the offering of this Warrant,
and any issuance of Common Stock on conversion thereof may not, will not be
registered under the Securities Act on the ground that the sale provided for
in this Agreement and the issuance of securities hereunder is exempt pursuant
to Section 4(2) of the Securities Act, and that the Company's reliance on
such exemption is predicated on the Holder's representations set forth
herein. Such Holder represents that it is experienced in evaluating
companies such as the Company, is able to fend for itself in investments such
as this one, and has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of its
prospective investment in the Company. Such Holder also represents that it
is an "accredited investor" as such term is defined in Rule 501 under the Act.
9. RIGHTS OF STOCKHOLDERS. No holder of this Warrant shall be
entitled, as a Warrant holder, to vote or receive dividends or be deemed the
holder of Common Stock or any other securities of the Company which may at
any time be issuable on the exercise hereof for any purpose, nor shall
anything contained herein be construed to confer upon the holder of this
Warrant, as such, any of the rights of a stockholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, conveyance, or otherwise) or to receive notice
of meetings, or to receive dividends or subscription rights or otherwise
until the Warrant shall have been exercised and the Warrant Stock purchasable
upon the exercise hereof shall have become deliverable, as provided herein.
10. NOTICES, ETC. All notices and other communications from the
Company to the Holder shall be mailed by first class registered or certified
mail, postage prepaid, at such address as may have been furnished to the
Company in writing by the Holder.
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<PAGE>
11. GOVERNING LAW, HEADINGS. This Warrant is being delivered in the
State of California and shall be construed and enforced in accordance with
and governed by the laws of such State. The headings in this Warrant are for
purposes of reference only, and shall not limit or otherwise affect any of
the terms hereof.
SOCKET COMMUNICATIONS, INC. EXPLORER FUND MANAGEMENT, L.L.C.
By: /s/ DAVID DUNLAP By: /s/ ROBERT L. HOLZ
---------------------------- ------------------------------
Name: David Dunlap Name: Robert L. Holz
Title: Vice President, Finance Title: Managing Director
and Administration, and
Chief Financial Officer
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
TO: Socket Communications, Inc.
The undersigned hereby elects to purchase ___________ shares of
Warrant Stock pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price of such Warrant Stock in full.
Please issue a certificate or certificates representing said
Warrant Stock in the name of the undersigned or in such other name as is
specified below:
Name:__________________________________
Address:_______________________________
_______________________________________
_______________________________________
The undersigned hereby represents and warrants that the aforesaid
shares of Warrant Stock are being acquired for the account of the undersigned
for investment and not with a view to, or, for resale in connection with the
distribution thereof, and that the undersigned has no present intention of
distributing or reselling such shares.
By:_____________________________________
Name:___________________________________
Title:__________________________________
Date:___________________________________
<PAGE>
EXHIBIT B
ASSIGNMENT FORM
FOR VALUE RECEIVED, _______________________________ hereby sells,
assigns and transfers unto ________________________________________ (Name and
Address) the right to purchase Warrant Stock represented by this Warrant to
the extent of ___________ shares and does hereby irrevocably constitute and
appoint ____________________________ __________________, attorney, to
transfer the same on the books of the Company with full power of substitution
in the premises.
Dated: _______________ , ____
By: _________________________________
Name: _________________________________
Title: _________________________________
<PAGE>
EXHIBIT C
SCHEDULE OF EXCEPTIONS
<PAGE>
EXHIBIT D
DISTRIBUTION AGREEMENT
<PAGE>
SOCKET COMMUNICATIONS, INC.
DISTRIBUTOR AGREEMENT
This Agreement, effective as of the twenty-first day of January 1998, is made
between Socket Communications, Inc. (Socket), a corporation organized under
the laws of the State of Delaware maintaining its principal place of business
at 37400 Central Court, Newark, CA 94560 USA. ("Manufacturer") and Explorer
Partners, L.L.C., a Delaware Limited Liability company, maintaining its
principal place of business at 3 Bermuda Lake Drive, Palm Beach Gardens, FL
33418 ("Distributor").
In consideration of the mutual promises and obligations created herein, the
parties hereto agree to the following:
DEFINITIONS:
"Products" shall mean Socket's Low Power Ethernet Card.
"Territory" shall mean worldwide.
"Proprietary Marks" shall mean trade names, trademarks, insignias, logos,
proprietary marks, and the like related to the Products or companies and
owned or controlled by Manufacturer or by Distributor.
"Confidential Information" shall mean such knowledge, information, or
materials concerning Manufacturer or its Products that are confidential and
proprietary information of Manufacturer or its affiliated companies.
1. APPOINTMENT OF DISTRIBUTOR
1.1 NON-EXCLUSIVITY
This appointment is non-exclusive and Manufacturer reserves the right to
appoint other distributors and to sell directly to the marketplace.
2. OBLIGATIONS OF DISTRIBUTOR
2.1 CONFIDENTIAL INFORMATION
2.1.1 Both Manufacturer and Distributor agree that any Confidential
Information of the disclosing party shall be held by the receiving party
using the same degree of care as it uses to hold its own Confidential
Information, and that such degree of care is adequate to protect the
Confidential Information. The Confidential Information shall not be
disclosed to any third party or used by the receiving party for its own
benefit except as otherwise provided in this Agreement. The receiving party
shall be under no obligation to treat any information as Confidential
Information if the information:
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a) is in or becomes in the public domain without violation of this Agreement
by the receiving party; or
b) was known to the receiving party prior to the disclosure and is not
subject to any obligation of confidence; or
c) was rightfully communicated to receiving party by a party free of any
obligation of confidence; or
d) was developed by the receiving party independently of, and without
reference to, any Confidential Information disclosed by the disclosing party.
2.1.2 The provision on Confidential Information above shall remain in effect
for three (3) years from the date of disclosure of the Confidential
Information, or until this Agreement is terminated, whichever is longer.
3. OBLIGATIONS OF MANUFACTURER
3.1 STOCK BALANCING PROGRAM
During the term of this Agreement Distributor shall be eligible to return,
for stock balancing, up to fifteen percent (15%) of Distributor's purchases
during the preceding three (3) months, but only to the extent prior returns
for stock balancing have not used the same purchases to establish eligibility
previously. A balancing order, for a net dollar amount equal to or larger
than the value of the products subject to return must also be placed.
Products returned must be one of those listed in Manufacturer's current
International Distributor Stock Balancing Product Eligibility List that may
be changed without notice by Manufacturer from time to time, and be
undamaged, unused and in their original packaging. Distributor must obtain a
Return Material Authorization number ("RMA Number") from Manufacturer prior
to any return, and Distributor must ship any such return CIF (Cost,
Insurance, Freight) Destination, such destination to be provided by
Manufacturer upon issuance of an RMA number. Distributor shall bear all
costs of shipment and risks of title until the Products are delivered to
Manufacturer. Upon receipt and verification of the return, Manufacturer
shall credit towards the stock balancing order of Distributor, the actual
price paid for the products returned, less any discounts or credits
previously applied, with no adjustments for duties and other taxes or fees
which remain the responsibility of Distributor.
3.2 RETURNS FOR CREDIT
During the term of this Agreement, Distributor shall be eligible to return,
for credit, up to five percent (5%) of Distributor's purchases during the
preceding three (3) months. Once purchases during any one month have been
used to establish eligibility for a return, that month's purchases may not be
used to establish eligibility for further returns. Products returned must be
current Products, or Products that have been listed on the International
Price List within the last 90 days and be undamaged, unused and in their
original packaging. Products that have been deleted from the International
Price List more than ninety (90) days prior to the return are ineligible for
return. Distributor must obtain an RMA (Return Material Authorization)
number from Manufacturer prior to any return, and
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Distributor must ship any such return CIF (Cost, Insurance, Freight)
Destination, such destination to be Manufacturer's Northern California
facility, the address to be provided by Manufacturer upon issuance of an RMA
number. Distributor shall bear all costs of shipment and risks of title
until the Products are delivered to Manufacturer. Upon receipt and
verification of the return, Manufacturer shall issue a credit to Distributor
equal to the actual price paid for the products returned, less a five percent
(5%) restocking fee and less any discounts or credits previously applied.
3.3 RETURNS OF DEFECTIVE PRODUCT
Distributor may deal directly with Manufacturer's Customer Service Department
for return of any defective Products. Distributor shall return defective
units received in such exchanges to Manufacturer for replacement at least
once each quarter upon issuance of an RMA number. Distributor must obtain an
RMA (Return Material Authorization) number from Manufacturer prior to any
return, and Distributor must ship any such return CIF (Cost, Insurance,
Freight) Destination, such destination to be Manufacturer's Northern
California facility, the address to be provided by Manufacturer upon issuance
of an RMA number. Distributor shall bear all costs of shipment and risks of
title until the Products are delivered to Manufacturer. Manufacturer shall
repair or replace the returned Product at its expense and shall make best
efforts to ship repaired or replaced product at Manufacturer's expense within
ten days of receipt.
4. PRODUCT ORDERS
4.1 TERMS AND CONDITIONS
4.1.1 Manufacturer agrees to sell Products to Distributor in accordance with
Manufacturer's current applicable prices, terms and conditions, which may be
changed without notice by Manufacturer. Manufacturer will use reasonable
best efforts to give 30 days written notice of price increases.
4.1.2 All Products are shipped FOB Point of Origin and prices do not include
transportation charges, insurance, duty and taxes or fees of any nature.
Manufacturer may add charges for such fees or taxes to the sales invoice
unless evidence of exemption acceptable to both Manufacturer and the
appropriate taxing agency is provided by Distributor.
4.1.3 Title to the Products shall pass at the time they are presented to the
carrier for shipment. In the absence of specific shipping instructions from
Distributor at the time of order placement, Manufacturer will ship by the
method it deems most advantageous. Transportation charges will remain the
responsibility of Distributor.
4.2 SCHEDULED DELIVERY DATES, DELAY
Manufacturer will use reasonable best efforts to deliver on the promised or
scheduled delivery date. Manufacturer shall not be liable for any delay in
delivery of Products or for failure to give notice of the same, and
Distributor agrees that the delivery date may be
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extended for a period of time equal to any such delay. Manufacturer will use
reasonable best efforts to notify Distributor of; (i) the actual shipping
date as soon as it becomes known and, (ii) as soon as practicable after
shipment, the shipment details including carrier, waybill number and
estimated date/time of arrival.
4.3 PLACING, ACCEPTANCE OF, AND CHANGES TO ORDERS
4.3.1 All orders by Distributor must be placed in writing either by mail,
electronic message or facsimile transmission. Any written orders so placed
are, unless notified to the contrary within 10 days of receipt by
Manufacturer, deemed accepted by Manufacturer.
4.3.3 Manufacturer reserves the right to reject orders in its sole
discretion. Furthermore, Manufacturer may cancel all or part of accepted
orders or refuse or delay shipment of Products in its sole discretion.
Reasons for rejection, cancellation or delay include, but are not limited to,
if Manufacturer determines in its sole discretion that (i) Distributor has
exceeded its credit limit in the purchase of Products, or (ii) Distributor is
in default under this Agreement or any other Agreement between Manufacturer
and Distributor, or (iii) an allocation of Products is required. No such
extended, canceled, or delayed shipment shall be deemed a termination or
breach of this Agreement by Manufacturer.
5. PAYMENT AND PRICES
5.1 PRICES AND TERMS APPLICABLE
The prices, terms, and conditions stated in Manufacturer's price lists,
invoices, and sales orders, in effect from time to time and in this Agreement
shall apply to all purchases from Manufacturer by Distributor of Products.
5.2 CURRENCY USED
All prices are stated in US Dollars, and all payments by Distributor to
Manufacturer shall be in US Dollars. Any sums due by Manufacturer to
Distributor shall also be stated, and paid, in US Dollars.
5.3 PAYMENT TERMS AND CREDIT EXTENSION
Payment terms shall be Net 45 days. Payment made on open accounts shall be
effected by wire transfer or other instrument acceptable to Manufacturer.
Manufacturer reserves the right at all times either generally or with respect
to any specific order, to withdraw, change, or limit the amount or credit
extended under such terms to Distributor. In the absence of an open account,
payment shall be effected by means of irrevocable letters of credit on a
California bank established to Manufacturer's satisfaction, or by prepayment
by wire transfer at the time the order is placed. All exchange, interest,
banking, collection or other charges shall be at the sole expense of
Distributor.
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6. USE OF TRADEMARKS AND OTHER PROPRIETARY MARKS
6.1 PERMISSION TO USE PROPRIETARY MARKS
During this Agreement, Distributor may use the Proprietary Marks, only in
connection with Distributor's sale, advertisement, and promotion of the
Products, provided that Distributor's use of Proprietary Marks shall be in
accordance with Manufacturer's policies and procedures and shall always
indicate that the same is the property of Manufacturer or Manufacturer's
affiliated company, as the case may be.
6.2 EXCLUSION OF INTEREST IN PROPRIETARY MARKS
Nothing contained in the Agreement shall give Distributor any interest in the
Proprietary Marks (except the use thereof as herein provided) or in any
patents, copyrights, trade secrets, or other proprietary or confidential
information related to the Products, and Distributor specifically disclaims
any right, present or future, in any of the Proprietary Marks, patents,
copyrights, trade secrets, or other proprietary or confidential information.
6.3 LIMITATION ON USE OF ALL MARKS
Distributor shall not (i) use any of the Proprietary Marks as a part of the
business name of Distributor's company, except as may be approved by
Manufacturer in writing; (ii) attach any name or mark to any of the Products,
other than the names and marks originally appearing thereon; or (iii) add to,
obliterate, deface or remove any name, Proprietary Mark, or serial number on
the Products or packaging thereof.
6.4 RIGHT TO APPROVE OF ANY USE OF MARKS
Distributor acknowledges that Manufacturer may at any time object to a
specific use of application of any of the Proprietary Marks, in which event
Distributor will cease such use or application thereof immediately.
Distributor's right to use Proprietary Marks shall cease upon termination of
the Agreement. Distributor shall have no right to sublicense, transfer, or
assign any right or benefit to the use of Proprietary Marks to any third
party.
7. TERMS AND TERMINATION OF AGREEMENT
7.1 TERM
This Agreement shall commence on the effective date first written above and
continue in effect for a period of three (3) years from said date and may be
reviewed or extended upon written agreement of both parties.
7.2 RIGHT TO ACQUIRE PRODUCT DIRECTLY FROM MANUFACTURER'S SUPPLIERS
Distributor shall have the right to acquire Products directly from
Manufacturer's suppliers in the event, and only in the event, that Company
becomes insolvent or ceases to operate. Such right shall remain in effect
only for those periods in which the Company is insolvent or is not operating.
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8. LIMITATION OF LIABILITY
8.1 LIMITATION OF LIABILITY
IN NO EVENT WILL EITHER PARTY BE LIABLE FOR COSTS OF PROCUREMENT OF
SUBSTITUTE PRODUCTS OR SERVICE, LOST PROFITS, OR ANY SPECIAL, INDIRECT,
CONSEQUENTIAL, OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF
LIABILITY, ARISING IN ANY WAY OUT OF THIS AGREEMENT. THIS LIMITATION SHALL
APPLY EVEN IF MANUFACTURER HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED
REMEDY PROVIDED HEREIN.
8.2 LIMITATION OF WARRANTIES
IT IS UNDERSTOOD THAT MANUFACTURER MAKES NO WARRANTIES OR REPRESENTATIONS,
INCLUDING, WITHOUT LIMITATION, IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, AS TO THE PRODUCTS SOLD TO DISTRIBUTOR BY
MANUFACTURER EXCEPT AS MAY BE SET FORTH IN MANUFACTURER'S LIMITED CONSUMER
WARRANTY, IF ANY, ACCOMPANYING DELIVERY OF THE PRODUCTS. THE LIABILITY OF
MANUFACTURER, IF ANY, FOR DAMAGES RELATING TO ANY ALLEGEDLY DEFECTIVE
PRODUCTS SHALL BE LIMITED TO DEFECTS WITH RESPECT TO WHICH MANUFACTURER
RECEIVES A WRITTEN NOTICE OF THE CLAIM FROM DISTRIBUTOR WITHIN 90 DAYS OF THE
DATE OF MANUFACTURER'S SHIPMENT OF THE PRODUCTS. AT MANUFACTURERS
DISCRETION, MANUFACTURER MAY EITHER REPLACE THE PRODUCTS OR REFUND THE ACTUAL
PRICE PAID TO MANUFACTURER BY DISTRIBUTOR FOR SUCH PRODUCTS.
8.3 INDEMNIFICATION BY MANUFACTURER
Manufacturer shall be solely responsible for the design, development, supply,
production, and performance of the Products and the protection of its trade
names. Manufacturer agrees to defend and indemnify and hold Distributor
harmless against and to pay all losses, costs, damages, and expenses
whatsoever, including reasonable attorney fees, which Distributor may sustain
or incur on account of infringement or alleged infringement of patents,
trademarks, or trade names, or other intellectual property rights resulting
from the sale of Manufacturer's Products, or arising on account of warranty
claims or product liability matters. Distributor will promptly deliver to
Manufacturer any notices or papers served upon it in any proceeding covered
by this indemnity, and Manufacturer will defend same at its expense.
Distributor shall, however, have the right to participate in the defense at
it's own expense.
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8.4 INDEMNIFICATION BY DISTRIBUTOR
Distributor shall be solely responsible for, and shall indemnify and hold
Manufacturer free and harmless from, any and all claims, damages, or lawsuits
(including Manufacturer's attorney's fees) arising out of acts or omissions
of Distributor, its employees, agents, or customers. Manufacturer will
promptly deliver to Distributor any papers served upon it in any proceeding
covered by this indemnity, and Distributor will defend same at its expense.
Manufacturer shall have the right to participate in the defense at its own
expense.
9. MISCELLANEOUS
9.1 ENTIRE AGREEMENT, MODIFICATIONS, WAIVERS
This agreement sets forth the entire understanding between the parties hereto
and supersedes any and all prior understandings in connection therewith.
9.2 GOVERNING LAW AND JURISDICTION.
This Agreement shall be governed by and construed in accordance with the laws
of the State of California. The parties agree to submit to the jurisdiction
of the appropriate courts located in California for the purpose of any suit,
action, or other proceeding in connection with this Agreement. The parties
expressly waive any objections to jurisdiction or venue in any such courts
and hereby consent that service of process in any litigation may be served in
the same manner as any notice hereunder as set forth in Paragraph 9.5 hereof.
9.3 NOTICE.
Any notice required or permitted to be given under this Agreement shall be in
writing and either delivered personally or sent by fax, or deposited in the
mail, postage prepaid, registered or certified, return receipt requested,
addressed to the parties at the address appearing at the end of this
Agreement, and shall be deemed given three (3) days after the date of mailing
or on the date of fax delivery.
9.4 ASSIGNMENT.
This Agreement and the rights and benefits hereunder shall inure to the
benefit of the parties and their respective successors and assigns. This
Agreement may be assigned or delegated by Distributor, either voluntarily or
by operation of law.
9.5 COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original.
9.6 FORCE MAJEURE
Nonperformance of either party shall be excused to the extent that
performance is rendered impossible by strike, fire, flood, governmental acts,
orders of restrictions, or any
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other reason where failure to perform is beyond the reasonable control and
not caused by the negligence of, the non-performing party.
9.7 ATTORNEY'S FEES
The prevailing party in any legal action brought by one party of this
Agreement against the other and arising out of this Agreement shall be
entitled, in addition to any other rights and remedies it may have, to
reimbursement for it's expenses, including court costs and reasonable
attorney's fees.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement through
an officer of the company whose signature appears below.
"DISTRIBUTOR" "MANUFACTURER"
Explorer Partners, L.L.C. Name Socket Communications, Inc.
3 Bermuda Lake Drive Address 37400 Central Court
Palm Beach Gardens, FL 33418 City State Zip Newark, CA 94560
/s/ Timothy J. Keating Signature /s/ David Dunlap
- ---------------------- -------------------
Timothy J. Keating Printed Name David W. Dunlap
Manager Title Vice President
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EXHIBIT E
CONSULTING AGREEMENT
<PAGE>
CONSULTING AGREEMENT
This Consulting Agreement (this "Agreement") is made on the 21st day of
January, 1998 by and between Socket Communications, Inc., a Delaware
corporation (the "Company"), and Explorer Fund Management, L.L.C., an
Illinois limited liability company ("EFM").
BACKGROUND
This Agreement is being entered into by the Company and EFM pursuant to
that certain Series B Preferred Stock Purchase Agreement of even date
herewith (the "Stock Purchase Agreement") by and among the Company, EFM and
Explorer Partners, L.L.C., a Delaware limited liability company ("Explorer
Partners").
The Company desires to retain EFM to provide certain financial services
to the Company, including without limitation (a) assisting the Company in
engaging an investment banking firm that will provide analyst coverage for
the Company and that will act as a market-maker in the Company's Common Stock
and (b) assisting the Company in identifying investors who invest $3 million
or more in the Company through a public or private equity offering. EFM
desires to provide such services to the Company.
AGREEMENT
1. ENGAGEMENT; SERVICES TO BE RENDERED.
1.1 ENGAGEMENT AS FINANCIAL CONSULTANT. Subject to the terms and
conditions of this Agreement, the Company hereby engages EFM to act as a
financial consultant to the Company during the term of this Agreement, and
EFM hereby agrees to such engagement.
1.2 SERVICES TO BE RENDERED. Subject to the terms and conditions
of this Agreement, EFM will provide to the Company financial advisory
services, including without limitation (i) assisting the Company in engaging
an investment banking firm that will provide analyst coverage for the Company
and that will act as a market-maker in the Company's Common Stock, (ii)
assisting the Company in identifying investors in the Company through a
public or private equity offering, or (iii) rendering such other financial
advisory services as the Company and EFM may mutually agree. EFM, in
assisting the Company to identify investors, shall only contact accredited
investors under Regulation D of the Securities Act of 1933, as amended, and
institutional investors under local securities laws.
<PAGE>
2. COMPENSATION.
2.1 DEFINITION OF MILESTONE. The following events shall be
Milestones that result in the payment of compensation by the Company to EFM
under Section 2.2 below (each, a "Milestone"):
(a) The Company's engagement of an investment banking firm
with whom the Company has not had a pre-existing business relationship that
commences providing analyst coverage for the Company and that commences
acting as a market-maker in the Company's Common Stock and which continues to
provide such analyst coverage to act as a market-maker for a period of at
least three (3) months.
(b) The closing of a private or public equity offering of
the Company's securities in which the Company receives net proceeds (after
deducting underwriting discounts or placement agent fees) of $3 million;
provided (i) such closing occurs on or before December 31, 1998; and (ii) at
least $2.5 million is attributable to "New Investors." The term "New
Investors" as used in this Agreement means all persons purchasing equity
securities in the offering, except (i) current or former officers, directors
or employees of the Company or any member of their immediate family, (ii)
existing stockholders of the Company on the date hereof, or (iii) EFM or any
of its affiliates and principals.
2.2 COMPENSATION. As consideration for EFM's services
hereunder, upon the achievement of each Milestone, the Company will issue to
EFM a warrant in substantially the form attached as Exhibit B to the Stock
Purchase Agreement (each, a "Warrant") to purchase that number of shares of
the Company's Common Stock equal to five percent (5%) of the total number of
shares of the Company's Common Stock purchased by Explorer Partners pursuant
to the Stock Purchase Agreement. The exercise price per share of the
Company's Common Stock subject to each Warrant shall be equal to the average
price per share paid by Explorer Partners.
3. CONFIDENTIALITY.
3.1 DEFINITION OF CONFIDENTIAL INFORMATION. EFM acknowledges
that in connection with the performance of his duties hereunder, the Company
will be disclosing proprietary information to EFM, including commercially
valuable technical and business information ("Confidential Information").
Confidential Information shall include information or material designated by
the Company as confidential, whether in written or oral form, including
without limitation, information or materials which EFM develops or acquires
knowledge of or access to as a result of EFM's relationship with the Company
and information or materials acquired from a third party which the Company
indicates shall be treated as Confidential Information. The term
Confidential Information does not include information that (i) is or becomes
generally available to the public other than by
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disclosure in violation of this Agreement, (ii) becomes available to EFM on a
nonconfidential basis from any other party without any obligation of
confidentiality to the Company, or (iii) is disclosed in any offering
documents prepared by the Company in connection with any public or private
offering that may result in the achievement of a Milestone.
3.2 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. EFM acknowledges
that the Company's business is extremely competitive, dependent in part upon
the maintenance of secrecy, and that any disclosure of Confidential
Information to any third party may result in serious harm to the Company. EFM
agrees that the Confidential Information will be used by EFM only in
connection with consulting activities hereunder, and will not be used in any
way that is detrimental to the Company. EFM agrees not to disclose, directly
or indirectly, the Confidential Information to any third person or entity,
other than (i) to EFM's partners, employees, agents and representatives in
connection with EFM's engagement hereunder and who shall be informed of the
confidential nature of the information and that such information is subject
to a confidentiality agreement; or (ii) to any person with the written
consent of the Company, including to any prospective investment banker or
prospective investor.
3.3 RETURN OF CONFIDENTIAL INFORMATION. Upon termination of the
Agreement, EFM will promptly return to the Company all materials containing
Confidential Information as well as data, records, reports, materials and
other property furnished by the Company to EFM or produced by EFM in
connection with Services rendered hereunder, together with all copies of any
of the foregoing. Notwithstanding such return, EFM shall continue to be bound
by the terms of the confidentiality provisions contained in this Section 3
for a period of three years after the termination of the Agreement.
4. TERM AND TERMINATION.
4.1 TERM. This Agreement will commence on the date first written
above and will continue until the earliest to occur of (i) December 31, 1998,
(ii) the mutual written agreement of the Company and EFM, or (iii) the date
on which each of the Milestones has been achieved.
4.2 RIGHTS UPON TERMINATION. Upon termination of this Agreement,
all rights and duties of the parties toward each other shall cease except (i)
Company shall be obligated to pay all amounts due hereunder within thirty
(30) days of such termination, and (ii) Section 3 shall survive termination
of this Agreement for any reason.
5. MISCELLANEOUS.
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5.1 INDEPENDENT CONTRACTORS. The relationship of the Company and
EFM established by this Agreement is that of independent contractors, and
nothing contained in this Agreement will be construed to (i) give either
party the power to direct or control the day to day activities of the other
or (ii) allow EFM to create or assume any obligation on behalf of the Company.
5.2 NOTICES. Any notice required to be given hereunder will be
deemed to be properly given if delivered by hand or sent by pre-paid post, to
the address below or to such other address as may, from time to time, be
communicated to the sender of the notice. Notices sent by pre-paid post will
be deemed to have been received five (5) working days after the date of
posting. Notices delivered by hand will be deemed to have been received on
the first working day following the date of delivery or sending as the case
may be.
If to the Company: Socket Communications, Inc.
37400 Central Court
Newark, CA 94560
Attn: President
If to EFM: Explorer Fund Management, L.L.C.
444 North Michigan Avenue, Suite 2910
Chicago, IL 60611
Attn: Robert L. Holz, Managing Director
with a copy to: GIA Securities Inc.
One Wall Street Court
New York, NY 10005
Attn: James N. Baxter
5.3 ARBITRATION AND EQUITABLE RELIEF.
(a) Except as provided in Section 5.3(b) below, the Company
and EFM agree that any dispute or controversy arising out of or relating to
any interpretation, construction, performance or breach of this Agreement,
shall be settled by arbitration to be held in Santa Clara County, California,
in accordance with the rules then in effect of the American Arbitration
Association. The arbitrator may grant injunctions or other relief in such
dispute or controversy. The decision of the arbitrator shall be final,
conclusive and binding on the parties to the arbitration. Judgment may be
entered on the arbitrator's decision in any court of competent jurisdiction.
The Company and EFM shall each pay one-half of the costs and expenses of such
arbitration, and each shall separately pay its respective counsel fees and
expenses.
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(b) EFM agrees that it would be impossible or inadequate to
measure and calculate the Company's damages from any breach of the covenants
set forth in Section 3 herein. Accordingly, EFM agrees that if EFM breaches
Section 3, the Company will have available, in addition to any other right or
remedy available, the right to obtain from any court of competent
jurisdiction an injunction restraining such breach or threatened breach and
specific performance of any such provision. EFM further agrees that no bond
or other security shall be required in obtaining such equitable relief and
EFM hereby consents to the issuances of such injunction and to the ordering
of such specific performance.
5.4 GOVERNING LAW. The laws of the State of California and the
federal laws of the United States of America will govern the validity,
performance and enforcement of this Agreement.
5.5 MODIFICATION. No alteration, amendment, waiver, cancellation
or any other change in any term or condition of this Agreement will be valid
or binding on either party unless it has been mutually assented to in writing
by bother parties.
5.6 ENTIRE AGREEMENT. The terms and conditions herein contained
constitute the entire agreement between the parties and supersede all
previous agreements and understandings, whether oral or written, between the
parties hereto with respect to the subject matter hereof.
5.7 SEVERABILITY. In the event that any provision in this
Agreement is held to be invalid or void, such provision will be severed from
the remainder of this Agreement, will in no way affect any other provision in
this Agreement, and will be replaced with a provision that most closely
effectuates the intent of the parties. If such provision is deemed invalid
due to scope or breadth, such provision will be deemed valid to the extent of
the scope or breadth permitted by law.
5.8 BINDING NATURE. This Agreement will be binding upon and
inure to the benefit of the parties and their respective successors and
assigns; provided that this provision shall not be construed as permitting
assignment, substitution, delegation or other transfer of rights or
obligations by either party except with the prior written consent of the
other.
5.9 COUNTERPARTS. This Agreement may be executed simultaneously
in one (1) or more counterparts, each of which will be deemed an original,
but all of which shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"COMPANY"
SOCKET COMMUNICATIONS, INC.
By: ___________________________________
Title: ________________________________
"EFM"
EXPLORER FUND MANAGEMENT, L.L.C.
By: ___________________________________
Title: ________________________________
[SIGNATURE PAGE TO CONSULTING AGREEMENT]
<PAGE>
SOCKET COMMUNICATIONS, INC.
AMENDMENT NO. 1 TO
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
This Amendment No. 1 to Series B Preferred Stock Purchase Agreement
(this "Amendment") is made as of March 18, 1998 among Socket Communications,
Inc., a Delaware corporation (the "COMPANY"), Explorer Partners, L.L.C., a
Delaware limited liability company (the "Investor"), and Explorer Fund
Management, L.L.C., an Illinois limited liability company ("EFM"). For
purposes of this Amendment, capitalized terms shall have the same meaning as
those terms defined in the Original Agreement (as defined below), unless
otherwise provided.
WHEREAS, the Company, the Investor and EFM are parties to that certain
Series B Preferred Stock Purchase Agreement dated as of January 21, 1998
(the "Original Agreement"), pursuant to which (i) the Investor has purchased
a total of 21,350 shares of Series B Preferred Stock of the Company for an
aggregate purchase price of $1,000,000, (ii) the Company issued to EFM a
warrant to purchase 320,250 shares of Common Stock of the Company and (iii)
the Investor has the option to purchase an additional $1,000,000 of shares of
Series B Preferred Stock of the Company; and
WHEREAS, the Company and the Investor desire to amend the Original
Agreement to provide for (i) the exchange of 8,850 shares of Series B
Preferred Stock acquired for $500,000 at the closing of the first Additional
Tranche as of February 6, 1998 for 8,850 shares of Series B-1 Preferred Stock
of the Company, and (ii) the issuance of Series B-2 Preferred Stock at the
closing of the second Additional Tranche on the date hereof.
NOW, THEREFORE, the parties hereby agree that the Original Agreement is
amended by this Amendment, and parties hereby further agree as follows:
1. The first sentence of Section 1.3 is hereby amended and superseded
as follows:
"Investor shall have an option to purchase additional shares of
Preferred Stock of the Company, in one or more additional series, in
two $500,000 tranches (each, an "Additional Tranche" and collectively,
the "Additional Tranches")."
2. The following shall be inserted following the last sentence of
Section 1.3, which sentence ends "less than $40.00 per share.":
"Any additional series of Preferred Stock shall have rights,
preferences and privileges on a parity with the rights, preferences
and privileges of the Series B Preferred, except that the dividend,
liquidation and conversion rights of such series shall reflect the
different purchase price, if any, of such series of Preferred Stock
from the purchase price of the Series B Preferred. On or before the
closing of an Additional Tranche involving the issuance and sale of an
additional series of Preferred Stock of the Company, the Company
<PAGE>
shall file with the Secretary of State of Delaware a Certificate of
Designations of Preferences and Rights with respect to such series of
Preferred Stock."
3. The following shall be inserted as a new Section 1.5 of the
Original Agreement:
"1.5 ISSUANCE OF SERIES B-1 PREFERRED. Concurrent with
the closing of the second Additional Tranche, the Investor shall
convey, transfer, assign and deliver to the Company good and
marketable title to the 8,850 shares of Series B Preferred issued to
the Investor in the first Additional Tranche as of February 6, 1998
(the "First Additional Tranche Shares"), free and clear of all liens,
and the Company agrees to and will acquire from the Investor such
First Additional Tranche Shares. The consideration for such First
Additional Tranche Shares shall be a like number of Series B-1
Preferred Stock of the Company, which shall have rights, preferences
and privileges on a parity with the rights, preferences and privileges
of the Series B Preferred, except that the dividend, liquidation and
conversion rights of such Series B-1 Preferred Stock shall reflect the
different purchase price per share of such series from the purchase
price per share of the Series B Preferred."
4. The following shall be inserted at the end of Section 6.1 of the
Original Agreement following the definition of "SELLING EXPENSES":
" "SHARES" shall mean, for purposes of this Section 6 only,
the shares of Series B Preferred issued to the Investor pursuant to
Section 1.1(b) of this Agreement and the shares of Series B Preferred
and shares of additional series of Preferred Stock of the Company
issued as Default Shares or in an Additional Tranche pursuant to
Section 1.1(c) and 1.3 of this Agreement, respectively."
5. This Agreement shall be governed in all respects by the laws of the
State of California as applied to contracts entered into solely between
residents of and to be performed entirely in such state.
6. Except as otherwise provided herein, the provisions of this
Amendment shall inure to the benefit of, and be binding upon, the successors,
assigns, heirs, executors and administrators of the parties hereto, provided,
however, that the obligations of the Investor to purchase shares of Preferred
Stock shall not be assignable without the consent of the Company.
7. This Amendment and the Original Agreement and the other documents
delivered pursuant hereto and thereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
8. This Amendment may be executed in any number of counterparts, each
of which shall be enforceable against the parties actually executing such
counterparts, and all of which together shall constitute one instrument.
-2-
<PAGE>
The foregoing Amendment No. 1 to Series B Preferred Stock Purchase
Agreement is hereby executed as of the date first above written.
SOCKET COMMUNICATIONS, INC.
a Delaware corporation
By: /s/ David W. Dunlap
---------------------------------------
Name: David W. Dunlap
-------------------------------------
Title: Vice President and CFO
------------------------------------
EXPLORER PARTNERS, L.L.C.
By: /s/ Timothy J. Keating
---------------------------------------
Name: Timothy J. Keating
-------------------------------------
Title: Manager
------------------------------------
EXPLORER FUND MANAGEMENT, L.L.C.
By: /s/ Robert L. Holz
---------------------------------------
Name: Robert L. Holz
-------------------------------------
Title: Managing Director
------------------------------------
-3-
<PAGE>
BONUS PLAN
This Bonus Plan (the "Plan") is effective as of February 18, 1998 (the
"Effective Date") for Socket Communications, Inc., a Delaware corporation (the
"Corporation").
R E C I T A L S
A. The Corporation wishes to provide for a bonus amount for eligible
participants in the event of a sale of the Corporation. In this connection, the
Board of Directors of the Corporation believes that it is in the best interests
of the Corporation and its stockholders to provide such participants with an
incentive compensation arrangement that will motivate them to maximize the value
of the Corporation upon its Acquisition (as defined below) for the benefit of
its stockholders.
B. In order to accomplish the foregoing objective, the Board of Directors
has adopted the following Plan.
1. ACQUISITION BONUS POOL.
(a) BONUS POOL. Subject to Section 1(e) below, in the event of an
Acquisition (as defined in Section 2 below) on or before December 31, 1999, the
Board of Directors of the Corporation shall create a bonus pool in the amount of
10% of consideration payable by the buyer (including cash, property and/or
securities) in connection with the Acquisition.
(b) ELIGIBLE PARTICIPANTS. The individuals eligible for bonus to be
awarded from the Bonus Pool shall be the executive officers and such other
employees (which term shall include any former employee), if any, that the Board
of Directors determines in its discretion to include in such awards (the
"Eligible Participants"). The Board of Directors shall award the entire Bonus
Pool which shall be paid at the time of the consummation of the Acquisition.
However, no officer shall have the right to any specific amount of the Bonus
Pool and no other employee shall have any right to participate in such Bonus
Pool except as determined by the Board of Directors in its discretion. For
purposes of this paragraph, an Acquisition will be deemed to have occurred as of
its closing date or such other date as determined in good faith by the Board of
Directors.
(c) BOARD DETERMINATION. For purposes of computing the amount of the
bonus payable, the Board of Directors of the Corporation shall determine the
method by which the consideration payable by the buyer in connection with the
Acquisition is to be valued. For purposes of the preceding sentence, the value
of the total proceeds payable by the buyer in an Acquisition which consists of
consideration other than cash shall be determined in good faith by the Board of
Directors.
(d) PLAN TO BE TERMINATED IF DISQUALIFIES POOLING. Notwithstanding
any provision of this Agreement, if a requirement of the buyer is that the
Acquisition be accounted for as a pooling of interest and in the opinion of the
independent public accountants for the buyer and Company the awards of bonuses
under the Bonus Plan would disqualify the Acquisition from
<PAGE>
pooling of interest accounting, then the Bonus Plan shall be null and void in
its entirety or to the extent that such Bonus Plan would cause such
disqualification.
2. DEFINITION OF TERMS. "Acquisition" and "Acquired" shall mean the
occurrence of any of the following events:
(a) Any "person" (as such term is used in Section 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial
owner" as defined in Rule 13d-3 of the general rules and regulations under said
Act, directly or indirectly, of securities of the Corporation representing fifty
percent (50%) or more of the total voting power represented by the Corporation's
then outstanding voting securities; or
(b) The stockholders of the Corporation approve a merger or
consolidation of the Corporation with any other corporation, other than a merger
or consolidation which would result in the voting securities of the Corporation
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 corporation or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Corporation approve a plan of complete liquidation of the Corporation or
an agreement for the sale or disposition by the Corporation of all or
substantially all of the Corporation's assets.
3. LIMITATION ON PAYMENTS. In the event that any payment or benefit
received or to be received by any Eligible Participant pursuant to this
Agreement (collectively, the "Payments") would (i) be treated as a "parachute
payment" within the meaning of Section 28OG of the Internal Revenue Code of
1986, as amended (the "Code"), or any similar or successor provision to 28OG and
(ii) but for this Section 5(a), be subject to the excise tax imposed by
Section 4999 of the Code or any similar or successor provision to Section 4999
(the "Excise Tax"), then, in the discretion of the Board of Directors, such
Payments may be reduced up to the largest amount which would result in no
portion of the Payments being subject to the Excise Tax. The determination of
any reduction pursuant to this Section 3(a) (including the determination as to
which specific Payments may be reduced) shall be made by Board of Directors in
its sole discretion, and such determination shall be conclusive and binding upon
the Corporation or any related corporation for all purposes.
4. SUCCESSORS. Any successor to the Corporation (whether direct or
indirect and whether by purchase, lease, merger, consolidation, liquidation or
otherwise) to all or substantially all of the Corporation's business and/or
assets shall assume the obligations under this Bonus Plan and agree expressly to
perform the obligations under this Bonus Plan in the same manner and to the same
extent as the Corporation would be required to perform such obligations in the
absence of a succession. The Corporation shall not enter into an agreement with
any entity unless the entity agrees expressly to perform the obligations under
this Bonus Plan. For all purposes under this Bonus Plan, the term "Corporation"
shall include any successor to the Corporation's business and/or assets which
executes and delivers the assumption agreement described in this Section 4 or
which becomes bound by the terms of this Bonus Plan by operation of law.
-2-
<PAGE>
SOCKET COMMUNICATIONS, INC.
AMENDMENT NO. 1 TO STOCK OPTION AGREEMENT
WHEREAS: The Company believes it is in the best interests of the Company
and the Optionee to amend Optionee's Stock Option Agreement attached hereto to
provide for a Change of Control provision; now therefore,
In consideration of the continued services of the Optionee to the Company,
the Company and the Optionee hereby agree that the following Sections 12 and 13
shall be added to the Stock Option Agreement entered into between the Company
and the Optionee:
12. VESTING ACCELERATION ON CHANGE OF CONTROL.
(a) VESTING ACCELERATION. In the event of a "Change of
Control," all of the Optionee's rights to purchase stock under this Agreement
with the Company shall be automatically vested in their entirety on an
accelerated basis and be fully exercisable:
(A) as of the date immediately preceding such "Change of Control" in
the event this stock option agreement is or will be terminated or
canceled (except by mutual consent) or any successor to the Company
fails to assume and agree to perform such stock option agreement as
provided in Section 2(a) hereof at or prior to such time as any such
person becomes a successor to the Company; or
(B) as of the date immediately preceding such "Change of Control" in
the event the Optionee does not or will not receive upon exercise of
the Optionee's stock purchase rights under such stock option agreement
the same identical securities and/or other consideration as is
received by all other shareholders in any merger, consolidation, sale,
exchange or similar transaction occurring upon or after such "Change
of Control"; or
(C) as of the date immediately preceding any "Involuntary
Termination" of the Optionee occurring upon or after any such "Change
of Control"; or
(D) as of the date [one (1) year] following the first such "Change of
Control," provided that the Optionee shall have remained an employee
of the Company continuously throughout such one-year period, other
than a termination as a result of death or disability;
whichever shall first occur (all quoted terms as defined below); provided,
however, that if it is determined by the Company's independent public
accountants that the accelerated vesting and exercisability provided in this
Section 12(a) would preclude accounting for
<PAGE>
the "Change of Control" as a pooling of interests for financial accounting
purposes, and it is a condition to the closing of the "Change of Control"
that the transaction be accounted for as a pooling of interests, then the
vesting and exercisability shall not be accelerated pursuant to this Section
12(a).
(b) CHANGE OF CONTROL. "Change of Control" means the occurrence
of any of the following events:
(i) Any "person" (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing fifty percent
(50%) or more of the total voting power represented by the Company's then
outstanding voting securities; or
(ii) A change in the composition of the Board of
Directors of the Company occurring within a two-year period as a result of which
fewer than a majority of the directors are "Incumbent Directors." "Incumbent
Directors" shall mean directors who either (A) are directors of the Company as
of the date hereof, or (B) are elected, or nominated for election, to the Board
of Directors with the affirmative votes (either by a specific vote or by
approval of the proxy statement of the Company in which such person is named as
a nominee for election as a director without objection to such nomination) of at
least a majority of the Incumbent Directors at the time of such election or
nomination; or
(iii) The consummation of (A) a merger or
consolidation of the Company with any other entity, 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 or the entity that controls the Company or such surviving
entity) at least fifty percent (50%) of the total voting power represented by
the voting securities of the Company or such surviving entity or the entity that
controls the Company or such surviving entity outstanding immediately after such
merger or consolidation, or (B) the sale or disposition by the Company of all or
substantially all the Company's assets; or
(iv) The shareholders approve a plan of complete
liquidation of the Company.
(c) INVOLUNTARY TERMINATION. "Involuntary Termination" shall
mean without the Optionee's written consent: (i) a termination by the Company
of the Optionee's employment with the Company other than for Cause; (ii) a
material reduction of or variation in the Optionee's duties, authority or
responsibilities, relative to the Optionee's duties, authority or
responsibilities as in effect immediately prior to such reduction or variation;
(iii) a reduction by the Company in the base salary of the Optionee as in effect
immediately prior to such reduction; (iv) a material reduction by the Company in
the kind or level of employee benefits, including bonuses, to which the
2
<PAGE>
Optionee was entitled immediately prior to such reduction, with the result
that the Optionee's overall benefits package is materially reduced; (v) the
relocation of the Optionee to a facility or a location more than thirty (30)
miles from the Optionee's then present location; (vi) the failure of the
Company to obtain the assumption of this Agreement by any successor as
required in Section 13, or (vii) any act or set of facts that would under
applicable law constitute a constructive termination of Optionee.
(d) CAUSE. "Cause" shall mean (i) any willful act of personal
dishonesty, fraud or misrepresentation taken by the Optionee in connection with
his or her responsibilities as an employee which was intended to result in
substantial gain or personal enrichment of the Optionee at the expense of the
Company and was materially and demonstrably injurious to the Company; (ii) the
Optionee's conviction of a felony on account of any act which was materially and
demonstrably injurious to the Company; or (iii) the Optionee's willful and
continued failure to substantially perform his or her principal duties and
obligations of employment including under any written agreements (other than any
such failure resulting from incapacity due to physical or mental illness), which
failure is not remedied in a reasonable period of time after receipt of written
notice from the Company. For the purposes of this Section 12(d), no act or
failure to act shall be considered "willful" unless done or omitted to be done
in bad faith and without reasonable belief that the act or omission was in or
not opposed to the best interests of the Company. Any act or failure to act
based upon authority given pursuant to a resolution duly adopted by the Board of
Directors of the Company or based upon the advice of counsel for the Company
shall be conclusively presumed to be done or omitted to be done in good faith
and in the best interests of the Company.
(e) VOLUNTARY RESIGNATION; TERMINATION FOR CAUSE. If the
Optionee terminates employment as a result of an Involuntary Termination, the
Optionee shall be entitled to receive accelerated vesting under Section 12(a)
hereof. If the Optionee's continuous status as an employee of the Company
terminates by reason of the Optionee's voluntary resignation (and not
Involuntary Termination) or if the Optionee's continuous status as an employee
of the Company is terminated for Cause, in either case prior to such time as
accelerated vesting occurs as provided in Section 12(a) hereof, then the
Optionee shall not be entitled to receive accelerated vesting under
Section 12(a) hereof.
13. SUCCESSORS. Any successor to the Company
(whether direct or indirect and whether by purchase, merger or
consolidation) shall assume the obligations under this
Agreement and agree expressly to perform the obligations under
this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in
the absence of a succession. The terms of this Agreement and
all rights of the Optionee hereunder shall inure to the
benefit of, and be enforceable by, the Optionee's personal or
legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees.
3
<PAGE>
IN WITNESS WHEREOF, the Company and the Optionee have executed this
Agreement on the _____ day of ____________, 1998.
SOCKET COMMUNICATIONS, INC. OPTIONEE
By:
---------------------------------
4
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-97350) pertaining to Socket Communications, Inc. 1993 Stock
Option/Stock Issuance Plan and 1995 Stock Plan of our report dated February 17,
1998 (except for Note 17 for which the date is March 25, 1998), with respect to
the financial statements and schedule of Socket Communications, Inc. included in
this Annual Report (Form 10-KSB) for the year ended December 31, 1997.
ERNST & YOUNG LLP
San Jose, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF OPERATIONS OF THE COMPANY'S FORM 10-KSB FOR THE YEAR
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 276,900
<SECURITIES> 0
<RECEIVABLES> 899,296
<ALLOWANCES> 0
<INVENTORY> 195,127
<CURRENT-ASSETS> 1,380,371
<PP&E> 1,131,090
<DEPRECIATION> 807,502
<TOTAL-ASSETS> 1,770,264
<CURRENT-LIABILITIES> 4,954,277
<BONDS> 0
0
0
<COMMON> 6,501
<OTHER-SE> (3,231,445)
<TOTAL-LIABILITY-AND-EQUITY> 1,770,264
<SALES> 4,657,973
<TOTAL-REVENUES> 4,779,200
<CGS> 2,788,108
<TOTAL-COSTS> 2,788,108
<OTHER-EXPENSES> 5,382,953
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 165,472
<INCOME-PRETAX> (3,600,254)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,600,254)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,600,254)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
</TABLE>
