<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number 1-13810
SOCKET COMMUNICATIONS, INC.
(Name of small business issuer as specified in its charter)
Delaware 94-3155066
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
37400 Central Court, Newark, CA 94560
(Address of principal executive offices including zip code)
(510) 744-2700
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Number of shares of Common Stock ($0.001 par value) outstanding as of
May 12, 1998 was 7,187,632 shares.
This report, including all attachments, contains 24 pages.
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INDEX
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
Part I. Financial information
Condensed Balance Sheets - March 31, 1998 and December 31, 1997 . . 3
Condensed Statements of Operations - Three Months Ended
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . 4
Condensed Statements of Cash Flows - Three Months Ended
March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . 5
Notes to Condensed Financial Statements . . . . . . . . . . . . . . 6-9
Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . 10-22
Part II. Other information . . . . . . . . . . . . . . . . . . . . . . 23
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
2
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PART I. FINANCIAL INFORMATION
SOCKET COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, December 31,
1998 1997(*)
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 842,580 $ 276,900
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . 775,234 899,296
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321,076 195,127
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,684 9,048
----------- ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,949,574 1,380,371
Property and equipment:
Machinery and office equipment. . . . . . . . . . . . . . . . . . . . . . . 600,851 600,851
Computer equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 523,548 530,239
----------- ------------
1,124,399 1,131,090
Accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . (850,617) (807,502)
----------- ------------
273,782 323,588
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,805 66,305
----------- ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,286,161 $1,770,264
----------- ------------
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . $373,707 $523,941
Convertible subordinated notes. . . . . . . . . . . . . . . . . . . . . . . 200,000 1,950,000
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . 1,549,508 1,962,354
Accrued payroll and related expenses. . . . . . . . . . . . . . . . . . . . 211,912 277,553
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167,980 178,625
Current portion of capital leases and equipment financing notes . . . . . . 68,782 61,804
----------- ------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 2,571,889 4,954,277
Long-term portion of capital leases and equipment financing notes. . . . . . 17,901 40,931
Stockholders' equity :
Preferred stock, $0.001 par value; Authorized shares - 3,000,000
Series B Convertible Preferred Stock:
Designated shares-37,500; Issued and outstanding shares-30,065
at March 31, 1998 and none at December 31, 1997 . . . . . . . . . . . 1,567,269 --
Series C Convertible Preferred Stock:
Designated shares-150,000; Issued and outstanding shares-146,611
at March 31, 1998 and none at December 31, 1997. . . . . . . . . . . 1,544,175 --
Common stock, $0.001 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 7,173,078 at March 31, 1998 and
6,501,275 at December 31, 1997 . . . . . . . . . . . . . . . . . . . 7,173 6,501
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . 13,696,645 13,208,038
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,118,891) (16,439,483)
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Total stockholders' net capital deficiency . . . . . . . . . . . . . . . (303,629) (3,224,944)
----------- ------------
Total liabilities and stockholders' net capital deficiency. . . . . . $2,286,161 $1,770,264
----------- ------------
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</TABLE>
_______________
(*) Derived from audited financial statements.
See accompanying notes.
3
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SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
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<S> <C> <C>
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,175,670 $ 1,070,748
Cost of revenue. . . . . . . . . . . . . . . . . . . . . . . . . 520,083 540,123
------------- -------------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . 655,587 530,625
Operating expenses:
Research and development. . . . . . . . . . . . . . . . . . . 251,797 271,787
Sales and marketing . . . . . . . . . . . . . . . . . . . . . 457,108 756,800
General and administrative. . . . . . . . . . . . . . . . . . 298,600 329,355
------------- -------------
Total operating expenses . . . . . . . . . . . . . . . . . 1,007,505 1,357,942
------------- -------------
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . (351,918) (827,317)
Interest income and other, net . . . . . . . . . . . . . . . . . 4 1,871
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . (62,700) (26,981)
------------- -------------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . (414,614) (852,427)
Preferred stock dividend . . . . . . . . . . . . . . . . . . . . (14,794) (30,318)
Accretion of preferred stock . . . . . . . . . . . . . . . . . . (250,000) --
------------- -------------
Net loss applicable to common stockholders . . . . . . . . . . . $(679,408) $(882,745)
------------- -------------
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Basic and diluted net loss per share applicable to common
stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . $(0.10) $(0.23)
------------- -------------
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Weighted average shares outstanding. . . . . . . . . . . . . . . 6,501,275 3,854,309
------------- -------------
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</TABLE>
See accompanying notes.
4
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SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (414,614) $ (852,427)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . 54,576 70,190
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . 124,062 (94,641)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (125,949) (105,721)
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,636) (104,070)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500 (7,379)
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . (297,564) 88,531
Accrued payroll and related expenses. . . . . . . . . . . . . . . . . (65,641) 24,810
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . (10,645) (36,354)
------------ ------------
Net cash used in operating activities. . . . . . . . . . . . . . . . (733,911) (1,017,061)
INVESTING ACTIVITIES
Purchase of equipment. . . . . . . . . . . . . . . . . . . . . . . . . . (4,770) (88,434)
------------ ------------
Net cash used in investing activities. . . . . . . . . . . . . . . . (4,770) (88,434)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of costs of $29,353 . . . . . 1,470,647 --
Payments on capital leases and equipment financing notes . . . . . . . . (16,052) (34,250)
Proceeds from issuance of convertible notes. . . . . . . . . . . . . . . -- 1,000,000
Stock options and warrants exercised . . . . . . . . . . . . . . . . . . -- 3,777
Net proceeds (repayments) from borrowing under bank line of credit . . . (150,234) 163,840
------------ ------------
Net cash provided by financing activities . . . . . . . . . . . . . 1,304,361 1,133,367
------------ ------------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . 565,680 27,872
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . 276,900 618,344
------------ ------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . $ 842,580 $ 646,216
------------ ------------
------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,975 $ 26,981
Dividends accrued but unpaid . . . . . . . . . . . . . . . . . . . . . . $ 14,794 $ 30,318
Notes payable and accrued interest converted to preferred stock. . . . . $1,544,175 $ --
Note payable and accrued interest converted to common stock. . . . . . . $ 335,901 $ --
Accretion of preferred stock . . . . . . . . . . . . . . . . . . . . . . $ 250,000 $ --
</TABLE>
See accompanying notes.
5
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements of Socket Communications, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-QSB item 310(b). Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring accruals) considered
necessary for fair presentation have been included.
The financial statements have been prepared on a going concern basis.
The Report of Independent Auditors on the Company's financial statements for
the year ended December 31, 1997 included in Form 10-KSB contained an
explanatory paragraph which indicated substantial doubt about the Company's
ability to continue as a going concern because of the Company's recurring
operating losses, net capital deficiency and working capital deficit. As of
March 31, 1998, the Company had cumulative losses of $17,118,891, a net
capital deficiency of $303,629, and a working capital deficit of $622,315.
The Company believes its existing capital resources will be insufficient to
satisfy its working capital requirements through the end of 1998. The
Company will need to raise additional capital to fund operations during 1998
and beyond which the Company intends to accomplish through the issuance of
additional equity securities, through increased borrowings on the Company's
bank lines as the levels of receivables permit, and through development
funding from development partners. The Company believes that sufficient
outside financing sources will be available, however, there can be no
assurance that the Company will be able to obtain such financing on
commercially reasonable terms, if at all, and such terms may be dilutive to
existing stockholders. The Company's inability to secure the necessary
funding would have a material adverse affect on the Company's financial
condition and results of operations. The Company's actual working capital
needs will depend upon numerous factors, however, including the extent and
timing of acceptance of the Company's products in the market, the Company's
operating results, the progress of the Company's research and development
activities, the cost of increasing the Company's sales and marketing
activities and the status of competitive products, none of which can be
predicted with certainty. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of assets and
liabilities that may result from the outcome of this uncertainty.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Operating results for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
NOTE 2 - CASH EQUIVALENTS
Cash equivalents consist mainly of money market funds, which are highly
liquid financial instruments that are readily convertible to cash. The
Company has not incurred losses related to these instruments. As of March
31, 1998 and December 31, 1997, the Company had no material investments in
debt or equity securities.
6
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NOTE 3 - INVENTORIES
Inventories consist principally of raw materials and sub-assemblies,
which are stated at the lower of cost (first-in, first-out) or market.
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------------------------
<S> <C> <C>
Raw materials and sub-assemblies . . . . . $305,440 $179,267
Finished goods . . . . . . . . . . . . . . 15,636 15,860
-------------------------
$321,076 $195,127
-------------------------
-------------------------
</TABLE>
NOTE 4 - INCOME TAXES
Due to the Company's loss position, there was no provision for income
taxes for the three months ended March 31, 1998 and 1997.
NOTE 5 - NET LOSS PER SHARE AND NET LOSS PER SHARE APPLICABLE TO COMMON
STOCKHOLDERS
In 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE. Statement 128 replaced the calculation of primary
and fully diluted loss per share with basic and diluted loss per share.
Unlike primary loss per share, basic loss per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted net loss per
share includes potential common shares, when dilutive, from stock options
(using the treasury stock method), from convertible preferred stock (using
the if-converted method), from convertible notes (using the if-converted
method) and from warrants (using the treasury stock method). As the Company
has experienced losses in all periods presented, no potential common shares
have been included in the net loss per share calculation as they are
antidilutive.
The Company is required to accrue dividends (8% per annum) on shares of
its outstanding preferred stock. In addition, in 1998, the Company recorded
accretion of preferred stock reflecting the issuance during the quarter of
$1,000,000 of Series B preferred stock at a 20% discount to market.
Dividends of $14,794 and accretion of preferred stock of $250,000 for the
quarter ended March 31, 1998 and dividends of $30,318 for the quarter ended
March 31, 1997 were added to the net loss to determine the net loss per share
applicable to common stockholders. Dividends and accretion of preferred stock
increased the net loss applicable to common stockholders by $(0.04) per share
and $(0.01) per share for the quarters ended March 31, 1998 and 1997,
respectively.
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 the lenders index rate, which is based on
prime, plus 1.5% (10% at March 31, 1998). The Original Agreement contains
covenants that required the Company to maintain certain financial ratios.
As of December 31, 1997, 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
7
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Company to maintain certain financial ratios including current ratio and
tangible net worth. As of March 31, 1998 and December 31, 1997, outstanding
borrowings under the Agreement were $269,674 and $268,908, 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 March 31, 1998 and December 31, 1997, outstanding
borrowings under the International Agreement were $104,033 and $255,033,
respectively, which were the amounts available under the line.
NOTE 7 - SERIES B CONVERTIBLE PREFERRED STOCK
In January 1998, the Board of Directors designated 37,500 shares of Preferred
Stock as Series B Convertible Preferred Stock ("Series B Preferred Stock).
Series B Preferred Stock is convertible into Common Stock at the option of
the Holder anytime from 60 days to two years after issue ("mandatory
conversion date") and automatically converts earlier in the event of a merger
or consolidation of the Company if, as a result of such transaction, the
holders of Common Stock immediately prior to such merger or consolidation
would hold less than 50% of the voting securities of the surviving entity
immediately following such merger or consolidation. In the event of
liquidation, holders of Series B Preferred Stock are entitled to liquidation
preferences over common stockholders equal to their initial investment plus
all accrued but unpaid dividends. Dividends accrue at the rate of 8% per
annum and are payable quarterly in cash or in Common Stock, at the option of
the Company.
On January 21, 1998 (the "Series B Closing"), the Company sold 12,500 shares
of its Series B Convertible Preferred Stock, $0.001 par value, at $40 per
share (total of $500,000) pursuant to Regulation D of the Securities Act of
1933, as amended (the "Series B Transaction"). The Series B Transaction was
effected pursuant to a Private Offering Memorandum. Each share of Series B
Convertible Preferred Stock is convertible into 100 shares of Common Stock at
the option of the holder, in whole or in part, at any time for a period of
two years following the Series B Closing. The Series B stock will convert
into a total of 1,250,000 shares of Common Stock. The conversion ratio for
the Series B Transaction was based upon the average bid price of the
Company's Common Stock for the ten days prior to the Series B Closing. The
Company also issued five-year warrants to acquire 187,500 shares of Common
Stock at $0.40 per share and granted two options to invest an additional
$500,000 on similar terms, with the first option expiring on February 15,
1998 and the second option expiring on March 15, 1998.
On February 6, 1998, (the "Series B-1 Closing"), the Company sold 8,850
shares of Series B Convertible Preferred Stock, $.001 par value, at $56.50
per share, pursuant to exercise of the option to invest an additional
$500,000 expiring on February 15, 1998. On March 18, 1998, such 8,850 shares
of Series B were exchanged for a like number of Series B-1 Convertible
Preferred Stock, $.001 par value (the "Series B-1 Transaction"). Each share
of Series B-1 Convertible Preferred Stock is convertible into 100 shares of
Common Stock at the option of the holder, in whole or in part, at any
8
<PAGE>
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 recorded Accretion of
Preferred Stock of $125,000 in the first quarter of 1998 for the 20% discount
given to the Series B-1 holders.
On March 16, 1998, (the "Series B-2 Closing"), the Company sold 8,715 shares
of Series B-2 Convertible Preferred Stock, $.001 par value, at $57.375 per
share, pursuant to exercise of the option to invest an additional $500,000
expiring on March 15, 1998 (the "Series B-2 Transaction"). Each share of
Series B-2 Convertible Preferred Stock is convertible into 100 shares of
Common Stock at the option of the holder, in whole or in part, at any time
for a period of two years following the Series B-2 Closing. The Series B-2
stock will convert into a total of 871,500 shares of Common Stock. The
conversion ratio for the Series B-2 Transaction was based upon 80% of the
average high and low sales price of the Company's Common Stock for the ten
days prior to the Series B-2 Closing. Dividends accrue at the rate of 8% and
are payable quarterly in cash or in Common Stock at the option of the
Company. The Company also issued five-year warrants to acquire 130,725
shares of Common Stock at $0.57375 per share. The Company recorded Accretion
of Preferred Stock of $125,000 in the first quarter of 1998 for the 20%
discount given to the Series B-2 holders.
These transactions resulted in the valuation of warrants of approximately
$153,378 which has been recorded as additional paid in capital.
NOTE 8 - CONVERSION OF CONVERTIBLE SUBORDINATED NOTES INTO SERIES C CONVERTIBLE
PREFERRED SHARES AND COMMON STOCK
On March 31, 1998, $1,750,000 of convertible subordinated notes and
$140,076 of accrued interest were converted into 95,037 shares of Series C
Preferred Stock, 51,574 shares of Series C-1 Preferred Stock and 671,803
shares of Common Stock. Series C and Series C-1 Preferred Stock plus accrued
dividends at 8% per annum are convertible into Common Stock at the option of
the holder, with a mandatory conversion date of March 31, 2000. At March 31,
1998, Series C shares, if converted, would have converted into 2,014,778
shares of Common Stock and Series C-1 shares, if converted, would have
converted into 546,684 shares of Common Stock, the same number of common
shares as if the notes and accrued interest had been converted directly into
Common Stock in accordance with the original note terms.
9
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS SECTION CONTAINS FORWARD-LOOKING STATEMENTS (IDENTIFIED WITH AN
ASTERISK "*") THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FOR A MORE COMPLETE DISCUSSION OF THE FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE, SEE "BUSINESS" AND "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IN
THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31,
1997 (COLLECTIVELY THE "FORM 10-KSB SECTIONS").
OVERVIEW
The Company's family of serial PC card products and Ethernet card
products for PC card mobile computers are its principal sources of revenues
with a focus beginning in 1997 on connection products for devices using the
Windows CE operating system from Microsoft, including handheld computers
(H/PCs and Palm-size PCs) and embedded devices. In December 1996, the
Company expanded its serial and Ethernet card lines into a family of PC card
products including a ruggedized serial card, a dual serial card and an
Ethernet/serial multifunction card, and in October 1997, the Company
introduced a barcode scanner PC card and a low power Ethernet card for
Windows CE handheld computers. In 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-size PC,
expected to be volume shipping 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 also earns
royalties on wireless messaging services provided by third party carriers and
revenue from development work performed for others. Revenue from wireless
messaging products have been less than 10% of the Company's total revenues
and in the fourth quarter of 1997, the Company wrote off its POCSAG PageCard
inventories because of low demand and the 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. The Company will earn
development revenues
_______________
(*) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
10
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 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.
In addition, as of March 31, 1998, the Company had a net capital
deficiency of $303,629 and a working capital deficit of $622,315. 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
_______________
(*) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
11
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
RESULTS OF OPERATIONS
REVENUE
Revenue for the first quarter of 1998 totaled $1,175,670, a 10% increase
from the corresponding period a year ago. The increase was due to: higher
sales volumes of the Ethernet PC Card, including the low power Ethernet PC
Card for Windows CE handheld computers which was introduced in the fourth
quarter of 1997; higher sales volumes of the Company's expanding family of
serial PC Card products; and higher sales of the Company's data collection PC
Card products which were introduced in the fourth quarter of 1997. This
growth was partially offset by lower PageCard sales.
GROSS PROFIT
The Company's gross profit for the first quarter of 1998 was 55.8% of
revenues compared to 49.6% for the same quarter a year ago due to favorable
product mix including higher volume of serial PC card sales and higher
margins on newer products such as the low power Ethernet PC card.
RESEARCH AND DEVELOPMENT
Research and development expenses were $251,797 for the first quarter, a
decline of 7% from the corresponding period a year ago, primarily due to a
reduction in outside development costs. The Company expects to increase its
research and development expenses in the second half of 1998.(*)
SALES AND MARKETING
Sales and marketing expenses were $457,108 for the first quarter, a 40%
decrease over the corresponding period a year ago. The decrease reflected
staffing reductions in the second and third quarters of 1997 and higher
expenses in 1997 associated with marketing studies and new product
introductions. The Company expects to increase its sales and marketing
expenses in 1998.(*)
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $298,600 for the first quarter
of 1998, a 9% decrease from the corresponding period a year ago, reflecting
reductions in staffing in the second quarter of 1997, partially offset by
higher costs of professional services in 1998.
_______________
(*) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
12
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST INCOME AND OTHER, NET/INTEREST EXPENSE
Interest income primarily reflects interest on cash balances earned
through investment in money market funds. Interest expense was $62,700 for
the first quarter of 1998 compared to $26,981 for the first quarter of 1997.
Interest expense for the first quarter of 1998 included interest on higher
levels of convertible subordinated notes compared to the same quarter a year
ago as well as higher levels on revolving credit line balances outstanding
during the quarter, offset slightly by reduced equipment financing
obligations. 1997 interest expense included interest on convertible
subordinated notes sold in February 1997, interest on revolving credit line
balances outstanding during the quarter and interest on equipment lease
financing obligations.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarters of 1998 and 1997, the Company used $733,911
and $1,017,061, respectively, in cash for operating activities. Net cash used
for operations in the first quarter of 1998 resulted primarily from the net
loss, increases in inventory and decreases in accounts payable and accrued
payroll and related expenses, offset in part by decreases in accounts
receivable. Net cash used for operations in the first quarter of 1997
resulted primarily from the net loss and increases in accounts receivable,
inventories and prepaid expenses, offset in part by increases in accounts
payable.
Cash used for investing activities was $4,770 in the first quarter of
1998 and $88,434 in the first quarter of 1997. The higher levels of
investing activity in 1997 reflected higher purchases of equipment associated
with the Company's relocation into new facilities in the fourth quarter of
1996.
Cash provided by financing activities during the first quarter of 1998
reflected the issuance of $1,500,000 in Series B Convertible Preferred Stock
net of issuance costs of $29,353 (see Note 7 of Notes to Condensed Financial
Statements) and partially offset by payments on capital leases and equipment
financing notes and from a reduction in outstanding borrowings under the
Company's revolving lines of credit. Cash provided by financing activities
during the first quarter of 1997 reflected higher borrowings under a
revolving line of credit with a bank (see Note 6 of Notes to Condensed
Financial Statements) and proceeds from the issuance of $1,000,000 in
convertible subordinated notes.
FUTURE CAPITAL NEEDS; INDEPENDENT AUDITORS' REPORT CONTAINED EXPLANATORY
PARAGRAPH REGARDING GOING CONCERN.
As of March 31, 1998, the Company had cash and cash equivalents of
$842,580. Although the Company sold $1,500,000 of Series B Convertible
Preferred Stock during the first quarter of 1998, the Company believes its
existing capital resources will be insufficient to satisfy its working
capital requirements through the end of 1998. The Company will need to raise
additional capital to fund operations during 1998 and beyond, including
planned increases in its sales and marketing and research and development
efforts which the Company intends to accomplish through the issuance of
additional equity securities, through increased borrowings on the Company's
bank line as the levels
13
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of receivables permit, and through development funding from development
partners.(*) The Report of Independent Auditors on the Company's financial
statements for the year ended December 31, 1997 included in Form 10-KSB
contains an explanatory paragraph regarding the Company's need for additional
financing and indicated substantial doubt about the Company's ability to
continue as a going concern. There can be no assurances that such capital
will be available on acceptable terms, if at all, and such terms may be
dilutive to existing stockholders. The Company's inability to secure the
necessary funding would significantly impair the ability of the Company to
carry out its strategy of increasing its sales and marketing and research and
development efforts and otherwise would have a material adverse affect on the
Company's financial condition and results of operations.
RISK FACTORS
FUTURE CAPITAL NEEDS; INDEPENDENT AUDITORS' REPORT CONTAINED EXPLANATORY
PARAGRAPH REGARDING GOING CONCERN See "Liquidity and Capital Resources", same
title, in the preceding paragraph.
ILLIQUIDITY OF TRADING MARKET; POSSIBLE DELISTING OF SECURITIES FROM THE PACIFIC
EXCHANGE; RISK OF PENNY STOCK STATUS
From the effective date of Socket's initial public offering (June 6,
1995) through November 26, 1996, Socket's Common Stock was listed on the
Nasdaq SmallCap Market. However, the Common Stock was de-listed from such
market effective November 27, 1996 and since then has traded on the OTC
Bulletin Board. The Nasdaq SmallCap Market has recently adopted new, more
stringent listing criteria. In order for the Company to become listed in the
Nasdaq SmallCap Market under the new listing criteria, it must (i) either
have net tangible assets of $4 million, a market capitalization of $50
million or net income in two of the past three years of $750,000; (ii) 1
million shares of public float; (iii) a market capitalization of public float
of $5 million; (iv) a bid price of $4.00 per share; (v) three market makers;
and (vi) 300 stockholders. The Company currently does not meet these
requirements, and there can be no assurance that the Company will meet these
requirements in any future period. Socket's Common Stock is also quoted on
the Pacific Exchange. The continued listing criteria of the Pacific Exchange
requires the Company to have (i) at least 300,000 publicly held shares of
Common Stock with a market value of at least $500,000, (ii) at least 250
public beneficial holders of its Common Stock, (iii) total net tangible
assets of at least $500,000 or net worth of at least $2,000,000, and (iv) a
share bid price of at least $1 per share of Common Stock. The Company has not
been in compliance with the net tangible asset requirements of the Pacific
Exchange since December 31, 1996 and has, therefore, been subject to possible
delisting procedures since that time. In 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 March 31,
1998, the Company had a net tangible asset deficit of $303,629. Accordingly,
the Company will need to raise additional equity capital and convert
remaining 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
_______________
(*) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
14
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
so. In that case, there can be no assurance that the Pacific Exchange will
not decide to initiate delisting proceedings against Socket. If Socket's
Common Stock remains delisted from the Nasdaq SmallCap Market and becomes
delisted from the Pacific Exchange, the Company will become subject to the
Commission's "penny stock" rules and therefore an investor will find it more
difficult to dispose of, or to obtain accurate quotations as to the price of,
Socket's securities.
In the event that the Company's Common Stock is delisted from the
Pacific Exchange, its Common Stock will be subject to the so-called "penny
stock" rules under the Securities Exchange Act of 1934, as amended, which
impose additional sales practice and market making requirements on
broker-dealers who sell and/or make a market in such securities. For
transactions covered by the penny stock rules, a broker-dealer must make
special suitability determinations for purchasers and must have received the
purchasers' written consent to the transactions prior to sale. In addition,
for any transaction involving a penny stock, unless exempt, the rules require
delivery prior to any transaction in a penny stock of a disclosure schedule
prepared by the Commission relating to the penny stock market. Disclosure is
also required to be made about commissions payable to both the broker-dealer
and the registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, Socket's delisting from the
Pacific Exchange and its becoming subject to the rules on penny stocks would
affect the ability or willingness of broker-dealers to sell and/or make a
market in Socket's securities and therefore would severely adversely affect
the market liquidity for the Company's securities.
SIGNIFICANT DILUTIVE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON MARKET PRICE
OF THE COMMON STOCK
As of March 31, 1998, 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 3,079,169 shares of Socket Common Stock issuable upon exercise
of warrants, including certain dilution adjustments resulting from the
subsequent issuance of Common Stock or securities converting into Common
Stock at prices below the initial public offering price for the Company's
Common Stock. In addition, an aggregate of 416,562 shares of Common Stock may
be issued upon conversion of the remaining convertible promissory notes and
accrued interest and 2,561,462 shares will be issued upon the conversion of
Series C Preferred Stock (See Note 8 to Notes to Condensed Financial
Statements) . 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 3,006,500 shares of Common Stock at the option of the
holder at any time, 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. 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
15
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Exchange.(*) To the extent the Company does so, existing stockholders of the
Company may experience substantial dilution, particularly if the terms of
such issuance include discounts to market prices or the issuance of warrants,
as the Company did in the first quarter of 1998 with the issuance of
$1,500,000 worth of Series B Convertible Preferred Stock and related
warrants. 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.
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 completion of Socket's development contract 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-size PC beginning in
the second half of 1998, the expansion of development and OEM customer
relationships to increase development and product sales revenues, the
development of successful new products for new and existing markets, Socket's
ability to increase gross margins through higher sales volumes and contract
manufacturing efficiencies, expand its distribution capability, perform on
development contracts, and manage its operating expenses. There can be no
assurance that Socket will meet any of these objectives or ever achieve
profitability.
SLOWLY EMERGING MARKET FOR WIRELESS DATA COMMUNICATION PRODUCTS
The market for wireless data communications products has been slow to
emerge, and there can be no assurance that it will develop sufficiently to
enable the Company to achieve broad commercial acceptance of its products.
Because this market is relatively new and has developed slowly, and because
current and future competitors are likely to introduce a variety of competing
wireless data communications solutions, it is difficult to predict the rate
at which this market will grow, if at all. 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
_______________
(*) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
16
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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-size PCs. The Company expects to continue to derive a significant
portion of revenues from the sale of its products for use in mobile
computers, particularly those that use the Windows CE operating system. The
market for mobile computers is characterized by rapidly changing technology,
evolving industry standards, frequent new product introductions and
significant price competition, resulting in short product life cycles and
regular reductions of average selling prices over the life of a specific
product. Although the market for mobile computers has grown substantially in
recent years, there can be no assurance that such growth will continue. A
reduction in sales of the market for mobile computers or a reduction in the
growth rate of such sales, would likely reduce demand for the Company's
products. Any reduction in the demand for mobile computers would have a
material adverse effect on the Company's business,
_______________
(*) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
17
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
financial condition and results of operations. In addition, the Company's
ability to compete successfully will depend on its ability to identify and
ensure compliance with evolving industry standards. Unanticipated changes in
industry standards could render the Company's products incompatible with
products developed by major hardware manufacturers and software developers,
including Microsoft and Motorola. The Company could be required, as a
result, to invest significant time and resources to redesign the Company's
products to ensure compliance with relevant standards. If the Company's
products are not in compliance with prevailing industry standards for a
significant period of time, the Company would miss opportunities to have its
products specified as standards for new hardware components designed by
mobile computer manufacturers and OEMs. The failure to achieve any such
design win would result in the loss of any potential sales volume that could
be generated by such newly designed hardware component which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Beginning in 1997, the Company implemented a strategy of focusing its
product development efforts on mobile computers and other devices that use
the Windows CE operating system of Microsoft. As a result, the Company's
success is substantially dependent on the commercial success of handheld PCs,
palm PCs and other devices that operate on the Windows CE operating system
for which the Company's current products and products under development are
designed. Therefore, the Company's future success depends on factors outside
of its control, including market acceptance of Windows CE generally and other
factors affecting the commercial success of Windows CE computers and devices,
including changes in industry standards or the introduction of new or
competing technologies. Accordingly, there can be no assurance that Windows
CE will achieve the market acceptance anticipated by the Company. Any delays
in or failure of Windows CE to achieve such market acceptance would reduce
the number of potential customers of the Company's products, which could
result in a material adverse effect on the Company's business, operating
results or financial condition.
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON PRODUCT DEVELOPMENT; PRODUCT DEFECTS
The market for the Company's products is characterized by rapidly
changing technology, evolving industry standards and short product life
cycles. Accordingly, the Company's success will be 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
18
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
preferences and frequent product introductions. The future success of the
Company will depend in large part on its ability, and that of its strategic
partners, to keep pace with advances in software and hardware technologies
for mobile computing and wireless data communications. There can be no
assurance that the Company will be able to respond effectively to these
technological changes or to new product introductions by others. For
example, the Company's PageCard receiver is designed to operate on the
worldwide POCSAG protocol, and operates on the frequencies approved by the
Federal Communications Commission ("FCC") for paging and messaging
technologies in the United States and Canada in the 930 MHz frequency range.
For the European market, the PageCard receiver operates on the Euromessage
frequency of 466 MHz. New competitive wireless technologies, such as FLEX in
the United States and ERMES in Europe, being developed by various market
participants are not compatible with the POCSAG protocol and may operate at
different frequencies. If these new technologies succeed, paging carriers
may cease to support POCSAG. The Company is jointly 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 also fluctuate due to
factors such as the demand for the Company's products, the size and timing of
customer orders, unanticipated delays or problems in the introduction of new
products and product enhancements by the Company or the introduction of new
products and product enhancements by its competitors, changes in the
proportion of revenues attributable to royalties and engineering development
services, product mix, timing of software enhancements, changes in the level
of operating expenses, and competitive conditions in the industry including
competitive pressures resulting in lower average selling prices. Because the
Company's staffing and other operating expenses are based on anticipated
revenue, a substantial portion of which is not typically generated until the
end of each quarter, delays in the receipt of orders can cause 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.
19
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
_______________
(*) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
20
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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
21
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, returns, stock rotation
exchanges or price protection adjustments materially above those anticipated.
However, future warranty claims, returns, stock rotation exchanges, or price
protection adjustments could be materially higher than anticipated. The
Company intends to continue to introduce new and enhanced products, which
could result in higher warranty or return claims due to the risks inherent in
the introduction of such products.(*) There can be no assurance that warranty
claims or returns will not have a material adverse effect on future operating
results.
EXPORT SALES
Export sales (sales to customers outside the United States) accounted
for approximately 49% of the Company's revenue in 1997 and approximately 44%
of the Company's revenue in the first quarter of 1998. Accordingly, the
Company's operating results are subject to the risks inherent in export
sales, including longer payment cycles, unexpected changes in regulatory
requirements, import and export restrictions and tariffs, difficulties in
managing foreign operations, the burdens of complying with a variety of
foreign laws, greater difficulty or delay in accounts receivable collection,
potentially adverse tax consequences and political and economic instability.
In addition, the Company's export sales are currently denominated
predominately in United States dollars, and accordingly, an increase in the
value of the United States dollar relative to foreign currencies could make
the Company's products more expensive and therefore potentially less
competitive in foreign markets.
_______________
(*) This statement is a forward-looking statement reflecting current
expectations. There can be no assurance that the Company's actual future
performance will meet the Company's current expectations due to factors
described in this Management's Discussion and Analysis Of Financial Condition
and Results Of Operations and in the Form 10-KSB Sections.
22
<PAGE>
PART II. OTHER INFORMATION
Items 1-5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
3.1 Certificate of Designations of Preferences and Rights of Series C
Convertible Preferred Stock
3.2 Certificate of Designations of Preferences and Rights of Series C-1
Convertible Preferred Stock
27.1 Financial Data Schedule (Edgar only)
b. Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange Commission
during the quarter ended March 31, 1998.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOCKET COMMUNICATIONS, INC.
Registrant
Date: May 13, 1998 /s/ David W. Dunlap
-----------------------------
David W. Dunlap
Vice President of Finance
and Administration and
Chief Financial Officer
24
<PAGE>
CERTIFICATE OF DESIGNATIONS
OF PREFERENCES AND RIGHTS OF SERIES C CONVERTIBLE PREFERRED STOCK OF
SOCKET COMMUNICATIONS, INC.
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
Socket Communications, Inc., a Delaware corporation (the "Company"),
certifies that pursuant to authority given by the Company's Amended and
Restated Certificate of Incorporation, and in accordance with the provisions
of Section 151 of the General Corporation Law of the State of Delaware, the
Board of Directors of the Company has duly adopted the following recitals and
resolutions creating the Series C Convertible Preferred Stock of the Company:
WHEREAS, the Amended and Restated Certificate of Incorporation of the
Company provided for a class of shares known as Preferred Stock, issuable
from time to time in one or more series; and
WHEREAS, the Board of Directors of the Company is authorized to
determine or alter the rights, preferences, privileges and
restrictions relating to any unissued series of said Preferred Stock
and the number of shares constituting and the designation of said
series; and
NOW, THEREFORE, BE IT RESOLVED: that the Board of Directors hereby
designates, fixes the number of shares constituting, and determines
the rights, preferences, privileges and restrictions relating to the
Series C Convertible Preferred Stock:
1. DESIGNATION. The new series of Preferred Stock shall be
designated "Series C Convertible Preferred Stock." The number of shares
constituting the Series C Convertible Preferred Stock shall be 95,103. The
Board of Directors may at any time amend this Certificate of Designations of
Preferences and Rights to decrease the authorized number of shares of Series
C Convertible Preferred Stock to a number equal to or greater than the number
of shares of Series C Convertible Preferred Stock issued and outstanding at
the time of the amendment. The "Initial Price" of shares of the Series C
Convertible Preferred Stock shall be $10.60 per share and the "Original Issue
Date" shall mean the date on which shares of Series C Convertible Preferred
Stock are first issued to investors. The relative rights, preferences,
privileges and restrictions granted to or imposed upon the Series C
Convertible Preferred Stock or the holders thereof are specified below.
<PAGE>
2. DIVIDEND RIGHTS OF SERIES C CONVERTIBLE PREFERRED STOCK. The
holders of the Series C Convertible Preferred Stock shall be entitled to
receive dividends, out of any assets at the time legally available therefor,
at the rate of 8% of the Initial Price for each share of the Series C
Convertible Preferred Stock. Such dividends shall accrue quarterly on each
March 31, June 30, September 30 and December 31, each a "Quarter End" after
the Original Issue Date through and including the Mandatory Conversion Date
(as defined in Section 4(b) hereto). Such dividends may be paid in cash or
in shares of Common Stock of the Company, as the Board of Directors may
determine; provided, however, that all accrued and unpaid dividends shall be
paid on the Mandatory Conversion Date; provided, further, that if such
dividend is to be paid in Common Stock, the value of the Common Stock shall
be the average of the high and low sales prices of the Common Stock of the
Company over the ten (10) trading days immediately preceding the applicable
Quarter End. No dividend may be paid on or declared or set apart for the
Common Stock in any one fiscal year unless an equal or greater dividend is
paid on, or declared and set apart for, each share of Series C Convertible
Preferred Stock.
3. LIQUIDATION PREFERENCE. In the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the Company, no
distribution shall be made on the shares of Common Stock without first making
a distribution to the holders of Series B Convertible Preferred Stock, Series
B-1 Convertible Preferred Stock, Series B-2 Convertible Preferred Stock
(collectively, the "Series B Preferred Stock") and Series C Convertible
Preferred Stock, the Series C-1 Convertible Preferred Stock and the Series
C-2 Convertible Preferred Stock (collectively, the "Series C Preferred
Stock") in an amount equal to the number of shares of the applicable Series B
Preferred Stock and applicable Series C Preferred Stock, as the case may be,
multiplied by the Initial Price with respect to such series of Preferred
Stock, plus all accrued but unpaid dividends (if any) thereon (the "Stated
Value"). The Series B Preferred Stock and the Series C Preferred Stock shall
rank on a parity as to the receipt of the respective preferential amounts for
each such series upon the occurrence of such a liquidation, dissolution or
winding up of the Company. If upon occurrence of such event, the assets and
property thus distributed among the holders of the Series B Preferred Stock
and the Series C Preferred Stock shall be insufficient to permit the payment
to such holders of their full respective preferential amounts, then the
entire assets and property of the Company legally available for distribution
shall be distributed ratably among the holders of the Series B Preferred
Stock and the Series C Preferred Stock such that the same percentage of the
preferential amount to which each series of Preferred Stock is entitled is
paid on each share of Preferred Stock. If upon occurrence of such event, the
assets and property thus distributed among the holders of the Series B
Preferred Stock and the Series C Preferred Stock are sufficient to permit the
payment to such holders of their full respective preferential amounts, then
the Company shall make a distribution out of the remaining assets and
property of the Company legally available for distribution to the holders of
Common Stock in an amount equal to the Stated Value. In the event that both
the holders of the Preferred Stock and the holders of Common Stock are paid
their respective preferential amounts, thereafter the holders of the Common
Stock and the holders of the Preferred Stock are entitled to share pro rata
in all remaining assets of the Company available for distribution, with the
number of shares held by each holder of Preferred Stock deemed to be the
number of shares of Common Stock into which the Series B Preferred Stock and
the Series C Preferred Stock, as the case may be, are then convertible. A
consolidation or merger of the Company with or into any other corporation or
corporations, other
-2-
<PAGE>
than a merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity) at least fifty percent (50%) of the total voting
power represented by the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or a sale
of all or substantially all of the assets of the Company, shall be deemed to
be a liquidation, dissolution, or winding up of the Company.
4. CONVERSION. The holders of the Series C Convertible Preferred
Stock shall have conversion rights as follows:
(a) RIGHT TO CONVERT. Each share of Series C Convertible
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the Original Issue Date at the office of the Company or any
transfer agent for the Series C Convertible Preferred Stock. Each share of
Series C Convertible Preferred Stock shall be converted into that number of
fully-paid and nonassessable shares of Common Stock that is equal to the
Initial Price divided by the Conversion Price (as hereinafter defined). The
initial Conversion Price per share of Series C Convertible Preferred Stock
shall initially be $0.50. (The number of shares of Common Stock into which
each share of Series C Convertible Preferred Stock may be converted is
hereinafter referred to as the "Conversion Rate".) Upon any decrease or
increase in the Conversion Price or the Conversion Rate, as described in this
Section 4, the Conversion Rate or Conversion Price, as the case may be, shall
be appropriately increased or decreased.
(b) AUTOMATIC CONVERSION. All shares of Series C Convertible
Preferred Stock outstanding shall automatically convert into shares of Common
Stock upon the earliest of (i) immediately preceding a merger or
consolidation of the Company if as a result of such transaction the holders
of Common Stock immediately prior to such merger or consolidation would hold
less than 50% of the voting securities of the surviving entity immediately
following such merger or consolidation, or (ii) the second anniversary of the
Original Issue Date (the "Mandatory Conversion Date").
(c) MECHANICS OF CONVERSION. No fractional shares of Common Stock
shall be issued upon conversion of Series C 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 C Convertible
Preferred Stock shall be entitled to convert the same into full shares of
Common Stock, and to receive certificates therefor, he shall surrender the
certificate or certificates therefor, duly endorsed, at the office of the
Company or of any transfer agent for the Series C Convertible Preferred
Stock, and shall give written notice to the Company at such office that he
elects to convert the same; provided, however, that in the event of an
automatic conversion pursuant to paragraph 4(b) above, the outstanding shares
of Series C 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
-3-
<PAGE>
obligated to issue certificates evidencing the shares of Common Stock
issuable upon such automatic conversion unless either the certificates
evidencing such shares of Series C Convertible Preferred Stock are delivered
to the Company or its transfer agent as provided above, or the holder
notifies the Company or its transfer agent that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection
with such certificates.
The Company shall, as soon as practicable after such delivery (but
in any event no later than ten (10) days), or after such agreement and
indemnification, issue and deliver at such office to such holder of Series C
Convertible Preferred Stock, a certificate or certificates for the number of
shares of Common Stock to which he shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result
of a conversion into fractional shares of Common Stock, plus any declared and
unpaid dividends on the converted Series C Convertible Preferred Stock. Such
conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series C
Convertible Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on such date.
(d) REVERSION OF SERIES C CONVERTIBLE PREFERRED STOCK INTO
UNDESIGNATED PREFERRED STOCK. Upon the conversion of any shares of Series C
Convertible Preferred Stock into Common Stock, the shares so converted shall
revert to the status of authorized but undesignated Preferred Stock.
(e) ADJUSTMENTS TO CONVERSION RATE.
i. ADJUSTMENTS FOR SUBDIVISIONS, SPLITS, COMBINATIONS,
CONSOLIDATIONS, REORGANIZATIONS OR RECLASSIFICATIONS OF COMMON STOCK. In the
event that after the date of the first issuance of the Series C Convertible
Preferred Stock the outstanding shares of Common Stock shall be (a)
subdivided or split into a greater number of shares of Common Stock; (b)
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock; or (c) changed into a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise, the holders of the shares of
Series C 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 C Convertible Preferred Stock converted.
ii. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In
the event the Company at any time after the date of the first issuance of the
Series C Convertible Preferred Stock makes, or fixes a record date for, the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in the securities of the Company, then the holders
of the shares of Series C 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
-4-
<PAGE>
would have been entitled had the holder held, at the time of said dividend or
other distribution, the same number of shares of Common Stock as the number
of Series C Convertible Preferred Stock converted, and had they thereafter
during the period from the date of such event to and including the date of
conversion, retained such stock or securities receivable by them as aforesaid
during such period, subject to all other adjustments called for during such
period under this Section 4 with respect to the rights of the holders of the
Series C Convertible Preferred Stock.
(f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of the Conversion Price or Conversion Rate of
the Series C Convertible Preferred Stock pursuant to this Section 4, the
Company, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to
each holder of Series C Convertible Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon
which such adjustment or readjustment is based. The Company shall, upon the
written request at any time of any holder of Series C Convertible Preferred
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (1) such adjustment and readjustment, (2) the Conversion Price
or Conversion Rate at the time in effect, and (3) the number of shares of
Common Stock and the amount, if any, of other property which at the time
would be received upon the conversion of a share of Series C Convertible
Preferred Stock.
(g) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Company shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series C Convertible Preferred Stock such
number of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding shares of the Series C
Convertible Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the
conversion of all outstanding shares of the Series C Convertible Preferred
Stock, in addition to such other remedies as shall be available to the holder
of such Series C 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
-5-
<PAGE>
or the continuing corporation and no change occurs in the Common Stock), or
any transfer of all or substantially all the assets of the Company to any
other person; or
(c) any voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, and in each such case, the Company shall cause to be mailed to the
holders of record of the outstanding shares of the Series C Convertible
Preferred Stock, at the address shown on the stock transfer books of the
Company, at least 20 days (or 10 days in case of any event specified in
clause (A) above) prior to the applicable record or effective date
hereinafter specified, a notice stating (i) the date or expected date on
which any such record is to be taken for the purpose of such dividend,
distribution or right and the amount and character of such dividend,
distribution or right or (ii) the date or expected date on which any such
reorganization, reclassification, recapitalization, consolidation, merger,
transfer, dissolution, liquidation or winding up is to take place and the
time, if any such time is to be fixed, as of which the holders of record of
Common Stock shall be entitled to exchange their shares of Common Stock for
the securities or other property deliverable upon such reorganization,
reclassification, recapitalization, consolidation, merger, transfer,
dissolution, liquidation or winding up. The failure to give any notice
required by this Section 5, or any defect therein, shall not affect the
legality or validity of any such action requiring such notice.
6. VOTING RIGHTS. Except as otherwise required by law, the holders
of Series C Convertible Preferred Stock shall not be entitled to notice of
any shareholders' meeting nor to vote with the holders of the Common Stock
upon the election of directors or upon any other matter submitted to
shareholders for a vote.
7. COVENANTS. In addition to any other rights provided by law, the
Company shall not, without first obtaining the affirmative vote or written
consent of the holders of not less than a majority of the outstanding shares
of the Series C Convertible Preferred Stock:
(a) amend or repeal any provision of, or add any provision
to, the Company's Amended and Restated Certificate of Incorporation if such
action would materially and adversely alter or change the preferences,
rights, privileges or powers of, or the restrictions provided for the benefit
of, the Series C Convertible Preferred Stock authorized hereby; or
(b) redeem or repurchase any outstanding shares of Series C
Convertible Preferred Stock.
[This space left blank intentionally.]
-6-
<PAGE>
IN WITNESS WHEREOF, said Socket Communications, Inc. has caused this
Certificate of Designations of Preferences and Rights of the Series C
Convertible Preferred Stock to be duly executed by its President and Chief
Executive Officer and attested to by its Secretary this 31st 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 C-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 C-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 C-1 Convertible Preferred Stock:
1. DESIGNATION. The new series of Preferred Stock shall be
designated "Series C-1 Convertible Preferred Stock." The number of shares
constituting the Series C-1 Convertible Preferred Stock shall be 51,574. The
Board of Directors may at any time amend this Certificate of Designations of
Preferences and Rights to decrease the authorized number of shares of Series
C-1 Convertible Preferred Stock to a number equal to or greater than the
number of shares of Series C-1 Convertible Preferred Stock issued and
outstanding at the time of the amendment. The "Initial Price" of shares of
the Series C-1 Convertible Preferred Stock shall be $10.60 per share and the
"Original Issue Date" shall mean the date on which shares of Series C-1
Convertible Preferred Stock are first issued to investors. The relative
rights, preferences, privileges and restrictions granted to or imposed upon
the Series C-1 Convertible Preferred Stock or the holders thereof are
specified below.
<PAGE>
2. DIVIDEND RIGHTS OF SERIES C-1 CONVERTIBLE PREFERRED STOCK. The
holders of the Series C-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 Price for each share of the Series C-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 may be paid in cash or
in shares of Common Stock of the Company, as the Board of Directors may
determine; provided, however, that all accrued and unpaid dividends shall be
paid on the Mandatory Conversion Date; provided, further, that if such
dividend is to be paid in Common Stock, the value of the Common Stock shall
be the average of the high and low sales prices of the Common Stock of the
Company over the ten (10) trading days immediately preceding the applicable
Quarter End. No dividend may be paid on or declared or set apart for the
Common Stock in any one fiscal year unless an equal or greater dividend is
paid on, or declared and set apart for, each share of Series C-1 Convertible
Preferred Stock.
3. LIQUIDATION PREFERENCE. In the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the Company, no
distribution shall be made on the shares of Common Stock without first making
a distribution to the holders of Series B Convertible Preferred Stock, Series
B-1 Convertible Preferred Stock, Series B-2 Convertible Preferred Stock
(collectively, the "Series B Preferred Stock"), Series C Convertible
Preferred Stock, the Series C-1 Convertible Preferred Stock, and the Series
C-2 Convertible Preferred Stock (collectively, the "Series C Preferred
Stock") in an amount equal to the number of shares of the applicable Series B
Preferred Stock and applicable Series C Preferred Stock, as the case may be,
multiplied by the Initial Price with respect to such series of Preferred
Stock, plus all accrued but unpaid dividends (if any) thereon (the "Stated
Value"). The Series B Preferred Stock and the Series C Preferred Stock shall
rank on a parity as to the receipt of the respective preferential amounts for
each such series upon the occurrence of such a liquidation, dissolution or
winding up of the Company. If upon occurrence of such event, the assets and
property thus distributed among the holders of the Series B Preferred Stock
and the Series C Preferred Stock shall be insufficient to permit the payment
to such holders of their full respective preferential amounts, then the
entire assets and property of the Company legally available for distribution
shall be distributed ratably among the holders of the Series B Preferred
Stock and Series C Preferred Stock such that the same percentage of the
preferential amount to which each series of Preferred Stock is entitled is
paid on each share of Preferred Stock. If upon occurrence of such event, the
assets and property thus distributed among the holders of the Series B
Preferred Stock and Series C Preferred Stock are sufficient to permit the
payment to such holders of their full respective preferential amounts, then
the Company shall make a distribution out of the remaining assets and
property of the Company legally available for distribution to the holders of
Common Stock in an amount equal to the Stated Value. In the event that both
the holders of the Preferred Stock and the holders of Common Stock are paid
their respective preferential amounts, thereafter the holders of the Common
Stock and the holders of the Preferred Stock are entitled to share pro rata
in all remaining assets of the Company available for distribution, with the
number of shares held by each holder of Preferred Stock deemed to be the
number of shares of Common Stock into which the Series B Preferred Stock and
the Series C Preferred Stock, as the case may be, are then convertible. A
consolidation or merger of the Company with or into any other corporation or
corporations, other
-2-
<PAGE>
than a merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity) at least fifty percent (50%) of the total voting
power represented by the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or a sale
of all or substantially all of the assets of the Company, shall be deemed to
be a liquidation, dissolution, or winding up of the Company.
4. CONVERSION. The holders of the Series C-1 Convertible Preferred
Stock shall have conversion rights as follows:
(a) RIGHT TO CONVERT. Each share of Series C-1 Convertible
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the Original Issue Date at the offices of the Company or any
transfer agent for the Series C-1 Convertible Preferred Stock. Each share of
Series C-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 Price divided by the Conversion Price (as hereinafter defined). The
initial Conversion Price per share of Series C-1 Convertible Preferred Stock
shall initially be $1.00. (The number of shares of Common Stock into which
each share of Series C-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 C-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 C-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 C-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 C-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 an
automatic conversion pursuant to paragraph 4(b) above, the outstanding shares
of Series C-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
-3-
<PAGE>
obligated to issue certificates evidencing the shares of Common Stock
issuable upon such automatic conversion unless either the certificates
evidencing such shares of Series C-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
C-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 C-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 C-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 C-1 CONVERTIBLE PREFERRED STOCK INTO
UNDESIGNATED PREFERRED STOCK. Upon the conversion of any shares of Series
C-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 RATE.
i. ADJUSTMENTS FOR SUBDIVISIONS, SPLITS, COMBINATIONS,
CONSOLIDATIONS, REORGANIZATIONS OR RECLASSIFICATIONS OF COMMON STOCK. In the
event that after the date of the first issuance of the Series C-1 Convertible
Preferred Stock the outstanding shares of Common Stock shall be (a)
subdivided or split into a greater number of shares of Common Stock; (b)
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock; or (c) changed into a different number of
shares of any other class or classes of stock, whether by capital
reorganization, reclassification or otherwise, the holders of the shares of
Series C-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 C-1 Convertible Preferred Stock
converted.
ii. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In
the event the Company at any time after the date of the first issuance of the
Series C-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 C-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
-4-
<PAGE>
would have been entitled had the holder held, at the time of said dividend or
other distribution, the same number of shares of Common Stock as the number
of Series C-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 C-1 Convertible Preferred Stock.
(f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of
each adjustment or readjustment of the Conversion Price or Conversion Rate of
the Series C-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 C-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 C-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 C-1 Convertible
Preferred Stock.
(g) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Company shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series C-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 C-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 C-1 Convertible Preferred
Stock, in addition to such other remedies as shall be available to the holder
of such Series C-1 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
-5-
<PAGE>
or the continuing corporation and no change occurs in the Common Stock), or
any transfer of all or substantially all the assets of the Company to any
other person; or
(c) any voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, and in each such case, the Company shall cause to be mailed to the
holders of record of the outstanding shares of the Series C-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 C-1 Convertible Preferred Stock shall not be entitled to notice of
any shareholders' meeting nor to vote with the holders of the Common Stock
upon the election of directors and upon any other matter submitted to
shareholders for a vote.
7. COVENANTS. In addition to any other rights provided by law, the
Company shall not, without first obtaining the affirmative vote or written
consent of the holders of not less than a majority of the outstanding shares
of the Series C-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 C-1 Convertible Preferred Stock authorized hereby; or
(b) redeem or repurchase any outstanding shares of Series C-1
Convertible Preferred Stock.
[This space left blank intentionally.]
-6-
<PAGE>
IN WITNESS WHEREOF, said Socket Communications, Inc. has caused this
Certificate of Designations of Preferences and Rights of the Series C-1
Convertible Preferred Stock to be duly executed by its President and Chief
Executive Officer and attested to by its Secretary this 31st day of March,
1998.
/s/ Charlie Bass
-----------------------------------------
Charlie Bass
Chief Executive Officer
ATTEST:
/s/ David W. Dunlap
- ---------------------------------
David W. Dunlap
Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SOCKET
COMMUNICATIONS, INC. CONDENSED FINANCIAL STATEMENTS FOR THE INTERIM PERIOD ENDED
MARCH 31, 1998 INCLUDED IN FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 842,580
<SECURITIES> 0
<RECEIVABLES> 775,234
<ALLOWANCES> 0
<INVENTORY> 321,076
<CURRENT-ASSETS> 1,949,574
<PP&E> 1,124,399
<DEPRECIATION> (850,617)
<TOTAL-ASSETS> 2,286,161
<CURRENT-LIABILITIES> 2,571,889
<BONDS> 0
0
3,111,444
<COMMON> 7,173
<OTHER-SE> (3,422,246)
<TOTAL-LIABILITY-AND-EQUITY> 2,286,161
<SALES> 1,175,670
<TOTAL-REVENUES> 1,175,670
<CGS> 520,083
<TOTAL-COSTS> 520,083
<OTHER-EXPENSES> 1,007,505
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62,700
<INCOME-PRETAX> (679,408)
<INCOME-TAX> 0
<INCOME-CONTINUING> (679,408)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (679,408)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
